December 10, 2020

All Good Things Come to an End

WarnerMedia, HBO Max, and the Twilight of the Box Office

Greetings TDG readers. It’s good to talk to you again. As I’m sure you heard, AT&T and WarnerMedia have announced that all Warner Bros. movies in 2021 will be released to the HBO Max streaming service (for one month) and theatres simultaneously. Hollywood is an uproar as a result, but what does this decision really mean for the future of TV?

Two thoughts…

1. Content Needs an Audience
If there’s one thing that 2020 has taught us, it’s that we need each other, even if that need is expressed via a screen. Most of us have celebrated birthdays, holidays, graduations, baptisms (and even weddings and funerals) via Zoom this year. One of the fundamental reasons for this is that you cannot simply “bank” such events for the future. They have a shelf life. You cannot just tell your 5-year-old (or their 65-year-old grandparent!) that they can have two birthdays next year.

Movies are much the same. You cannot simply put the new James Bond movie in the vault for a couple of years and expect it to have the same impact when you take it out. New content has to breathe—art exists in order to make an impression on an audience. Without an audience, art dies, as does the business of art.

Hollywood has no choice but to follow the audience and connect with them wherever and however it can. This year and next, that place is not in a crowded movie theater but, rather, in the safety of one’s own home. Studio executives can gnash their teeth all they want about WarnerMedia’s recent decision, but they really don’t have a choice in matter. Studios (and creators in general) who provide content to today’s (enormous) streaming audience will be rewarded. Those that refuse based on blind loyalty to past business models will find themselves out of a job and, increasingly, out of business entirely.

2. Subscription Revenue is Eating the World
There was a time when all businesspeople thought cash was king. In a world of seemingly endless capital (the value of all global markets now exceeds $100 trillion) and zero (or even negative) interest rates, cash is not hard to come by, for big companies at least. It’s not clear cash even has value today (if a company like Disney or Apple can borrow infinitely more at no cost), much less any real power.

The real king of the business world today is recurring (i.e., subscription) revenue. Companies of all kinds are stepping over one another to transform themselves into subscription companies. Apple (via Apple One) is now a subscription company. Walmart (via Walmart Plus) is now a subscription company. Disney (via Disney+) is now a subscription company. Uber (via Uber Pass) now wants to be a subscription company.

Why the obsession?

It’s simple. Recurring subscription revenue is far more valuable, in terms of stock price, enterprise value, etc. Most investment bankers will tell you that a dollar of recurring revenue can be worth five times as much as a dollar of, say, hardware revenue. This is why Netflix trades at a much higher revenue multiple than the movie studios. Its revenue stream is simply more attractive.

In this light, AT&T’s decision to focus all of its content-generating power on HBO Max makes perfect sense. A dollar of subscription revenue (or even just a new subscriber, period) for HBO Max is simply the most valuable thing that AT&T can do right now across any of its sprawling businesses. Nothing else even comes close. HBO Max currently has a shade under 13 million subscribers out of nearly 29 million total HBO subscribers. If these new release movies take that total to 50 million by the end of 2021, then AT&T and WarnerMedia are going to look like geniuses. Even if they don’t hit 50 million, it will have been worth the effort.

Generating box office revenue from theaters, by comparison, is far more difficult. It’s one-time by definition, high risk, not repeatable, not scalable, and not even high margin (given that production and marketing costs of blockbuster movies have to be amortized on a title-by-title basis). Compared with subscription streaming, theatrical release is not that great of a business.

Hopefully most of us will get vaccinated next year against the Coronavirus. But there is no vaccine against the permanent shift in business models away from one-time transactions (i.e., selling movie tickets) and towards recurring revenue. There is no going back to normal. The Old Normal is gone. Long Live the New Normal.

COVID-19 has dramatically accelerated the digital transformation of every aspect of our lives. Premium video is no exception. The winners are those who move with the market and match their supply of content with real consumer demand to see it. Kudos to AT&T and WarnerMedia for killing the industry’s sacred cow for the sake of their own survival.

Stick with TDG and stay ahead of the curve.

Joel Espelien is a Senior Advisor for TDG. He is also Executive Director of the Corum Group where he advises technology companies on M&A transactions. He lives near Seattle, WA.

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