Int. Morning Brew office, content team weekly check-in:
Int. Morning Brew office, content team weekly check-in:
[Writer 1] Question: What kind of streaming service is best?
[Writer 2] That’s a ridiculous question.
[Writer 1] False. Black bear.
Any fan of The Office recognizes that reference. And any fan of business news knows the streaming wars are in the process of fundamentally changing the way you get your Dunder Mifflin fix, or any other media for that matter.
Today on Morning Brew’s weekly podcast, Business Casual, we’re picking apart precisely what’s made the streaming wars just that—wars, from Disney to Netflix, Apple to Amazon.
How do subscriber counts, ad dollars, and content spend equate to small, individual battles, each with winners and losers? Matt Ball, verified media guru and former global head of strategy for Amazon Studios, has the answers. Plus...
Note: Business Casual transcripts are generated using speech recognition software and human transcription. They may contain errors, although we do our best to avoid them. Please check the corresponding audio before quoting a transcript in print. Questions? Errors found in a transcript? Email email@example.com
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Kinsey Grant, Morning Brew business editor and podcast host [00:00:06] Hey there, and welcome to Business Casual, the weekly podcast from Morning Brewt hat doesn't even have time to ask if you are still listening. I'm Kinsey Grant, your host and Brew business editor. Let's get into it.
Kinsey [00:00:18] Today we are talking about the streaming wars from Netflix to Apple to Disney, HBO, Amazon, and more. It feels like all we ever write about, or talk about, or think about, is a new streaming platform every single week. And we've been writing about these so-called streaming wars all year. This month alone, we're watching the launch of Apple TV Plus and Disney Plus. There are plenty more following in early 2020. But what I really want to know: how will the entertainment media landscape change as these so-called streaming wars near a crescendo? So here to walk you and me through everything from content spend to winners and losers, Matthew Ball. Thank you so much for joining us today.
Matthew Ball [00:00:55] It's my pleasure. Good morning.
Kinsey [00:00:57] So, your background is one of the best that we've had on Business Casual, I would venture to say. It's very impressive. And I'll run through some of the highlights here. From 2016 to 2018, you were the global head of strategy for Amazon Studios. Prior to that, a director at the Chernin Group. And that was a digital media investment company that News Corp CEOO/20th Century Fox CEO Peter Chernin founded. Today, you are a venture capitalist focused on interactive media, and you've also gotten bylines—all the big places, New York Times, The Economist, etc.
Matt [00:01:31] That’s it?
Kinsey [00:01:32] That that's all the good stuff. [laughs] So we're really excited to have you on Business Casual today. And I think that the streaming wars are one of the biggest topics we're going to talk about this fall season. And it feels like, as I mentioned before, we've got something new every day. And I'm excited to kind of parse through it and figure out why we should be thinking about this and how we should be thinking about it, more importantly. So let's jump into it.
Matt [00:01:54] Let's do it.
Kinsey [00:01:55] So for someone like me, who writes about media a lot, writes about Netflix and Disney and Apple all the time, I understand the streaming wars in context, but for someone who's never experienced that, why does it matter? And what are these so-called streaming wars? Is that even a fair term to characterize this race, to get out these platforms?
Matthew [00:02:16] Sure. So there's basically one important premise here, which is every time you have a supposed platform shift, so that could be from PCs to laptops or PC to mobile or from broadcast television to cable television, and now from cable television to digital—digitally delivered television. It's always the biggest and best opportunity for market share shifts for new entrants to invade the market, so to speak, for the number six player to become the number four player, for the number one player to lose their titles, so to speak. And so what we're seeing right now is really the point in time in which the jostling is about to begin. And so there are all these outstanding questions about who's going to be the winner and indeed, what even is winning.
Matthew [00:02:56] Is it lucrative or is the competition going to be so severe that all of these so-called winners are going to find that their kingdoms are quite modest, that their profits and spoils are actually quite modest as well? And so we see this point in time right now where everyone is going to market. The press has described this narrative of the streaming wars. I think internally most in the industry are terrified about that narrative because they don't see it as truly winner take all. But certainly there is this last outstanding question, which is not just how many media companies are going to succeed, but is the average consumer going to adopt five of these services? Is it going to be seven services? And therefore, even if you have seven that are popular, if people are constantly churning in and out, does that work?
Kinsey [00:03:39] OK. So when you say that some of these platforms in these media companies are terrified of the term “streaming wars,” they don't expect it to be winner take all. Are they are you saying that they're OK with the fact that you are going to subscribe to Netflix and maybe that means you spend less time on Disney’s streaming platform?
Matt [00:03:56] No, certainly attention is finite. It's always been that way. Economists back in the 1800s defined this idea of work versus leisure. And we have never expanded the amount of free time you have.
Matt [00:04:06] And so certainly there's an understanding that time that's going to one platform versus another is time that you're not going to get. And yet to look at these as a war, which is to say that there's going to be one person standing among many lifeless dead bodies, so to speak, is just a narrative that doesn't look like it's going to play out that way. And part of what's important there is if we take a look at the permutation of the so-called streaming wars, most of these video services are no longer standalone. They are actually part of a much, much broader ecosystem. So even if you think about the question of who is going to survive, the answer is not a media company. It's more a component of a much larger company.
Kinsey [00:04:44] OK. So it's not just going to be, you know, Apple wins the streaming wars because of Apple TV Plus—it's going to be Apple TV Plus does well. But Apple also has iPhones.
Matt [00:04:53] Right.
Kinsey [00:04:54] OK. I want to also talk through quickly, before we get too much in the weeds, about some of the major players here. We've already mentioned Apple has Apple TV Plus, launched November 1st. Disney's Disney Plus launching in mid-November. We already have Netflix, HBO, HBO Max will be sometime in 2020. There's also NBC’s streaming platform Peacock. Am I missing any? That feels like a long list. [laughs] Are those the big hits?
Matt [00:05:19] Those are the expected players, yeah. [Kinsey laughs]
Kinsey [00:05:22] There are also some smaller players out there, right, that are maybe not considered part of the streaming wars narrative. Something like a Quibi. Are those considered also players in this this back-and-forth?
Matt [00:05:34] Yeah, they're certainly considered players. I mean, you can think about the market in multiple different tiers, but of course, we can take a look at some of the companies like WWE, which continues to scale into the millions and probably has significant headroom left. They're not competing on the battlefront of the streaming wars because frankly, whether or not Apple wins or Amazon wins or Netflix wins doesn't affect WWE. Similarly, you can think of a company or a service like Fox Nation, probably playing a very different game. Quibi is perhaps the most competitive with those major streaming wars. But of course, they are coming at it from a very distinct perspective. We're going to do a very different type of content both stylistically and in duration. We're going to go after a very different audience. And the experience overall by limiting to mobile also suggests that they believe that ultimately time may be finite, but they have a slightly different lane that they can participate in.
Kinsey [00:06:25] OK. You mentioned Amazon and I feel like you—you are the former strategic planning head for Amazon Studios. Why isn't Amazon maybe as much in the forefront of this conversation about the streaming wars? Do you think that it's fallen behind in any way because it's got so many other things going on? Or, you know, it so often, at least in the last couple of years, has been Apple, Disney, Netflix, whereas Amazon in this conversation?
Matt [00:06:49] Well, I mean, the interesting thing is, it's part and parcel with the idea that there isn't anything new or superficially different about what they're doing. So comparatively, Netflix is going through ups and downs, and so that keeps them in the press. You see Disney Plus about to launch. There's a multibillion dollar marketing campaign behind that. Apple 2 was very secretive for years. And so part of that is Amazon is understood and there are new players coming into the market. The third thing is there was always a difficulty in understanding what an arm of Amazon is doing and what performance and success looks like. If you take a look at HBO or Netflix, it's very simple. How many subscribers do they have? How many hit shows do they have? Where does that line up with external estimates? And of course, those aren't the core metrics for prime video.
Matt [00:07:35] And indeed, we don't even know the specific core metrics. I think if you take a look at Amazon's success overall, there are key data points that you can look at. And the answer, in a long-winded way, is you see it in the ecosystem, you don't see it in the specifics. So Roku launched its connected TV device in 2008. It was the market leader for more than a decade. Apple launched their Apple TV hardware in 2007. Fire TV launched in 2014. It's now the largest in the world. Amazon was estimated by, I believe, IDG to have 15 to 20% market share in digital downloads of movies and TV show back in 2012, compared to 70% from iTunes. They're now roughly neck and neck.
Matt [00:08:17] Rich Greenfield estimates that Amazon is driving roughly 70 to 80% of direct-to-consumer subscriptions through Amazon channels. That's HBO and Showtime and Starz, despite the fact that the percentage of the population that has an Amazon device that uses Amazon products is dramatically lower than iOS. So if you take a look at that in its whole entirety, it's very clear that whether or not Prime Video was the leading element or an important contributor to that expansive ecosystem, there's been enormous success.
Kinsey [00:08:48] So, I feel like the takeaway from that is don't sleep on Amazon. [laughs] It's been around the block. And just because it's not in the press doesn't mean, really, anything. So why do you think that, given the fact that we just went through all of these ways that Amazon has been kind of quietly expanding in so many of the past years, and we are talking about Apple, like you mentioned, a ton in the press.
Matt [00:09:08] Yeah.
Kinsey [00:09:09] Why do you think this is the year that we're doing a podcast episode like this? Why are we talking about this now? Is there any reason that 2019 and early 2020 were the time and the place that all of these new streaming platforms are going to kind of crop up?
Matt [00:09:23] One of the reasons this is happening right now is there are long lead times to each deal cycle. So a distribution deal, a pay one output deal in which you say, I'm going to sell all of my feature releases in theaters to network A or network B, those typically happen years in advance and then last for several years. So, for example, Netflix’s deal with Disney's films was struck in 2013 or 2014. It then came into effect in 2017. It ran for two years. And so when you take a look at all of these companies, they all have some form of these. Sometimes it's just distributing your networks through Direct TV or Verizon. And so what we've hit right now is a 1½-year window where most of these companies are starting to get those rights back. And so because of that cycle time, they tend to be bunched together. We're now, for the first time, really seeing these companies able to say both let's stop licensing to Netflix, and we've now accumulated enough over the past year to go to market.
Kinsey [00:10:22] OK. So there is an expiration date on those deals and it's now. [laughs]
Matt [00:10:26] Right. And that's part of convenience. Now, at the same token, there's also that race to scale, race to market. And so, whereas we're in this general period in which most companies can launch, whether or not you're as prepared as you'd like to be is different from whether or not you just need to move.
Matt [00:10:41] And so there are some companies who are not as prepared, whose deals are a little bit longer, who haven't had two years to accumulate content. But they know that if they wait for two years or three years, they will be too late.
Kinsey [00:10:54] How important is this race to market, though? I mean, I've had Netflix for years now. Is that going to, in some way, keep me from subscribing to Disney Plus? And if Apple launches two weeks before Disney, does that give them any sort of competitive advantage?
Matt [00:11:10] Certainly not on a week basis. But if you're talking about one year or two years or three years from now, that's where you start to really feel that saturation start to seep in. Again, when we think about this from a phase change perspective or a technology shift, right now, there is still an enormous amount of TV time that has not transitioned to digital video.
Matt [00:11:30] And so to some extent, you don't actually need to compete for share and over-the-top video. You can still just collect share as it shifts from the old system to the new system. But over time, that will start to conclude. We will now be at the point in which there aren't just minutes being freed up. There aren't just new consumers coming to market, and there aren't people cutting $100 pay TV subscription and then deciding where to allocate that online. By ’23 or ’24, you might see that that's all ended. And at that point, competition is going to be truly within one another, and the ability for a new competitor to come to market will really start to go away.
Kinsey [00:12:07] So is that the idea of instead of cord cutters, just people who never had a cord to begin with?
Matt [00:12:13] It's a mix of those people, plus those who are about to make the jump.
Kinsey [00:12:17] OK. So when we think about the impetus for all of these companies getting into these, maybe we'll think of a different word [laughs] at some point than streaming wars, but getting into these streaming wires. They kind of have different motivations.
Matt [00:12:30] Yeah.
Kinsey [00:12:31] You think about Apple wants to do $50 billion in services by 2020. You think about Disney, which maybe has a lot more focus on intellectual property and on getting data on consumers. Do you think that it matters to think about the different motivations for these companies when approaching thinking about the streaming wars in the larger sense possible?
Matt [00:12:51] Yes, certainly, because it's going to define what content they do make, which they don't, how they are actually monetizing and so forth. Because if we take a look at many of these services, to give a good example, Disney is the most dominant media company we have ever seen. And they are going to leave off the table tremendous profitability by choosing to develop their own service. They could be generating billions of dollars per year in zero-risk cash just by licensing their content.
Kinsey [00:13:19] So that would be saying to Netflix, you have rights to X, Y and Z.
Matt [00:13:23] Yeah, you receive billions of dollars for just transferring an electronic copy of your content. Instead, they spend $3 billion on MLB’s advanced media platform. That's BAMTech. They spent $70 billion on Fox. They tried to buy Sky. They're trying to buy Hulu. They're taking a huge, enormous amount of risk. And then they shocked the market by coming out with a $7 price point. Then they said, actually, if you do a annual subscription, it's $6. And then actually if you do a three-year subscription, it gets down to $3.80 per month. And then actually if you have a Verizon wireless subscription, you're going to get it for free.
Matt [00:14:00] All of that suggests a complete disagreement between the quality of their content, the enthusiasm consumers have, and their price point. And the answer is because their monetization is coming elsewhere. It's the same for Apple. It's the same for Prime. And it's the same with how AT&T announced they were going to take HBO Max, keep the same price point as HBO, but double or triple the total investment. Why are you doing that? How does the math work out? The answer is it's because they're all monetizing in other areas. And so understanding that defines what they do, what they don't, and whether or not these are going to work. But more importantly, what does success in the streaming wars look like?
Kinsey [00:14:38] OK, let's talk a little bit more about pricing here for a second. You know, these prices have kind of been across the board, like you were mentioning before. I pay 12.99 a month for this—the most popular Netflix package. We have, Disney, like you mentioned, 6.99 per month or 69.99 per year. Apple TV Plus 4.99 per month. Free for a year if you buy new Apple hardware, though. HBO Max 14.99 a month. How does this matter? I mean, how should we be thinking about this as a consumer?
Matt [00:15:10] So as a consumer, there's a very simple answer, which is we have talked a lot about disruption in how content is distributed or delivered. No one has figured out how to disrupt the cost of content production. And in fact, the intense competition for today's audiences have seen budgets skyrocket. In 2000, Band of Brothers broke every single record by making a $100 million miniseries that was $10 million per hour. Right now, you're seeing myriad series coming out at 15 to 20. Apple just launched Band of Brothers Three into production. It's going to cost $25 million per episode. There are reports that every single original series that Disney Plus is making in the Marvel Universe in the Star Wars Universe is 15 to $20 million. And yet, ultimately, you have to pay for this. And there's fat that can be taken out from the pay TV bundle. There's fat that can be taken out from churning month to month. But ultimately, content is incredibly expensive, and it's only getting more expensive.
Kinsey [00:16:17] But when we think about something like an HBO Max costing almost $15 per month. Their strategy has been, we're not going to just flood you with bad shows and bad films. We're gonna give you premium stuff. We're gonna give you the stuff that wins awards. Netflix hasn't exactly taken the same kind of approach. They have a [laughs] ton of crappy romantic Christmas movies that I will watch, you know, whatever all on that.
Matt [00:16:40] But then they’re not crappy.
Kinsey [00:16:41] Yeah—you think about some of the shows they're putting out—aren't good shows—and they get one season and then they're canceled. But Netflix, they seem to be OK with that. Does pricing in any way suggest what kind of quality content we should expect from something? Does a 4.99 Apple suggest to a consumer that this isn't gonna be as good as HBO Max?
Matt [00:17:02] It's less around what the pricing is suggesting and it's more about what the service is. So Netflix's answer is they want to be a utility. They want to deliver as much video to as many customers as possible at all times. Their business model is predicated upon tonnage of consumption. Delivering tonnage of consumption means addressing various different audience interests. We talk about the fact that everyone loves “The Crown,” that they love “Game of Thrones.” But most people don't only watch those shows. They don't only like watching those shows. 70% of primetime consumption—so that's between 7:00 and 10:00 p.m.—is unscripted reality shows.
Matt [00:17:40] And so we never think of those as good or Emmy winners. But if you were trying to say we are a bulk provider for all of your entertainment needs, that's the type of content you need. HBO, conversely, had a very different model that typified specialization. They said, we are going to deliver content specifically and exclusively focused on your most-prioritized time. It's not while you're cooking, it's not while you're tending to your baby. It's 9:00 p.m. Sunday evening. Your lights are off. Your kids are asleep. Your phone's turned over. You've sat down with your partner and you want to watch something superb. Like any business, when you say, I'm going to go after the most valuable thing, the ultra-luxury handbag, the business class Concorde ticket, you charge a lot for that. When you start to say we're going after different experiences, you need to change your content.
Matt [00:18:34] So, for example, while HBO was very successful in monetizing that focus, they had an enormous price point. Enormous margins. They were capped at 25% of TV homes, 30% of pay TV homes, because ultimately, 9 p.m. on Sunday doesn't scale. You don't get 10 of those a week by definition. And similarly, not everyone wants that same 9 p.m. experience. Sometimes they just want “Duck Dynasty.” [Kinsey laughs] And so what HBO is doing is saying we are going to broaden our appeal. That means more content and more people. That means that our service is going to be less for you specifically, but we're going to offer a lot more of the content that you also consume. And Americans love video.
Kinsey [00:19:18] Let's talk about the impacts of pricing, post changing prices or post updating prices. When Netflix released its Q2 results, it was the first loss of U.S. subscribers since 2011 and Q2; that bounced back in Q3. It was fine again, but a lot of people in the media space said that that had to do with Netflix raising prices earlier this year. Do you think that's an accurate base case for what happens when you change pricing?
Matt [00:19:47] Yeah, I mean, undoubtedly, anytime you increase price, you are going to have an impact on your consumers. Most companies on Earth would kill for a competitive dynamic where you increase your prices 20% and you lose .15% of your customers. That's called price inelasticity of demand. Everyone would kill for it. And if it were repeatable, Netflix could instantly become a hyper-profitable company. The second thing that's important there is Netflix is constantly losing and then gaining subscribers. Right now, they may have fewer subscribers than they did yesterday. They might have fewer than they had a week ago. And that could change tomorrow or in an hour. What we see, just because of corporate financial reporting, is it's a very specific moment in time.
Matt [00:20:31] And to point, the closer you are to that pricing decision in which you're going to get the most churn, the more distortive that is. To put that in perspective, if we had a reporting cycle that ended July 31st instead of June 30th, that wouldn't have happened. But more importantly, four days after the quarter ended, their biggest show in the world, “Stranger Things,” launched. That undoubtedly buoyed their subscriber numbers. Nineteen days after the start of Q3, their biggest international show launched. And so whether or not those shows could have moved up a week would have changed that report, whether or not they came two weeks later doesn't make a difference as to how many subscribers they have right now, as you and I are sitting down.
Kinsey [00:21:13] OK. You sound like the Warren Buffett argument against quarterly reporting. I want to talk more about Netflix specifically in just a second. But first, let's hear from our sponsor. —
Kinsey [00:21:24] And now back to the conversation on the streaming wars with Matt Ball. So we were talking about Netflix just now. To me, Netflix doesn't necessarily have as big of a backup plan as some of these other players in the streaming wars. So, like we say, their subscriber count may change, kind of negotiably, even though some marginal change and it doesn't really matter and stranger things will come out soon anyway. But they don't have necessarily a backup plan like Disney does. They don't have a theme park. They don't have, you know, they don't sell ads on Netflix. Does that put them in any danger, in your view?
Matt [00:22:01] There's inherent danger in having less of a cushion or not having many plan B’s, certainly. We also know that there's enormous advantage—or there are enormous advantages to be gathered from that focus, that commitment. You can virtually guarantee that if Netflix had a strong DVD business, if they cared about that business, if they had a merchandising business, if they had an audio division, a podcast division, they would have gone less hard at this video opportunity. Ultimately, many people argue, and I agree with this, that what will make Netflix succeed, despite this influx of competition, despite the enormity of their content loss, despite lower price points, is the scale of their present-day advantages defined not just by how many subscribers they have, but how many shows they have, how strong their technology stack is, how default to their brand is, like Kleenex, that was received because of their focus, because there was no plan B.
Matt [00:23:00] Everyone there is swinging for the fences and they know that they probably don't have a parachute, to mix metaphors terribly. If you are a well-run company that has achieved success and every single person in your company is obsessed with success specifically, that is a template for success. One of the examples that I like to use is, right now, Netflix has more engineers than HBO has total employees.
Kinsey [00:23:25] Okay. It sounds a lot like we're veering into the [laughs] part of the conversation where we decide if these are media companies or tech companies.
Matt [00:23:32] Right.
Kinsey [00:23:33] Which is opening Pandora's box in this streaming wars conversation. But one of the present-day advantages, like you mentioned before, is kind of that Netflix has adopted this sort of tech mentality that, like you said, they're hyper-focused. They have all these engineers. They are constantly thinking, you know, taking the Jeff Bezos approach, being obsessive about the customer experience, what it's like to get on the Netflix app, to go to Netflix.com. But do you think it's fair to even bring this part of the conversation up about do we have to decide if it's a tech company or a media company? Can it be both? And is there any advantage to kind of playing both sides of that?
Matt [00:24:09] So I actually love this conversation and I keep having it lately, which is to say, there is this macro narrative of tech versus media. And the reality is that actual competition of tech versus media, and whether or not one is going to kill the other and is tech or is content or distribution king—that's actually not going to happen. We've skipped that. It deflated. It's an old question. And so you can take a look at it like this. NBC Universal, one of the biggest media companies on earth—it was acquired by a telecoms company, Comcast. And Comcast is now positioning themselves as a tech company. When you keep going down the stack, you see more and more examples of this. Fox, another enormous media company, sold to Disney. I wouldn't really say Disney is a media company.
Matt [00:24:51] It's an IP company. It's transmedia. It operates enormous cruise ships. To define that as a media company is different. And then you take a look at the new leaders and you have YouTube, clearly a tech company, and often to their detriment. You have Amazon and Apple there in the video business. They're also the most important partners for these media companies. And then you have the twitchers of the world. All of which is to say all of these companies are so far beyond that delineation of media versus tech. We can have conversations about what does that mean for margins, scalability, what does that mean for share of their business that's going into tech R&D? Those are all kind of beside the point. But at a more macro level, that media versus tech is too. And I think that over time, Netflix is moving more and more towards adopting media capabilities.
Matt [00:25:45] I'll give you an example. In 2011, when Netflix greenlit “House of Cards,” their story was, we looked at the data. People like Kevin Spacey, they like David Fincher, they like political dramas. Let's do it. By 2015, Ted Sarandos was saying their greenlight decisions were based 70% on data, 30% on judgment. But the judgment came first. Then, by 2018, it was the reverse. It was 70% judgment, 30% data. And earlier this year, he revised it down further. It's 80% judgment, 20% data. This is a reflection of a tech-driven company. And truly, they are tech-driven in almost all senses.
Matt [00:26:22] However, they are continually adopting more and more media stylings—media conceptions and approach to thinking about content that is more akin to Hollywood and a screenwriter than a AI or a robot. And at the same time, as I mentioned, all of these media companies are, if not adopting technology-based thinking, optimization algorithms, data delivery, they're at least being acquired by companies who then give them directive. And those companies are trying to be tech companies.
Kinsey [00:26:51] So what about the concept of owning the platform? I mean, you think about Morning Brew, we identify as a media company, but we oftentimes act in a way a tech company might act. We're focused on the product, etc—do all of these techie things as a tech startup might approach a business. But I'm not going to say we're a tech company. We didn't invent email. We just send emails. Does a company need to own the platform where it's meeting the customer to be able to kind of capitalize on that tech part of the tech media spectrum?
Matt [00:27:23] [laughs] I mean, the honest answer is bespoke, which is, it depends on what your ambitions are, what your customers need, what your competitors are forcing you to do. But more importantly, what it is that you want to do and monetize. So to give you an example, for Disney, much of what I believe they want to do, which is to specifically understand which of their characters are popular, which are their titles are popular, how popular are they? How do we convince a family that's never bought a cruise vacation to purchase a cruise vacation? Historically, that's been tough because they don't know that family directly. They have to go through travel agencies. They need to push very expensive marketing ads through the universe.
Matt [00:28:03] But owning a platform requires you to do different things. Often you're not going to be able to do as many new things as you do as well as the core thing that you do. And so it comes down to, what are the limitations? Disney very clearly said, yes, we're going to have to invest billions of dollars. Yes, we are going to have to take risk. Yes, we are going to have to do things we don't know how to do. But they also know that in exchange, truly important opportunities will finally be realizable, and those opportunities would never have been possible if they didn't own that platform.
Kinsey [00:28:37] OK. We'll talk more in just a second about some of these specific money-related items. But first, let's take a break to hear from our partner. —
Kinsey [00:28:48] And now back to the conversation with Matt Ball about these streaming wars. So I want to get into more of the nitty-gritty here about money. We'll have to talk about it. Morning Brew. Obviously, our Business Casual listeners are interested in it. But let's start this part of the conversation with content spend.
Matt [00:29:04] Let's do it.
Kinsey [00:29:05] It used to be insane to think that Netflix was going to spend $12 billion a year in creating original content. Then, like you mentioned before, we have shows like “The Morning Show,” $300 million for two seasons is a lot of money for a show that hasn't come out yet. The reviews for [laughs] a lot of Apple's early slate of original programing for Apple TV Plus haven't been awesome. [laughs] People haven't been super-enthusiastic about them yet. But how do we justify this enormous content spend and where is this money coming from for these streaming platforms?
Matt [00:29:37] OK. So here's the thing that I think is most important and also most fascinating, if academic, about the streaming wars. There's this really weird dynamic in the media industry overall, which is to say, audiences are obsessed with it. That's why we talk about which film did what over the weekend at the box office, which was the bomb, which over-delivered. It's a cultural sensation that goes down to the starlet that's been cast or what Miley did or did not do and with whom. [Kinsey laughs softly] When we look at the consumption, it's not just that we have incredible attachment to it. We watch 5½ hours per day of video in the United States. About five of that is television. We listen to another 2½ hours per day of music.
Matt [00:30:19] And yet when you take a look at the category globally, as well as in the United States, the amount consumers spend on these content categories is really modest. We say that attention is finite and attention is very valuable. And yet it actually turns out that you can't directly monetize that. The best example is pay TV. If you think of it in abstraction, pay TV in 2012 or 2014, the FCC found, was an average of $65. There are then add-ons for HBO and for your cable box. But think about the fact that a family would watch 450 hours of television a month for $60 and then gripe about an annual increase of 2 to $3. We hate spending for media. And so, when you have an industry where there's enormous cultural attachment, where there's an immense sway, and yet there's not tremendous monetization capability, you start to think of how do you actually use that asset or that medium then to deliver other things.
Matt [00:31:17] And so if you take a look at Amazon's argument, the argument Amazon seems to make is: people love video. They're not going to spend a lot on video. So let's use it to sell other things. That's in a weird way, a reversion back to the dawn of television, where you didn't sell TV, you didn't sell CBS. You used the attention you got from delivering video to sell other things versus advertising. And so the industry overall seems to have gotten to this point of saying, we are going to take video that you love. We are going to either lose money on it or barely make money on it. And we're going to use that to sell other things. Those other things are in other categories that are far more, or far larger and far more valuable economically to Apple.
Matt [00:32:01] That's an iPhone, that's a hardware. That's the iOS ecosystem to Amazon, it's ecommerce. To Disney, it's a storytelling universe. And as we've seen with AT&T, their premise is they will get greater usage from their mobile network, greater churn, and higher pricing capability by giving HBO away for free. That's a definitive answer. We're not in the media business. We are not trying to maximize profits from media. We're going to maximize the return by selling something else.
Kinsey [00:32:28] OK. I also want to hear your strategy here on this idea of taking, like we mentioned before, when these contracts expire, when, you know, NBC no longer is contractually obligated to have “The Office.” And, you know, “Friends,” for example, as well, two of the most watched shows on Netflix, writ large, when they're no longer contractually obligated to have those shows on a streamer like Netflix. And they take them away and they say, if you want your “Friends,” you have to subscribe to, probably HBO Max in 2020, to watch it. It's not going to be on Netflix anymore. Is that a viable strategy for these companies, basing this competitive landscape on just one landmark giant show that everybody's going to watch and quote in perpetuity?
Matt [00:33:14] Certainly that's not a sufficient answer. I think about it this way. When you take a look at all of the companies that are successful in the digital era, they're successful and Morning Brew’s an example of this.
Matt [00:33:23] When they solve a customer problem, when it's something that you fulfill, that someone clearly says, yeah, that's right, I need this in my life. Yanking your content off of Netflix creates a problem because you want to solve the problem. If the answer is, how do we make Peacock successful? Well, let's annoy customers by withholding “The Office” and then let's give them the solution—it's Peacock—that's not going to cut it. That's not sufficient. Taking that content away is important because it fortifies your stores, your stock—you’re giving audiences more to value there. But it's far from sufficient. And they're gonna have to earn that. And if you take a look at Peacock, part of the way that they are doing that is massively expanding their content, offering massively—“The Office” is far from sufficient—coming out with new originals and essentially giving away it for free.
Kinsey [00:34:13] OK. So it's a strategy, but it shouldn't be the only strategy.
Matt [00:34:16] Right.
Kinsey [00:34:17] Let's talk first. [indistinct] about the sort of Wall Street point of view, the investor point of view. So Q2 and partly Q3 have kind of been lauded as the last quarters for Netflix or for Apple; this fall has been when all these are coming forth. And by Q4, we're going to see how these companies react to one another being present in the marketplace. Do you think that there is any way of establishing some sort of guess of what the timeline will be for when we can start making value judgments as to how this plays out?
Matt [00:34:47] Yeah, sure. So you can pin me down on that one. [Kinsey laughs] I think the simple answer is—and I've said this before publicly—I don't think that there is going to be any clarity on Netflix until 2021, probably the end of 2020, at best. And you can walk back that logic. I think it's a scenario where, in the best-case scenario, Netflix continues to meet expectations. They continue to show meaningful growth. Unless they blow it out of the park at $6 million U.S. subscribers, I can virtually guarantee that the response to their success will be easily excused away. So, for example, let's say Netflix has a superb Q4. What will the arguments be? They only had a superb Q4 because all of Apple's launch shows were bad. That's not a good comp. Or, how is it that they fought off Disney Plus. Well, Disney Plus only launched with one show and that was a “Mandalorian” and its eight episodes.
Matt [00:35:42] But you know what? Apple, like Amazon, will slowly improve the volume of its content. Their content will get better. Disney will slowly launch more and more original series. They'll have Marvel, their real leader. Similarly, if we start to take a look at HBO Max, you'll start to say, well, actually, the problem with HBO Max is it's not going to be until Q4 of 2020 or Q1 of ’21 until most of their originals hit the service. Peacock comes out in April. What's the problem with Peacock? Peacock doesn't actually get “The Office” back until Q1 ’21. It doesn't actually get “Parks and Recreation” until Q4 of 2020. And so for the next five or six quarters, for anyone who's bearish on Netflix, for anyone who believes that they're not going to be resilient to competitive pressures, there are so many enormous explanations to say, well, it's not actually yet.
Matt [00:36:32] They're not really facing competition. Actually, they're still losing content. And so we won't know. And so, conversely, a miss will have an enormous impact. And so I think you're in this weird dynamic where in all plausible scenarios, Netflix modestly beats expectations, but the market excuses it away. The bigger risk is that they come short, the market will eviscerate them for it. And yet the clarity on what all of this means will take some time.
Kinsey [00:37:02] So come 2021, would you feel comfortable choosing a winner in this “no winner takes all” streaming wars scenario?
Matt [00:37:11] Yeah. I mean, my point is, I think it will start to become clear over that point, but in their own short term —
Kinsey [00:37:14] They’ll become a front-runner.
Matt [00:37:15] Yeah. I mean look, the front-runner is demonstrably Netflix. That's absolutely true. And there's really no argument to say that that won't still be the case. The argument for Netflix has very much shifted from they’re going to be defeated to they are going to be a bad business. And how big can that business be? And so to point, if you take a look at all of the subscriber estimates, Disney has said by ’24, they'll have 60 to 90 million subscribers. Netflix already has 165. HBO Max is expecting to add 12 million U.S. subscribers, which means in 2025, they have 50 compared to Netflix’s 62 right now. Peacock is not going to go global, either. HBO Max just announced through their deals with Bell Canada, with Sky, that they're never essentially never going to Canada or the U.K. or Italy or Germany.
Matt [00:38:05] And so even if you walk back the truth of the matter, which is these companies are saying, our objective is to be smaller in five years than Netflix is today. And then you match that to what is even achievable based on the geographic limits of their operating. It's very clear that Netflix is going to be the front-runner, at least in subscribers. But to earlier conversation, they're focusing for market leadership in a market that is not super-valuable, that is hyper, hyper-competitive, and they're not even availing themselves to half of the traditional revenue in that category—advertising.
Kinsey [00:38:38] OK. I feel like we covered so much ground [laughs] in the last half-hour or so. But, you know, as that kind of the—we'll say like the pre-eminent expert on content right now—what else do you think that our Business Casual listeners should be consuming or listening to, or reading or watching right now?
Matt [00:38:56] I spend almost all of my time today taking a look at the video gaming space, at large. It is just so much smarter in terms of evolving how media interacts with audiences, how you monetize media at large. The technology that's available to media companies today, especially in gaming, is changing on a day-to-day basis. The iPhone 10 came out a year-and-a-half ago and it has 16,000 data points of tracking on your face. The storytelling that you can perform with that type of sensor, the gameplay that you can enable with that type of capability, is really fascinating. And it's all the gaming guys that are looking at it; the traditional media companies aren't. And so to the extent that you can pay attention to what's happening in that sector or whether or not you are a gamer or not, doesn't matter.
Matt [00:39:42] It's going to tell you what the future media looks like. The more self-promotional element: you can find all of my [indistinct]—oh, I hate saying this.
Kinsey [00:39:47] [laughs] It’s OK.
Matt [00:39:48] It's terrible. Please [laughs] don't cut this part. It's Matthewball.vc, as in dot venture capital, where most of my ever-so long essays can be found.
Kinsey [00:39:58] And they are fantastic essays. A big fan.
Matt [00:40:01] They may be fantastic. Thank you.
Kinsey [00:40:03] Okay. [laughs] We'll go at that. So usually, at the end of a podcast episode, I bring out this famous magical wheel of fortune. But for you, I want to play a little bit of a different game. [Matt says something indistinct] We always like to play a little game at the end of an episode of Business Casual. We're going to play explain your tweets.
Matt [00:40:21] Oh, God. [Kinsey laughs] I'll give you a caveat to any of my friends who do listen to this, which is probably going to be zero. They will all tell you I'm the most cryptic person they know. [Kinsey laughs] And so it's almost guaranteed I can't answer these.
Kinsey [00:40:34] Okay. This is exact—I'm glad you said that because that's exactly why I want to play this explain your tweets. On September 17, at 11:04 a.m., you tweeted “People like aggregation. It will return. Period.”
Matt [00:40:46] Yeah, that's simple. The reality is we're at a point in time in which all of the individual media companies are launching their own streaming services, and they are wresting their content away from the dominant video aggregator Netflix. And so we are now in a place in which we used to be able to go to one or two destinations to watch everything you want, and you're going to have to go to 19 different destinations to watch what you want. Ultimately, that's because all of these businesses are trying to solve their business problem. This is the earlier conversation. They want a platform. I get it. But ultimately, that doesn't solve a consumer problem. And so some of these companies that have these lofty expectations of owning the customer, having a standalone, not needing to sell to Netflix, are going to fail. And that's going to lead to a re-aggregation of what that experience looks like.
Kinsey [00:41:30] We've got a [indistinct]
Matt [00:41:31] Right. And, you know, to some extent, we already have that in Amazon and Apple.
Kinsey [00:41:35] OK, on to the next tweet. Let's see. I like this one here. “It's insane to think this is October 24th, 2019 at 12:37 p.m.,” [Kinsey laughs] @ball.matthew tweeted. “It's insane to think Fortnite probably devours more oxygen from the gaming industry than Marvel does to film.” What do you mean by oxygen?
Matt [00:42:01] [Kinsey laughs] Gaming, more so than—actually—let's take a step back. If you take a look at what happens in the media category with film, with television, or one of the things that allows for so many media companies to be successful, so many TV shows to be successful, is they're pretty capped.
Matt [00:42:14] You probably watch 40 shows in a year. “The Bachelorette” is not your life because “The Bachelorette” ends in an hour. Well, you're looking at me suspiciously. [Kinsey laughs]
Kinsey [00:42:24] Don't look at my Instagram feed. No, just kidding.
Matt [00:42:25] Gaming has incredible leverage on the same content investment. There are people—many people—who spend—I think the average per Fortnite is 12 hours per week among active users. There are many people who spend 100 hours playing Fortnite every month. If you take a look at the most obsessive fans of “Game of Thrones,” they can't watch it 100 hours per month, every month, for three years. And therefore, as dominant as Marvel is at the box office, it still allows for a lot of other films or TV shows at home to be successful, to find an audience.
Matt [00:42:59] Fortnite is so successful, it's crowding out available time. And because gaming is fundamentally social, ultimately, you can watch a movie by yourself and enjoy that movie. But gaming is so oriented around multiplayer that the fact that all of your friends play Fortnite not only crowds out any games competing for their time, but it actually prevents you from enjoying a game that you might prefer, like Overwatch or Warcraft, because you want to play with your friends.
Kinsey [00:43:27] OK, that makes sense. I feel like that was a perfect explanation for a tweet. But because I can't help myself and I love the rapid fire part of our wheel of fortune, we're just gonna do a quick rapid fire. How many hours of content would you say you consume on average in a given week?
Matt [00:43:44] I mean, that depends on whether or not we're defining Twitter as content.
Kinsey [00:43:47] Let's say —
Matt [00:43:48] I have no idea.
Kinsey [00:43:49] Streaming, streaming content.
Matt [00:43:50] That's almost all on the treadmill at this point. Or on a plane.
Kinsey [00:43:54] OK. So you don't just flop down on the couch and throw on anything?
Matt [00:43:58] Not anymore.
Kinsey [00:43:59] OK. What is your favorite show to binge? If you were going to binge a show, though, from a streaming platform?
Matt [00:44:05] I honestly don't know.
Kinsey [00:44:09] You don't know?
Matt [00:44:10] I don't.
Kinsey [00:44:11] You're the Netflix expert.
Matt [00:44:12] My favorite show to binge. I don't know. I mean, I will tell you, I'm a strong believer that most of these networks are making the right choice to not binge-release.
Kinsey [00:44:21] You’re anti-binge.
Matt [00:44:22] I have the first six episodes of “The Watchmen” on HBO, which I love. The show's terrific. And I watched all six of them right in a row or basically overnight. It was a phenomenal experience because it just wraps you into this world. And yet I desperately miss the fact that I can't finish at 10:00 p.m., go on Twitter, talk to my friends and all the rest of it. And so the answer is I like most of these shows. But I can tell you from living proof, when you don't have that culture around you, it sucks.
Kinsey [00:44:48] [laughs] OK. You're an advocate of slow but steady consumption and not of a 12-hour ugly marathon. OK. What is your go-to movie, TV or video game snack when you are consuming these media platforms? What do you snack on?
Matt [00:45:04] I'm a Keto guy, so it’s mostly —.
Kinsey [00:45:05] You do mostly like cheese and avocados?
Matt [00:45:09] Yeah, it’s mostly [indistinct] because they are the lowest carb, [Kinsey laughs] which is a terrible answer.
Kinsey [00:45:13] So if you learn nothing from this podcast episode [Kinsey laughs] —
Matt [00:45:18] So it's usually one of the two.
Kinsey [00:45:20] All right. OK. Pecans and whiskey. Got it. So, Matt, thank you so much —
Matt [00:45:23] Thank you.
Kinsey [00:45:24] For coming on Business Casual. I feel like we kind of tackled [indistinct] of a topic in the best way possible. Ran through all of the highlights, the money stuff, the content stuff, the streaming stuff, the low-carb nut stuff. So thank you so much for coming on. And we are really, really grateful that you stopped by.
Matt [00:45:40] Thank you for sparing me from the rest of your tweet [indistinct].
[00:45:41] [sound of coffee being poured]
[00:45:45] [outro music starts]
Kinsey [00:45:46] Thank you so much for listening to this week's episode of Business Casual. I know I just covered a ton of ground about media and the media landscape, but I feel like if you learned anything from that conversation with Matthew Ball, you know it's all about attention. That's why next week, I am diving into the micro-attention spans of TikTok. It's a huge subject to take on, but I have a really, really cool guest coming on the show to talk about it. Spencer X is an incredibly animated and really, really smart viral TikTok superstar, who's going to come on and explain to me all of the ways that you can understand how TikTok is changing media, how businesses are making money off of it. And we might even do a short lesson in how to be [indistinct]. You don't want to miss it. So I will see you on Tuesday.
Kinsey [00:46:32] [sound of a ding] And if you're still listening, I know that we probably all just went to Disney's new streaming platform and subscribed. Who are we kidding? So tweet me @kinseygrant and let me know what your favorite new show is.