Deep Dive Reports
January 28, 2020

20 Charts for 2020

A collection of charts that highlight some of the trends happening across the sports, media, and entertainment industries over the past year, and the key questions executives and investors should be asking over the next 12 months.

At the start of every year, we like to take a step back and look at emerging trends and see how they will impact the sports, media, and entertainment industries over the next 12 months (See Last Year's Charts).  After a wave of consolidation across big media companies, deal making is expected to slow down, and there will be a greater emphasis on executing strategic shifts to an increasingly DTC environment.  Any M&A activity will most likely take the form of strategic tuck-ins, rather than ones seeking scale.  While unbundling provides price and access benefits to consumers, it creates a very fragmented landscape, making it difficult for content owners to stand out.  Distributors will need to take on a greater role as aggregators and curators, leveraging data to personalize experiences for consumers.  Regulatory changes will also have an impact, both in the opening of new markets (sports betting), and potential reduction in others (user privacy).  As the TMT industry continues its transformation, legacy businesses will need to adapt quickly to the continual advances in technology, as well as the evolving consumer habits of different generations.

 

The Battle For Customer Attention
20 Charts for 2020 3

The first iPhone was released in 2007, revolutionizing the media industry, and still years later, mobile usage is exponentially growing.  Early innovation came from new entrants, most notably “FAANG,” who were able to capture outsized market share as legacy business were slow to adapt (Netflix is grouped in there, but it is by far the least defensible).  Now, traditional media companies are embracing mobile more and more as they look to build out direct-to-consumer relationships.  There are limited opportunities for these latecomers to meaningfully disrupt the current incumbents, as advances in technology will have marginal impacts.  5G, which gets a lot of attention for its potential transformative applications, is still far still further away than people think, but at the end of the day is very much a better version of a 4G network.  The high-speed, low-latency allows for new types of applications to be layered on (AR/VR, assistants, cloud gaming), yet most of the wealth creation will stay with the established market leaders.  Instead, companies will need to focus on leveraging current infrastructure in order to improve and optimize consumer experiences.  As the amount of entertainment options continues to exponentially grow, fragmentation will become even greater, making it difficult to stand out.  The general shift from ownership to access has put even more of the decision-making into the hands of the consumer, as they become more accustomed to some level of personalization.  Even if the majority of revenues is derived from a B2B perspective, many media companies will need to develop a B2C mindset in order to engage with their audiences.  There is a greater need to meet the customer on their terms, rather than trying to guide them into a one-size fits all product or service.  Corporations will need to diversify across different platforms, from TV to digital to audio, as they look to stay at the top of consumers’ minds. 

 

The Evolution Of Free-To-Play Games
20 Charts for 2020 4

Mobile games have been a key component behind the growth of the video game industry and have quickly surpassed PCs and consoles as the primary platform.  It’s important to note, that mobile hasn’t cannibalized the existing markets in the same way music streaming did to CDs, or what OTT is doing to linear TV.  Instead, mobile has grown the total market size, by increasing engagement amongst current gamers, and more importantly, lowering the barriers to entry for first-time players.  The free-to-play model has been widely adopted, creating a large funnel for users to experience/enjoy the game, and then using gameplay mechanics to help monetize a subset of the most engaged players.  While there are some parallels to gambling, publishers have focused on ensuring they are using microtransactions to enhance the gameplay, rather than creating a pay-to-win environment.  As digital console games continue to gain traction, free-to-play titles have become the standard version for many new titles.  This convergence creates potential opportunities for cross-platform gaming, as players will no longer be confined to one system.  The computing power of smartphones are continually improving, leading to higher quality specs and graphics, which lends itself to more mobile games outside of the casual and mid-core genres.  AAA publishers are developing versions of their premium console titles that are designed specifically for mobile in order to further their engagement with existing players as well as introduce the franchise to new ones.  While this is a new development in Western markets, it’s been occurring in Asian markets for some time, where mobile games have established hardcore gaming audiences.  The Chinese market is notoriously difficult to enter due to their strict regulations, the temporary halt in new releases in 2018, and more recently, the curfew on gameplay by children.  As a result, the largest Chinese publishers are looking to expand outside of The Middle Kingdom, and tap into the growing pool of players across the world.  Tencent has been the leading the charge, aggressively investing and acquiring western developers, looking to build relationships and extend their gameplay expertise.  As seen with other forms of entertainment, not all IP or genres will translate around the globe, and games will need to be catered to various regions with distinctive tastes.  However, this should come somewhat naturally as the free-to-play model is built around rigorous data analytics, constant testing, and gameplay optimization.

 

The Need For New Consoles Is Diminishing
20 Charts for 2020 5

The gaming universe seems to be overlooked as the concept of direct-to-consumer services and customer engagement encapsulates the traditional media landscape.  Similar to other forms of content, gaming has seen a transition from physical to digital, but the shift has been gradual, rather than linked to a specific point of disruption.  These platforms have created digital storefronts to allow customers to purchase games directly, but adoption has still been somewhat underwhelming, with digital representing less than 50% of console game purchases.  However, they should take on greater importance as major publishers start to focus heavily on live services and updates for their marquee franchises rather than releasing new titles.  With a new generation of consoles set to launch at the end of 2020, these online networks will be vital for transitioning the gamer experience.  Unlike the previous generations of consoles, PS5 and Xbox Series X will both offer backwards compatibility allowing players to continue with their favorite titles.  As a result, it would not be surprising if there was limited demand for these new systems, especially without the release of exclusives or major franchise titles.  Even anticipated sequels, such as Overwatch 2, will be built as an extension of the original versions, rather than an entirely new game.  The elongated success of GTA V, which has now surpassed 115M copies sold since its release in 2013, shows the potential for developing such strong franchise affinity.  Across different titles, players have developed user personas, that include customized skins and other cosmetic microtransaction purchases, which they are not willing to forgo.  Fandom has always been built around the popular games, but increasingly, communities are being built within these titles, leading to even stronger engagement.  These new ecosystems within games have been long established in Roblox and Minecraft, and while they don’t get a lot of attention, they are quite popular (Roblox 29.6B, Minecraft 100.2B YouTube hours watched in 2019).  Fortnite has embraced these unique features through their partnerships with Marshmello and Disney/Star Wars, where people logged into the game just to concurrently watch content, rather than actually play the game.  As games turn into virtual worlds, where anyone can build a new environment, there will be a diminishing role for hardware, especially as cross-platform becomes more ubiquitous.

 

The New “Streaming Wars”
20 Charts for 2020 6

Amazon’s acquisition of Twitch for $970M in 2014 seems like a bargain as it has become the dominant platform for gaming related content.  However, over the past year, there have been cracks forming, and in Q4, a new form of “streaming wars” broke out.  Ninja, who rose quickly rose to fame through Fortnite, surprised many by signing an exclusive streaming deal with Microsoft’s platform, Mixer.  This sparked a flurry of activity amongst the most popular streamers on Twitch, with the majority signing exclusive contracts with competitors.  Ninja’s move to Mixer hasn’t really moved the needle for the platform, which is becoming a distant 4th place, but YouTube Gaming and Facebook Gaming, have been able to gain market share over the past year.  These 2 services are attractive to streaming personalities due to their inherent expertise in advertising, and large network of users on the main service.  With the release of Stadia, YouTube Gaming will become even more appealing to content creators as there is potential to seamlessly integrate with Google’s cloud gaming service.  Recently, these popular streamers have been used to boost marketing efforts around new titles, with Apex Legends reportedly paying Ninja $1M to play the title on its surprise release date.  These gamers have grown their following partly due to their skill level, but more so due to their streaming persona and interaction with their viewers.  As gaming content becomes more fragmented, it will be even harder for audiences to navigate the landscape and find their favorite players.  There is an opportunity for these streaming platforms to build a foundation that gives more structure to the gaming community and drive more concurrent viewership.  This can be done through focusing on 1 franchise, and becoming the leading provider of content around that title, although it would be obviously difficult to sustain.  It may easier to start developing a programming schedule that is similar to linear TV, where there can be dedicated time slots for live content around certain games or personalities.  Aggregating audiences can make the content feel like events, and can boost advertising revenue, as well as help drive cross-promotion.  Additionally, as more publishers invest into Esports, there will be a need to broadcast these matches online, as the majority of gamers are cord cutters or cord-nevers.  Gaming-first platforms are the logical home for these leagues, but they first need to focus on establishing their audience and prove to publishers that they can effectively monetize the content and drive additional value.

 

The Social Networks Are Regulating Themselves
20 Charts for 2020 7

After the purchase of Musical.ly in 2018, TikTok launched in the U.S. and experienced a meteoric rise in 2019, becoming the must have app for Gen-Z.  The social platform bears the most resemblance to now-defunct Vine with its focus on short-form video (<15 seconds), and was quickly embraced by existing digital content creators, although mainly as a marketing funnel towards their primary platform (YouTube).  The breakout success of Lil Nas X’s Old Town Road showcased the ability to use the network’s viral effects to drive demand for new music, as well as lesser known catalog titles.  There is little monetization of the music on-platform, instead driving users towards streaming services to play the full song, where artists can start to capture some of the revenue.  It’s essentially using one algorithm to jumpstart an algorithm on another service.  Due to the nature of its content, TikTok doesn’t lend itself to pre-roll or mid-roll advertisements, and sponsored content has been fairly limited to date.  But product placement and partnerships are expected to pick up as the platform is starting to develop a new crop of native content creators with a rabid following that continues to grow quickly.  Still, marketers remain skeptical due to brand safety concerns advertising around UGC, and increasingly more so with a Chinese-owned app during periods of heightened security.  Washington DC has been taking a closer look at all the social platforms and their policies around capturing, storing, and selling user data.  Facebook and Google are by far the largest players, and have spent a lot of time giving testimonials to explain their business practices.  But while some of these actions have been painstakingly reprehensible, regulators haven’t taken any significant action to deter these businesses.  Fining YouTube $160M (~.1% of 2019 revenue) for violation of children’s privacy laws isn’t going to materially change their business.  For the most part, these tech giants are regulating themselves, or working with policymakers to gradually introduce new rules that don’t inhibit their business model.  User data is at the essence of their success, from personalized experiences/recommendations to partnerships to most importantly, advertising.  And while AI and machine learning can be helpful to limit the impact of “bad apples”, the volume of user generated content is far too great to control or monitor. 

 

The Best Place To Spend Advertising Dollars
20 Charts for 2020 8

Digital advertising revenue has already eclipsed TV, but the overwhelming portion of that is coming from search (aka Google).  In 2020, digital media (display + video) advertising is expected to surpass TV, which is a bit more reflective of the shift in spending.  While there are better opportunities to target customers, there are systemic issues in the digital ecosystem that create brand safety concerns.  Advertisers are keen to spend on digital because that’s where younger audiences are spending more time, but most of the content remains user-generated.  Roku, with access to premium inventory, is starting to make in-roads in OTT advertising, but is still considered experimental by many agencies.  Hulu is another ad-supported platform that performs well, but still has plenty of room for improvement, as the demand is still low enough where the same mid-roll advertisements are repeatedly played during programming. With the forthcoming launch of Peacock, Viacom’s acquisition of Pluto, and WarnerMedia’s Xandr, there are more opportunities to bundle linear and digital advertising spend together, and help grow the overall pie.  In 2020, with a highly contentious presidential election forthcoming, political ad spend will grow significantly over the next 10 months.  This should benefit the traditional TV networks as digital platforms have taken different stances towards political advertising.  Twitter has completely banned political advertising, but there will be ways to get around those rules.  On the other hand, Facebook has taken the complete opposite approach, and will continue to allow this type of advertising without additional scrutiny.  Spotify will “pause” political ads in 2020 on their ad-supported tier and podcasts until they have the capabilities to properly vet such ads.  TV networks should reap the rewards, in a substantial way, which may diminish inventory for traditional marketers, leading brands to look elsewhere to spend their dollars.  But with an economic downturn seemingly on the horizon, advertising is usually one of the first places where there are cutbacks on spending.  With limited budgets, advertisers may allocate more of their resources towards established mediums with known returns, rather than testing emerging platforms.  As a result, advertising with OTT platforms, Connected TVs, and interactive click-to-buy formats may take even more time to get off the ground, even though that’s where the majority of viewing is taking place.

 

The Path To Profitability For Digital Publishers
20 Charts for 2020 9

As the valuations of many digital media darlings plummeted (Disney wrote down its $350M investment in Vice), it was only a matter of time before a series of consolidation occurred.  This sector has had a tumultuous decade, and the constant pivot in strategy (Facebook, Video, etc.) has limited the growth of those that have managed to survive.  But there is a corner nearing as the shine of the internet fades, and the number of digital native users continues to exponentially grow.  This emergent audience has become more accustomed towards consuming and transacting on the web, and more likely to pay for digital content.  While the subscription model can work for premium content, mainly centered around news or sports, it’s not a universal solution.  Many more digital-first publishers will find success through the diversification of revenue streams.  There are inherent problems with digital advertising, but sites that attract large audiences can still generate significant ad revenues that can support other initiatives.   These digital publishers will increasingly look towards e-commerce opportunities, either by partnering with brands directly to generate affiliate revenue, or creating their own suite of branded products that can be sold direct, or through 3rd parties.  For larger entities, video content production can be another instrument in the toolkit, but comes with considerable risk due to the significant investments required to generate returns.  Podcasts are becoming a more popular form of content, due to their low costs, and engaged audiences, but it’s still a developing sector and revenue is fairly limited.  Live events, such as conferences or conventions, can bring passionate fans together in real life, but are difficult to meaningfully scale.  Regardless of the business line, the crucial component will be maintaining the brand identity, as well as knowledge of their audience.  Experimentation will continue as publishers move away from 3rd parties for distribution, and focus on developing their own platform.  Management (and business models) will need to be flexible since the optimal revenue breakdown will differ based on each publisher and its audiences’ unique interests. 

 

The Monetization Of Podcasts Is About To Change
20 Charts for 2020 10

Podcasts have spent a lot of time in the spotlight in 2019, and expect it to garner even more attention from larger audio and media companies alike in 2020.  The predominantly ad-supported industry is still tiny compared to other media, but there has been a rush of creators looking to capitalize on the demand for spoken-word audio.  Spotify made a splash at the beginning of 2019 with 3 acquisitions (Gimlet, Anchor, Parcast) and this year will be focused on improving the monetization.  Only 14% of their MAU are active podcast listeners, so there is plenty of room to expand their audience, as well as drive more advertising revenue.  To date, a majority of podcasts still come from amateurs, but in reality only the well-known brands are successful.  They either have an established podcast network (Wondery), well-known host (Joe Rogan), have built in listeners (NPR), or avid digital audience (Barstool).  While Apple remains very much content, not even bundling podcasts into Apple Music, Spotify continues to innovate around the space.  They recently launched their streaming ad insertion technology which allows for more dynamic targeted advertising, which should a be considerable improvement from host-read ads.  This will be helpful for long-tail content that doesn’t attract much advertising to begin with, but premium podcasts will have a bigger say in how they share into this new revenue stream.  The recent move of Luminary to reduce their prices shows the limited consumer appeal of a subscription model, where the majority of content is “free” and non-exclusive.  SiriusXM, with their abundance of talk content, seems likely to aggressively enter the space, but will only do so with established talent that can move the needle.  On the opposite spectrum, tipping is gaining traction with amateurs, and it’s a much better route as they can maximize the monetization of their smaller, but passionate audience.  Super fans are very common, as majority of podcasts are very niche, and will never gain the scale necessary to be that attractive to brands.  Similar to music, discovery remains a huge problem for listeners, but as data grows and helps provide insight on listener preferences, there is room for platforms to close the monetization gap.

 

The Record Labels Are Holding The Music Industry Back
20 Charts for 2020 11

The recorded music industry has continued its upward trajectory from the low of 2014, but the growth in streaming consumption is already starting to show early signs of slowing down.   Spotify has been the catalyst for the success of streaming, but its listening time continues to outpace monetization since the overwhelming majority of songs are controlled by a few record labels, giving them strong influence over the economics for distribution.  This was evident at the turn of the century when digital distribution first disrupted the industry, the labels fought to protect an existing business model, rather than looking to embrace the internet.  Digital downloads were essentially a replica of the physical model, whereas streaming has led to a new method of distributing revenue.  But still, the majority of revenue is allocated towards content costs (and subsequently artists), limiting the potential success for streaming distributors of music.  After the major record labels have exited their equity stakes in Spotify, they are even less incentivized to acquiesce on new licensing agreements.  Spotify, not content to be a pure middleman, has expanded their business into podcasts and is trying to develop a marketplace that helps fan better connect with artists.  Both of these strategies will reduce the importance of the record labels, albeit in different ways, which in turn makes the licensing negotiations extremely difficult.  While new tools, such as promotional ads, can help labels market their most popular artists, the marketplace will be exceedingly more beneficial to lesser known artists.  These streaming services need to find new ways to increase monetization without raising their prices (and thus paying more content costs).  Spotify’s ARPU continues its descent as it expands into more international territories and focuses more on family plans, bundles and student discounts to bring new users into the service.  Meanwhile, in China, Tencent Music offers a way for listeners to directly compensate artists through microtransactions, and this can work domestically, but it’s unlikely the labels will get on board.  But Spotify is not the only service, and other distributors will look to capitalize on the consistent demand for audio entertainment.  Through its ownership positions of SiriusXM (and Pandora), LiveNation and iHeartRadio, Liberty Media is flying under the radar despite its exposure to all parts of the audio ecosystem.  Their entire Investor Day was focused on the under-monetization of the ear and expect to see them be more active in 2020.  But they, along with other distributors, are always going to be at the mercy of the record labels.  Netflix was able to reduce its reliance on 3rd party content by heavily investing in original productions, but those capabilities aren’t easily available to music distribution platforms.  And as the value of the labels continue its ascent, as evident by Tencent’s recent investment in Universal Music Group, there isn’t a huge priority for them to evolve the business to maximize the capabilities of streaming.

 

The Burgeoning Presence Of Voice Control
20 Charts for 2020 12

Smart speakers continue to gain adoption as they go through the traditional hardware cycle, where the tech becomes cheaper, leading to lower prices and more willingness by customers to make their first purchase.  Google’s Home and Amazon’s Alexa products dominate the domestic market, and both are focused on integration with other devices/appliances to build a connected smart home.  This drives more consumer loyalty as there is more stickiness to the manufacturer, as products only work within the same ecosystem (i.e. Amazon devices do not work Google voice control).  Meanwhile, mobile voice control is gaining traction, and after a rocky start, Apple’s Siri quickly made improvements (as expected with machine learning) and is becoming more frequently utilized.  There is still much uncertainty as to how the market evolves over time.  The obvious use case is replacing the home radio, or existing home speakers, and all the streaming services are quickly moving to obtain distribution across all smart speaker systems, as ubiquity is essential to continuous growth.  More recently, smart speakers are increasingly coming with screens (Alexa Show, Facebook Portal), and while beneficial to the user, this completely changes the product.  This new feature is making them a more similar product to a mobile device (or tablet), which may somewhat diminish their value as they compete with a significant bigger install base.  The combination of video/sound replicates the experience, and as wireless headphones become even more widespread, the convergence will become stronger.  There are new features that can be utilized to stimulate the video experience, making it a much more interactive medium, rather than passive lean back viewing.  Those may take some time to develop as it will require more connectivity between devices (i.e. syncing Smart TVs to Smart speakers) and further software enhancements.  There are many parallels to the early stages of the App Store, but without visual aids, there are tougher obstacles to climb, from discovery to consumption.

 

The Fight For 5G Supremacy Has Begun
20 Charts for 2020 13

The only place to start in the wireless market is with the proposed merger between T-Mobile and Sprint, which has dragged on significantly longer than expected.  The horizontal consolidation from 4 to 3 has raised obvious anti-trust concerns, with questions on pricing and competition from a consumer perspective.  This has been slightly remedied by the disposition of Sprint’s prepaid business to DISH, but no matter how much Sprint has been struggling lately, they would still be a better 4th competitor than a new entrant.  That is a very near-term line of thought, with the expectation that the wireless industry will continue along the same path as to how it exists today.  But the wireless industry is rapidly changing as 5G networks come into effect, and both incumbents and new entrants are trying to capitalize on the growth in market size.  The most interesting aspect to the industry is how the Big 4 carriers are taking different strategic approaches to the transformational change.  Sprint has been lagging behind for some time, and is becoming desperate for the merger with T-Mobile to go through.  On the other hand, T-Mobile has been aggressively taking share, and would probably be comfortable continuing their battle in a 4G environment.  Their 5G strategy of nationwide low band will provide minimal speed increases, and will be most appealing to rural customers who do not have access to broadband today.  The addition of Sprint’s mid-band gives their network a significant boost, and increases their ability to acquire new customers.  AT&T is also using mid-band, with their initial rollout focusing on the FirstNet responders, which is a new customer base, but not that large in size.  While wireless remains 50% of their business, recent acquisitions of DirecTV and TimeWarner means much of their focus has been on integrating and improving the entertainment business to serve as a key differentiator for their mobile customers.  Verizon, has taken a different approach, and rather than own content assets, is looking to leverage its network strength to become the premium distribution partner.  They are essentially shutting down their wireline video business by offering YouTubeTV, and on the mobile side have partnered with Disney+ and Apple Music for promotional offerings to drive customers into unlimited plans.  Their 5G strategy based around mmWave is targeted to dense, urban areas where they have a strong footprint, and while speeds will be the strongest, they will be the most volatile depending on the line of sight (i.e. weather).  Meanwhile, cable companies have leveraged their MVNO to gain some early scale, as they replace wireline voice with mobile in the bundle in order to improve churn and customer relationships.  Introductory offerings have been priced fairly aggressively, and many customers have opted for unlimited plans, rather than the by-the-gig pricing that would make it a more stable additive of profit.  As a result, it’ll be difficult for cable companies to scale this business in a profitable manner without negotiating new terms.  With the majority of mobile consumption happening on Wi-Fi networks, broadband providers should explore more ways to capture economics from mobile customers.

 

The Pace Of Cord Cutting Could Get Even Worse
20 Charts for 2020 14

Cord cutting has been happening for years, but losses accelerated in 2019 as MVPDs increased their focus on profitable video subscribers and the overall customer relationship.  DirecTV (and U-verse) lost 2.5M subscribers in just 9 months as they have continued to eliminate promotional offerings, both on a standalone basis, as well as through wireless bundles, where they essentially were giving away the video product for free.  Looking at the chart above can be somewhat misleading, as not all DirecTV customers cut the cord completely – many stayed in the linear ecosystem and went to another MVPD, primarily DISH Network, inflating their numbers.  While other PayTV operators might implement their own pricing strategies, it’s difficult to see any subscriber losses being as dramatic as those at AT&T.  One positive trend helping the traditional bundle is that vMVPDs continue to raise prices and expand their channel offerings, and are becoming a less valuable choice to consumers.  But as distributors experience different rates of churn, there is a clear divide occurring as the cable companies are in a superior position than the satellite providers.  Cable companies are growing in confidence about their ability to manage the loss of unprofitable video customers by focusing their attention on overall relationships with their remaining customers.  As video margins decline due to escalating programming costs, broadband (and its significantly higher margins) have become the focal point of the consumer relationship, as it should be with streaming and mobile becoming more and more popular.  Cable operators have made investments into their broadband network, with a focus on control, speed, and security in order to support the rapidly growing consumption of data.  But there hasn’t yet been a rush to push customers into higher tiers, with a bigger emphasis on giving customers options, such as Verizon’s new mix and match program.  The first half of the year will see the launch of the remaining OTT services from major players, with Peacock and HBOMax (and Quibi), joining AppleTV+ and Disney+ (and Netflix).  While each are taking different approaches, they are all primarily focused on entertainment programming that can be watched on-demand.  As they ramp up content investments, the only content left on linear networks will be sports and news, which is only attractive to a subset of the current households.

 

The MVPDs Are Finally Starting To Push Back On Programmers
20 Charts for 2020 15

Looking back at 2019, it seemed like every month there was a new carriage dispute between networks and distributors.  While the majority were eventually resolved, it shows how difficult these negotiations are getting, with much more at stake than just affiliate fees and pricing.  DISH has had drawn out stand-offs with Univision, HBO, and Sinclair (Fox RSNs), and while Charlie Ergen is a notoriously difficult negotiator, it’s happening across the ecosystem.  Pay TV operators are growing wary of just passing along price increases to customers.  It can withstand the video cord cutters to a certain extent, but losing customer relationships (broadband) will hurt the bottom line even more.  Recent consolidation has given major media companies a bigger portfolio of networks that can be packaged together in negotiations, using the highest rated ones to lift up the ones lagging behind.  Meanwhile, niche, independent cable networks are the most vulnerable to being dropped as viewers can find an abundance of entertainment programming on SVOD or AVOD, services.  Premium scripted programming used to be the crucial element, but increasingly the only thing that really matters is sports, news and high profile live content.  In 2020, there will be more negotiations being centered around the growing the number of OTT services.  MVPDs have always had a “frenemy” relationship with these services, and when Netflix launched they were very much enemies, but they are gravitating towards are a more amicable partnership as DTC services can be useful tool to reducing churn.  Distributors are upgrading their set-top boxes to compete with streaming hardware and connected TVs that serve as the main hubs for these apps.  With new CPE, MVPDs can offer seamless access to programming with the same remote (no changing inputs), or in some cases, voice command.  These carriage negotiations were a little bit more simple with Netflix or Amazon who have no linear footprint, as opposed to the traditional media companies who have existing channels.  DTC services generate significantly better unit economics than a single channel, but are not subsidized by non-viewers like the big bundle.  Media networks will use their standalone service as a negotiating tool, but there is still too much money trapped in the linear ecosystem to completely leave it on the table.  These legacy networks, first and foremost, are still programmers of content, with limited customer interaction, so bundling DTC services through MVPDs makes sense because many are not equipped to handle billing and support on their own.  The downside is that they will lose access to customer data and viewing habits that can be extremely useful in programming and strategic decision making.

 

The First Time Netflix Is Facing Legitimate Competition
20 Charts for 2020 16

Netflix has consistently held the view that their total domestic market size was 60 to 90 million households.  At the beginning of 2019, they surpassed the low-end of the range, and there has been intense scrutiny of how much bigger it can get.  Growth has slowed considerably in the U.S. this year, most likely in part due to an 18% price increase and an underperforming slate.  In Q2, the service lost subscribers for the first time, but even with the .2% decline in memberships, they still managed to grow revenue by 11%.  2019 could have been an aberration, and perhaps 2020 ticks back up, but domestically it has lost a lot of popular programming (i.e. Friends) and is facing more competition than ever.  Legacy networks are pulling back on licensing content to streaming platforms, instead keeping it for their own service, as well as increasing their production output.  In the era of Peak TV, the cost for premium scripted programming has grown astronomically as these hit shows are essential for subscriber acquisition.  The biggest players can probably rely solely on in-house productions, but smaller companies will still produce 3rd party content, effectively helping the competition.  This already happens in the linear world, but as the business models gravitate away from profit participations towards cost-plus, the potential upside for breakout hits is eliminated.  In a rapidly changing environment, studios need to the weigh the benefits (or mix) of guaranteed short-term profit versus long-term investments.  The “arms dealer” approach will only work if the IP/content gets returned, or can be utilized in international markets to capture better owner economics.  Many Hollywood studios would welcome those type of arrangements, but Netflix is keen on acquiring worldwide rights to further strengthen their global position.  As new entrants launch (primarily in the U.S.), Netflix seems one step ahead as they increase their focus on their rapidly growing international markets and local language productions.  It goes without saying that the global market is significantly a bigger pie, but cultural differences across regions can make it harder for content to scale.  For now, there seems to be limited competition from any media companies, domestic or foreign, and Netflix will have a sizeable cushion as they figure things out. 

 

The Beginning Of The End For The Theatrical Window
20 Charts for 2020 17

The theatrical window continues to shorten, as the home video market (purchases/rentals) declines and is replaced by streaming services.  But the physical home entertainment market (i.e. DVDs) is still a sizable business in the U.S. ($6B in 2019) and even more so across the world where OTT is still less developed.  The industry shifts are clearly gaining momentum, but major theater circuits have been holding firm, as the exclusive window remains crucial to their success.  Netflix has increased their film output over the past few years, especially with awards contenders, and have used these premium titles, along with aggressive marketing, to put more pressure on theaters.  The potential interest in acquiring independent theaters would be a greater step forwards towards the day and date release they desperately crave.  Not surprisingly, the major circuits have steadfastly refused to alter their approach, and aside from the brief flirtation with PVOD, the big 6 studios (especially Disney) have supported their partners’ decisions.  However, this should all change over the coming years as each major studio has a corporate OTT service where they will be incentivized to drive subscriptions.  Obviously, there will be a reduction in film library licensing to 3rd parties, as well as Pay 1 output deals gravitating from premium linear networks to DTC services.  Films generally make up 60% of viewing on these on-demand services, so this library content is low hanging fruit that can drive a lot of value to the new platform.  What will be more interesting to see is how the various media companies use their established franchise IP to drive subscriptions.  In the near term, the latest installment of the StarWars or Fast and Furious franchise will still be shown in theaters as they drive attendance in masses, and are the flywheel to other pieces (consumer products, theme parks).  But as Disney has recently done with The Mandalorian, there are opportunities to develop exclusive streaming content that extends the franchise and increases fan affinity.  While this was a TV show, it is easy to envision the same strategy with films around lesser known characters, but the quality of content remains of the utmost importance to maintain branding.  Interspersing stories on streaming services, to build audiences for existing (and new) franchises can build up excitement for theatrical releases.  In music streaming, there are spikes in an artist’s back catalog ahead of a new album release, and it’s easy to see similar parallels in older titles ahead of new installments of popular franchises. 

 

The Box Office Is The Tip Of The Iceberg
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Disney’s growing influence on the domestic box office over the last decade has been pretty astounding, and predicated on Bob Iger’s vision of IP when acquiring Pixar, LucasFilm, and Marvel.  Kevin Feige’s oversight of the Marvel Universe has weaved characters and storylines through 23 films over 11 years, culminating in the record setting performance of the Avengers: Endgame in 2019.  Now, all of the major studios are following the same blueprint as they place more emphasis on sequels and tentpoles, although not always with great success.  The lack of summer blockbusters (and notable bombs) brought up concerns around “franchise fatigue” amongst audiences, but that seems a little misguided.  Some sequels have not performed well recently, but that is not necessarily due to IP, but rather the quality of content.  Many franchises have continued to perform well, and when that happens, there are no concerns about the fatigue.  But this shift in content has had an impact on attendance, with a concentration of blockbuster events driving audience.  This is happening in two ways – one, there is a higher concentration of box office in the opening week and two – there is a higher concentration of box office in the Top 10 films.  As a result, the mid-budget market (independent studios) are being squeezed out and finding their best option for releases are at streaming companies.  Theaters have reinvested around the big-screen experience and as renovations/remodels of the physical location have slowed, there is a greater emphasis of interaction with consumers through digital apps to serve as a better partner to studios.  Subscription programs have started to slow with the early adopters in place, so there will be a need to experiment with more features to drive more subscribers, but also more overall attendance.  Rising prices have helped box office figures, but are masking some of the systemic issues in the industry.  The move to dynamic pricing around blockbusters (i.e. surcharges for opening weekend), seems like a short-term strategy of squeezing more money out of hardcore fans, and encouraging more casual audiences to stay at home.  With direct-to-consumer relationships in place through loyalty programs, there should be more emphasis on utilizing data/targeting to drive attendance outside of the tentpoles.  This can stimulate more F&B spending, which has higher margins, and can provide more benefit in the long-run.  With a weak 2020 slate, theaters should be more willing to experiment with innovative features that could drive more awareness for 2021 and beyond.

 

The Sports Betting Gold Rush Has Begun
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After the legalization of sports betting, there has been a rush of excitement as companies and investors explore how to tackle this multi-billion dollar industry.  A lot of insight can be gleaned from looking at the international markets (UK, Asia) where sports gambling has been established for some time, although not everything will translate directly.  It’s still early innings in the U.S., and the state-by-state rollout has been moving slower than initially expected, but there are some early trends emerging.  There are massive jumps during football season, with a quick spike in March for the NCAA tourney, and the summer months are usually the quietest, with only the MLB in action.  However, baseball could be the most appealing sport to gamblers due to the volume of opportunities, both through the number of games, as well as in-game actions (each pitch could be bet upon).  Mobile betting hasn’t been embraced by all states right away, but as seen in NJ, this is going to the primary platform for gambling, and the daily fantasy sports (DraftKings, FanDuel) have a significant early lead.  Mobile, in combination with improved latency from 5G networks, will set the foundation for the growth of in-game betting, which will quickly become the primary method.  While direct monetization of gambling might be fairly limited in the beginning, the trickle down impact is quite clear.  There should be a significant boost in sports viewership, which will be a driving factor in upcoming media rights negotiations.  TV networks have already started to incorporate sports gambling into their programming, mainly through shoulder content, but soon enough will be promoting it directly during live telecasts.  However, gambling still has a stigma to it, and it will take some time to incorporate into mainstream audiences.  Leagues/Teams who are ultimately supplying the content will feel the most hard pressed to get directly involved.  From the Black Sox in 1919 to Pete Rose in the 70’s to Tim Donaghy’s (NBA ref) in 2000’s, the notion of fixed matches will quickly estrange casual viewers, which will result in leagues taking a fairly conservative approach.  The quick wins will come through marketing and sponsorship, as well data licensing, but those commercial deals will be fixed terms, limiting the potential upside from growth over the next few years.

 

The 21 Fox RSNs Have Become Worthless To The Market
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The market’s view of the Fox RSNs has soured after Sinclair purchased them for $10.6B, a massive discount to the initially expected price of ~$20B.  RSNs are able to demand outsized affiliate fees from their exclusive sports rights and the passionate audiences they attract.  And despite the smaller number of sports viewers, they still maintain broad carriage, rather than being tiered.  Recently, accelerating cord cutting trends have amplified concerns about these networks’ abilities to maintain their distribution.  DISH Network has highlighted the worst case scenario as they have managed to add video subscribers, even after dropping the RSNs over the summer.  While there may be some ancillary impact from DirecTV’s aggressive price hikes, other Pay TV operators will most likely take more aggressive stances in their negotiations.  Each local market acts a bit differently depending on the team(s) and sport(s), but Sinclair still has plenty of muscle to throw in these discussions.  They are the dominant player in local sports with over 50% of local teams under contract.  Additionally, they are a leader in local news, with nearly 200 O&O stations, and many of those in overlapping footprints to their RSNs.  Local news will take on increasing importance in a presidential election year, and should help finalize an extension with Comcast, their last significant renewal outstanding.  Additionally, with targeted advertising still miniscule in scope, local stations offer an opportunity for brands to refine their target audiences.  And while TV remains appealing to brands for its broad reach, consumer insights from other digital sources can help create better curated linear advertising.  Sports betting, with its state by state rollout, can not advertise nationally, so they will be forced to look to local networks, especially one with sports content.  As a result, there are opportunities for Sinclair to build out more shoulder programming that can increase viewership outside of the games, which essentially is their only valuable airtime.    

 

The Dwindling Market For Sports Franchises
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Over the past decade, the value of U.S. professional sports franchises has skyrocketed.  Much of this appreciation has been a result of the substantial national media rights deals signed by the leagues.  As these contracts come up for negotiation in the coming year(s), teams should see an even bigger windfall as a result of the increasing importance of live sports to the linear bundle.  In addition, the legalization of sports betting, will provide additional optimism around its ability to drive large, passionate and engaged audiences to the TV screen.  But as the volume of content continues to proliferate, fans are encountering more entertainment options than ever before, and many are choosing not to go to stadiums anymore.  Attendance figures have been notably down across the Big 4 sports, most notably MLB, due to increasing ticket prices and the convenience (and comfort) of watching at home.  While ticket sales aren’t a major driver of revenue, the stadium atmosphere is a key component to enhancing the home viewing experience.  There has been more experimentation around group ticket sales, food & beverage discounts, and non-traditional seating in order to maintain attendance figures throughout the course of the season.  These strategies are important for smaller market teams, who have difficulty attracting top-tier players, as well as significant local broadcast revenues.  While the leagues distribute pooled national revenues across the teams, there is a growing bifurcation between the haves and have nots.  Still, all these teams have seen their value continue to grow each year, and have proven to be a well-performing asset.  Many owners have been in control of their franchises for decades, and there has been limited incentives to sell their stakes, which has resulted a dearth of transactions.  As the average age of GPs continues to grow, there may be more buying opportunities, as owners focus on exit opportunities as well as their estate planning.  The exponential growth in valuations, along with the limitations around owners, makes the pool of potential purchasers even more scant than it was before.  The MLB and NBA have recognized this issue and are creating LP funds in order to pool together investors who wouldn’t be able to make these purchases on their own.  In a similar move, the NFL is considering drastically raising its debt limit for purchases in order to expand the number of potential buyers.  For many childhood fans, owning a sports franchise is a lifelong dream, but LPs have such limited rights that it becomes an extremely passive investment, rather than being able to impact decision making.  In a fund, these investors would have even less access to the team, and the unique nature of these assets could become somewhat commoditized.

 

The Value Of Live Sports Keeps Going Up
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A number of major sports rights are set to expire in the next few years, and negotiations will start to pick up steam over the course of the year.  Despite the well-documented decline in linear TV, live sports have proven they can still drive ratings, and should see healthy increases in rights fees during these renewals.  The only place to start is with the NFL, which continues to command audiences like no other, representing 41 of the top 50 broadcasts in 2019.  ESPN has made it very clear that they want a package to air on ABC, in order to get into the Super Bowl rotation as well as drive more retrans revenue.  The main question is what happens to Monday Night Football as shifting it from ESPN to ABC, could accelerate cord cutting at the cable network.  Obviously, having 2 packages would be ideal, but seems unlikely despite Jimmy Pitaro’s best efforts to repair the relationship with the NFL.  Competition is intense, and many of the current right holders will be paying excessive premiums to maintain their rights.  Fox has doubled down on the live strategy, and Thursday Night Football and Sunday Football are crucial to their 4 nights of sports programming.  CBS is set to lose their premium SEC package, and losing NFL rights would be devastating.  This is all under the assumption that the NFL keeps the same packages intact, but there could be a wrinkle if the league decides to carve up the games a little bit more.  The international games could be a small package to offer, but the ratings are normally poor, especially in London where time difference is a factor.  This most likely wouldn’t be too valuable to a linear broadcaster, unless it comes with a bigger package, but there could be interest from streaming services, most notably Amazon.  The NFL has been notably slow to embrace streaming, partly due to the technical difficulties, as live streaming is much more difficult than on-demand content.  The Sunday Ticket is another way to increase their exposure to the tech players, but after sticking with DirecTV through their opt-out period, it’s difficult to imagine them making a big leap by moving exclusively OTT.  Still, these deals won’t start for a while, and will be long term, so waiting another decade before broadcasting on a streaming platform might be too long.  For sports leagues, reach remains vital, and there will be some reluctancy to move away from the linear ecosystem.  All the incumbents now have their own DTC service, which makes it likely the networks will look to acquire linear and digital rights, with the hope they can carve out some exclusivity within their packages.