Episodic TV carries a superior risk/reward compared to feature films.
The streaming wars featuring Disney (tkr: DIS), Netflix (tkr: NFLX), Apple (tkr: AAPL), Amazon (tkr: AMZN), AT&T (tkr: T), and others will be won by the content producers that capture the most subscribers over a measurable period of time. Questions that content producers must answer include “How best to cost-effectively acquire subscribers?” and “How to optimally allocate a production budget between episodic television and feature films?” (We will focus on episodic television and feature films while ignoring live events and news content).
Big budget feature films are less attractive from a risk/reward standpoint than episodic TV for a few reasons:
- Big Bang approach carries significant risk. It is not uncommon for a feature film to carry a budget of $250 million or more. 2019’s Avengers Endgame reportedly had a $356 million budget (IMDB). What happens if the project is not a success? When a movie bombs at the box office it typically does not find a large audience in the post-theatrical market. 2012’s “John Carter” was one such example. The film carried a $250 million budget yet only generated approximately $73 million in its U.S. release. Seven years later the film has generated $283 million in global cumulative revenues. Another expensive failure was when Warner Brothers tried to replicate Marvel/Disney’s success by building its own cohesive superhero universe (2013-2018). The effort was chaotic and the expensive, over-produced, CGI-driven movies failed to attract a large audience in theaters or in post-theatrical release. Warner Brothers parent AT&T made a number of changes to the executive suite and slate of superhero movies some months ago. Coincidentally, the recent low budget release “Joker” has enjoyed great financial success ($55 million budget, $860 million worldwide gross).
- Episodic TV carries less risk. TV production budgets don’t require enormous sums of upfront capital. For example, Disney’s “The Mandalorian” (a Star Wars spin-off), carries an approximate budget of $100 million to deliver 10, hour-long episodes. $100 million for 10 quality content hours (directed by Disney stalwart Jon Favreau) seems to be a more cost-effective approach to acquiring new subscribers than the latest Avengers installment. By comparison, Avengers Endgame cost $120 million per hour of content, which is 10x more expensive than The Mandalorian and unlikely to deliver an ROIC that is 10x superior. Remember, the game has changed from opening weekend box office revenues to measuring success by the number of new subscribers.
- We have seen this movie before. Bloated tentpole movies and their out-sized budgets remind me of the Software industry last decade before most every vendor switched to Subscription-based revenue models. Prior to this, Software companies sold large deals (six and seven figure deals were not uncommon), that were typically heavily discounted at the end of the quarter in order to entice customers to sign the deal. Earnings releases carried more drama back then as a missed deal or two often had a material impact on reported revenues and earnings for the quarter. Quarterly results and post EPS stock movements carried far more volatility when compared to the predictable nature of ratable revenue recognition models that have become today’s norm.
- Episodic TV looks good. From a production quality standpoint, there isn’t a noticeable difference between The Mandalorian and the forthcoming Star Wars feature film “The Rise of Skywalker.”
- When may we see production studios abandon tentpole films? We’re not sure that studios will abandon comic book and other big budget movies in the near term, especially when a studio enjoys financial success the way that Marvel/Disney has had with the Avengers franchise. Our best guess is that the next generation of studio CEOs will push episodic TV production more aggressively. To this end, it has been rumored that Bob Iger’s successor at Disney may be Kevin Mayer, who leads Disney’s streaming/ direct-to-consumer effort DisneyPlus.