Numlock Sunday: Julia Alexander on the summer that we finally start understanding the movie business
By Walt Hickey
Welcome to the Numlock Sunday edition.
This week, I spoke to my friend Julia Alexander, who writes one of my favorite newsletters over at Puck and is the director of strategy at Parrot Analytics.
We’ll get into it below, but nobody thinks about the streaming business more than Julia and I wanted to talk to her about a fascinating moment we find ourselves in, with places like CNN and ESPN desperately figuring out ways to translate firehoses of cable dollars into a viable streaming business and with stalwarts like Pixar seeing their theatrical business nearly evaporate.
This conversation also contains one of the single most coherent distillations about why the movie business is extremely weird right now from a financial perspective, and why this summer will actually tell us where it’s going.
Julia can be found on Twitter, and her newsletter is over at Puck, it’s great I’m a huge fan.
This interview has been condensed and edited.
All right. Julia Alexander, thank you so much for coming back on.
Thanks, man. I appreciate you having me.
You are at Parrot Analytics, which is a very fascinating company that tracks the viewership and consumption across very hard to track kinds of media on streaming, but also you are writing for Puck. You have one of my favorite columns there. Folks can find you in a lot of different places, but the crux of it is that you cover streaming. Do you want to give us a little bit of a heads and tails of where the streaming industry is right now? Because it doesn't seem like everybody's having fun.
I think it's safe to say it's in a placeholding moment. You have two situations happening. You have the front-runner really leading the pack; if you look at Netflix, you look at the strength that they have both from a financial standpoint but also from a content standpoint and their kind of evolution to the next phase of their company life, which may be games, it may be other forms of entertainment, but as they go they can kind of figure that out.
Then you've got these kind of legacy players who are coming in and they are folks like Warner Bros. Discovery, and they are trying to figure out how to move from a very lucrative landscape that was the paid TV bundle, that was their media networks, into streaming, which as far as we can tell are never going to generate the profit margins that the paid TV bundle did.
And so how do you convince shareholders and investors and those on the Street that although this is the absolute right move from a distribution standpoint, to think about just where humans consume content, how do you convince them that this is the way to get into it, knowing that your profits are going to halve over the next few years? I think it's a moment of great anxiety, but a bit of a placeholder as everyone kind of figures out what the next beat looks like before they commit to anything.
Obviously, there are some prevailing economic conditions that I think have forced a lot of hands, but at the same time we can kind of go company by company a little bit. Let's pick two, let's bite off a little more than we can chew: CNN and ESPN I've seen repeatedly in your work as in the same conversation. What do these things have in common? What's at stake for them?
The best thing that ever happened for CNN and ESPN was they belonged to a paid TV bundle. The paid TV bundle was a beautiful socialistic experiment within media. It was this idea that you're going to generate affiliate revenue based on the amount of households that had paid TV or cable. And so even if they did not subscribe to CNN or ESPN, you were going to generate revenue based on the per-household members that had this kind of system. So when you look at what that did, a funny topic to think about is if we think about Disney acquiring Marvel and Lucasfilm circa 2008 and 2012, part of the reason that Disney was able to do that was because ESPN was printing money. ESPN was generating significant revenue compared to the cost that they were putting into it. At the time, sports rates have always been expensive, but they are not necessarily what they are today.
So when you look at what the success of ESPN within that paid TV bundle was able to do for Disney as a corporation looking at future acquisitions for its other content including studios and parks, then you get into this moment of, "Well, that's how Disney became Disney."
CNN, to the same kind of extent, was reaching 80, 90 million households and printing money. You're paying for talent and you're paying your operational cost for having this 24/7 global operation, but you're really the primary news service within this paid TV bundle. This is when households that had paid TV or cable were sitting at 110 million to 115 million households. We're sitting at about 80 million households now. We're probably going to see that cut even further over the next few years as we rapidly take a kind of hammer to this runway of time that linear has.
So they are struggling with how do we make up for this affiliate revenue in a direct-to-consumer market where to charge for ESPN OTT, you're just looking at $30, $40 in order to offset the churn that you're going to get and to pay for the sports rights.
And with CNN, I mean, we can talk about CNN+, but what that was was an experiment in determining whether or not a cord-cutting generation would actually pay for CNN, versus just having this part of their cable bundle. They are under great stress and anxiety, because if we think about, again, those profit margins that I was just talking about, those profit margins going away erode, most importantly, the primary things for a lot of the revenue that these companies can then use to expand their own empire. And that's a very anxiety-inducing period to see those go away.
Yeah. It's not only that they're losing viewers, it’s that they're losing potential future acquisitions based on the cash cow dying.
If you think about the CNN+ argument, so people looked at CNN+ and said, "Well, why wouldn't you move Jake Tapper or Don Lemon, Anderson Cooper, why wouldn't you move them over?"
And the big thing is, and this is the other struggle, is the affiliates are upset, like Comcast. Who you pay for your paid TV does not want to say, "Well, if you're going to bring them over here and you're going to charge $5 versus they're paying $80 for this cable bundle, then we might just go over there. We cut the amount of advertisers who are with us. We cut the amount of viewers and therefore impact on advertising revenue,” et cetera, et cetera. It has this ripple effect across the entire ecosystem.
So now if you're Disney and the Warner Bros. Discovery, you know what you kind of need to do and it's going to be a loss operation for a minute, but you know what you have to do. The issue is that you don't want to piss off your affiliates in the short-term because you're still generating significant revenue from it, even if you kind of cannibalize that subscriber base. It's a complicated affair. I think the last thing I'll say is that anyone who assumes that they have the answer is totally lying bullshit. No one has the answer and everyone's trying to figure it out. And it's a very complicated, theoretical, you're modeling so many different scenarios, situations, to try to figure out the best way forward knowing you're going to offer it at a loss for the next little bit.
It's had a little bit of the impact on the theatrical as these places have tried to get people to log onto their streaming services rather than potentially see things on a big screen.
One reason I wanted to talk to you this weekend in particular is that, by all accounts, it looks like a Pixar movie is about to open to $35 million, give or take. That's not what Pixar has done historically. You and I have talked a little bit in the past about how Disney's urge to get people to do Disney+ has potentially undermined some of their theatrical business. It seems very stark this weekend.
I was talking to a few friends at Disney, and Pixar is my biggest concern. If we kind of look at Disney as a whole, Disney had this really strong decade. They had the strong '90s, really difficult kind of early 2000s during the Michael Eisner era. Iger comes in, repairs relationships with Steve Jobs, and all of a sudden, they buy Pixar. It's a great moment. And part of the reason that they bought Pixar was that Iger very astutely realized that, "We can't compete with them. We're not making anything close to what they're doing." So he buys Pixar. That is doing well for them. Again, ESPN's printing money. So that leads to the acquisition of Lucasfilm, which is Star Wars and Indiana Jones, and then Marvel. Those obviously have been extremely lucrative for Disney.
If you look at where Disney sits now, the Marvel audience is not growing. If anything, it's arguably contracting, which is a very big concern. Star Wars is facing its own creative issues. And you could argue that that audience is not necessarily going to linear or passive entertainment space. The gaming space is very strong for Star Wars. Those licensing deals with companies like Electronic Arts are very lucrative to Disney. And so if you look at what you're doing on the studio side, if you can't really put out that many Star Wars films — which has been chaos. Marvel films are kind of stagnating. They're doing well. There's not too much concern around Marvel for the next five, six, seven years. But they are stagnating a little.
And then you have Pixar. You have this opportunity to really reach an audience base that is not being served in theaters. But the issue is that the Pixar quality has degraded slightly. And more importantly, when we look at the experiment that Bob Chapek, who's the former CEO, did with Pixar, audience training is a very, very real thing. He trained audiences to think, "Well, you're going to get this Pixar film either day-of on Disney+ for free or you're going to get it within the next 30 days." So if the film is not necessarily that great in general, you have a lot of people saying, "Well, I'll just wait for it on Disney+. Why spend $90 with my kids at a theater if I can just do this at home?"
More importantly, when we think about what Pixar was circa 1996 and then 2006, 2015 and then now, if you look at the competition in the space, companies like Illumination Entertainment, which did the Super Mario Bros. Movie, they did Minions, they do all those types of films, they are dominating. Universal has become the new Pixar for a young generation on the TV side. You have Cocomelon on YouTube that's become a big thing; Bluey is a big thing.
So where Pixar fits into that from both a cultural perspective and also from a business operations standpoint is really difficult and that's concerning, because those movies are expensive movies. Those are very expensive movies to make. They take a bit of marketing budget. And your hope is that you generate some form of revenue on it in theaters. That way you can generate stronger Pay-1, Pay-2 windows.
I think that's something that we actually don't talk about enough with streaming and film.
So from a TV side, streaming is kind of a one-to-one relationship. We've kind of figured out how that works. Film though, the majority of films make their money in the Pay-1 and Pay-2 windows. So what do we mean by that for some people who may not know?
The film goes to theaters. It plays there for 30 days, 45 days, 90 days. Then it goes typically, in the old days, it would go to like an HBO. And it would be there for like six months. And then it would go to like TNT for like 12 months. And then it would go to like ABC for a year. There were all these things. We call that PVOD or TVOD releases. In between that you had Blu-ray.
So what we miss with the Pay-1 and Pay-2 window is all this ability to actually make money on the films themselves. When you're going straight from a theater to streaming, your hope is that it makes a decent amount of money in the theatrical window. By the time it gets to streaming, you hope that it brings in new audiences or kind of retains audiences. But those are expensive bets to do that on. You're taking out hundreds of millions of dollars in order to swap out your streaming service. If it's in the saturation point in certain markets like the U.S. anyways, a new Pixar movie is not going to bring in new audiences. The Pixar audience is there.
So now you're trying to figure out, "Okay. Is this going to make money theatrically?" And if it doesn't make money theatrically, what that does to the model for the Pay-1 window? They don't right now, but let's say Disney had a new deal with Netflix, and they say, "You're going to get Pay-1 Pixar movies." The way that the deals work is that if a film makes $X in theater, Netflix will pay $X; if a film makes $XX in theater, Netflix will pay $XX for it. So the stronger it does in the box office, which is great from a revenue standpoint, great for talent anyway, the stronger it does theatrically, the more you can charge on the Pay-1, Pay-2 windows, when you kind of look at the bill at the end of the day.
So if a film is not performing theatrically, not only are you losing the money there and losing that on profit from a marketing standpoint, but you also are losing money in the Pay-1 window, and if you don't have a Pay-1 window, that film is not necessarily going to perform what you need it to on streaming.
So it is this kind of cataclysmic effect. And Pixar should be performing stronger, considering there's a lack of kids films in the theatrical space and parents want to go out, too. The fact that Pixar has kind of repeatedly underperformed in part because of actions made by the previous regime is a very concerning moment for Disney.
It reminds me of that Matt Damon interview that was on Hot Ones that has weirdly become somewhat canonical about how the destruction of the DVD market made it so that movies either have to be huge hits in theaters or they're nothing else because there's no secondary market for them. It just seems like we're hitting a point where that's getting cranked up even more so where if they can't even make it in theaters anymore, then the model just doesn't exist.
Or you need movies that make a billion dollars. And that is increasingly hard to do. If you look on the supply side, if you look at the number of titles from the big five studios (used to be big six, but Disney acquired Fox), most of them have reduced their output pretty extraordinarily. There are two reasons for that. One is to be in the theatrical space and make what you need to make, which with the erosion of some of these pay windows gets much, much, much more complicated, much more expensive, especially when you add in marketing. To make a $200 million movie, you're spending hundreds of millions of dollars on marketing; you might need to be sitting closer to $850 million, $900 million so you can make some kind of profit on it.
I think the bigger issue when we look at some of these pay windows is what this does to a lot of the decisions for a film. Even companies like Sony that don't have a streaming service, but a company like Lionsgate, which has Starz theoretically, but what they do is they say, "Well, we're going to take five movies and put them in theaters, because we can generate that $650 million, $700 million based on what we're doing with it and then we're going to sell the other ones to Amazon and Netflix for basically what we assumed we would make on this in theaters, and go that way."
That was really great for a lot of these companies for a while. The issue is that Amazon and Netflix are now saying, "Well, we don't necessarily know if we need those. We want to go at things a different way." So now you have this kind of question on the supply side of like, "Well, how many movies are you going to make in general? How many are you going to do theatrically? What type of genres are you creating films in to do it the most efficient way possible?" All these questions start coming into play and it's a difficult scenario.
Rich Greenfield, an analyst — and we disagree on quite a bit; we agree on some things, but we disagree on quite a bit — he talked a lot about how the theatrical model is kind of done. I disagree with that vehemently, but what I will say is that it's getting much more complex to kind of say, "We're going to put this movie out. We're going to market it and we're going to hope that we make this $X. And even if we don't, we can make it up in the PVOD window, the Pay-1, the Pay-2 window."
If you remove those windows entirely, then you have to make everything on theatrical or you have to do it in streaming acquisition, but the cost of acquiring those customers on streaming goes up and the ability to acquire more customers in overly saturated markets, like the U.S., where consolidation is going to increase and competition decreases, really becomes even more difficult.
So there is this, to his point, there is this concern of, "Well, if you remove all the opportunities to make revenue in the post-theatrical window, what does theatrical do?" It becomes a marketing tool. It becomes a very expensive marketing tool for a model that we haven't actually proven out yet on the film side. So it's complicated. There's no easy answer for it yet, unfortunately.
Got it. All right. Well, you've been so generous with your time. This is such a fascinating topic. Thanks again for diving in. What can people look forward to over the course of the summer? I know that summer's traditionally kind of the big movie box office season. It's a little more crowded this year than usual. Is that going to have any ramifications for streaming versus theatrical kind of being able to commandeer some of the audience?
You know what I'm really excited about? We've been operating off of skewed data for the last three years. If you look at a lot of the decisions that are being made within the streaming space as it relates to the theatrical window, a lot of it is based on either 2019, which was an insane year for film that we should never compare anything to, because Disney had 80 percent of the top 10 films domestically, but they were all like Frozen II and Endgame. You had insane, insane movies that were coming out. Toy Story 4, I think. Then we said, "Okay. We'll look at 2020, 2021." Except what happened? There was a pandemic. Things shut down. The first movie back in the pandemic was Tenet. That movie did maybe a fourth of what it would've normally done because people couldn't go out.
And so what we're saying is, "Well, here's what people are doing in the last three years." But the supply side hasn't been able to catch up to the demand. The demand for theatrical releases is still there. What we've said as an industry is, "We're going to completely cut off supply. We're going to figure out new ways of distributing this. We're going to only put certain movies in theaters." And so you actually have skewed data to operate off of to model how to make your decisions.
So what I'm hoping, to your exact point as we have more movies this summer than we did in the last three years, as we start to see where people are going back to, families are going back to, older audiences, Gen X+, are going back to, as we start to see some of those decisions play out and data play out, we can actually start formulating new models and new business opportunities around what we're seeing consumers do going forward as they have access to streaming services. That barrier to adoption is gone. People have platforms. They're on them.
The barrier to going back to theater is mostly removed. The pandemic, according to WHO, is over. So now it is this question of like, "Well, what do people actually do? And how do we make decisions based on this actual non-skewed data that we're getting?" So that's what I'm excited about. So we'll see how things play out over the summer.
All right. Love to hear that. Julia, where can folks find you?
I really love your stuff on Puck. Thanks again for coming on!
Thank you for having me.
If you have anything you’d like to see in this Sunday special, shoot me an email. Comment below! Thanks for reading, and thanks so much for supporting Numlock.