Member Mailing #220: Lionsgate's Mad Men, Amazon, WarnerMedia, and Content Licensing
Thinking Through The New Market Dynamics Around Content Licensing in Streaming
A quote from a good profile of WarnerMedia CEO Jason Kilarby Jessica Toonkel of The Information seems like the best way to frame this week's mailing about content licensing
One of the most far-reaching changes Kilar wants to undertake is to pull back from selling the shows it makes to other networks. WarnerMedia long has been one of the most prolific producers of shows for television: It made “Friends,” “The Big Bang Theory” and “ER,” for instance, which initially aired on either NBC or CBS. After their initial broadcast, Warner licenses reruns of the shows to other outlets. It’s an enormously profitable business. But streaming has upended that model because consumers now can access any show at any time on one service—making reruns a less profitable endeavor.
At the same time, rivals like Netflix and Disney are making more proprietary, original content, giving them more control over the programming on their services. Kilar wants WarnerMedia to make more of its shows for HBO Max, for instance, to ensure that it will have the right to stream them overseas once the service launches outside the U.S., as it plans to do eventually....
To force employees to alter their thinking, the company has discussed modifying executive compensation to discourage the licensing of content to other companies, according to people familiar with the situation. Kilar has brought up this issue in meetings, citing it as a priority, according to one executive.
The implication is that Kilar sees content licensing as a weakness in a streaming strategy, and believes the business is better off if its original content is on its streaming service, only. He is willing to cannibalize WarnerMedia's licensing revenues to prove that point. His boss, AT&T CEO John Stankey, agrees with him:
...[Stankey] had also advocated for this shift. But management changes at the various WarnerMedia units over the past couple of years delayed implementation, according to an executive at the company.
If content licensing for a streaming service is a weakness, as Kilar and Stankey both believe, then why were multiple other streaming services announcing major content licensing agreements last week?
There were two major deals announced:
The simplest was a licensing deal between NBCU and ViacomCBS for ViacomCBS library titles to be distributed, non-exclusively, on Peacock.
More complicated was a deal announced between Lionsgate, AMC+, Starzplay, and Amazon’s IMDb TV, where Lionsgate ( licensed the series Mad Men to third parties for domestic U.S. and global distribution, but retained certain rights for its international streaming service, Starzplay.
In both instances, legacy media companies with streaming services (ViacomCBS with CBS-All Access and Showtime Anytime, Lionsgate with Starz and Starzplay) licensed their content to third parties in exchange for revenue at a time when they need subscriber growth.
Both deals had been preceded by a deal between Disney's Direct-to-Consumer & International group and Amazon's IMDb TV in February for library content exclusive to IMDb TV, including Lost and Desperate Housewives.
That deal was notable for two reasons: first, because Disney licensed premium content to a third party instead of putting it on Hulu (where Lost and Desperate Housewives would be monetized with both subscription fees and ad revenues); and second, because both Disney and Amazon made the deal as a quid pro quo: Disney+ was effectively granted distribution outside of Amazon Channels in exchange for licensing Disney library content exclusively to IMDb TV.
I highlight this first Disney deal because it offers a helpful caveat to the near binary certainty of Jason Kilar's new strategy: licensing library content to a streaming competitor should be avoided unless it serves an important business objective. In the case of Disney, the objective was to ensure distribution for Disney+ outside of Amazon Channels, and the sacrifice - content that likely would have done fine on Hulu - was not too painful.
This caveat applies to these two big deals of the week. For ViacomCBS's deal with NBCU's Peacock, the business objective is to ensure supplemental revenues at little expense and at low risk (non-exclusivity means they are not prevented from distributing and monetizing the content themselves, effectively a win-win). And, similarly, for Lionsgate's deal with Amazon, AMC, and Starzplay, the business objectives of having a "combination of multiple exclusive and non-exclusive windows for Mad Men... will bring in revenue comparable to the fee paid by Netflix". So, effectively, the caveat allowed for Lionsgate to sign a deal with Netflix-type economics (presumably a low to mid eight-figure upfront payment), but without being locked into Netflix exclusively.
To me, from these two deals the business objectives are clear from the supply side: revenues matter, and in streaming a direct-to-consumer relationship matters (NOTE: I think avoiding exclusivity with Netflix increasingly matters, too). That is not why I focus on these stories.
Rather, the caveat is particularly interesting for what it tells us about the buyers, the demand side of the equation. Because there are three common themes across three entirely different deal structures:
Amazon seeking out highly specific content for its AVOD service, IMDb TV (Disney, Lionsgate)
AVOD services seeking out more content to license because of a "more is more" strategy (Peacock, Roku)
Legacy media companies who should be buyers instead of selling valuable content for valuable target audiences to competitors (CBS All-Access, Starz, Hulu)
1. Amazon seeking out highly specific content for its AVOD service, IMDb TV (Disney, Lionsgate)
I find this the most fascinating story: in two consecutive deals within six months, Amazon seeks highly specific content to target to Prime Video subscribers, and to lure users to its IMDb AVOD service. Meaning, it is as if Amazon knows which titles will work to attract, engage and retain audiences on Prime Video and IMDb TV.
The implication is that, from two decades of selling and renting DVDs and streaming movies, it has the data to identify those titles for Amazon audiences. That is unsurprising.
What is surprising is the lengths to which Amazon will go to license these titles. The deal with Disney for IMDb TV content was unusual for its creativity: effectively, Amazon was willing to compromise its Channels business model in exchange for specific premium content for IMDb TV.
The deal Amazon struck with Lionsgate is unusual for its complexity. Here is a basic summary of the deal:
Amazon Prime Video and IMDb TV will have Mad Menexclusively from July 15 until Oct. 1
IMDb TV will become Mad Men's exclusive free-streaming platform in the US, starting July 15.
A global licensing deal means, starting July 3, Amazon Prime will begin carrying all 92 episodes of Mad Men in Europe, Australia, Latin America, and more; then, on July 15, Japan, Israel, Indonesia, and Thailand; Canada will begin carrying Mad Men on October 1, and the Netherlands will carry Mad Men starting November 1.
Starting October 1 on a variety of AMC platforms, the entire Mad Men series will become available, including the company’s linear networks and SVOD services. AMC will get linear and SVOD rights to Mad Men in October, adding AVOD rights a little later.
Starting October 1, Lionsgate-owned Starzplay will have Mad Men across their European and Latin American footprint as well as in Japan.
In this deal, Amazon is willing to agree to a windowed mix of short-term and long-term exclusivity, domestically and internationally, to ensure it exclusively has all seven seasons of a single show on its AVOD service, IMDb TV.
What does one TV series offer Amazon that is worth such a complicated negotiation and outcome? The likeliest, simplest explanation is that Amazon's data tells them Mad Men will keep Amazon Prime and IMDb audiences engaged domestically and internationally. Essentially, the data tells them Mad Men is a powerful marketing tool. Also, Mad Menco-star John Slattery starred in an Amazon Prime series, Modern Love, so there are cross-promotional opportunities, too.
A second rationale could be that the stakes have escalated for Amazon's IMDb TV, and it is telling the market as much. Advertisers have been lukewarm to IMDb TV's pitch to advertisers. IMDb TV should be perceived as more valuable with a target audience of 41MM+ Fire Device owners, 156MM Amazon Prime Video consumers, and 250MM IMDb.com users worldwide. Mad Men gives the Amazon ad sales team a premium, tentpole franchise to market Amazon's valuable audience, IMDb TV's reach, and Amazon's advertising tech. As I wrote in February: "Amazon's advertising backbone proves it has built the best conversion funnel for streaming apps, with the best economics, and proven tools to convert those users into subscribers."
AMC's demographic for Mad Men was an extraordinarily valuable: 53 percent of Mad Men viewers ages 25 to 54 were from households with incomes that exceed $100K. So, with Mad Men exclusively on IMDb Tv Amazon has content that is valuable to a valuable customer base that overlaps with Mad Men's: as recently as 2016, more than 70% of households with more than $112,000 a year in annual income were Amazon Prime members. Amazon can route that audience to Amazon Prime this summer, and to IMDb TV for the foreseeable future, where it can leverage Amazon's emerging video technology to monetize those customers with sales.
Even though this is probably the most compelling explanation, there is another fun explanation, which I hinted at in my mailing on June 16 about Jeffrey Hirsch and Starz:/p>
Hirsch makes it clear Starz is symbiotic with Amazon when he tells Wallenstein "the better we do, the better they do”.... As I wrote before, Amazon Prime Channels sits in the middle for Showtime and HBO and Starz, driving anywhere between 60% to 75% of subscriptions for these apps.
Effectively, because of its Prime Video Channels product, Amazon knows the Lionsgate customer better than Lionsgate or Starz because it is responsible for 60-75% of Starz subscribers, and that allows Amazon to make bold bets like this bet on Mad Men.
So, Amazon's move is fascinating for what we can discern based on available evidence. Something tells me we are going to see more of these licensing deals with what Starz's Jeffrey Hirsch labels "Tier Two" services (e.g., Epix, Showtime). Why? Because Amazon can both connect the content to valuable audiences, and monetize those audiences across both SVOD and AVO platforms.
2. AVOD services seeking out more content to license because of a "more is more" strategy (Peacock, Roku)
In contrast to Amazon's highly specific content deals, the deal between Peacock and ViacomCBS seems unusually broad. For those of you who read my two-part mailing two weeks ago (Part One here, and Part Two here), I laid out NBCU's strategy:
Coming back to Curse of the Mogul, nothing in the quote above nor any data in the Comcast Peacock Watchathon test suggests that Shell has Peacock focused on what its targets customers want. For example, Disney+ launched with a much smaller library than Netflix's, and is getting positive user reviews (above). Instead, Shell seems to be focused on variables like the size of the content library and sports business models rather than on the key questions of who the target customers are, and what will keep them engaged.
The problem with Shell's "more is more" approach is it is overly broad. It seems to play up the intangibles instead of identifying their specific value to target audiences, so licensing titles like Ray Donovan or The Godfather trilogy non-exclusively seems more like a volume play than a business strategy to address what is target consumers want or need. Meaning, why does a Peacock subscriber also want Showtime content? So, in terms of a savvy DTC strategy, bulk acquisitions contrast with the data-driven specificity of an approach like Amazon's, above.
It also contrasts with the Disney and Amazon deal, which I have speculated is being used as precedent for HBO Max's negotiations with Roku (and Amazon). The Jason Kilar quote up top suggests as much: it is a directive not to license WarnerMedia content to competing AVOD platforms like The Roku Channel (or Amazon's IMDb TV). But, that licensed content is what each streaming service likely needs in exchange for permitting HBO Max to control the entire customer relationship through the HBO Max app, only, and not through Channels interfaces.
Roku's model is different than Amazon's - it relies more heavily on revenue sharing around ad sales and subscriptions than Amazon - so its business objectives are broader. It wants more content channels to monetize with advertising, and also seeks more content for its AVOD.
So, NBCU and Roku value broader content libraries, but for different reasons. Because Roku owns the hardware and the software, it knows which content to target to its users to keep them engaged across the platform. When it licenses more content, it is doing so because it knows what its audiences wants. Whereas, NBCU's Peacock has not launched yet. Moreover, it still has to figure out that for its Peacock service, and Comcast still has to figure out how Peacock will keep users engaged on its Flex and Xfinity platforms.
More is more works for Roku, but it is less clear whether more will be more for NBCU and Comcast.
3. Legacy media companies who should be buyers instead of selling valuable content for valuable target audiences to competitors (CBS All-Access, Starz, Hulu)
In terms of building out a direct-to-consumer business model, how smart is ViacomCBS in licensing its content at a time when its CEO has promised a "more is more" approach with 30K titles on its "House of Brands" service? How smart is Lionsgate in licensing content both exclusively and non-exclusively at a time when Starz needs growth? How smart is Disney in licensing content to Amazon that could perform well on Hulu? v Or, are they all making a crucial mistake in not following the business logic WarnerMedia's Jason Kilar subscribes to?
I ask these questions because the sellers all have streaming services which need more scale, particularly ViacomCBS and Starz.
On the first question, I wonder why ViacomCBS is licensing valuable TV titles like Showtime’s Ray Donovan and The Affair, the original Charmedand former UPN/WB Network favorites Everybody Hates Chris and The Game, CBS’ Undercover Boss, and BET’s Real Husbands of Hollywood(the deal also includes Paramount titles like Catch Me If You Can, The Talented Mr. Ripley, and American Beauty). One answer suggests that the upside of these shows and movies to a streaming service is limited: they are unlikely to drive subscribers, but will likely drive engagement and retention. So, if NBCU values these titles, too, it is better for ViacomCBS to monetize this content two times over: with CBS All-Access viewers and with NBCU Peacock viewers.
The skeptical take is ViacomCBS are opening themselves up to unnecessary competition on valuable library titles, which reflects that, as I have argued before they do not have "an understanding of who the target customer is, what they want, what will convert them to subscribers, and what will keep them engaged."
My two cents is it is probably an indecipherable mix of both. ViacomCBS is struggling to understand its customers, but the market values original content more than older library content for growth. This deal has a business logic to it, even as an insurance policy if its "House of Brands" underperforms.
For Starz, there is a different issue: their target audiences of women and African-Americans are narrower than AMC's highly valuable demographic for Mad Men. The upside in hosting Mad Men is limited for them because it does not map to their value proposition or their existing target customer: Starz offers premium, bespoke content targeting women and African-Americans. So, there is more value to Amazon and AMC than to Starz.
[NOTE: there is the interesting question of why Mad Men is particularly valuable to Starzplay audiences, which are international audiences which value English-speaking content. Neither Lionsgate's last annual report nor its recent earnings call help to shed light on why Mad Men would be valuable to Starzplay but not Starz].
As for Hulu, if Lost, Desperate Housewives, My So-Called Life, Ally McBeal, and Malcolm in the Middle are valuable to driving viewers to ad-supported services, why would Disney sacrifice the opportunity to drive more subscribers to Hulu?
The reality is that, in November, launching and distributing Disney+ direct-to-consumer was likely a greater business priority for Disney than monetizing this content on Hulu. Moreover, Hulu was pivoting to relying more heavily on FX content. As with ViacomCBS, the shows could have helped to drive the retention and engagement of users on the platform, but not in a way that would be make-or-break for Hulu.
Conclusion
I started with WarnerMedia's Jason Kilar because of the binary simplicity of his perspective on content licensing: it is "a weakness in a streaming strategy, and [Kilar] believes the business is better off if its original content is on its streaming service, only."
This perspective has a core tension to it: is licensing library content to third parties always a weakness if a streaming service pursues it?
The short answer from the above is: no. If ViacomCBS can incrementally monetize the same content two-times over, and simultaneously, then they should do so. If Mad Men does not belong on Starz because the target audience is not there, and that is not Starz's brand, then Lionsgate absolutely should be licensing its content across multiple services, especially if it can reap Netflix-type licensing fees in return. If Disney can secure distribution of Disney+ to 41MM Fire devices outside of Prime Video channels, and the only cost is an AVOD-only license for Lost and other premium titles, then of course it should do so.
This all suggests the binary certainty of Kilar's business logic is problematic in that it ignores the reality of a DTC marketplace that more is not always more: some content is more likely to find its target audiences on other services than on the proprietary service. That is effectively the business rationale for the Amazon-Lionsgate deal.
Meaning, there are likely instances where WarnerMedia may be better off licensing certain content than retaining it on its service. There is market demand for this content and underperforming or under-built streaming services willing to pay for more content where the competition around those specific titles will be negligible, at best.
Put another way, there is arguably a deal to be struck around WarnerMedia library content with Roku and Amazon. Kilar's position may simply be too rigid.
I think Kilar's main concern is protecting IP: meaning, if Kilar were at ViacomCBS he would not have licensed Ray Donovanto NBCU because the IP of the property has been valuable to the Showtime Anytime app, and is likely to attract subscribers to the Showtime app (or "House of Brands" app if ViacomCBS unites all of its properties in one app and under one subscription). Not only that, but he also would not want third parties to have data on the consumers who watch the ad-supported version of Ray Donovan. To him, that data is too valuable.
He is not wrong to have these concerns. But, as we see in three scenarios, his business logic is not always right. Business objectives like securing the maximum return on library IP for shareholders (Lionsgate, CBS All-Access, Disney/Hulu) can outweigh the need for moats around library IP.
The business objectives for streaming of Amazon, Starz, NBCU's Peacock, ViacomCBS, Roku and Hulu all fail the orthodoxy of Kilar's perspective. As we saw with Amazon's deal with Lionsgate and AMC, sometimes the best outcome for customers and streaming services is not the rigid business logic that Kilar is preaching. There are buyers like Roku and Amazon who may simply be better at serving certain content to certain target customers. There can be exceptions to streaming services wanting to own the relationship with target customers completely, and those exceptions can have completely valid business rationales.
That seemed to be the common thread of the three licensing deals announced this past week.