Topic: Original content
The Wall Street Journal reports, with confirmation from NBC but not Apple, that the latter has signed a deal to reboot Steven Spielberg’s 1980s TV series as part of its big original video content push. This would be the first deal that’s come to light since Apple brought in two Sony TV execs to run the initiative, which I think of as version 2.0 of its original content push, with the first characterized by a variety of smaller projects with ties to its ecosystems like Planet of the Apps, Carpool Karaoke, and a variety of one-off music documentaries. Amazing Stories wasn’t a huge hit back in the day, running for only two seasons with limited ratings, but the Spielberg name will likely do a lot for it, and with a big budget ($5m per episode) and some good stories it could well be an interesting hit. Apple will obviously need quite a few more of these to use up its billion-dollar budget and secure enough content to become a draw for whatever service Apple wraps around this content, but this seems like a promising start.
YouTube has licensed nine of its original shows and movies, which were until now exclusive to its Red subscription service, to a third party in order to generate additional licensing revenue. Two of the great advantages of producing original content are exclusivity and licensing rights, though the two are often somewhat mutually exclusive, but YouTube appears to be playing both sides here, keeping the shows as exclusives for a period of time before broadening availability to develop a content licensing revenue stream too. That’s not a strategy I would ever see most of the other companies developing original content employ in such a windowing approach, but it likely suits YouTube reasonably well given its smaller subscription footprint and the increasing presence of aggregators and others who want to show YouTube content to fans on other platforms like traditional TV, somewhat ironically. But this will also allow YouTube to monetize its content in other geographies where the Red service hasn’t launched, whereas Netflix is now very focused on its near-global presence.
Hulu Will Spend $2.5 Billion on Content in 2017 (Sep 14, 2017)
Spotify and Apple Make Video Content Hires (Sep 6, 2017)
This is a minor thing, but nevertheless an important one in several ways. Apple has updated the executive bios on its website to reflect a few changes, notably the change in responsibility for Siri from Eddy Cue (generally responsible for online services) to Craig Federighi (responsible for software), and Eddy Cue’s ownership of Apple’s original video content push. That’s notable for two reasons: one is that Eddy Cue has lost other areas of responsibility recently, notably the App Store to Phil Schiller, and Siri is an area where Apple can ill afford to be seen to be falling behind the competition. Taking it away from Cue is likely a sign that Apple wants to see the same rapid improvements there as it did in the App Store when Schiller took over, but also a recognition that the content push is going to take more of Cue’s attention going forward.
Also worth noting: though there’s still only one woman among Apple’s top-tier leadership of SVPs and CXOs as shown on its executive leadership page, the next tier of VPs is now half women, with three of the four women of color. Diversity in the top ranks at Apple has been poor and slow to change, in part because the senior leadership team has been so stable for so long, but it’s clear that Tim Cook is using the more frequent changes happening at the next tier down to increase diversity there.
via Mac Rumors
Right after both Business Insider and Mashable posted sourced stories about it launching tomorrow, Facebook appears to have decided to take the wraps off its new video tab today instead. That this was coming was widely reported, and now we just know a few more details – the new tab in Facebook is called Watch, and will showcase lots of different kinds of videos, although the focus appears to be on personality-driven stuff of the sort that dominates the more popular YouTube channels. In general, the model here feels very YouTube-like, with a subscription model, though Facebook’s apps for TV platforms in recent months have signaled the broad structure and interface, with a combination of videos recommended or liked by friends, things you’ve saved, things that are popular on the platform, and so on. What I don’t see much of in Facebook’s announcement today is the longer form, more produced stuff that’s supposed to be coming too, probably because it’s not ready yet. There will be some other content in there too including the live MLB coverage Facebook acquired rights to a while back starting next season, but in general this is a hub for all kinds of video on Facebook, from professionally produced stuff to the stuff your friends share. Simply calling out video into its own tab, though, is going to raise its profile and thereby push people to spend more time in videos, where they’ll see ads only every few minutes, as opposed to scrolling through the News Feed, where they’ll see ads every few seconds. I’m more and more convinced that’s a risky move for Facebook, because all the anecdotal evidence I’ve seen so far suggests people are really put off by interruptive ads in Facebook videos (I certainly am too), and this whole effort could end up backfiring. That’s something I’m hoping to write about soon. Update: Variety has a listing of additional shows from professional producers which wasn’t in Facebook’s blog post.
Netflix is (somewhat remarkably) making its first ever acquisition, buying comic book company Millarworld, which was started by Mark Millar and some former colleagues who had all written comic books for DC and Marvel and wanted a bigger stake in their creations, nearly 15 years ago. The terms of the deal aren’t being disclosed, so it’s far from clear what the immediate financial impact on Netflix will be, either in terms of the acquisition price or the revenue or profits from adding this first bit of diversification to the business. The whole announcement from Netflix reads like a subtle dig at Marvel, which is interesting given the close relationship the two companies currently enjoy. Millar is described as a “modern-day Stan Lee”, when of course Stan Lee himself is still alive and actively involved in the community if not actively creating new content, while the release also says that Millar was behind a number of the characters whose stories have been turned into movies by Marvel Studios over the last few years. Clearly, the claim here – somewhat farfetched – is that Millarworld is the new Marvel. Several of its characters and stories have already been turned into movies in recent years, and with some success, so it’s not a totally absurd claim. But overall few of them have the mass-market name recognition of Marvel or DC’s characters, and some quick feedback from people on Twitter who are more into this world than I am suggest that as a competitor it’s a pretty distant third behind the big two. This is clearly an attempt to secure more original content for Netflix, but also something of a hedge against the time that Netflix’s deal with Disney and therefore Marvel goes away, though on the latter point the acquisition also likely raises the risk that deal does go away, so perhaps Netflix has already had signals (or has simply decided independently) that it won’t renew. But it doesn’t sound like it’s going to provide anything like the same quality or quantity of content for Netflix that the Marvel deal does.
via Netflix (PDF)
This may help explain why Netflix laid out its content economics in even more detail than usual in last week’s earnings material: it’s apparently taking out a further $500 million line of credit, with an option to extend that by an additional $250 million. The driver is clearly its rapidly growing investment in original content, which has to be paid for up front, in contrast to the existing content it licenses, which is paid for as it’s made available on the site. All of that means that shifting to original content pushes cash burn much earlier in the process and thereby dramatically increases Netflix’s negative free cash flow, something I explained in some detail in this Variety piece last month. As I’ve said before, there’s no real reason why this should be a concern for investors, as long as Netflix is able to keep up its rapid pace of revenue growth, which is currently more than enough to fund its content investments and justify its increased borrowing. But the company’s debt load continues to rise fairly rapidly and at some point it will need to ease off and see that free cash flow picture change to something more positive.
Facebook Readying First TV Pilots for August (Jul 26, 2017)
Apple Launches Siri Ad Campaign Featuring Dwayne Johnson (Jul 24, 2017)
Yesterday, actor Dwayne Johnson (also known as The Rock) tweeted a tongue-in-cheek teaser for an ad campaign with Apple centered on Siri, with a three-minute ad posted to YouTube later. The ad campaign is only one of the things to talk about here, though, because the reaction to the teaser is worth discussing too. The campaign itself comes at an interesting time for Siri, given the massive media attention paid recently to the much smaller but arguably hotter home voice speaker market and the dominant assistant in that space, Amazon’s Alexa. Note that the Siri campaign is all about Johnson going around getting stuff done, and that of course is the major weakness of Alexa today: it’s basically useless away from home. There’s no direct jab here from Apple, but it’s clearly one of the underlying messages that Siri is with you throughout your day no matter where you are (albeit not, as the ad suggests, in space). But the other thing worth noting is how many people reacted to the teaser by taking it literally, or in other words believing that Apple was actually making a full-on movie featuring Siri and Johnson. That’s so absurd as to be laughable, but I’m pretty sure it’s the context of Apple’s recent push into original content and the negative response in much of the media to its Planet of the Apps show that makes it suddenly seem plausible. Once Apple starts spending serious money on content, and demonstrates that it’s willing to make shows featuring its own products and services prominently, almost anything seems possible. At this point, releasing Planet of the Apps first feels like it was a big mistake in launching Apple’s original content strategy – it’s set the tone for what’s to come, and though future offerings will hopefully be more compelling to a wider range of Apple customers, the reaction to this Siri campaign is a great encapsulation of the expectations Apple has now set. It’s got work to do.
Netflix today kicked off the Q2 earnings season with the first official earnings from a company that I cover, and reported stronger than expected subscriber growth off the back of a House of Cards season launch that was pushed back from Q1. Netflix was way off on its sub growth forecast, and though it surprised on the upside this time around that hasn’t always been the case in several recent guidance misses. Even though Netflix didn’t mention it this quarter, the delayed HoC launch screwed around with lots of year on year comparisons both this quarter and last, since Q1 is usually by far its strongest quarter for subscriber adds and Q2 is usually the low point of the year. Taking a step back, though, Netflix continues on its recent tear, with international growth the major driver, and profits domestically continuing to grow nicely off the back of last year’s price increases. Importantly, Netflix is now projecting that the international business will be profitable on a contribution basis for 2017 as a whole, which will be another major milestone after total non-US subs surpassed US streaming subs for the first time in Q2. The cash flow drain continues to be rapid, with an average of over half a billion dollars per quarter in negative free cash flow over the past year, and over $2 billion in cash content costs in Q2, and $8 billion over the past year, relative to the $6 billion Netflix protected for 2017 on a P&L basis (see this Variety piece I wrote last month for why cash and P&L spending are so different). For now, the subscriber and associated revenue growth are keeping Netflix out ahead of its content spending, but Netflix absolutely has to continue to grow at close to the current rate if it’s to continue to finance massive original content costs and grow profits at the same time.
This is a good time to remind you about the Jackdaw Research Quarterly Decks Service I also offer, which provides slide decks and videos on roughly a dozen major tech companies including Netflix each quarter during earnings season. Tech Narratives subscribers get a 50% discount, so let me know if you’re interested and I’ll send you a coupon code. The Q2 Netflix deck is available now, and will be updated in a few days when the 10-Q is out with more data. You’ll find some of the charts in this Twitter thread from earlier.