Social Goes Hollywood and What That Means for Investing in Media & Entertainment

Several weeks ago, I discussed how the rapidly evolving digital landscape is changing traditional, and creating new, media and entertainment investment opportunities at Opal’s Family Office & Private Wealth Management Forum.

Digital audiences have shifted how and where they consume content, and streaming services have evolved into award-winning production studios. Possibly more important is looking at the consumption habits of younger demographics like Generation Z. This generation is bigger than the baby boomers, they are constantly connected to screens with access to content, and they have new ideas about their digital footprint. Generation Z chooses to spend a significant percentage of their time consuming content on apps and services such as Snapchat, Instagram and more. This tidal wave of disruptive channels is already encroaching on time spent on traditional media and entertainment channels (read: eyeballs), and the emergence of new platforms that seek to capture Generation Z audiences is showing no sign of slowing down.

Although Snap (Snapchat’s parent company) hasn’t been an over performer on Wall Street, as a company they understand how significant a part of Generation Z’s digital content footprint they’ve become. Generation Z Snapchat users have grown up creating, self publishing, and consuming friend and studio content side-by-side, without adhering to traditional lines of distinction. While it’s true that the majority of content on Snapchat to date has been user generated (UGC), Snap is aggressively licensing original short format video content, in large part through a partnership with investor NBCUniversal.

As reported by Cynopsis, “Stay Tuned,” Snapchat’s first daily news show from NBC News, has over 29 million unique viewers since its July 18 launch.* Alongside spinoffs of “The Voice” and “Saturday Night Live,” it becomes clear that what was once a social network has it’s sights on becoming the channel of choice for Generation Z.

In other words, Snap wants Snapchat to become Generation X’s seamless one-stop shop for content about friends, news, and entertainment. If Snap’s foray into original content is successful, Snapchat has the potential to become one of today’s primary tastemakers, much as MTV was for Generation X.

Update (8/24/17): Snapchat Shows plans to add their own scripted video content to the mix by the end of the year. While head of content Nick Bell stated that Snapchat is more of a complementary service to TV, he acknowledged that they are “capturing the audience who are not probably consuming TV at the same rate and pace of engagement that they once were.” This suggests Snapchat might become more of a direct competitor to broadcast, cable, and streaming services.

Investing in media & entertainment in the age of digital disruption


This presentation was given to a group of family offices interested in making investments in media & entertainment at Bloomberg‘s New York offices in October 2016, and focused on sustainable business investment strategies, including:
• Content creation and distribution platforms
• Emerging technology (e.g. TVE, OTT, AR, MxR, VR, etc.)
• Monetization (subscription, PPV, advertising, commerce)
• Data analytics and support systems

Is Customer Experience Cable’s Biggest Advantage?

 

2015 is looking like it will be the beginning of a tipping point in which US consumers will be able to subscribe a la carte to television networks over-the-top (jargon free, that’s HBO, etc. without a cable subscription).

Tabling individual feelings about this inevitable shift, cable companies have certain significant advantages over the networks that are about to go direct. This is independent of the apparent consumer desire to “cut the cord,” and it’s the networks that need to be careful in how they transition to include a new, direct-to-consumer, model.

First, it’s important to simply summarize the business model of each based on the customer (who’s paying) and the product (what’s being sold):

mso-network-business-model.001
These business model differences are the core of where the advantages lie for cable companies:

  1. Customer Service: Because the cable company customer is the consumer, they already have robust systems ranging from automated and live phone support systems to online chat in place for resolving a wide variety consumer service issues quickly (While consumers often complain about cable company customer service, it’s important to distinguish the difference between resolving service related issues and dissatisfaction between the pricing of subscription packages).
  2. Quality of Service (QoS): Cable companies generally own and maintain their own physical networks, meaning they provide television services end-to-end from the facility where they receive network satellite feeds all the way through the last mile to the consumer’s television. As a result, they have very consistent uptime and can troubleshoot, and resolve, service related issues anywhere down the line, from their facilities to the individual consumer’s home.
  3. Program Guide: It may sound antiquated in a world rapidly transitioning from live to time-shifting to on-demand, but one of the things that’s lost on all over-the-top devices is the discovery of programs by way of a cross-channel guide (and queueing by way of recording) . This is especially important for networks’ fall lineups, which have precious little time to build an audience, and to older demographics resistant to any change in how they find or watch programs.

So, what are the networks’ primary challenges?

  1. Brand Awareness: Networks have two levels of branding, corporate and program franchises. Networks deeply care about their corporate brands, but consumers primarily care about programs. From a viewership perspective, removing the layer of a guide by going direct forces a change to a “network first” mentality in order to find programs that consumers may not embrace (Consider how well record label websites did in the late 1990’s when they tried to circumvent Tower Records and HMV).
  2. Customer Service: Networks have always fielded calls from consumers in the form of complaints about programs, but they’ve never had to directly support a consumer customer base. Going direct means they have to be staffed and equipped to resolve a world of issues including account authorization / verification, payment processing, connectivity, crashes and more for the first time. This isn’t trivial, and can have a direct impact on customer perception of the corporate brand.
  3. Pricing: The cost of a top-tier network subscription isn’t likely to be less than the ~$8.00 / month a Netflix or Hulu Plus account currently charges. In addition to a live feed and on-demand current programming, networks will need to have substantial and desirable back catalogs to both draw consumers and minimize churn. Additionally, if a lower overall bill proves to be a primary driver for the consumer, networks may end up having to compete for consumer dollars like CPG companies before they even have the opportunity to compete for eyeballs.

While networks definitely have the opportunity to be successful in a direct distribution model if they scale accordingly, it’s hardly a “doom and gloom” scenario for cable companies if they leverage their significant strengths in Customer Experience.

Hulu’s Creating a Phoenix From Someone Else’s Ashes

 

Hulu already has an interesting position in the market, often airing shows the day after they appear on broadcast television. For consumers who are no longer tethered to broadcast schedules because of time-shifting (DVRs, etc.) or other means, Hulu has become a big piece of the cord-cutting puzzle.

While the television industry is known for its impatience with new program franchises taking time to build audiences, there’s relatively little risk for Hulu to leverage the smaller audiences of shows cancelled mid-season considering its non-linear streaming model. Over the past month or so as the list of fall lineup casualties has become clear, Hulu acquired the rights to the remaining unaired episodes of at least two shows:

  • “Selfie:” Average of 1.5 18-49 rating
  • “Manhattan Love Story:” Average of 0.7 18-49 rating

While the ratings weren’t strong enough to save them from the itchy trigger fingers at ABC, that’s a combined total of 7.3M viewers in a highly desirable demographic, which can be quite a windfall for Hulu. Even a dirty top-down conversion of 1% would mean 73,000 new customers, which is $584,000 in monthly recurring revenue or $7M annually. And Hulu plans to release episodes weekly, effectively “setting the hook” to go beyond their 30-day trials for new users.

Although this is a good way to capitalize on what were once considered valueless assets, short-term customer acquisition is probably not Hulu’s endgame. With Netflix and Amazon in the original content game, and broadcast / cable networks starting to announce plans to deliver content over-the-top in 2015, the writing is on the wall, and Hulu is laying a very strategic foundation for the future.

They just got two programming franchises with built in awareness and interest (admittedly too small for broadcast), without incurring production expenses, that they get to test with their total customer base. If one or both franchises perform well enough, Hulu can be in the original programming business without having taken on the expense or risk of R&D using a variation of Netflix’s “Arrested Development” model.

As an added bonus, Hulu likely has the program acquisition fees categorized as a marketing expense since they are officially about customer conversion. Since Hulu can track individual streams by customer account, even if neither program goes back into development, this is still a very measurable marketing program with the high probability of having a positive ROI. That’s a pretty compelling worst case scenario.

Netflix vs. HBO

netflix-vs-hboJanko Roettgers published an article “Netflix exec: HBO would have many more customers if it sold online-only subscriptions” earlier this week on GigaOM in response to David Wells’ (CFO of Netflix) statement at a Goldman Sachs conference that HBO should be more like Netflix (read: direct to consumer) to grow. Frankly, it’s not that simple and, coming on the heels of Netflix’s recent original programming award wins, this smells a little like a PR play for Netflix to draw a comparison with HBO, especially as Well’s made another comment (unmentioned in the GigaOM article, but reported by Cynopsis) at the same conference that “We [Netflix] would love… to be available via the existing device in the home, which is the set-top box.”

Netflix doesn’t have the legacy business model (or related nuances) to consider in making such a broad statement, whereas HBO has an established and profitable revenue model, one which offering subscriptions over the Internet would, at a minimum, disrupt. Not something to do lightly.

HBO’s stance of having “no plans to sell subscriptions directly over the Internet,” it’s at least partially posturing due to the MSOs having anticipated content owner’s potential desire to go direct to consumers in their carriage agreements. Most current agreements have “most favored nation” clauses that, in short, mean MSOs don’t have to pay the network more per subscriber than any other outlet they offer their service on.

Considering Netflix subscriptions hover at around $8 a month, that would be considerable lost revenue for any premium cable network. For a network like HBO, this means that they would have to immediately exceed their current subscriber base just to match their current revenue. Unless HBO were taking on significant water in their current model, there’s little immediate incentive for HBO to take the risk.

MSO deals also allow the stronger network brands to negotiate carriage for sister and child networks, something that may very well get lost in an online / direct model. And for networks with advertising, it’s even more complicated because, if they don’t hit their subscription numbers, they negatively impact both of their primary revenue streams, subscription and advertising.

HBO is already on the forefront of TVE with HBOGo and MAXGo, both as apps / services and via their on deck positions on products like Apple TV. From a consumer standpoint, a direct offering give that an online subscriber online access, but they now have to stream to their television (Apple TV, Roku, etc.) because if MSOs aren’t making any revenue on the subscription, they certainly aren’t delivering it via cable or satellite.

Meanwhile, HBO is no doubt learning a ton about the consumption habits of HBOGo and MAXGo users without having put all their proverbial eggs in that basket. Trend data they have at this point in time however is short-term (e.g the binge-viewing and non-linear programming options that Netflix thrives on), and they may not have a large enough sample set across generational demographics to make an informed decision on David Wells’ suggestion.

We will see the day in the not too distant future where networks become unbundled offerings, whether it’s an evolution of MSO offerings, networks taking the Internet plunge and going direct or some TBD hybrid. For now, HBO seems to be striking the right balance.