Pandemic Binge
Predictions populate the startup sphere at the end and beginning of each year: times of reflection and looking ahead. Right now, it feels more like we’ve slipped dimensional seams of the multiverse, living in an alternate reality in 2020. Since we’re all new to a global pandemic driven by a virus so fluid that it has forced swaths of the world population to shelter in place, I’m thinking about industries that are transforming in the time of coronavirus. It seems like many sectors and business models that survive the pandemic may emerge in a post-vaccine world almost unrecognizable. I’m starting here with three entertainment categories: Broadcast Cable Networks, Movies - Theatrical Release, and OTT Streaming.
Broadcast Cable Networks
Over the past 5 years, cable TV has seen cord-cutting go from a dismissible future concern to a clear and present threat as subscribers steadily cancel service for OTT streaming. Grim Q1 subscriber churn set the table for the quarantine economy to hasten cable TV’s decline. It suggests a tenuous future for the business post-COVID. Combined, the big four pay TV providers lost 5% of their paying subscriber total in the first three months of this year. As lockdowns swept the country, cable TV lost its most dependable, differentiated, and defensible entertainment moat: live television. Live sports are all on hiatus; other live events have been cancelled. Morning and late-night talk shows are shadows of their normal production. The single, scary topic on daily news has overstressed viewers tuning out.
For now, at least, the timing of corona lockdowns offers a tiny bit of solace for broadcast cable reeling from the collapse of their live tv coverage. The majority of networks’ series and programs currently on the air are pre-recorded and can run as planned through the end of the spring season. Airing reruns and old movies is standard on network TV during the summer months, audiences are used to that lull. Unfortunately, that timing band aid won’t last. Interviewed on a Ringer podcast at the beginning of April, director and writer Alan Yang laid bare the a looming issue for TV and Film…“the lockdowns obviously delay series that are airing now and were still in post on a season’s final episodes...but the real problem will be delayed...more like 6-8 months from now because nothing is getting produced now that would air/premiere six months ahead from today.”
Scripted network television operates on a set 12-month calendar to ensure development and promotional stages have adequate lead-time running up to predetermined release dates. The annual ops year has remained largely the same as it was when the networks launched in the 1940s. So, the plan for 2020 was no different. Coronavirus lockdowns have likely erased six months of spring and summer production. All major networks are facing the brutal likelihood of arriving at their broadcasting start month with none of their returning series or new pilots ready to air. Prior to the rise of OTT streaming, that reality would be painful for cable networks. Today, a September without cable’s returning lineup will likely have long-term consequences for whether or not the businesses survive post-COVID.
Cable providers and broadcast networks do not have consistently robust archives, especially of movies. Due to the complexity of licensing between all entities involved, there’s major inconsistency in what’s available when on-demand in terms of old shows, earlier seasons, and licensed movies from each channel. Furthermore, most networks-providers digital and mobile interfaces turn “ease of access” into a struggle for viewers. Many channels require the user to choose to make each show available on demand, while the cable provider interfaces treat each network like a siloed channel interface. Nothing is easily available within a few clicks.
In the absence of live sports, there’s already been rumbling from customers for refunds from pay TV providers If those same customers are left with nothing but series reruns and limited movie options, cord cutting could be fatal for cable TV. There is a chance here for cable networks to finally experiment with new models for introducing new content, timetables for development, and catching up with the competition in web/mobile experiences.They have nothing more to lose by trying, though it will require a brutally honest recognition of past mistakes and failures. For instance, broadcast networks still rely on an expensive slate of productions, with just a few hit series retaining audiences year to year. Since 2010, across all networks, 58% of original programming is cancelled every year. Furthermore, clinging to outmoded pricing from legacy customers who may not realize what they’re paying is a failing proposition. In 2020, the average cable TV customer STILL pays $107/month for the box and bundle. That same customer could stack 4-5 OTT platforms and still save on the cable bill today. There may be a path forward post-corona virus, though it will require reducing expectations of revenue and growth for now.
Movies - Theatrical Release
For the film business, where both creating supply and realizing demand depend on the ability of large groups to gather, the coronavirus lockdowns have already paralyzed the industry. With productions delayed indefinitely, studio lots vacant, and theaters closed, the Hollywood box office, which normally earns $11B annually, has been taken off the board. Not unlike cable TV and cord cutters, moviegoing audiences have been gradually shrinking for twenty years. In 2018, 336 million fewer movie tickets were sold compared to the industry’s peak in 2002. The rising cost of movie tickets -- nearly doubling over the same period -- has obscured this decline from reflecting in top line revenue. That contraction has not frozen the whole business, but I think there are a few emerging consequences of a Hollywood on ice during the virus.
There is a real possibility that theaters won’t reopen on a scale that facilitates standard nationwide premieres for the foreseeable future. In response to that scenario, many major theatrical releases planned for the end of the year are being pushed back into 2021. Even films that had scheduled domestic releases much later in 2021 are pulling the theater plan and cutting deals to premiere on Netflix or other streaming services instead. The new production gap mentioned above will also severely limit the number of films in the can and ready to be released in the fall/winter even if theaters are open. Arriving at the end of the year with no star-studded blockbuster films hitting theaters will slaughter box office revenue and could shatter the theatrical release distribution model. November and December are crucial for the film industry, accounting for more than 40% of the $11.3 billion total domestic box office revenue in 2019. If studios and theaters rush to spin-up some theatrical re-releases of popular or classic films to fill the void, those will likely turn out a fraction of the dependable, large audiences normally seen at theaters at the end of the year.
The emotional reluctance of moviegoers and state timelines to officially reopen businesses are intertwined. Even if some productions make it into the theaters, even if the virus is tamed and distancing guidelines relax, every day that passes makes it harder to imagine moviegoers venturing out to crowd into theaters in numbers anywhere near the projected norm for the box office. People are going to be cautious and will be warned to take small steps towards reengaging in normal activity. Large gatherings, especially with whole families, will probably be among the last consumer events to come back to life.
The longest-lasting negative consequence for studios and theaters arises from the complete shuttering of their businesses while their major industry competition, OTT streaming platforms, are surging to new heights. Streaming offers homebound movie lovers of every age and demographic a cheaper, safer, high quality alternative in bottomless quantity. I wouldn’t be surprised if, in a post-COVID world, theatrical releases and going out to the movies settle into niche consumer activity. Existing theater businesses like Alamo Drafthouse nationwide and Nighthawk Cinema and Metrograph in NYC are already serving the market. These theaters have full-service kitchens, high quality menus, and full bars, all of which can be accessed throughout a film from your seats, which are La-Z-Boy quality plush. Such models would significantly reduce overall box office dollars and, as a higher-priced cinematic experience, would likely be reserved more for special occasions and special films rather than remaining a regular family experience.
OTT Streaming
A lone bright spot in battered public markets, Netflix shattered analyst revenue projections in Q1 2020 by adding 16 million new subscribers. At first blush this might seem extra impressive given the pandemic. Growing their total subscriber base by nearly 10% in one quarter is amazing for sure, but not the shocker that blindsided Wall Street. Reid Hastings said in 2018 that his company wasn’t competing with all the other new streaming options, Netflix was competing with our sleep. A global shelter-in-place order is a dream come true for the company that invented binge watching and is by far the closest thing to a generic eponym for streaming services. Netflix in particular and the OTT category broadly are uniquely built to thrive and lead during COVID and immediately thereafter.
The lockdown confinement advantage is a major positive swing for OTT providers right now. We are all stuck at home, with very little to do, hungry for distractions, delights, and diversion from the real world outside. Of course, it will end at some point and viewership hours will revert to normal. However, given the probability of a more enduring economic downturn as well as the subscription model for all the TV providers (OTT and cable), this lockdown surge won’t be a one-time blip in streaming popularity. Within OTT streaming’s most unprecedented collective binge, there’s a distinct exercise happening with real implications for OTT long-term retention. Approaching Month 3 of lockdown, viewers have binged beyond their favorite programming lineup and so, consciously or subconsciously, are devoting many hours evaluating their content providers: How deep are their libraries? How many genres do they cover? How easy or clunky are their interfaces to navigate?
This degree of rigorous kicking of the tires doesn’t really happen in the course of peoples’ normal, busy daily lives, but life during coronavirus is a whole new world and, while I’m not a fan of the phrase, content is the king we’re all kneeling before right now. There’s no way the powers that be could have predicted the lockdown, though it seems prescient of Netflix to have dropped so much acquisition money over the last few years to beef up their library alongside all the original programming. Expect to see a much higher degree of long-term consumer lock-in for the OTT providers they choose during a period of intensive consumption.
A regular thread in the emergence of the OTT competitive field has been how much signing up for multiple streaming services feels like cable bundle and will soon cost more too. In reality, the cost comparison is the opposite. Shockingly, and likely aided by a substantial number of long-term subscribers who don’t know better, the average monthly cable TV bill is $107.00 in the U.S. $107!!! Add up monthly subscriptions to Netflix, Hulu. Disney+, HBO Now, and Apple TV and at $45/month this streaming bill saves consumers more than 50% compared to cable. They could even add in a Live TV OTT like YouTube TV and still pay less than the current cable bill.
That true cost comparison will likely be revealed to more consumers due to pandemic impact on the economy. Payer price sensitivity is being felt in an acute spike, especially for those on lockdown without any income. It will have an even more widespread impact in a post-COVID economy with consumers looking for ways to reduce their monthly expenses. The custom streaming bundle is cheaper than pay TV head-to-head regardless of pandemic. In a pandemic country on lockdown, with cable TV having lost its live programming advantage, the inflated cable TV bill seems all the more glaring. Switching to OTT providers will be a no-brainer for more consumers. The cord cutting floodgates may just burst open in the months ahead.
When Netflix dropped all of the first season of House of Cards in 2013, the company blew up the timed-release marketing-distribution playbook that was industry standard. The company took a significant risk on the notion that, if the content was good, audiences would swap anticipation and premieres for volume and availability. That theory proving out since, they’ve been rewarded with ultimate flexibility and autonomy in how and when they release. Not beholden to concrete lease plans, they can be strategic and responsive to genre popularity trends. They can test bolder creative risks on a 365 days-a-year release window. And, they can adjust on the fly to external issues, from production delays to global pandemics, without sacrificing their style or reputation. We’re used to Netflix as a place to find interesting stuff to watch, stuff that often experiments with episode, season, and series constraints. This makes dynamic OTTs more durable through an industry-wide production shutdown. Interruptions, delays, and some shows that just don’t come back -- all are much more copacetic on Netflix and streamers. For broadcast networks with audiences trained to watch on a regular and consistent programming schedule, these same issues may cause much more friction.
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A coronavirus effect on the entertainment industry so far seems to be accelerating the adoption curve for new technologies transforming how we watch TV and movies. Life in lockdown won’t last forever, but post-pandemic Hollywood may reveal an industry that’s leapfrogged a few stages in the broad shift to being streaming-first.