US content distribution Studios go direct to consumer
13 April 2021
François Godard [email protected] Tom Harrington [email protected] Tom Standen-Jewell [email protected]
+44 (0)20 7851 0900 Most content is likely to remain Despite relying on a narrow IP Responding to the rise of Netflix accessed by consumers through base, US content production is and Amazon Prime, studios seek bundles. Provided they engage booming, overwhelming other to shift distribution from with aggregation, European markets and seeking alternative wholesale to retail—but only broadcasters can adjust to the new distribution to cinemas Disney may succeed studio model
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Disney+: non-exclusive deal with Sky Q [2020-019]
Peacock: the future of ad-supported TV brands? [2020-002]
Consumers endorse Disney's digital transition [2020-013]
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Studios go direct to consumer [2021-036] 2 Summary
• Hollywood studios are leveraging copyright law by focusing their new production development on existing intellectual property, already a source for most blockbusters but increasingly for TV series too
• The production boom in television series understandably subsided during the pandemic but is likely to resume
• Leadership in volume production has passed from TV networks to streamers, even though Disney and Comcast/Universal remain the biggest investors. AT&T’s HBO still enjoys a pre-eminence in quality
• Outside the US, and specifically in the UK, domestic fare remains far more popular than American content—but the latter’s appeal is increasing thanks to streaming
• Despite its continuing popularity and unique relevance, non-US domestic production needs access to greater financial resources to keep pace with Hollywood budgets spiralling upwards
• Cinema closures due to the pandemic have accelerated the decline of the theatrical exhibition window, leading studios to experiment with a mixed distribution model
• Studios are under pressure from financial markets to copy Netflix and deploy direct-to-consumer (DTC) strategies. In theory, studios would pivot from wholesaling content to channels and platforms to retailing direct to consumers, eliminating middlemen
• Forecasting profits for new DTC vehicles may please Wall Street, but much uncertainty remains on the future of legacy divisions
• Disney has relentlessly built scale through acquisition. Disney+ now has scale akin to Netflix and is well designed to facilitate the migration of brands from linear to on-demand
• AT&T’s WarnerMedia’s HBO Max lacks momentum and suffers from hazy positioning
• ViacomCBS’ Paramount+ and Pluto may have more future in bundles than as DTC vehicles
• Comcast/NBCUniversal associates Peacock, its online on-demand brand, with a broader aggregation strategy supported by its fixed network. In Europe, Sky follows a similar approach with telecoms and content bundles
• DTC services increasingly join pay-TV bundles, pointing to a future where distribution will still need aggregators. The new ecosystem opens space for European broadcasters to extend their prominence as content suppliers and discovery paths
Studios go direct to consumer [2021-036] 3 1. IP power and Peak TV 2. Cinema impairment: the flow to TVOD & SVOD 3. The studios’ digital transition 4. The endgame: bundling and aggregation
Studios go direct to consumer [2021-036] 4 IP drives Hollywood
• IP has been driving Hollywood since its birth as an US Copyright law extensions–a Mickey Mouse timeline entertainment powerhouse, underpinning expansion 120 1998 Copyright Term Extension Act 2023: current in merchandising, theme parks and video games copyright expires 100 1976 Copyright Act • Helped by skilful lobbying, studios have gained extensions of copyright from US legislators: in the 80 1909 Copyright Act past century the maximum length has almost 1831 Copyright Act 60 doubled to 105 years in 1998, with similar 1790 Copyright Act extensions in Europe 40 1928: 1978: Mickey Original 20 Mouse is copyright
• If there is no change, Disney’s Mickey Mouse—or at years in duration Maximum created expires least the Steamboat Willie version—will enter the 0 public domain in two years 1790 1840 1890 1940 1990 Note: Note: Assumes author lives 70 years and created their work at 35. • Studios are increasingly reliant on this accumulated [Source: Tom W. Bell, Enders Analysis] IP. On the newly-rebranded service Paramount+, 43 episodes from four Star Trek series will premiere this Hours of Star Trek-branded scripted content since 1966 year. Disney+ has ten Star Wars series planned, while HBO Max is considering a Harry Potter series and is 50 developing spinoffs of Game of Thrones 45 40 • Reliance on existing IP is even more striking on the 35 30 big screen: in the past three, regular theatrical 25 seasons, only one of the top ten most-grossing films 20 was not a sequel, a reboot or a spinoff, Bohemian 15 Rhapsody in 2018 (see next page) 10 5 0 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013 2017 2021 TV series Animated series Feature films Note: 2021 values are projections based on network programming announcements. [Source: Enders Analysis]
Studios go direct to consumer [2021-036] 5 Cinema consolidates around ‘sure-things’
Sequels, reboots and spinoffs in the top ten grossing films globally
12
10 10 10 9 9 9 8 8 8 8 8
6 6 5 5 5 5 4 4 4
2 2 2
0 0 1970 1980 1990 2004200520062007200820092010201120122013201420152016201720182019
[Source: Box Office Mojo, Enders Analysis]
Studios go direct to consumer [2021-036] 6 Peak TV: driven by the need for scale and desperation
• The first phase of Peak TV was propelled by basic cable channels’ need to fight on-demand and become more than just repositories of syndicated Estimated number of US original scripted series rerun programming. The second phase has been the rise of the SVODs 600 532 487495 500 455 452 • The explosion in the number of US scripted series in production was 422 389 stunted in 2020 due to: 400 349 288 ⎻ Some channels quitting the expensive and competitive scripted 300 266 210216 182 192189 market prior to COVID-19, such as A+E and Cinemax 200 155156 161163159168
⎻ Some series being postponed due to COVID difficulties/prosaic 100 issues such as demand for soundstages or talent 0 ⎻ Some series being cancelled due to added COVID costs making 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 them unprofitable and dispensable: anecdotally PPE has added up to $300-500k per episode for some programmes, testing adding Note: Excludes non-English language, short-form content, one-offs and children’s programmes. $100k and there have been other costs such as quarantining actors [Source: FX Research, SNL Kagan, Enders Analysis] and subsequent payment of lost pay. As such, borderline shows are Estimated number of US original scripted series by commissioner less likely to continue 200 • Primetime averages (18-49 year olds) for scripted-dominant channels saw big declines in 2019 YoY, with TNT (-16%), USA Network (-16%), TBS (- 150 18%), Adult Swim (-23%) and FX (-25%). 2020 saw a minor and temporary respite: studios are fast pulling assets out of channels and placing them in 100 their OTT offerings. Only the NFL remains as a major fixed viewing asset on linear 50 • Despite the drop in 2020, we have not yet reached Peak TV. Some borderline shows will go but the competitive dynamic (and the existential 0 necessity to spend big on content) is not going anywhere. Indeed it has 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 probably even accelerated with the decline of cable. Furthermore, AVODs Broadcast Basic Cable Premium Cable Online Note: Excludes non-English language, short-form content, one-offs and children’s programmes. like Tubi, Roku Channel and probably Pluto are starting to launch series [Source: FX Research]
Studios go direct to consumer [2021-036] 7 Variability of content spend and quality
Estimated 2020 content spend by media group, $bn • It is now less of a case of what channel or service has what particular show, but what media group has what particular asset, how many of them, and 16 how they are utilising them 14 12 10 • Comparison of spend on content gives an indication of output volume 8 (including licensing of third-party content). The arsenal that each company 6 4 has at its disposal becomes more important given the consolidation of 2 0 resources and distribution due to the move to DTC
A+E AMC • Quality is a more difficult metric to represent, here we show Emmy Disney Netflix Apple MGM Amazon Comcast Discovery Lionsgate nominations—we note the caveat that it is arguable whether the best ViacomCBS WarnerMedia shows win awards, and that critical acclaim doesn’t necessarily align with Note: P&L not cash spend—as such, Netflix may look underrepresented here—does not include sport or viewing/value news. Some content spend may be double counted e.g. production spend by one group and acquisition cost of same programming by other group. • Under AT&T, HBO (WarnerMedia) will be making more content (both the [Source: company reports, Enders Analysis] channel and HBO Max): between 2018 and 2019 HBO channel went from 100 hours to 150 hours of original content Major Emmy nominations by media group since 2013 • In the past, HBO’s drama output has been very small—on par with say, 350 300 Channel 4—but very impactful. It will be interesting to see whether volume 250 affects quality, and whether online release in a library setting will change 200 audience perception—previously most scripted release came amongst 150 other quality programmes in a tight Sunday night line-up 100 50 • Despite its cultural footprint, HBO has never had more than 35 million 0 subscribers in the US, as such, a lot of the volume increase is for widening AMC PBS A+E its base—through DC Comics fare, and young adult/WB-type programming Disney Netflix Apple Comcast Amazon ViacomCBS WarnerMedia • Interestingly, even with the increase, HBO has said that it doesn’t want to 2013 2014 2015 2016 2017 2018 2019 2020 “overdo” it when it comes to IP shows (WarnerMedia has DC, Game of Note: Channel groups as of January 2020 compiled retrospectively. Programmes attributed to US Thrones and Harry Potter), unlike Viacom (Star Trek) or Disney (Star Wars and broadcaster. For this chart, BBC America programmes attributed to AMC group. Marvel) who are maximising these assets [Source: Enders Analysis]
Studios go direct to consumer [2021-036] 8 Where does quality live on TV?
• If the chart below does not act as a representation of where quality lies in • Networks are barely participants in awards season. For some time a US television, it is at least a representation of where the industry thinks it network, say Fox, would broadcast the Emmys and have no, or few, resides nominations—last year ABC hosted the event and earned only four major nominations (out of about 140) • Basic cable is remaining relevant through non-scripted. Things can change quickly—a standout show like Atlanta or Schitt’s Creek can garner many • HBO remains strong and makes up almost all of the Premium cable band nominations—but FX and AMC have fallen away in scripted since a few in the chart below—Showtime or Starz have had relatively few awards years ago when series such as Mad Men, Breaking Bad, American Crime Story, nominations. HBO’s conversion rate of nominations to wins is higher than Fargo and The Americans placed them in the same conversations as HBO and Netflix Netflix
Major Primetime Emmy nominations by broadcaster type
180
160 140
120
100 80
60
40 20
0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Note: cable programmes first became eligible in 1988. Network Basic cable Premium cable SVOD [Source: Enders Analysis]
Studios go direct to consumer [2021-036] 9 US content underwhelms in the UK
• In the UK, US content doesn’t do particularly well. This 2,000 most-watched programmes on UK linear TV, UK v. non-UK produced must be noted, however, with the caveat that we don’t really know what is being watched on Netflix, although it is 2019 2020 likely that younger viewers are getting a greater taste for foreign, and especially US content Non-UK produced = 8 Non-UK produced = 2
• But, as it stands, on linear and catchup—which obviously skews older—what is watched is still predominantly local: only a handful of shows per year in the most-watched 2,000 programmes are not from the UK
• A lot of this has to do with PSB viewing dominance—and how their schedules predominantly consist of local UK produced = 1,992 UK produced = 1,997 content—but things like FX programming on BBC2 (e.g. Dave, What We Do in the Shadows, Mrs America, Devs, Pose [Source: Enders Analysis, BARB/AdvantEdge] and Trust) do poorly compared to local fare. HBO programming on Sky that isn’t Game of Thrones is also Av. completion* of UK-premiere scripted series by commissioning country (%) usually underwhelming—Succession’s second series averaged 175k viewers, while Barry, for which Bill Hader 74 has won two Emmys, was watched by under 20k 72 70 • Analysing completion rates of programmes (see What TV 68 shows do people actually finish? [2020-102]) eliminates 66 64 various variables that effect raw viewing figures, like 72 62 promotion, prominence, slot competition, quality of UIs etc. 69 60 65 58 • Between 2018 and 2020 UK shows were finished by an 61 56 average of 72% of those that started them; for US shows it 54 was 61% UK US Other All Note: 2018-2020, 380 programmes. *Viewing of final episode of series as a proportion of first episode. PSB channels, Sky One, Sky Atlantic and UKTV. [Source: Enders Analysis, BARB/AdvantEdge]
Studios go direct to consumer [2021-036] 10 UK TV needs foreign investment, but $ means control
• Despite the glut of content being produced in the US, given Co-productions as a proportion of total UK High-end TV productions* the attitude of UK viewers, there may not be much scope for growth in the acquisition of US content, especially 35% scripted 30% • However, given the dramatic rise in cost of scripted production, even before COVID expenses are added on, 25% UK broadcasters will progressively need more assistance 20% to afford expensive productions—most broadcasters in the UK have flattish content spend year-on-year 15%
• Netflix has been a big contributor in terms of co- 10% productions with British broadcasters—peaking in 2017- 2014 2015 2016 2017 2018 2019 18 with some shows still flowing through, such as Dracula, *To qualify for the High-end Television Tax Relief productions must satisfy tests that there are sufficiently British and Giri/Haji and The Serpent with the BBC—but this will surely have a minimum core expenditure of more than £1m per hour. continue to reduce as its UK commissioning arm speeds up. [Source: BFI, COBA, Enders Analysis] Why would Netflix pay for most of something if it doesn’t British terms, expressions, reference points or idioms per hour even get to show it in the country where is it most relevant? Nevertheless, there are other streaming 50 Commissioned by local broadcaster services, premium and basic cable channels, also thirsty for 40 Commissioned by international platform content, that will continue to be interested in co-producing 30 with UK broadcasters—these options will reduce further, 20 however, if the likes of WarnerMedia (with HBO Max) 10 decide to go DTC in the UK 0 • One product of funding smaller and smaller proportions of
programmes—the current trend for the PSBs—is that the Skins (C4) Brassic (Sky) Ext ra s (BBC) Top Boy (C4) Save Me (Sky ) Fleabag (BBC) Peep Show (C4) Top Boy (Ne tflix) Bodyguard (BBC) commissioner will get less control, and it becomes less Inside No.9 (BBC) BroadchurchBlack Mirror (ITV) (C4)* After Life (Netflix) Criminal:UK (Netflix)The Duchess (Netflix) Safe (Netflix/Canal+) Call the Midwife (BBC) The CrownBlack (Netflix)** MirrorThe Stranger (Netflix)*Sex Education (Netflix) (Netflix) likely that the resulting content is truly local, and relevant Turn Up Charlie (Netflix) Coronation Street (ITV)† All Creatures Great... (C5) The E ng lish Ga me (Net flix) A Very English Scandal (BBC) to its intended audience (see Outsourcing culture: When Note: First series only unless noted. *Episodes set in Britain only. British shows aren’t ‘British’ [2021-023]) **Does not include character names or residences. †Selected episodes broadcast in 2021. [Source: Enders Analysis]
Studios go direct to consumer [2021-036] 11 1. IP power and peak TV 2. Cinema impairment: the flow to TVOD & SVOD 3. The studios’ digital transition 4. The endgame: bundling and aggregation
Studios go direct to consumer [2021-036] 12 North American cinema was in decline before COVID
North American Box Office and tickets sold per person • Elements of TV have struggled during the pandemic, however at least the TV set wasn’t locked up. It is likely that well into the future, even if there was the same 5.0 $12 number and quality of films available in the theatre there will be a reticence from 4.8 $11 a proportion of customers to ever go back, or go back as much 4.6 $10 Billions 4.4 • That being said, in North America, attendance has been in decline for some time. 4.2 $9 Total box office has been growing but overall ticket sales have dropped from five 4.0 $8 tickets per person per year in 2002 down to 3.3 in 2019. Given that decline it is 3.8 $7 no surprise that what is now shown in cinemas has consolidated around fewer, 3.6 $6 bigger, films that can justify higher ticket prices. All while the cinema experience 3.4 attempts to transition to a more premium product, with better food, seats, etc. 3.2 $5 3.0 $4 • Even in decline, 2020 was particularly terrible for North American cinema, with 1995 1998 2001 2004 2007 2010 2013 2016 2019 both box office and tickets sold down 82% Tickets per person per year (lha) Box Office (rha, $bn) [Source: MPA, UN, Enders Analysis] • Across the year, as films were continually pushed back there was experimentation in distribution and attempts to shorten the theatrical window: North American cinema 2019 v. 2020 (bn) ⎻ Trolls World Tour went straight to TVOD for $20—AMC threatened 12 Universal with a ban ⎻ Mulan went on Disney+ (plus $30), perhaps being too expensive as that 10 price was quickly reduced ⎻ Hamilton’s debut on Disney+ saw a surge in app downloads 8 ⎻ Universal struck a deal with AMC, reducing the theatrical window to three 6 weeks, amongst other levers ⎻ Warner Bros announced Wonder Woman 1984 would be released 4 simultaneously (‘day-and-date’) in theatres and on HBO Max (theatres receiving 60% of the Box Office rather than the normal 50%) at no extra 2 charge. This was followed in December 2020 by the announcement that 0 Warner Bros would release its entire 2021 slate in this way Box Office ($USD) Tickets sold ⎻ In March 2021 Disney announced Black Widow would be day-and-date 2019 2020 [Source: MPA] ⎻ All the while, Netflix and Sky hoover up non-studio films for their services
Studios go direct to consumer [2021-036] 13 How can the studios hope to replace cinema revenues?
• Externally, it’s difficult to know which of the experimentations around windowing have worked. We may never know, for instance, how many people watched Wonder Woman 1984 on HBO Max: in a press release, WarnerMedia stated that "nearly half" of the service's "retail subscribers" had seen the movie in its opening weekend, and "millions" of subscribers with access to HBO Max via a cable or wireless partner had also watched. Even so, any number is only helpful to a point: what is relevant is how many people signed up for the service to watch the film, or how many subscribers stayed longer because of the film, and for how long? It is additional revenues that matter
• The next page’s table shows, at a high level, what the studios would have to do to substitute box office revenue in 2021 at different levels of cinema impairment:
⎻ If cinemas were completely closed in the US in 2021 (far right column: 100% decline on 2019 levels), the studios would have to find $5.3 billion (their 50% share of the box office) to replicate 2019 intakes—ignoring any TVOD/SVOD revenue sharing deals with cinema chains
⎻ Given that the margins are better in TVOD and SVOD, the consumers themselves would have to spend less on actual content (the household cinema spend average was $107/year, but those same households would need to spend ~$89 on TVOD (a similar number of films) or an extra $71 on SVOD subscriptions. This works out as an extra 0.4 SVOD subscription ($15/month) per moviegoing household
⎻ On the surface, the TVOD revenues needed seem obtainable (as consumers are merely switching locations for the same/similar content) but it is arguable whether people are likely to spend similar amounts at home as they would at the cinema. For many, going to the cinema is an activity discrete to just watching video at home. Furthermore, at home, the film finds itself in an environment (the TV set) where there are a lot of free options or cheap competition i.e. instead of purchasing or renting a film, why not watch one of the 70 new films released in 2021 on Netflix?
⎻ What about SVOD? Would two out of five moviegoing households take HBO Max because all the Universal movies were on it? Potentially. Furthermore, the subscription business insulates against the variability of revenues of a hits-based business, and at a global scale the economics of the subscription model are favourable compared to transactional business like TVOD and the box office. However, in the short to medium term, such a move not only diminishes the value of the theatrical window, but also other subsequent windows, such as TVOD, cable and network. This lost revenue would not be replaced by subscription payments, or ameliorated by price rises—these will continue to be difficult to push through in a competitive, low-price SVOD marketplace
• Of course, in practice, most studios will embark on a mixed distribution model, releasing films where and how they think they will do best. Studios will continue to push for agreements that balance the existing value of cinema—where revenues heavily weighted to the front of theatrical runs—with the growing value of TVOD/streaming. But it is important to note that even though the cinema is in decline, given the extreme competitiveness in other areas of video it will be difficult to replicate in other spaces the revenue cinema normally produces
Studios go direct to consumer [2021-036] 14 Replacing US cinema at different levels of impairment
US movie business 2021 25% decline 50% decline 75% decline 100% decline Studios lost box office revenue $1.31bn $2.63bn $3.94bn $5.25bn (50% of BO)* Annual saving per moviegoing $27 $54 $81 $107 household Fewer cinema trips per 1.2 2.2 3.5 4.6 household
Number of additional TVOD purchases** needed to replace 109m 219m 328m 437m studios’ box office
Additional purchases per 1.1 2.2 3.3 4.5 household Cost per household $22 $45 $67 $89
Number of additional SVOD subs per household† needed to 9.7m 19.5m 29.1m 38.9m replace studios’ box office
Additional subs per household 0.1 0.2 0.3 0.4
Cost per household $18 $36 $54 $71
*Using 2019 Box Office. **$20 with 60% margin. †$15/month with 75% margin. [Source: Enders Analysis]
Studios go direct to consumer [2021-036] 15 1. IP power and peak TV 2. Cinema impairment: the flow to TVOD & SVOD 3. The studios’ digital transition 4. The endgame: bundling and aggregation
Studios go direct to consumer [2021-036] 16 Wall Street rewards aggressive DTC narrative
• The challenge for studios is migrating content from old linear brands to new, on-demand Market capitalisation of major US-based entertainment groups (indexed 100 on 1/1/18) DTC pipelines, without undermining existing revenue streams. Numerous brands must be streamlined, with content rerouted from 250 third-party channels to these new services. For some, like Disney, this effort may pay off, but for others, such as AT&T‘s WarnerMedia unit, this may not be the case 200
• The stock market agrees. Netflix has aggressively expanded thanks to the support of Wall Street. This has pressured US media groups to rewrite their investor narrative to 150 obtain the ‘tech’ label and the resulting valuation uplift. Now almost all Hollywood operators claim to be pivoting to a direct-to- consumer distribution model—Sony the main 100 exception
• Disney’s stock was lifted in 2019 after plans for Disney+ emerged 50 • ViacomCBS gained traction last year after its SVOD projects were announced, but its price lost 55% in one week in March after a too Disney Netflix AT&T Comcast ViacomCBS aggressive capital increase announcement 0 Jan Apr Jul 2018 Oct Jan Apr Jul 2019 Oct Jan Apr Jul 2020 Oct Jan Apr • AT&T is trailing, while Comcast is getting 2018 2018 2018 2019 2019 2019 2020 2020 2020 2021 2021 credit for the potential of its cable network Note: CBS market cap data used before December 2019 merger between CBS and Viacom. Market caps last updated on 12/04/2021. [Source: Y Charts, Enders Analysis]
Studios go direct to consumer [2021-036] 17 The would-be digital transition model
• Each studio is trying to sell investors the story of its own digital Before Cinemas transition, a radical change in business model Studios • Historically, studios have licensed content to third parties, retailing it or broadcasting it with advertising. Pay TV Consumers In this brave new world, the studios, including newcomers like Netflix, intend to all sell directly to consumers (see previous page) Free-to- • By implication, this eliminates middlemen … but also the lucrative air TV successive windows through which content previously gained profitability After?
Studios
Consumers
Studios go direct to consumer [2021-036] 18 Disney M&A timeline: Outfoxing Murdoch
2001 • The transition from wholesaler to retailer 1994 1996 calls for further consolidation—there is not Buys Fox Family room for everybody in the retail market. In Failure to buy Acquisition of Worldwide (incl. this competitive race, the Walt Disney NBC ABC Company is the only studio so far to have Fox Kids) upped its game to the level of Netflix
• In the past quarter of a century, Disney has relentlessly sought to build scale. First by 2004 2002 buying broadcasters like ABC and Fox Kids, 2006 and then smaller studios like Pixar, Marvel Comcast rejects Failed attempt Acquisition of and Lucasfilm. unsolicited bid to buy Universal Pixar • By 2019, Disney had outfoxed its rival Rupert from Disney Studios Murdoch, who decided to sell most of his 21st Century Fox assets
• This has enabled a supremacy over 2018 Hollywood—see next page—growing from 2009 2012 12-14% of the US box office at the beginning Loses Sky Acquisition of Acquisition of of the decade, to 26% in 2018 and, adding takeover battle Marvel Lucasfilm Fox, to 38% in 2019 to Comcast
Successful merger/acquisition 2019
Failed attempt at Acquisition of merger/acquisition most assets of 21CF
Studios go direct to consumer [2021-036] 19 Disney’s Hollywood supremacy
Share of domestic Box office sales 2010-2019 for major US production companies
90%
80% 6% 7% 6% 10% 5% 5% 16% 19% 8% 70% 9% 13% 14% 15% 12% 11% 22% 60% 8% 12% 13% 8% 10% 10% 11% 12% 12% 50% 12% 9% 12% 16% 11% 17% 19% 16% 14% 40% 15% 14% 18% 17% 30% 18% 15% 13% 9% 12% 12% 17% 20% 13% 10% 10% 9% 38% 26% 26% 10% 21% 22% 14% 12% 14% 16% 16% 0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Walt Disney 20th Century Fox Warner Bros. Sony Pictures Universal Paramount Pictures
[Source: The Numbers, Enders Analysis]
Studios go direct to consumer [2021-036] 20 Disney content migrating from legacy to digital brands
• Disney has rolled out an ambitious Film Studios transition plan encompassing all its legacy brands
• With its three online services up, running and gaining scale, the group can now control the pace at which content is migrated, from linear channels to DTC
• Disney+ is especially well conceived as a vessel for subsidiary brands. Star, the newest tile in the interface, that launched recently in Europe, is hosting content for adults, carving out a distinct space from Channels the more family-oriented brands • The three DTC services are commercially flexible, available bundled or independently. Note Hulu’s capacity to offer most of the linear channels on the pay-TV platforms
v
Studios go direct to consumer [2021-036] 21 Disney+ take off helped by bundles
• After a mere 15 months, Disney+ has recruited Disney+ subscribers*, worldwide (m) 100 million subscribers, in a truly blockbuster 100+ launch 100
• In the UK, where it went live last March, the 80 service was watched by 3.3 million homes, after 60 six months, according to BARB 40 • In France, Disney+ was already in over 5 million 20 homes in November, according to research from the regulator 0 Oct 19 Dec 19 Feb 20 Apr 20 Jun 20 Aug 20 Oct 20 Dec 20 Feb 21 • Why more subscribers in France, a market where *Includes Disney+ Hotstar (India) subscribers, which made up “approximately 30% of [Disney+’s] global subscriber base” in Q1 2021. pay-TV numbers are usually lower than in Britain? [Source: Walt Disney Company, Enders Analysis] It seems that Disney+ was helped by bundling with Canal+, which included the service at no Disney+: major distribution deals extra cost in its premium packages of new and existing subscribers Agreement on carriage of Disney linear services includes Disney+ integration Charter August 2019 on Spectrum set-top boxes—but no actual deployment has taken place • In the UK the partnership with Sky involves the Disney+ 12-month subscription included in premium mobile bundles, from integration on the set-top box and single billing Verizon November 2019 without bundling with the main TV packages August 2020 the offer includes Hulu and ESPN+ Deal for integration on Canal+ interface, bundling, Disney films on Canal+ Canal + February 2020 • This approach is gaining pace—in December channels and exclusive wholesale of Disney+ to third party operators Disney signed an integration agreement with Deal for carriage of Disney+ on Sky Q in the UK. Disney films are still supplied Comcast in the US Sky (UK) March 2020 to Sky Cinema
Telefónica March 2020 Deal for integration on Movistar+ set-tops and bundling
Comcast December 2020 Agreement for integration on Xfinity set-top boxes
Disney+ carriage debuts on Sky Q. Disney films are still supplied to Sky Sky (DE, IT) April 2021 Cinema
Studios go direct to consumer [2021-036] 22 The pandemic has accelerated Disney’s pivot
Media & Entertainment Distribution revenues ($bn) • In its last reported quarter, the legacy business lines of Disney recorded a 19% drop in revenues as the theme parks 12 and cinemas closed. Meanwhile, thanks to the launch of Disney+ in November 2019, the direct-to-consumer 10 $2.1 billion segment saw a 73% boom in sales 8 • Disney’s transition is costly however, and the pandemic has 6 worsened it. In that same quarter, Disney’s profits shrank by 4 $1.5 billion two-thirds, mostly due to the closure of parks
2 • The DTC division increased its gross operating income by 0 $644 million over the past year even though it still lost Legacy businesses* Direct-to-consumer nearly half a billion dollars. But Disney forecasts breakeven Q1 fiscal 2020 Q1 fiscal 2021 by 2024 *Linear networks and content sales, net of eliminations. [Source: company reports, Enders Analysis] • The prospects are fuzzier for legacy content operations. Linear channels, the company’s cash cow, experienced Gross operating income trend by segment ($m) erosion in profitability from the mid-2010s while much 4,500 uncertainty hangs over post-pandemic theatrical releases 4,000 3,996 3,500 • Revealingly, Disney has stopped reporting its cinema 3,000 intakes 2,500 • In other words, Disney promises success with DTC, without 2,000 spelling out the cost in lost revenues to legacy divisions. But, 1,500 42 644 1,332 1,000 -2,683 -79 however challenging the transition for Disney, the results so 500 -588 far look positive 0 Op erating Parks & Con sumer Linear chann els Con ten t sales, Direct to Op erating income Q1 fiscal experiences products licensing & co nsumers income Q1 fiscal 2020 others 2021 [Source: Enders Analysis, company reports]
Studios go direct to consumer [2021-036] 23 AT&T’s wobbly vertical integration
Film Studios • The outlook is less clear at telco AT&T • DirectTV, acquired at its peak in 2015, is now being divested by AT&T after its subscriber base entered rapid decline and cross-sale of broadband and mobile disappointed expectations
• In 2018 AT&T bought Time Warner, on grounds of somewhat hazy synergies
• Then AT&T decided to upgrade the successful, profitable HBO into an Netflix-style SVOD service, HBO Max, which launched last May Channels • Management was restructured and the creative remit widened—at the risk of undermining the HBO quality powerhouse
• The problem is, HBO Max’s positioning is unclear and it does not seem suited for many existing ?v Warner brands like the news and sports channels ?
Studios go direct to consumer [2021-036] 24 HBO Max’s uncertain European future
• WarnerMedia’s future strategy in Europe is uncertain. It Scandinavia: is in theory committed to the global rollout of HBO Max HBO Nordic • However, in late 2019 as Max plans were released, the UK and Ireland: output and co-production deal with Sky was renewed Sky output and co-production for the platform’s three markets, reportedly until 2025 deal until 2025 • In France, HBO has a deal with Orange and Canal+’s OCS
France: • In these top four European markets HBO has yet to OCS output deal ends announce Max roll out plans “after 2021” • Existing HBO channels in western Europe in Scandinavia and Spain trail other SVOD services in subscriber numbers Spain: HBO España • If WarnerMedia decide to terminate existing agreements it will have to forgo substantial licensing fees and will face an already mature DTC market
Germany, Austria Italy: and Switzerland: Sky output and co- Sky output and co- production deal until production deal 2025 until 2025
Studios go direct to consumer [2021-036] 25 HBO Max’s uplift has been weak, as AT&T look for growth
• The launch of HBO Max in May 2020 has provided 2020 trend in HBO KPIs WarnerMedia with only a very weak uplift. The total subscriber 45% +39% count has increased 20% to 42m in the US, but this is largely 40% due to free subscriptions given to AT&T customers 35% • Despite all the spin, HBO Max has been primarily an upgrade of 30% HBO, with wholesale remaining the prevalent distribution 25% +20% channel 20% 15% • Last year, subscription revenues increased only 5% (including a 10% boost from consolidating 100% of the Latin American +5% subsidiary), while costs jumped 39% as the production slate 5% dramatically expanded 0% Subscription revenues Costs Subscribers • HBO won’t be AT&T’s new driver of growth. AT&T is in much [Source: Enders Analysis, company reports] worse shape than rivals Disney and Comcast because of its lack of a growing business to offset the collapsing, but now AT&T revenue trends by selected segments ($m) demerging satellite TV unit 35,000
• Unlike Comcast, AT&T has only a small broadband footprint. 30,000 -11% Under Time Warner’s management, a largely autonomous HBO was very profitable and the world’s leader in upper end scripted 25,000 TV. The new telecoms owners may have broken the money 20,000 machine they bought dearly 15,000
10,000 -2% -3% 2% -27% 5,000 -14%
0 Warner Bros. Warner Bros. TV Turner Turner HBO Video theatrical subscription advertising entertainment 2019 2020 [Source: Enders Analysis, company reports]
Studios go direct to consumer [2021-036] 26 ViacomCBS from legacy to digital
• Reacting late to the changing market, CBS and Film Studios Subscription Viacom merged in December 2019 • In March, the US subscription service CBS All Access rebranded as Paramount+, which includes the DTC version of the Showtime premium service
• In Europe, Paramount+ is already operating in the Nordic territories, mostly as a wholesale service, an approach that may be followed in other markets. Showtime’s output (except Channels Homeland and Shameless) is exclusively sold to Sky in a deal due for renewal soon
• Advertising-supported PlutoTV is already in the UK, and being rolled out on the Continent. Pluto carries content from themed brands like MTV, Nickelodeon and Comedy Central, plus some CBS shows. In the UK, Pluto is looking at ways Free access to be merged with Channel 5’s My5
Studios go direct to consumer [2021-036] 27 ViacomCBS: late and subscale
• The truth is, ViacomCBS is late and subscale. All Access was much smaller than rivals, with Streaming subscribers: CBS All Access and Showtime* an estimated 8 million subscribers before 20 900 rebranding, seven years after launch 845
• Total US retail subscribers including 18 800 Showtime are now 19 million 16 • Revenue growth of the digital division has 700 accelerated, but it still accounts for only 10% of total 14 600
• The group has a large revenue stream from 12 content sales to third parties, the future of 500 which now looks uncertain 10 19.2 • All Access was integrated on Comcast set top 400 boxes in December, indicating a willingness 8 to maintain a wholesale approach—this may 300 have been the twist that pleased Wall Street 6 for a short while 200 4
2 100
0 0 Q1 2019 Q3 2019 Q1 2020 Q3 2020 Subscribers (m, lha) Revenues ($m, rha)
*Excluding Showtime’s wholesale subscribers. Figures are domestic only. [Source: Enders Analysis, company reports]
Studios go direct to consumer [2021-036] 28 NBCUniversal brands have homes in Peacock and Sky
Film Studios • Peacock, Comcast’s DTC vehicle, features a free tier, a standard version with advertising, and a premium option without
• As it is designed, Peacock can accommodate all existing NBCU brands in the US, including NBC shows and news, themed channels and Universal films Channels • Crucially, Peacock is seeking distribution on existing pay-TV platforms starting with Comcast, the country’s largest. This would greatly facilitate a smooth transition of viewers
• Roll out in Europe is quite unlikely, but Sky, in its territories, is becoming the main destination of NBCU content
• Wholesale fits in very well with the transition as seen from Comcast’s perspective, centred on aggregation
Studios go direct to consumer [2021-036] 29 Comcast transitions to aggregation
• In contrast to AT&T, Comcast’s content and distribution strategies appear to be on more sustainable paths Comcast’s revenue by selected segment ($m)
• Unlike other operators, confident in its aggregation approach, 25,000 Comcast is not reporting DTC revenues separately -1% • NBCUniversal is suffering from the pandemic, in collapsed box office (and theme park attendance), though content licensing +10% 20,000 has been resilient -3%
• Comcast’s cable service is the industry’s benchmark, small video revenue erosion is more than offset by the continuous increases in broadband subscriptions, where momentum was 15,000 already high before the pandemic
• Revenues from television channels are eroding
• Sky is not part of an integrated grand global distribution 10,000 -2% network. Rather, it reproduces in Europe the US twin track of -11% telecoms services and content aggregation
• Sport events suspension in H1 2020 impacted Sky negatively, but in the autumn sales growth resumed 5,000
• Evidence so far confirms that most studios will keep sizeable wholesale operations in Europe -71% • Only Disney will be able to afford a one-size-fits-all DTC 0 strategy. Yet it is likely to stick with distribution partners, Broadband Video TV advertising TV licence fee Theatrical Sky even in the long run subscription
2019 2020 [Source: Enders Analysis, company reports]
Studios go direct to consumer [2021-036] 30 1. IP power and peak TV 2. Cinema impairment: the flow to TVOD & SVOD 3. The studios’ digital transition 4. The endgame: bundling and aggregation
Studios go direct to consumer [2021-036] 31 The building up of bundles
• Looking ahead, what would be the endgame of this UK France Spain transition in Europe? Should we expect a video content future where diversity is as low as in the Sky TV Canal+'s Ciné séries+ Vodafone's Serielovers search engine market? The outcome of the transition will depend much on aggregation
Series (incl. HBO content) Series Series • The European pay-TV business is adjusting to the studios’ new model. Incumbent platforms are reinventing themselves as aggregators of services Netflix Films & sports Amazon Prime • Deals with third parties vary. Some integration deals go no further than displaying apps on the set- Netflix HBO top box, as is the case with recent agreements between Sky and Amazon
Disney+ • Others feature full bundling as with Netflix in these three examples, or allow the service to be added to the pay-TV bill (like Disney+ on Sky UK) OCS (incl. HBO content) at the retail price
• One can imagine bundling extending to the free- €14 per month to-air ecosystems, including platforms like £25 per month €39.99 per month First year free to premium Freeview Play 18-month contract Cancel anytime subscribers, cancel anytime
Disney+ Integrated billing
Telecoms services, films, Telecoms services, Netflix sports, Amazon Prime Optional
Studios go direct to consumer [2021-036] 32 Aggregation is key to Europe’s digital future
Studios
Aggregators Consumers
Programming
Broadcasters
• The shockwave of the re-engineering of the US content industry is • Facing a flood of derivative content from a narrow IP base—e.g. ten Star Wars impacting Europe. Studios, that used to be seen as suppliers, become series—broadcasters can stay in the race by leveraging and standing out direct competitors for audiences through unique and relevant creative content, live, locally-rooted shows, sports and their strong brands • But studios need European pay-TV and telecoms platforms to increase their penetration and contain subscriber management costs. They also • Crucially, incumbent broadcasters will need to upgrade their historical EPG need to maintain a programming market where they buy local content prominence, still users’ main discovery path to content. Aggregators from the for their libraries, and where they can keep licensing their output telecoms sector have opportunities opening up to strengthen relationships with European broadcasters wary of tech platforms • The development of the aggregation business will be key to maintaining the diversity of the European audio-visual industry. Broadcasters will not be squeezed out, but they will have to adjust to aggregation
Studios go direct to consumer [2021-036] 33 Disclaimer
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Studios go direct to consumer [2021-036] 34