Topic: Original content
Apple Delays Carpool Karaoke Launch (Apr 25, 2017)
Apple Acquires First Movie at Tribeca Film Festival (Apr 20, 2017)
Note: this is my first piece of commentary on Q1 2017 earnings. The Q1 2017 tag attached to this post will eventually house all my earnings comments for this quarter, just as the Q4 2016 tag does for last quarter and the earnings tag does for all past earnings comments. Netflix is also one of the dozen or so companies for which I do quarterly slide decks as part of the Jackdaw Research Quarterly Decks Service. See here for more.
Netflix today reported its earnings for Q1 2017, and the results were mostly good, with a few possible red flags. This year, the new season of House of Cards will debut in Q2 rather than Q1, and that makes some of the year on year comparisons tough. One of the results was much weaker Q1 subscriber adds this year than a year ago in the US, worsening what’s already been a trend of slowing growth for several years. Netflix is projecting something of a recovery next quarter, however. In some ways, the biggest news was the first quarterly profit for the international business, which has neared profitability in the past but been plunged deeper into the red by market expansions every time it did so. Now that Netflix is in essentially every country it can be, that won’t be the case anymore, so although it’s projecting a return to small losses next quarter, it’s now saying it wants to be judged partly on growing revenue and margins globally over time, which is a big shift (previously it wanted to be judged on sub growth and domestic margins only).
There were a couple of mild admissions of failure: customer satisfaction in Asia, the Middle East and Africa is not what it could be, and the company’s Crouching Tiger sequel didn’t achieve its goals for original content. Marketing spend will be up at least a little in 2017, and content obligations continue to grow. The company also made clear that the big free cash flow losses caused by its investment in original content will continue for “many years”, though it also said that it will eventually throw off significant cash when it hits a “much larger revenue base”, giving I think the clearest indication yet of what a long-term project positive free cash flow will be. In the meantime, it will continue to borrow to fund that growth. Domestically, profits are growing very rapidly, and the theory continues to be that eventually the International business will reach that level of maturity too and deliver decent margins. But in the meantime, a bet on Netflix continues to be a bet on continued high growth, something which certainly isn’t guaranteed in the US and may end up being tough long term internationally too.
It’s impossible not to see this new Spotify show as, to put it charitably, inspired by Carpool Karaoke, especially given the role the standalone version will play in Apple Music. But kudos to Spotify for finding a new angle on the concept and making it distinctive. It’s also interesting to see hip hop as the focus here – where Carpool Karaoke crosses all genres, this show will be much narrower and therefore find a smaller but potentially more engaged and passionate audience. It’s important to note that hip hop has been a big part of the rise of streaming service, and Apple has heavily leant on hip hop in building its music service, especially when it comes to exclusives and Beats 1. I’m curious to see how each of these shows does on its respective service, especially given that James Corden, arguably the element that makes the original version of Carpool Karaoke work, won’t be a permanent feature in the Apple version.
The Snapchat as TV thing is getting a little hackneyed, but it works because it’s increasingly true – it appears Snapchat is increasingly prioritizing video over other content in its Discover tab, and perhaps especially original video created for the platform. That could push other content (and its publishers) further down the listing of Stories within Discover, or could potentially demote all non-video content into a different area entirely. That’s not terrible news for those content partners who major in video, but would obviously be much worse for those who focus on articles and the like. My guess is that those already get much less viewership than the video stories given the setting and the audience, but it is going to push Snapchat to become much more video-oriented overall.
Netflix is seriously ramping up its original content investment, something it’s been talking about for some time. And recent flops notwithstanding, it’s had some really good content over the past couple of years. Now it’s shifting its focus to commissioning and acquiring more and bigger budget movies, and plans to release around 30 in 2017 including some starring big names like Will Smith, Brad Pitt, and Tilda Swinton. That number is impressive – none of the major traditional studios or distributors had more than 24 movies in market in 2016 and Disney, for example, will have only eight movies on its slate in 2017. Now, Netflix’s productions are generally smaller budget affairs – it’s acquired movies at Sundance and other film festivals, where the average acquisition price has risen from $2 to $5 million over the past few years but it’s also commissioning some bigger budget films, though nothing in the multi-hundred million range just yet. But this is yet another way for Netflix to set itself apart from Amazon, HBO, and other big names in the subscription video business. As of right now, Netflix has 119 originals slated for future release listed on its website, and 28 of those are films, so its main focus is still on series (each of which will obviously provide far greater total viewing time than a single feature), but movies are going to be increasingly important going forward as part of that mix.
Netflix’s original content has always been a mixed bag – on the one hand, shows like House of Cards won awards (and also won Netflix lots of customers), but on the other there was Marco Polo, which critics panned (it has a 24% score on Rotten Tomatoes) but audiences enjoyed anyway (the corresponding audience score is 93%). Given that Netflix doesn’t release any kind of viewing data, it’s emphasized positive critical response as a validation of its original content, but it’s also defended shows like Marco Polo as being popular with real people even if critics didn’t like them. This new show has done even worse than Marco Polo with critics, but there’s a decent chance audiences will lap that up too. The fact is that any content production is a gamble, and given that Netflix doesn’t use Amazon’s pilot model to select new shows, that gamble is that much larger, especially with a big budget, Marvel-branded show. Only Netflix knows what its internal calculus on what makes a show a success or a failure looks like, but I’m guessing a one-off critical panning won’t do too much damage to its original content strategy. If it starts to become a pattern, however, that would be more worrisome.
via Business Insider
Apple Debuts Planet of the Apps Trailer – Recode (Feb 14, 2017)
Apple debuted the trailers for its Planet of the Apps and Carpool Karaoke shows at the Code Media conference last night. These are two of Apple’s first bits of original video content, both of which will debut as part of Apple Music. Carpool Karaoke still features James Corden on some episodes, but not all, which will detract at least somewhat from the original format, which is compelling in large part because of him. Planet of the Apps is a Shark Tank-style reality / competition show focused on apps. This clearly plays to Apple’s strengths, and gives potential competitors a big draw in the form of featured placement on the App Store. This isn’t my kind of thing – I’ve never been a big fan of reality shows – but Shark Tank is very popular, and Apple’s show mirrors its format pretty closely, so it should do well among the same people that like that show. In addition to music exclusives, these bits of video content are another unique feature of Apple Music, which should help set it apart versus the competition. But to my mind, it’s more interesting to see this as an ongoing push by Apple into original content, which for now may live in Apple Music but certainly has the potential to become the foundation of an Apple subscription video service in future, which could be a much bigger deal.
YouTube Orders First Original Kids’ Programming for Red Subscription Service – Variety (Feb 13, 2017)
YouTube has some original content for adults already, almost all of it tied to YouTube creators in one way or another, but it’s now extending that investment into kids’ programming to go with its YouTube Kids app. Again, several of the shows feature YouTube personalities, so it’s leveraging its access to content as well as giving creators yet another reason to stick with it rather than switching focus to, say, Facebook. The YouTube Kids app has been a bit of a mixed bag so far – at a time when several big traditional kids’ programmers eschew advertising, it’s shown ads (unless the viewer has a YouTube Red subscription), for example. But this is an interesting next step.