The economics of Hollywood and investing in entertainment

Welcome to Finance and Fury. Todays episode will be a little different than normal – as we will be looking at the Economics of Hollywood and the potential of investing in entertainment

1. Companies like Disney, Paramount, Netflix, even in Australia you have companies like Nine Entertainment (owns Stan) are all publicly available companies to purchase on the share market – but is it worthwhile to do so?
   1. Some of these shares have lost value at a rate greater than the broader market over the last 12 months, particularly Netflix, which is down 60% over the last 12 months – does this mean that this is now a good buying opportunity, or is it a sign of times to come where this market becomes more saturated and competition emerges
2. I will note that I am going to be spending a fair amount of the episode looking at the economics of Hollywood and how this has changed over time – to help look at the potential future of revenue stream when you compare those that produce entertainment and those that demand it
3. In terms of basic economics – entertainment has the same driving forces of any industry, being supply and demand – it helps to explain the viability of purchasing entertainment companies as an investment, as if demand outstrips supply, then the value of these companies can increase, but if the opposite is true, then these initial declines might just be the beginning the of the end –
4. When it comes to demand – for entertainment this is fairly simple – people want to consume good quality content
   1. The better the entertainment – the more people will demand this – if there is only one great movie out at a time, then this product will clean up at the box office – but if there is competition, say you have 10 great movies out at the same time, then consumers are being spoilt, but the average person may not see all 10 movies – so the box office revenues for each movie are diluted
      1. This is a big part of movie release scheduling – as movie studios will sit on viable movies that are ready to release, if another studio is releasing a movie that is going to be competition as the same time as their planned release – they can often wait months, if not years to release their movie – very common practice
      2. Also – there are many different forms of entertainment – such as sport, going to a game of rugby, AFL, soccer, going to the ballet, or some other arts show – there are many forms of entertainment – these are all in a way competition to Hollywood produced movies or TV shows
   2. This introduces the concept of opportunity cost – for you as a consumer – to partake in entertainment, you are investing money and time to watch something – so you want to get some intangible benefit out of it (an increase in your utility) – for most people, they do have a finite amount of time and money – so there becomes the choice on where each of these resources are spent –
      1. Is the next best use of your funds to go to the movies, or to see a play, go to a game of rugby, or simply sit at home and watch Netflix?
      2. This is where the internet and streaming services did become a game changer – which brings us to supply
   3. Supply – This is the entertainment that we are given to consume – as previously mentioned, the style of entertainment that we have to consume has changed massively over the last 20 years
      1. The old days – movies and entertainment could only be consumed at a cinema –
         1. Genre’s of movies popularities rise and fall – what is being churned out by entertainment did go through waves
            1. Westerns were one of the first major genres of films which were enormously popular in the silent-film era (1894–1927)
            2. Film noir – crime dramas 1940s and 1950s – showing a gritty black and white depiction of crime dramas that emphasize cynical attitudes and motivations of characters
            3. Then you had to action/Cop/detective movies 70s 80s and 90s – Lethal Weapons, along with the rise of the action stars – with Clint Eastwood (which did have an overlap to late-stage Westerns), Arnold, Stallone – tapped into the feelings of many people who saw a lawless society around them before the crackdowns, particularly in LA and NY in the 1980s
            4. More recently – the major genre has been that of the super hero – between Marvel and DC characters
         2. Why were all of these types of movies over produced – as these weren’t the only movies made during these time periods, but they were produced on a scale greater than other films – well, it is because it’s what people went to watch – it provided positive feedback to studios, if it made money, then make more
      2. So, to make money, producers kept making more of these movies until they were no longer popular as profits started to decline
         1. What people demand changes over time – one major reason is audience fatigue – There are only so many western movies or buddy cop movies that people can watch until they lose their lustre – we are in the later stage of the super hero genre at the moment, as many Disney movies or DC movies are barely breaking even – causing studios to reconsider
      3. But by the late 80s – almost every household had one or more TVs – and a VCR player – so these movies could not only make money at the box office, but also in the home studio market
         1. This helped to diversify against losses – as if a movie would bomb at the box office, often it could be picked up through say a blockbuster deal and later released for sale on VCR
            1. Over the past decade, the lack of VCR and then DVD sales that studios used to be able to account for if a movie bombed at the box office are gone – in my opinion, this was a game changer, as the capacity for risk raking for studios was significantly reduced, in the past when a movie bombed at the box office, there was a chance it would become a cult classic – Some of my favourite movies today bombed at the box office, idiocracy, tropic thunder some examples – but made money back in DVD sales
         2. Over the past decade, the entertainment market was also expanded in the form of cable services came about – like Foxtel, where studios could generate revenues through selling the rights to these services
      4. With the internet – Over the past 10 year – Streaming services have really changed the game – you no longer need to go to the movies to watch movies, or you no longer need to have Foxtel or even tune into your free to air TV to watch your preferred entertainment – plus, you no longer needed to be present at the time that these shows aired – or record these to watch back later
         1. I remember as a kid – me and my brother were only allowed half an hour of TV a day – so we could record Dragon Ball Z on Cheez TV in the morning and watch this when we got home from school – it sounds foreign to say today – but this is how much the consumption of entertainment has changed
         2. This has created a problem for the entertainment industry – with people having all the entertainment they could want at their fingertips – creating a new normal, how do you incentivise people to continue consuming new products that you release?
            1. This is where the shift really started to begin between great movies and great TV shows – TV shows have in many ways replaced the narratives that movies used to provide – intriguing stories with character arcs – now, this is contained within TV series, and movies are an hour and a half of Michael Bay like explosion and action pieces to try to entertain where a storyline tag is absent – since the 2000s to now, TV series have become bigger than movies – Game of Thrones, the Wire or Breaking Bad as an example – even more recently, shows like Succession
            2. This can be a major problem with streaming services – with retention rates of consumers to subscription services – people can binge and dump – churn and burn – watch a season then cancel their subscription – initially, Netflix was one of the first providers to dump a whole season at once for consumer to binge watch – such as House of Cards
         3. What was the streaming services solutions to this to stop this from happening? Two things –
            1. Move back to weekly releases – streaming services are moving back to the episodic releases of the shows that they know people will want to watch, to keep them on the subscription service
            2. Secondly – now came the race of ever more content – Continue bringing out new content that people like to watch – oversaturate the market – Disney is probably the biggest culprit of this – once one season finishes, they need to be ready with a new show to release
         4. IMO – The average quality of content has declined due to this – why? Due to the increase of streaming services, including the nature of streaming platforms, they need ever more content to keep people subscribed to their services – therefore, supply had to increase, whilst demand has inherently stayed the same – This doesn’t mean that all content coming out is of low quality – but if you take an average, the average quality has declined, again IMO
            1. Where things went wrong IMO – rather than taking the time to come up with original ideas and develop new interesting shows – it all became a race for content – This created in one way, a race to the bottom –
            2. because new ideas were lacking to meet the need for never ending new shows to fill the catalogue of consumers, the purchase of rights and repurposing of existing intellectual properties has unfortunately become an industry standard –
         5. I say unfortunately as the age of adaptions are here – rather than taking the original source material, which was popular for a reason, and faithfully adapting this for the fans, show runners and writers have adapted this around their own visions–disregarding the source material
            1. Unfortunately, too many examples of this over recent times – But looking at some of the major entertainment conglomerates, being Netflix, Amazon and Disney – Shows include The Witcher, Wheel of time, LOTR rings of power, She-Hulk – All unfaithful to the source materials that these shows owe their namesake to – the end result was that all of these shows received much lower-than-expected viewership, hence losing money when compared to the costs of production
               1. Out of these series – WoT was one of the ones that stung the most for me – I read the book series as a kid, then relistened on Audible twice – I watched two episodes then turned off
            2. When looking at the business models for each entertainment provider – they do differ
               1. Netflix – solely subscription service based around the content that they provide through their streaming platform
               2. Amazon prime is a secondary service – has the benefits for many of free next day delivery – so it isn’t an exact comparison – but it doesn’t mean that they aren’t taking a bath in losing money over their produced shows –
               3. Disney – multinational mass media and entertainment conglomerate – owns streaming, movies, rights to comics and merchandise, theme parks and news media, like ABC
               4. HBO – Owned by AT&T – where streaming is a smaller allocation of their revenues – may have the best fundamentals out of the lot
               5. Warner brothers is an example of one that is suffering due to not having any diversification from its properties in DC – cancelled movies and is billions of dollars in the red – net income is at -2.4 billion USD
            3. The stand-alone example of Warner Brothers is probably an accurate reflection of how other streaming services would be fairing if they only had poor quality content that the market didn’t want to consume
            4. Looking specifically at Marvel, a Disney owned franchise – hard to get the official numbers, but I believe that many shows and movies that they are now producing are actually breaking even, if not losing money –
               1. Why? The budgets don’t include marketing
               2. The oversaturation of these movies compared to the costs of making – most movies budgets are in the hundreds of millions – but market budgets can also be of a similar scale – Streaming services don’t have to market to the same extent
            5. how has this continued for so long? Monopoly of entertainment – not many independent movie houses or production companies – The main players have diversified earnings –

In summary – If you want to invest in entertainment, you need to look at the companies that are involved – many tech companies now have streaming – Apple, plus most entertainment companies are diversified conglomerates  

1. Netflix and Paramount plus could be considered standalone streaming services for financials – but it is dard to get an idea on Disney and Amazon – much of their revenues come from other sources
   1. If you are purchasing one of these, most are not simply entertainment companies but their whole revenue streams
2. Looking at Netflix – For the second quarter running in 2022 – reported a drop in subscriber growth, only the second time in history – but this reflects a trend because of competition, recession, inflation, and general fears about the economy – can it continue to grow as people cut the cable cord with the emergence of cheaper option
   7. Netflix generated about $7.9 billion in revenue in the third quarter, a nearly 6 percent increase from the same period last year, but this was much lower than expected – so whilst they generated about $1.4 billion in profit, a 3% from a year earlier, their price is still down 60% – showing that a good result didn’t meet the market expectations of 12 months ago – previous numbers were based around quarantine – and the increase viewership that came with this
3. Many of these companies are in the growth industries categories – but what will hurt their growth is the competition of new services providers
   1. Amazon and Disley are companies that are more diversified, such as HBO, which is owned by AT&T – fundamentals
   2. It is difficult to invest directly in entertainment – but at the current stage of the market cycle, may be bottoming out in price
4. Quality of content may remain low – this is another point for another day