But from my point of view, the reason we’re doing HBO Max and one of the reasons that we expected walking in as we want to be where the customers want to be and we’re focused on building a platform that’s relevant for the next decade, and we have a great opportunity to pick those customers up to have a great opportunity to have both a subscription and an ad supported platform that we manage and we control that we have a direct relationship with the customer on where we not only do the distribution, but we own a large amount of the content that the customer is interfacing with. That is a good place for us to be strategically over time and we’re leaning in to do that. And I’m more in tune with that being important to us and having a great and growing broadband business that complements it and that’s whether it’s broadband by fixed or mobile, that’s where our business needs to be and that’s the focus on what we need to do going forward.
focused on a direct relationship with the customer
where AT&T owns a large amount of the content that the customer is interfacing with, and
complemented by a growing broadband business across fixed and mobile
If the IAC MGM Resorts hypothesis is focused on ecosystems built around monetizing IP, AT&T is building an ecosystem focused on monetizing the access points into its ecosystem where there is a direct customer relationship. As I have written before, AT&T has not yet built an ecosystem for monetizing WarnerMedia IP. Instead, AT&T is focused on three access points for consumers: (1) mobile and (2) fiber broadband, and (3) HBO Max direct-to-consumer.
That contrasts with Netflix’s “Ubiquitous Access”, or ubiquity, where “the next big blockbuster movie or must-watch TV show” from streaming service is always one click away via Instagram or TikTok, Snapchat or Twitter, WhatsApp or iMessage, or Roku or Amazon Fire.
In a week where we saw more information on Disney’s restructuring revealed, more restructuring at WarnerMedia, and more executive departures from Netflix, we were witnessing two different approaches to the objective of “ubiquitous access” in the streaming marketplace emerge. First, legacy media companies are restructuring their economics and operations behind their longer term strategic move towards ubiquity, while second, Netflix is restructuring to reimagine the economics and operations behind the ubiquity it has already achieved.
Imagine if you had to launch the digital marketing campaign for the next big blockbuster movie or must-watch TV show. You will need to create ads for a variety of creative concepts, A/B tests, ad formats and localizations, then QC (quality control) all of them for technical and content errors. Having taken those variations into consideration, you’ll need to traffic them to the respective platforms that those ads are going to be delivered from. Now, imagine launching multiples titles daily while still ensuring that every single one of these ads reaches the exact person that they are meant to speak to. Finally, you need to continue to manage your portfolio of ads after the campaign launches in order to ensure that they are kept up to date (for eg. music licensing rights and expirations) and continue to support phases that roll in post-launch.
The blog post is unusually detailed in laying out how Netflix pursues ubiquity through marketing of “the next big blockbuster movie or must-watch TV show” (meaning, we are unlikely to see transparency like this from legacy media companies). Because Netflix is a platform, ubiquity enables “the next big blockbuster movie or must-watch TV show” on Netflix to be one click away from anyone they market it to. So, their solution is to be omnipresent at a cost of $2.70 per subscriber (which is up $0.45 per subscriber from $2.25 in Q2… more on this below). Additionally, there is no additional marginal cost for marketing content it owns: additional views of content it owns will not create additional obligations to third parties. Last, they monetize the user once, with a subscription fee.
Contrast this with AT&T opting to market “the next big blockbuster movie or must-watch TV show” by focusing on three access points, activating and monetizing the HBO Max user either as a broadband fiber subscriber ($52.40 ARPU), a wireless subscriber ($54.70 ARPU), or an HBO Max subscriber ($14.99 ARPU) (from Q3 earnings). [NOTE: There are also offerings where HBO Max is not included and marketed as an add-on].
AT&T may seem to be picking fewer battles than Netflix in terms of ubiquity, but Netflix-type ubiquity would be a misleading comparative lens to understand AT&T’s model for HBO Max. Rather, Stankey’s objective for HBO Max and its library is to leverage the asset to achieve higher ARPU, lower churn (“one basis point of churn equals $100M”), and lower marginal costs for its wireless and broadband businesses as cord-cutting accelerates.
“As you might expect, we’re seeing more rapid activation with subscribers who are active users of HBO digital offers, but we still have work to do to educate and motivate the exclusively linear subscriber base and we’ll continue to work with our wholesale partners to drive these activation rates.
We’re also bundling HBO Max with some of our premium wireless and fiber plans. We’re seeing a positive pull-through that’s at or better than the wireless unlimited plan step-up assumptions we shared with you in October. You will recall this coupled with the 5G handset upgrade cycle is one of the key drivers to growing wireless service revenues in the latter half of the year.”
What this means is, Stankey is betting big on premium 5G and fiber plans driving HBO Max sign-ups in the Fall, but it has “work to do” to improve driving subscribers through its conversion funnels.
There are two conversion funnels for HBO Max: (1) Wholesale and (2) Retail. Stankey is betting big on wholesale, but 1.165MM wholesale subscribers implies that AT&T is failing at wholesale marketing.
Q3 proved me wrong and Stankey’s approach right, as this tweet from Twitter account Masa Capital aptly summarizes:
Today, AT&T reported they gained 5 Million HBO/HBO Max subscribers from 1Q20 to 3Q20.
They also reported just under 4 Million retail subscribers – accounts billed directly by $T or a 3rd-party app, as opposed to accounts through a wholesale video distributor, including DirecTV. https://t.co/KXWYC0eHJQ
Masa nailed their prediction, and the math of the prediction was based on a 3-month promotional offer of HBO Max for free to >10 million video subs that launched on May 27th, the same date as his post. Masa Capital believed AT&T was “predicting a decent chunk of the 3-month free video subs will stay on, making future subscriber numbers look good” by Q3.
I had thought lower Wholesale HBO Max activations than Retail activations in Q2 reflected weakness in the Wholesale marketing model: AT&T leverages three access points to scale HBO Max but in the process is confusing consumers with a complex decision tree. The complexity is perfectly encapsulated in this tweet:
Of ~26M people eligible for HBOMax at no add’l cost, only ~1M signed on to the service. WarnerMedia now restructuring. Aside from Roku/Amazon, biggest issue is confusion.
Proctoring ‘an IQ test’ is no way to treat a customer. Paying subscriber base is there — focus on converting pic.twitter.com/lrBQnlQd3I
However, after reading John Stankey’s quote above, this decision tree reflects a different point: AT&T’s version of “ubiquitous access”, or there are more than three access points into the AT&T ecosystem . This map also reinforces Stankey’s argument in the Q3 earnings call that both HBO Max and original content are better businesses long-term within the AT&T ecosystem than outside of it.
AT&T arguably has ubiquity with Wholesale customers in the domestic U.S. (but not yet internationally) with: 34.6MM non-Retail subscribers, 14MM Broadband Connections, and 76MM postpaid wireless subscribers. HBO Max and an original content library will help AT&T to grow wireless subs and reduce wireless churn, grow broadband subs and reduce broadband churn. Moreover, AT&T will be able to market both to an install base and growing target customer base (cord cutters) at scale and at zero marginal costs (meaning, it is not paying third parties a licensing fee for every new view of a TV show or movie).This approach already has helped to offset growing losses in premium TV, as AT&T TV’s gains in broadband accomplished in Q3.
Returning to the comparison of AT&T to Netflix, the contrast is in how AT&T defines ubiquity. AT&T is building out the early stages of Netflix-type ubiquity for HBO Max leveraging its own ubiquity at three access points, but is not only pursuing Netflix-type ubiquity within its ecosystem. With WarnerMedia it still has linear channels, and it still has theatrical distribution, too. AT&T has the ability to mirror Netflix-type ubiquity within its ecosystem, and find additional Product Channel fit for WarnerMedia content without its ecosystem.
Toby Emmerich will have oversight over all motion picture output for WarnerMedia, streaming and theatrical. Moving forward, all development and production of original feature films for HBO Max will be consolidated under Emmerich and the Warner Bros Pictures Group, working in conjunction with Casey Bloys on overall platform goals. Oversight of original feature films for HBO Max was previously shared by the leadership at WarnerMedia Entertainment and the WB Pictures Group.
Emmerich’s development and production team led by Courtenay Valenti at Warner Bros Pictures, Brener at New Line and Walter Hamada at DC will continue to develop and produce titles that will be distributed theatrically for the Pictures Group, and direct to streaming on HBO Max. Top brass will figure which platform is best for the project, a continuation of Hollywood leaning into a streaming future.
Per the company, these moves are in the spirit of breaking down silos within the company divisions that are being reassembled.
Under the new structure, says a source with knowledge of the situation, Daniel’s Media and Entertainment Distribution group will work with the studios to determine their overall budgets and to dictate the content needs of distributors like Disney+ and ABC. That group will also make the call about whether a project is destined for theatrical, linear TV or streaming distribution. But once those decisions have been made, Studios chairmen Horn and Bergman, General Entertainment chairman Peter Rice and Sports chairman Jimmy Pitaro will have the ultimate say over the finished product. That means Disney+ executives won’t get in the weeds on casting decisions or offer creative notes, and Strauss’ team will pivot to focus more on programming and curation than content development.
Daniel, in a note to his division staff on Oct. 20 obtained by THR, sought to further clarify the restructure, saying that the Media and Entertainment Distribution team will “manage operations of the Company’s streaming services and domestic broadcast and cable television networks, while working in close collaboration with the creative leaders on content budgeting.” Those reporting to him include international operations and direct to consumer chairman Rebecca Campbell, platform distribution president Justin Connolly, who adds theatrical film distribution to his purview, president of advertising sales Rita Ferro, and a yet-to-be-named head of networks that will manage the bottom line for Disney’s linear TV channels.
Disney’s restructuring mirrors AT&T’s bet on streaming as a growth engine.
WarnerMedia, Disney, Ubiquity & Marketing
Disney’s restructuring also mirrors WarnerMedia’s restructuring within AT&T. They have the obvious characteristic in common: they are restructurings where the distribution of “the next big blockbuster movie or must-watch TV show” will be evaluated by a centralized group to determine in which distribution channel the optimal ROI can be achieved. Better yet, they are restructurings focused on operationally ensuring that “the next big blockbuster movie or must-watch TV show” will achieve Product Channel fit on streaming, theatrical, and.or linear [NOTE: NBCU has pursued a similar restructuring, and Sony Entertainment just announced its own].
The more interesting question with Product Channel fit is how marketing and “ubiquitous access” at WarnerMedia and Disney will be operationalized. Ubiquitous access as a strategy in DTC is ultimately about driving conversions at scale, and very little of the press about these legacy media restructurings has touched upon how either Disney or WarnerMedia are building that out. The Hollywood Reporter piece on Disney (above) comes closest:
Disney’s streaming structure has raised eyebrows since former CEO and current executive chairman Bob Iger unveiled plans in 2017 to launch an over-the-top service for all of Disney’s family-friendly brands. Though Iger put longtime marketing executive Ricky Strauss and former ABC and Imagineering executive Agnes Chu in charge of programming decisions and gave them greenlight power, he also directed the company’s studio engines to supply original shows and movies to the service, creating confusion over who exactly was in charge of the final product. The reorganization makes it clear that Iger and new CEO Bob Chapek are tipping the creative decision-making power in favor of the content chiefs but that the financial power will reside with the distribution arm. It’s a move that should come as little surprise to those paying close attention to Disney, which in recent months lost two of Disney+’s top bosses — Chu and direct-to-consumer and international chairman Kevin Mayer.
Now, under the new structure, “Disney+ executives won’t get in the weeds on casting decisions or offer creative notes, and Strauss’ team will pivot to focus more on programming and curation than content development.” So, as head of curation for Disney Plus and Hulu, Strauss will have say on which content and programming will ROI on the platforms, but it is less clear whether he will have power over “ensuring that every single one of these ads reaches the exact person that they are meant to speak to”. The only other answer we have on marketing is from Disney’s restructuring announcement: “The Media and Entertainment Distribution Group will work in close collaboration with the content creation teams on programming and marketing.” Which suggests either Kareem Daniel and Ricky Strauss are being set up to work on achieving ubiquity in tandem, or in conflict.
At WarnerMedia, HBO Max marketing reports to Andy Forssell after the first phase of the restructuring was first announced in August by CEO Jason Kilar: Andy Forssell now runs a newly created HBO Max operating business unit, and “will be responsible for the product, marketing, consumer engagement and global rollout of HBO Max.” In other words, Forssell is responsible for ubiquity.
Returning to the Netflix blog post up top: ubiquity is about imagining “launching multiples titles daily while still ensuring that every single one of these ads reaches the exact person that they are meant to speak to”. There is a clearer answer from WarnerMedia today than from Disney on how internal restructurings help to optimize decision-making around which platform is chosen for distribution, and how ROI is accomplished, for “the next big blockbuster movie or must-watch TV show”. [NOTE: We are likely to learn more from Disney on its Investor Day on December 10.]
Netflix Restructuring & Ubiquity
Netflix’s recent restructuring begins with ubiquity, and seems to be re-evaluating Product Channel fit for its expensive Hollywood content. Meaning, an ongoing series of executive departures since Bela Bajaria assumed Head of Global TV (read Variety’s profile of Bajaria’s global strategy here) imply a shift in content strategy. I took one stab at the implications on Twitter, below (click on the tweet for a longer, more interesting discussion about what the departure may mean):
I’d say both at this point. Bajaria looking more international than domestic, expensive domestic dramas haven’t performed anywhere close to blockbuster movies, so in a company run by math & software geeks, it needs a different algorithm
The problem for Netflix is that big-budget, expensive TV Series content like Dark Crystal and Hollywood have underperformed, cheaper international content succeeds globally, and the responsibility for that disconnect fell on Cindy Holland:
“Cindy had no global experience,” says another former Netflix exec with knowledge of the streamer’s programming performance. “The real power of Netflix is not the stuff we talk about [think Stranger Things]; it’s The Witcher, Money Heist, Dark and all the international stuff — not making more Ozark. And [Bela] made smart acquisitions and spear-headed unscripted, too.”
More problems with Holland’s tenure emerged last week, with David Fincher answering in an interview with Vulture:
So is Mindhunter done as far as you’re concerned?
I think probably. Listen, for the viewership that it had, it was an expensive show. We talked about “Finish Mank and then see how you feel,” but I honestly don’t think we’re going to be able to do it for less than I did season two. And on some level, you have to be realistic about dollars have to equal eyeballs.
Netflix also likely reached the same conclusion about being “realistic about dollars have to equal eyeballs” with its cancellation of Away after one season, about which I mostly agree with The Entertainment Strategy Guy’s take: it was expensive for the (Nielsen) eyeballs it captured, it is owned by a third-party, and it wasn’t popular. The cancellations of two TV series emerged in one week because Netflix needs to “be realistic about dollars have to equal eyeballs”. That is a surprising twist for the billions Netflix has invested in Hollywood star vehicles.
Changing The Economics of Netflix’s Ubiquity
If the Hollywood star vehicle TV series are too expensive for the eyeballs, that would imply that the ROI equation for TV series within Netflix’s ubiquity has been suffering. That was evident in the Q3 earnings: marketing costs were up by $0.45 or 20% per user (see above), and annual ARPU is tracking at $10.45, down from $10.82 last year.
That puts the onus on Netflix to either
reduce the costs of its productions,
find more growth with content that targets and “reaches the exact person that they are meant to speak to”, and/or
if necessary, raise prices.
On the Q3 earnings call, co-CEO Ted Sarandos highlighted recent management changes and restructuring as emphasizing growth:
[I] restructured the content team to be more like our film team and more like our animation team and have one global organization. And to run that, I tapped Bela Bajaria who’s been with Netflix for a long time, has come in to start our unscripted group, brought in that team from scratch, and they developed this incredible unscripted slate that we have today, moved over to our local language original team, hugely successful. These are 2 areas of the business that are going to grow 3 or 4x over the next 3 to 5 years.
More international content also means lower production costs than Hollywood productions. Less expensive, local language international and unscripted TV series may now be more important to Netflix’s growth than the $1B+ promised to the likes of Ryan Murphy, Kenya Barris, and others (as I highlighted last month: “Language is no longer a barrier. Only ambition and quality are barriers”) .
As for raising prices, COO Greg Peters was asked on the earnings call about it:
Kannan Venkateshwar, Barclays Bank PLC, Research Division
Got it. And Greg, from your perspective, when you think about the price increase decision recently, I think there was a price increase in Canada and Australia. Is this based more on some kind of an algorithm around content release slate and subscriber momentum? Or is this based more on the strategic goal of where you want to be with respect to ARPUs over a given time frame? So how should we think about the cadence of price increases going forward given that productions are restarting now?
Gregory K. Peters, COO & Chief Product Officer
Yes. No magic algorithm, but the core model we have is, and what we think really our responsibility and our job is, is to take the money that our members give us every month and invest that as judiciously, as smartly as we can and creating new amazing stories. We’ve got titles that are coming out across
an increasing range of genres, amazing movies like Old Guard and Extraction and more animation like Over the Moon and Willoughbys and Klaus, and so just basically delivering more value is for our members, better product experiences. And if we do that well and we seek to basically every day be better about pretty much every component of how we’re investing in that and make that efficiency and that effectiveness better, we will deliver more value to our members, and we’ll occasionally go back and ask those members to pay a little bit more to keep that virtuous cycle of investment and value creation going.
And as we said before, we look at every country independently. So instead of an algorithm, we’re just basically assessing, okay, how many new popular titles have we delivered, what are local language originals in that particular country looking like, what’s the slate that’s coming looking like, what are the fundamental metrics, right, engagement and churn, what do those look like. And then we just — we do an assessment. And we say do we believe that we’re really delivering more value to our members and, if so, do we think it’s the right time to go back and ask them to pay a bit more so we can again keep that cycle going. And I think the one other important thing to note here, something, a north star that we hold close to our heart in this whole process, is we think that we are just an incredible entertainment value, and we very much want to remain an incredible value as we continue to improve the service and grow.
Peters is not explicitly ruling out price raises, and makes it clear both”efficiency” in its content investment and the perceived value of that content from subscribers will be key factors in a price increase. What is notable here is that no Hollywood-produced TV series are mentioned as examples of by Peters, only “local language originals”. I doubt that this is accidental given that marketing costs have gone up and more Hollywood series are underperforming relative to movie content.
These are not easy questions, nor are the questions which have emerged about Netflix’s Hollywood-produced TV strategy after Cindy Holland’s exit. What makes them particularly notable is that Netflix must answer them from a position of existing ubiquity and also while pursuing additional growth of its ubiquitous access internationally with more international content offerings but higher marketing costs. It also must do so while convincing investors that overpaying for Hollywood-produced TV series content was not a mistake, despite growing evidence to the contrary.
Ubiquitous access, or “ubiquity” is when “the next big blockbuster movie or must-watch TV show” from streaming service is always one click away, whether via Instagram or TikTok, Snapchat or Twitter, WhatsApp or iMessage, or Roku or Amazon Fire. It is a valuable lens on Product Channel fit at streaming services because it is the variable which Netflix has achieved, and which legacy media companies like WarnerMedia and Disney are actively restructuring their organizations towards achieving in the longer term.
The contrast is helpful because it teases out some details about how legacy media companies are defining “ubiquitous access” differently than Netflix while they pursue it. AT&T’s definition of “ubiquity” for HBO Max was derided because of how that ubiquity was summarized on one webpage, and limited to the AT&T universe of Wholesale customers. Three months later, it has found success in activating Wholesale subscribers into HBO Max subscribers, despite the confusion that web page created.
Disney’s rationale is less clear on how internal restructurings help to optimize decision-making and Product Channel fit around distribution and ROI for “the next big blockbuster movie or must-watch TV show”. That said, both companies have one important caveat to ubiquity in common – neither company needs ubiquitous access for all of its future content. Centralization is as much about maximizing the ROI from finding Product Channel fit content across available distribution channels than from within streaming distribution channels alone. Both Disney and WarnerMedia have more distribution channels for content than Netflix, and that is a distinction worth keeping an eye on for the road ahead.
Because as Netflix confronts growing questions like the efficiency and value of its nine-figure (!) Hollywood contracts with the likes of Ryan Murphy and Shonda Rhimes, it still does not have linear cable distribution or theatrical distribution channels as alternative distribution channels for this content (it uses the latter only for movies it believes are Awards contenders). The difficult question for Netflix going forward is, which content offers the highest ROI and cost efficiency now that it has achieved ubiquity? The answer appears to be a mix of Hollywood blockbuster movies, local language TV series and movies, and unscripted shows. It does not include Hollywood-produced scripted TV series.
Where else will this Hollywood-produced TV Series content be distributed if it doesn’t work on Netflix? Nowhere. Neither Disney nor WarnerMedia has that problem.
I had argued two weeks ago that the more appropriate term for “The Streaming Wars” was “The Genre Wars”. The implication from the above is that as HBO Max, Disney+, and Hulu start building towards Netflix’s ubiquity, they will offer better Product Channel fit for more expensive Hollywood scripted TV series. This is not only about Genre, this is about a broader category of content (Hollywood-produced TV series) which drives longer term engagement. The fact that Netflix is betraying signs may not be able to compete with Hollywood scripted series in this category is a stunning development.
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