It’s no secret that the publishing industry is struggling mightily as customers shift from paying for physical newspapers and magazines to reading information online, often for free. The shift has caused ruptures among other places at that bastion of French journalism, Le Monde, with the recent exit of the editor as staff rued the switch to online. So-called ‘lad’s mags’, the FHMs and Loaded magazines of the world, have been hit particularly hard, as the family PC and dial-up internet gave way to personal, portable devices and broadband connections, which provided easier access to more salacious content than the likes of Nuts could ever hope to provide. FHM’s monthly circulation is down almost 90% from a 1998 peak, according to the Financial Times. Condé Nast have pushed bravely into the new digital era, launching a comprehensive list of digital editions of its wares when the iPad launched in 2010. More recently, the company launched a new venture, La Maison. In association with Publicis and Google, the idea is to provide luxury goods companies with customer insights as well as content and technology solutions. We’ve often written about the need for more rigorous customer insights in the world of luxury, so it’s refreshing to see Condé Nast innovating and continuing to look beyond newsstand sales. We’ve written about other ways publishers are monetising their content here and here.
Time Warner is not alone then in its struggles for new ways of making money from previously flourishing revenue streams. According to The New York Times, Time Warner will be spinning off its publishing arm, Time Inc., with 90 magazines, 45 websites and $1.3bn in debt. In 2006, the article reports, Time Inc. produced $1bn in earnings, which has now receded to $370m. Revenue has declined in 22 of the last 24 quarters. This kind of move is not new. Rupert Murdoch acted in similar fashion recently when he split up News Corporation, creating 21st Century Fox. But with the publishing side of the business there were some diamonds in the rough for investors to take interest in; a couple of TV companies, as well as of course Dow Jones’ Wall Street Journal, which has been invested in heavily. Conversely, the feeling of the Time Inc spin-off was more one of being put out to pasture, particularly as the company will not have enough money to make any significant acquisitions. Like the turmoil at Le Monde, there have been managerial controversies, as those seeking to shake things up have tried to overcome historical divisions between the sales and editorial teams – something other large business journalism companies are reportedly struggling with – only to be met with frustration.
Setting that aside, Time Warner moved swiftly. A day later, the FT reported that the company was “finalising an investment” in Vice Media. We have written extensively about Vice previously, here. The company certainly seems to know how to reach fickle millennials, through a combination of interesting, off-beat journalism, content designed to create its own news, as well as compelling video documentaries that take an unusual look at topical subjects. Such an outlook however does not preclude it from partnering with corporations. As a millennial myself, it seems what people look for from those like Vice is authenticity, rather than the vanilla mediocrity arguably offered by others. We don’t mind commercialism as long as it’s transparent. It does not jar then when Intel is a major investor in its ‘content verticals’, or when last year 21st Century Fox invested $70m in the company. This bore fruit for the movie studio most recently in a tie-up promoting the upcoming Dawn of the Planet of the Apes. The sequel takes place 10 years after the 2011 film, and Fox briefed Vice to create three short films that would fill in the gaps. A great ploy, and the result is some compelling content to keep fans engaged in the run-up to the film’s release, particularly in territories where the film opens after the US market. Such activity is far beyond the purview of the traditional newspaper. But this is not necessarily a bad thing. Publishers must face up to the reality that newspapers alone will not deliver enough revenue to be sustainable. Seeking other content revenue streams while engaging in strategic partnerships with other companies looks, for now, to be a winning formula.
UPDATE 08/07/14: When it comes to engaging with millennials, mobile is most definitely the medium of choice. The FT reported today on Cosmopolitan magazine’s 200% surge in web visitors, year on year in May. Fully 69% of page views were from mobile devices (compared to a 25% average for the rest of the web). The publication has also wised up to the type of content this group likes to consume, as well as create. Troy Young, Hearst’s president of digital media, said the new site is “designed for fast creation of content of all types… Posts aren’t just text and pictures. They’re gifs, Tweets, Instagrams.” Mobile will only get the company so far though. PwC thinks US mobile advertising spending will account for only 4.6% of total media and entertainment advertising outlays this year. Cosmo is looking beyond mobile though to “exclusive events or experiences”, perhaps along the same lines as those other businesses are practicing who are looking for additional revenue streams. The article suggests users might “pay to see the first pictures of an occasion like Kanye West’s and Kim Kardashian’s recent wedding”. Beggars can’t be choosers.
UPDATE 10/07/14: Have all these corporate manoeuvres on the part of Time Warner been in the service of making itself appear an attractive acquisition? As the famous and clandestine Sun Valley conference takes place this week, rumours abounded that Google or 21st Century Fox were both interested in buying TW. This according to entertainment industry trade mag Variety, which commented, “Time Warner could be an attractive target. Moreover, unlike Fox or Liberty Media, it is not controlled by a founder or a founder’s family and with a market cap of $63.9 billion it is a relative bargain compared to the Walt Disney Co. and its $151 billion market cap”.
Apple seems to be at a bit of a cross-roads at the moment. Attending a Mobile World Congress wrap-up event in Cambridge last week, Zeitgeist listened carefully to one of the key speakers, William Webb, casually toss off the following epithet; “Since Steve Jobs died, so has all innovation… Everyone was catching up with Apple, then they did and Apple ceased to innovate.”
As a brand, the company is still strong. The above TV spot is one of the more effective pieces of advertising on the box right now. As a service, the story is less clear. So much ink has been spilled over the years writing about the imminent arrival of a fully-fledged Apple TV service, that the most recent rumours with Comcast did little to raise expectations. Variety called a deal between the two companies “improbable”. Elsewhere, Business Insider said yesterday it was time for Apple to launch a music subscription service – the chart below will make tough reading for the iTunes side of the business, with negative growth in 2013.
Strategic clarity seems to have escaped the company of late. Are Apple’s greatest days behind it then? We say, don’t bet on it.
Last night, Zeitgeist eagerly devoured the first episode of the new season of Netflix‘s House of Cards, a series that has received lavish praise – not least from us – both for its content and its position as vanguard of a new wave of television distribution, production and consumption. The series lead, Frank Underwood, takes on his competition with a ruthless lack of morality that is unlikely to jar with those in the cutthroat television industry. The New York Times recently featured an excellent piece on the series, focusing on the showrunner Beau Willimon, the unique nature of doing such a show with Netflix, which among other things guaranteed 26 shows upfront, and the new mood of “post-hope” politics. Is traditional linear TV entering its own post-hope state?
Such talk of impending doom makes for nice editorial (which Zeitgeist is not averse to), but how true is it? To some extent, such new forms of consumption are being hampered by externalities as the platforms make the switch from early adopters to the everyday consumer. Indeed, Netflix’s sheer popularity is proving to be a thorn in its side. In November last year, Sandvine reported that the content Netflix provides now accounts for almost a third of internet traffic in the US. This staggering figure no doubt accounts for at least part of why internet speeds take such a distinct hit during primetime viewing hours (see chart below). As Quartz has the insight to point out, such issues are less to do with intentional throttling and more to do with peering agreements between ISPs and content providers.
Such issues are likely to be ever more prevalent as the notion of net neutrality continues to come under attack. At the end of last month, a federal appeals court overturned the Federal Communication Commission’s Open Internet Order, which had stipulated that ISPs could not prejudice one type of internet traffic over another. The fear of any such policy being overturned has always been one of the creation of a two-tier internet, where people who can afford faster internet get preferential access, and companies are free to charge distributors differing amounts based on the type or amount of content they are delivering. Such consternation was also felt in government, where five US senators called on the FCC chairman to “act with expediency” to preserve the open internet. The news immediately caused concern for Netflix, as shareholders fretted that ISPs might start to charge the company for the traffic it takes up. CEO Reed Hastings responded categorically,
“Were this draconian scenario to unfold with some ISP, we would vigorously protest and encourage our members to demand the open Internet they are paying their ISP to deliver.”
Consolidation and the narrowing of choice took a further hit on Wednesday this week when Comcast announced it would buy all of Time Warner Cable for $44.2bn. The choice on cable landscape is already limited for the US, so it will be interesting to see what regulators make the deal. Chad Gutstein, former COO of Ovation, an independent arts-focused cable channel, penned an article in Variety saying that any concerns over the deal should be restricted to the possibility of abuse of a dominant position, rather than simply market share.Columbia Law School professor Tim Wu, writing in The New Yorker, rightly points out that the FCC should be approving such mergers only if they serve the public interest. He sees no such possibility in this instance, where the most pressing need for cable customers is lower prices. Last year, he writes, Comcast collected about $156 a month on average, per customer. For cable. Professor Wu contends that the merger would put Comcast in a position that would make it easier to raise prices further. This, despite the fact that conditions created via the merger would technically put the company in a position where it could create savings, both through economies of scale and more advantageous negotiating positions with programmers like ESPN and Viacom. Of course, Comcast is probably keen on preserving if not extending margins as it faces increasing competition from players like Netflix and Amazon. Cord cutting may be in vogue now, but Comcast will try to combat this by creating what is called ‘lock-in’. Craig Aaron, president of Free Press, a consumer advocacy group, is quoted in the New York Times; “Comcast and the new, giant Comcast are going to do as much as they can to stop you from unbundling. In order for you to get content you like, you’re going to be pushed to pay the cable bill, too”. Such tactics will test the limits of customer inertia, but only if they have somewhere else to go as a viable alternative.
The switch to online viewing is also raising issues of policy change in the UK. Public service broadcaster the BBC has long left it unclear as to at what point requiring a TV licence is mandatory, leaving citizens to infer that simply owning a television set is reason enough. Recently though, the broadcaster finally clarified that owners can use their TV, with no fee, to play games, watch DVDs, basically do anything that doesn’t involve watching live television. For the moment, this also includes their IPTV offering, iPlayer. In an article earlier this month, The Economist said the fee was “becoming ever harder to justify”. Antonella Mei-Pochtler of the Boston Consulting Group, quoted in the article, believes the increasing trend of young people to timeshift their viewing is likely to become ingrained. Coupled with the growth of internet-connected TVs, this is bound to accelerate a shift away from traditional linear consumption. The BBC is soon to begin developing premium content for its iPlayer service in order to seek additional revenue streams that may offset a decline in fees paid. But as The Economist points out,
“[T]hat would suggest, dangerously, that the BBC is like any other optional subscription service. Folding on-demand services into the licence fee could also amplify calls for the BBC to share its cash with other broadcasters, not least because such consumption may be precisely measured.”
When we look at the market for television sets and set top boxes, the news isn’t that superb either. The curved TVs debuted at CES in January are surely little more than a distraction. Last week, Business Insider reported that Sony is to finally spin off its TV operations into a separate unit, amongst news of $1.1bn in losses and 5,000 job cuts. But while we’ve talked of consolidation and narrowing choice, we also need to recognise this is also a period of unprecedented choice for consumers. As a recent article on GigaOm points out, there are millions of channels on YouTube alone. There are growing pains. As consumption of such content moves “to the living room”, the article details various sub rosa negotiationsby retailers like Walmart with their own video market, or players like Netflix willing to pay top dollar to put branded buttons on remote controls. What is clear, with all the issues described in this post, is that consumer choice needs to be preserved in an open market with plenty of competition. Such an environment will always foster innovation. This may breed disruption, but that doesn’t have to mean devastation. The age of linear TV viewing may be at the beginning of its end, but that doesn’t mean there’s still a lot to fight for, even if it’s a scrap. Frank Underwood wouldn’t have it any other way.
UPDATE (22/02/14): The New York Times published an interesting article comparing Netflix and HBO recently, showing how the two companies are faring financially (see image above), as well as their approaches to developing content, which started off as opposing ideologies but are slowly starting to meet in the middle as they borrow from each other’s playbook. The article quotes Ted Sarandos, Netflix’s chief content officer: “The goal is to become HBO faster than HBO can become us.”
UPDATE (22/02/14): Of course, commercial network television in general is also going through a period of consternation, slowly building since the day TiVo started shipping. At the end of last year, the Financial Times reported that share of advertising spend on television is set to end after three decades. This is partly due to a proliferation of new devices and platforms – not least of which is Netflix – but also partly due to the amount of people time-shifting their viewing and skipping through the ads along the way. Thinkbox, a lobbying arm for the television industry, recently published a blog article with accompanying chart. It illustrated how many people time-shifted a particular programme depending on the genre. For example, fewer people time-shifted the news than drama shows. But one of the key points made in the article is “that there is no significant difference in the amount of commercial TV which is recorded and played back compared with BBC equivalents. To put it another way: TV is not time-shifted in an attempt to avoid ads”. This is specious reasoning at best. While it may be true that, yes, people do not discriminate between whether they time-shift a BBC show or an ITV show, it would be totally wrong to infer that those viewers are not avoiding ads when they do appear. The article’s author is guilty of confirmation bias, not to mention grasping at straws.
Pretty much seven years ago to the month, Zeitgeist was putting the finishing touches to his Master’s dissertation. It centered on intellectual property rights, and the infringement of those rights by consumers who were downloading content they weren’t paying for. Zeitgeist conducted multiple interviews, including several with key people at studios and industry bodies in Europe and Los Angeles. It was a time when the industry were trying to curtail piracy using massive fines and jail sentences, at the same time providing few legal alternatives for content consumption online (this latter issue is still a problem today). Needless to say, there were a fair amount of heads buried in the sand. We’ve talked about piracy before, from its murky impact on the bottom line to the stricture of copyright law.
It was refreshing to see the news reported by industry trade mag Variety that Comcast – a large cable operator in the US, which also owns NBCUniversal – is investigating new methods of disrupting piracy online. Specifically, they are planning to push pop-ups to those who are downloading content illegally, providing them with links to alternative domains where the same product can be downloaded legally. There are privacy concerns here, undoubtedly. What was most reassuring about the idea though was crystallised below by journalist Andrew Wallenstein, which for Zeitgeist hits the nail on the head:
Using pirated content as a platform to drive legal transactions reflects an alternate philosophy regarding copyright infringement, one that sees the illegal activity less as a crime that requires punishment and more as lead generation to a consumer whose behavior is borne out of inadequate legitimate digital content options.
This post serves as a companion piece and extended update to our previous article on rethinking film industry strategy, which can be found here.
“For me, the business of tentpoles is about generating franchises. The more tentpoles that are being made, the more risky the first installment of a potential franchise is going to be. That’s why I think everybody needs to be asking hard questions about what is a real tentpole and what is a faux tentpole.”
- Jean-Luc De Fanti, managing partner at Hemisphere Media Capital
Since our last post a few weeks ago on the need to rethink film industry strategy, when Steven Spielberg publicly predicted an “implosion” in the industry, the subject remains in the zeitgeist. As we referenced in our last post, Mr. Spielberg has some familiarity with the industry’s modus operandi, having created the blockbuster phenomenon way back in the 70s with Jaws. Like a mutant in a film of that genre though, the nature of blockbusters has changed since then. Jaws, were it made today, would look very different (i.e. terrible). Despite Mr. Spielberg’s warnings, studios presumably took some comfort in an animated sequel – Despicable Me 2 – becoming, in the words of NBCUniversal chief Steve Burke, “the single most profitable film in the 100 year history of Universal Studios”, more than E.T., Jurassic Park, etc. Not only did it paint a picture of an industry continuing to grow (though presumably the figure did not take inflation into consideration), it must have also quietened any further calls for originality, safe in the knowledge that it was a pretty lowbrow sequel that had triumphed.
The caveat is a large one though, that any proponents of summer blockbusters need to pay close attention to. Despicable Me 2 has made £437 million so far, with a production budget of just £50 million. While on the surface then Despicable Me 2 seems to prove how successful and profitable summer movies can be, it actually provides a lesson in what commercial success can look like with a small-budgeted film. Instead, the rule of thumb during the summer is more likely to involve investing some $200m+ in a film that fails spectacularly – think The Lone Ranger. Though this Disney production is the most visible disappointment of the season, it is by no means alone. The New York Times count “six big-budget duds since May 1“. It is interesting to note that Now You See Me, “the kind of midrange film that studios have largely abandoned as they focus more on pictures that play globally — has taken in $200.4 million worldwide and is still playing”, after costing $75m to make.
Those responsible try to spread the blame. Johnny Depp and producer Jerry Bruckheimer absolved themselves of wrongdoing for their involvement in The Lone Ranger by blaming the critics. Said Depp, “They had expectations that it must be a blockbuster. I didn’t have any expectations of that”. Yet it is easy to see how one might assume the film – created at such expense, with ripe intellectual property to be exploited, with talent involved in the phenomenally successful Pirates of the Caribbean franchise – had all the appropriate ingredients to make it a blockbuster. Studios meanwhile harp on about Twitter, which lets people instantly share their thoughts on a film and is now considered a worrisome bellwether for box office potential. But this is a reaction to poor filmmaking, not a reason why a bad film exists in the first place. They also cite a tight calendar. As The New York Times elaborates, “One or more cinematic behemoths — those loaded with similar-looking computer-generated effects, films that cost $130 million to $225 million to make — have arrived almost weekly since May, fragmenting and fatiguing the audience”. Again, this is no one’s fault but that of the industry. The idea of launching films in a specific time window, when consumers now enjoy time-shifting and device-shifting with their content, is antiquated. It is just as irrelevant in winter, when back-to-back “prestige” films clutter cinemas, desperate for Oscar attention. It is overwhelming for audiences, reduces choice, and in the case of the winter season implies that the voting member of the Academy have no long-term memory.
The summer product is so derivative that evidently audiences are pushing back, showing indifference to the “clones” that feature so prominently at Comic-Con. Films are either direct sequels / reimaginings, or strongly resemble other recent projects. Again, The New York Times has an excellent article on this, elaborating,
“Studios showcased another Amazing Spider-Man, another Cloudy With a Chance of Meatballs, another Avengers, another Thor and another Captain America… In addition to Godzilla, remakes teased here in recent days included RoboCop… and Riddick,… Even many of the original movies introduced at Comic-Con this year had a been-there-done-that feeling to them, notably Legendary’s sword-and-sorcery picture Seventh Son, which co-stars Jeff Bridges, Julianne Moore and Ben Barnes. In thundering snippets of footage shown on Saturday, the movie at times resembled Clash of the Titans, Snow White and the Huntsman and The Chronicles of Narnia: Prince Caspian.”
Cheering news for Sony came last week when it announced a $35m profit in the last quarter, but turbulence lay beyond that. In our last post, we mentioned the imbroglio that Sony found itself in as investor Daniel Loeb – whose hedge fund owns roughly 7% of Sony – continued to urge Sony to spin off its entertainment assets. Last week, he wrote a third letter to Sony – the most aggressive yet, with the Financial Times calling it “blistering” – comparing the film division’s two recent duds After Earth and White House Down to Ishtar and Waterworld (two of the floppiest flops to ever flop). He wrote that the CEO, Kazuo Hirai was sitting by complacently while the film division remained “poorly managed, with a famously bloated corporate structure, generous perk packages, high salaries for underperforming executives and marketing budgets that do not seem to be in line with any sense of return on capital invested”. It was with some interest then that, this past Friday, Zeitgeist saw that none other than George Clooney had stepped into the fray, calling Loeb an “activist” who “knows nothing about our business”. He lambasted the hedge fund industry in general, saying “if you look at those guys, there is no conscience at work”.
Clooney added that the “climate of fear” Loeb was creating would lead to even more risk-averse productions. It is creative, rather than financial risk, that Hollywood is sorely in need of. Art doesn’t engage audiences when it is timid and derivative. It inspires people when it is innovative, daring and different. Usually such creative thoughts do not spring forth from the mind of a hedge fund manager. Such new thinking – involving a review of a market research firms say is suffering from “overcrowding” – will require a significant course correction, one that is not going to come anytime soon. The summer slate for 2015 currently includes a Terminator sequel, an Avengers sequel, a Smurfs sequel, Independence Day 2 and Pirates of the Caribbean 5.
This past week, Zeitgeist had the pleasure of enjoying a new adaptation of Shakespeare’s “Much Ado about Nothing”. This adaptation was not performed at the theatre but at the cinema. It was not directed by Kenneth Branagh or any other luminary of the legitimate stage, but rather by the quiet, modest, nerdy Joss Whedon, who until a few years ago was best known to millions as the brains behind the cult TV series phenomenon “Buffy the Vampire Slayer” (full disclosure: Zeitgeist worked on the show in his days of youth). Whedon was picked to direct a film released last year that can, without much difficulty, be seen as the apotheosis of the Hollywood film industry; “The Avengers”. A mise-en-abyme of a concept, involving disparate characters, some of whom already have their own fully-fledged franchises, coming together to form another vehicle for future iterations. “The Avengers” became the third-highest grossing film of all time, and it is a thoroughly enjoyable romp. Moreover, to go from directing on such a broad canvas to shooting a film mostly with friends in one’s own home – as with “Much Ado…” – displays an impressive range of creative ingenuity.
Sadly for shareholders and studio executives’ career aspirations, not every film is as sure-fire a hit as “The Avengers”, try though as they might (and do) to replicate the same mercurial ingredients that lead to success. Marvel, which originally conceived of the myriad characters surrounding The Avengers mythology, was bought in 2009 by Disney for $4bn. Disney for all intents and purposes have a steady strategic head on their shareholders. They parted ways with the quixotic Weinstein brothers while welcoming Pixar back into the fold. They were one of the first to concede the inevitability of closed platforms release windows – something Zeitgeist has written about in the past – they are debuting a game-changing platform, Infinity, which might revolutionise the way children interact with the plethora of memorable characters the studio have dreamt up over the years. However, such sound business strategy could not save them from the uber-flop that was 2012’s “John Carter”, which lost the studio $200m. This summer, the rationale for their biggest release has been built on what appears to be sound logic; taking the on- and off-screen talent behind their massively successful “Pirates of the Caribbean” franchise, and bringing them together again for another reboot in the form of “The Lone Ranger”. The New York Times said the film “descends into nerve-racking incoherence”; it has severely underperformed at the box office, after a budget of $250m. Sony’s “After Earth” similarly underperformed, suddenly throwing Will Smith’s bullet-proof reputation for producing hits into jeopardy.
These summer films – “tentpoles” to use the terminology bandied about in Los Angeles – are where the money is made (or not) for studios. As an industry over the past ten years, Zeitgeist has watched as these tentpoles have become more concentrated, more risk-averse and therefore less original, more expensive and more likely either to produce either stratospheric results or spectacular failures. Paramount is an interesting example of a studio that has made itself leaner recently, releasing far fewer films, and relying on franchises to keep the ship afloat. Edtorial Director of Variety Peter Bart seems to think there’s a point when avoiding risk leads to courting entropy. It’s an evolution that has escaped few, yet is was still notable when, last month, famed directors Steven Spielberg and George Lucas spoke out publicly against the way the industry seemed to be headed. Indeed, the atmosphere at studios in Hollywood seems to mimic that of a pre-2008 financial sector; leveraging ever more collateral against assets with significant – and unsustainable – levels of risk. The financial sector uses arcane algorithms and has a large number of Wharton grads whose aim should be to preserve stability and profit. Yet even with all this analysis, they failed to see the gigantic readjustment that was imminent. In the film industry, Relativity Media’s reputation for rigorous predictive models on what will make a film successful is rare enough to have earned it a feature in Vanity Fair. So what hope is there the film industry will change its tune before it is too late? Spielberg pontificates,
“There’s eventually going to be a big meltdown. There’s going to be an implosion where three or four or maybe even a half-dozen of these mega-budgeted movies go crashing into the ground and that’s going to change the paradigm again.”
Instead of correcting course as failures at the box office failed to abate, studios have dug in harder. Said Lucas,
“They’re going for gold, but that isn’t going to work forever. And as a result they’re getting narrower and narrower in their focus. People are going to get tired of it. They’re not going to know how to do anything else.”
Such artistic ennui in audiences is admittedly sclerotic in its visibility at the moment. “Man of Steel”, another attempt at rebooting a franchise – coming only seven years after the last attempt – is performing admirably, with a position still firmly in the top ten at the US box office after four weeks of release, with over $275m taken domestically. It’s interesting to note that audiences have been happy to embrace the new version so quickly after the last franchise launch failed; though actor James Franco finds it contentious, the same has been true with the “Spider-Man” franchise relaunch.
Part of the problem in the industry, some say, is to do with those at the top running the various film studios. In “Curse of the Mogul”, written by lecturers at Columbia University, the authors contend that since 2005 the industry as a whole has underperformed versus the S&P stock index, yet such stocks are still eminently attractive to investors. The reason, the authors say, is that those running the businesses frame the notion of success differently. They argue that it takes a very special type of person (i.e. them) to be able to manage not only different media and the different audiences they reach and the different trends that come out of that, but more importantly (in their eyes) to be able to manage the talent. They asked to be judged on Academy Awards rather than bottom lines. The most striking thing in the book – which Zeitgeist is still reading – is the continual pursuit by said mogul of strategic synergies. This M&A activity excites shareholders but has historically led to minimal returns (think Vivendi or AOL Time Warner), often because what was presented as operational or content-based synergy is actually nothing of the sort. It’s a point Richard Rumelt makes in his excellent book, “Good Strategy / Bad Strategy”. Some companies are beginning to get the idea. Viacom seemed an outlier in 2006 when it divested CBS. Lately, News Corporation has followed a similar tack, albeit under duress after suffering from scandalous revelations about hacking in its news division. A recent article in The Economist states,
“Most shareholders now see that television networks, newspapers, film studios, music labels and other sundry assets add little value by sharing a parent. Their proximity can even hinder performance by distracting management… they have become more assertive and less likely to believe the moguls’ flannel about ‘synergies’.”
So in some ways it was of little surprise that Sony came under the microscope recently as well, part of this larger trend of scrutiny. The company has experienced dark times of late, with shares having plunged 85% over the past 13 years. The departure of Howard Stringer in 2012 coincided with an annual loss of some $6.4bn. Now headed up by Kazuo Hirai, the company has undoubtedly become more focused, with much more being made of their mobile division. Losses have been stemmed, but the company is still floundering, with an annual loss reported in May of $4.6bn. It was only a couple of weeks later that hedge-fun billionaire Dan Loeb – instrumental in getting Marissa Meyer to lead Yahoo – upped his ownership stake in Sony, calling on it to divest its entertainment division in a letter to CEO Hirai. Part of the issue with Sony is a cultural one, where Japan’s ways of working differ strongly from the West’s. This is covered in some detail in a profile with Stringer featured in The New Yorker. In a speech he gave last year, Stringer said, “Japan is a harmonious society which cherishes its social values, including full employment. That leads to conflicts in a world where shareholder value calls for ever greater efficiency”. But Sony’s film division – which includes the James Bond franchise – is performing well; in the year to March 2013 Sony’s film and music businesses produced $905m of operating income, compared with combined losses of $1.9 billion in mobile phones, according to The Economist. It ended 2012 first place among the other film studios in market share. Sony is the last studio to consistently deliver hits across genres, reports The New York Times in an excellent article. The article quotes an anonymous Sony exeuctive, “We may not look like the rest of Hollywood, but that doesn’t mean this isn’t a painstakingly thought-through strategy and a profitable one”. Sadly the strategy behind films like ‘After Earth’ begin to look flimsy when one glances at the box office results. While Hirai and the Sony board concede that have met to discuss the possibility of honouring Mr. Loeb’s suggestion – offering 15-20% of it as an IPO rather than selling it off in full – Mr. Hirai also commented in an interview with CNBC, “We definitely want to make sure we can continue a successful business in the entertainment space. That is for me, first and foremost, the top priority”. In mid-June Loeb sent a second letter, advocating the IPO proposal and saying “Our research has confirmed media reports depicting Entertainment as lacking the discipline an accountability that exist at many of its competitors”. The question is whether selling off its entertainment assets would remove any synergies with other divisions, thus making the divisions left over less profitable, or whether such synergies even existed in the first place. For Loeb, the “most valuable untapped synergies” are still in the studio and music divisions yet after decades as one company they still remain untapped. That point won’t make for pleasant reading at Sony HQ.
Another problem is the changing nature of media consumption habits. Not only are we watching films in different ways over different platforms, we are also doing much else besides, from playing video games, which have successfully transitioned beyond the nerdy clique of yesteryear, to general mobile use and second screening. This transition – and with it a realisation that competition is not likely to come from across regional boarders but from startup platforms – is largely being ignored by the French as they insist on trade talks with the US that centre on the preservation of l’exception culturelle. Such trends are evident in business dealings. The Financial Times this weekend detailed Google’s significant foray into developing content, setting up YouTube Space LA. The project gives free soundstage space to artists who are likely to guarantee eyeballs on YouTube, and lead to advertising revenue for the platform. From the stellar success of the first season of “House of Cards”, to DreamWorks Animation’s original content partnership announced last month, Netflix has become the bête noire for traditional content producers as it shakes up traditional models. We have written before about the IHS Screen Digest data from earlier this year, showing worrying trends for the industry; as predicted, audiences are beginning to favour access over ownership, preferring to rent rather than own, which means less profit for the studio. As much due to a decline in revenue from other platforms as growth in of itself, cinemas are expected to be the major area of profit going forward to 2016 (see above chart). We’ve written before about the power cinema still has. Spielberg and Lucas pick up on this;
“You’re going to end up with fewer theaters, bigger theaters with a lot of nice things. Going to the movies will cost 50 bucks or 100 or 150 bucks, like what Broadway costs today, or a football game. It’ll be an expensive thing… [Films] will sit in the theaters for a year, like a Broadway show does. That will be called the ‘movie’ business.”
In a conversation over Twitter, (excerpts of which are featured above), Cameron Saunders, MD of 20th Century Fox UK told Zeitgeist that “major changes were afoot”. Such potential disruption is by no means unique to the film industry, and should come as a surprise to one. Zeitgeist recently went to see Columbia faculty member Rita McGrath speak at a Harvard Business Review event. In her latest book, “The End of Competitive Advantage”, McGrath discounts the old management consultant attempts at providing sustainable competitive advantages to business. Her assertion is that any advantage is transient, that incumbency and success often lead to entropy, unless there is constant innovation to build on that success. Such a verdict of entropy could well be applied to the film industry. The model has worked well for decades, despite predictions of doom at the advent of television, the VCR, the DVD, et cetera ad nauseum. But fundamental behavioural shifts are now at play, and the way we devise strategies for what content people want to see and how they wish to see it need to be readdressed, quickly. Otherwise all this deliberation will eventually become much ado about nothing.
UPDATE (15/4/13): Of course, context is everything. The New York Times published an interesting article today saying investing in Hollywood is less risky than investing in Silicon Valley, though the returns in the latter are likely to be greater. Neither are seen as reliable.
This issue isn’t going away. We write again about it, here.
“[T]he big screen. That is its natural habitat—the only place, you might say, where its proud and leonine presence has any meaning. Anything more cramped is a cage, as Jon Stewart showed during this year’s Oscar ceremony. At one point, we found him gazing at his iPhone. “I’m watching ‘Lawrence of Arabia.’ It’s just awesome,” he said, adding, “To really appreciate it, you have to see it in the wide screen.” And he turned the phone on its side. Deserts of vast eternity, reduced to three inches by two.”
- Anthony Lane, The New Yorker
Film can sometimes be a mercurial medium. Especially nowadays. It encompasses multiple genres, and, like food, is meant for different occasions, for different needs. Of course, sometimes we go to bad restaurants, or order in, and the experience is terrible. Uber-flop John Carter cost Disney a cool $200m, and wasted many a precious dollar and hour for those that went to see it (admittedly few). But sometimes it’s like a great burger and fries – Die Hard springs to mind – and sometimes it’s a sumptuous 6-course meal cooked by a Michelin-starrred chef – Lawrence of Arabia, or All the King’s Men. Film can stimulate us, it can teach us, and it can be a breezy bit of consumption to pass the time, like a coffee at Starbucks. Moreover, as with food, it can be consumed in different places and circumstances. There are times when the right way to watch a certain film is on your iPad in a cramped airline seat. Pure escapism. But cinema has a crucial place too.
It was interesting today, when Zeitgeist went to see a movie, that it was preceded by an announcement showing an empty cinema, covered in cobwebs and dust, bemoaning the death of the medium at the hands of pirates. Its aim was to take the audience on a guilt trip: ‘Why are you illegally downloading films?’ ‘Why aren’t you coming to see more films at the cinema?’ it pleaded. There are a couple of things strategically wrong with this approach. Firstly, what is the principle problem here? Alright, people are not going to the cinema as often as we would like. Zeitgeist remembers in a brief stint working for Fox several years ago that people went to the cinema 1.8 times a year in the UK. The Economist reports that the share of Americans who attend cinema at least once a month has declined from 30% in 2000 to 10% in 2011. The assumption is that people are instead pirating films at home, thereby depriving studios of money (ignoring research that suggests those that pirate are often avid cinema-goers, and optimistically equating every film downloaded to ticket revenue lost). Well, one quick way to address this is to make films legally available – at a sizeable premium – on multiple platforms day and date. We’ve argued this before, and entertainment trade Variety has used our argument for a lead editorial. It should be recognised, that, although the most prominent face of the film industry, cinema is not what makes the studio money; for years the bulk of profits have been made in home entertainment consumption. Furthermore, there are two fallacies here. One is that cinemas make most of their profit from the snacks people buy at the cinema, not the films themselves. If you want to increase margins, there should be a much more prominent focus on food options, and that means offering a wider, more tempting range of food to be eaten, which is then promoted more effectively. The way such snacks are currently promoted – “Let’s all go the lobby” – has not altered for a half century. Lastly and most egregiously, the communication is completely misdirected, talking to the very audience who is already doing what the ad asks them to do. The ad is shown nowhere but the cinema, therefore only people who go to the cinema will be subject to this guilt trip. To avoid feeling guilty, one can avoid the ad by avoiding the cinema. The logic is completely twisted. Negative communications have been shown to be much less effective in influencing behaviour than positive affirmation. So let’s think about a way to promote cinema that goes beyond a highlight reel of what movies are on in a particular season. More robust revenue streams will have to be found soon. Less people are turning out to the cinema, and in foreign markets, which are doing relatively well, a far smaller chunk of box-office receipts go to the studios.
What also played during the reel before the film started was a short film by Disney Animation that has been nominated for an Academy Award, called Paperman (see trailer above). Zeitgeist had watched the short some days ago on his iPhone after coming across it on Twitter, and enjoyed it thoroughly. It was exciting and convenient to be able to consume something so quickly after hearing about it. Moreover, it was instantly shareable with the 400-odd people who follow our tweets when we retweeted the link. Seeing it in the cinema today though really reinforced the power of the big screen; the detail you couldn’t see on the iPhone, the great sound, and the shared laughter and enjoyment from those around you. “Grandeur is a far from simple blessing”, writes Anthony Lane in the same article quoted at the beginning of this post, in The New Yorker back in 2008. The pleasure of watching something in the cinema is ultimately an irrational benefit, which can be hard to quantify, but even harder to ignore.
UPDATE (06.12.13): The Economist featured a good article on how cinemas are seeking new revenue streams around the world, here.
“If you have built castles in the air, your work need not be lost; that is where they should be. Now put foundations under them.”
- Henry David Thoreau
Though the brouhaha over the series House of Cards has been building steadily since its announcement almost two years ago, through rumours of budget battles between director and studio, it was upon the release of the series this week that the media meta-echo chamber really went into overdrive. The first season, with a budget far north of $100m, debuted to ebullient praise from critics. But what does it signify for the trail-blazing company’s future?
Aside from the mostly positive reviews, the series piqued the media industry’s interest for other reasons too. It is the first to be created and screened exclusively by Netflix, a company previously known for striking deals with studios to distribute and stream their content. Not satisfied solely with such (sometimes pricey) deals, the company also saw an opportunity for greater brand visibility and a separate revenue stream – assuming it eventually licenses the show regular TV networks – in fully-fledged independent production. What is also interesting is that the entire first season was made available for instant viewing, all 12 hours. By doing this the company recognised and capitalised on a trend that has been accelerating for almost a decade; people like to watch multiple episodes at once. This has never not been the case, but the weekly episodic installments of shows on network television have allowed the audience little say in the matter, and thus no room for such a habit to develop. This changed dramatically with the arrival of the DVD, specifically with affordable boxsets, as those that had missed the zeitgeists of West Wing, The Sopranos and 24 were able to quickly catch up with their obsessed brethren. Critics have often noted how the viewing of multiple episodes at once – which is how such reviews are often conducted as they usually receive a disc with several shows to consider – particularly for shows like Lost, improves the structure and narrative flow. With the arrival of boxsets, such opportunities were available to all. Indeed, marketers leveraged this enthusiasm for consecutive viewing, creating events around it. Netflix saw this with absolute clarity and allowed viewers to watch as much or little as they desired. Many, it seemed, chose to devour the whole first season in one weekend, which entertainment trade Variety covered with humourous repercussions to the viewer’s psyche, across now fewer than six stages of grief. Zeitgeist has written before about the increasing popularity of streaming, and the complementary preference that audiences have for the type of films (action, romcom, broad comedy) they like to watch when choosing such a distribution method. It is interesting to consider then just how much the viewing experience differs between a 12-hour marathon over two days, and a one-hour slice over a period of three months. As the article in Variety half-jokingly posits, “Is tantric TV viewing a thing? If it’s not, should it be?”.
Of course, Netflix aren’t alone in seeing an opportunity to delve into developing complementary products and assets. Microsoft are using the functionality of Kinect to pair with their own content development, letting children “join in” with Sesame Street, for example, and are in the process of setting up a dedicated studio for production, in Los Angeles. Amazon, which owns the streaming service LoveFilm, is also getting into the game, recently setting up Amazon Studios for original content production. At the end of last year, The Hollywood Reporter announced Amazon would be greenlighting twenty pilots, all of which were “either submitted through the studio’s website or optioned for development”. YouTube recently launched twenty professional channels on its UK website, Hulu is following suit… It really is quite startling to see such fundamental disruption and turmoil in environments where incumbent stalwarts (such as 20th Century Fox in film and Walmart in retail,) have long been accustomed to calling the shots. Could the model become completely inverted, such that the Fox network and HBO become the “dumb pipes” of the TV world, showcasing the best in internet-produced television? Maybe so, and this is not necessarily a bad thing. The Economist this week argue that one of the most important factors in Liberty Global’s recent purchase of Virgin Media was the avoidance of paying corporate tax for “years” to come. If content is still king though, a problem remains for those incumbents. The New Yorker astutely points out,
“An Internet firm like Netflix producing first-rate content takes us across a psychological line. If Netflix succeeds as a producer, other companies will follow and start taking market share… When that happens, the baton passes, and empire falls—and we will see the first fundamental change in the home-entertainment paradigm in decades.”
Netflix must tread carefully. Crucially, what seems like competitive differentiation and all-quadrant coverage now can quickly shift. Amazon’s ventures into content production will be backed up with a sizeable and perpetual stream of revenue that it derives from its e-commerce platform, which isn’t going away anytime soon. The BBC are publicly welcoming new entrants, and is devising its own tactics, such as making episodes available on iPlayer before they screen, if at all, on television. Interesting but hardly earth-shattering, and likely to make little difference to viewer preference. Netflix will have to do better than that if it wants long-term dominance of this market. It will have to be increasingly careful with its partners, too. Recent, though long-running, rumblings of discord with partners like Time Warner Cable, though seemingly innocuous, tend to be indicative of a larger battle ensuing between corporate titans. Moreover, though the act of providing a deluge of content seems new and sexy now, what about when everyone starts doing it? Chief content officer for Netflix Ted Sarantos told The Economist last week, “Right now our major differentiation is that consumers can watch what they want, when they want it, but that will be the norm with television over time. We’re getting a head start”. Fine, but about when that is the norm, what is the strategy for differentiation then? Netflix have made some lofty, daring, innovative moves here, exploiting consumer trends and noticing a gap in the competitive environment. But they will need firm foundations to support this move into an adjacent business area, of which they know relatively little, in the years to come. As President Bartlet of West Wing was often heard to say, “What’s next?”.