Member Mailing: If Investors AND A-List Talent Foresee Declining Returns from Streaming, Then What Happens Next?
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Key Takeaways
The basic premise of the Curse of the Mogul is that content creators reap more value than shareholders
There have been a few key twists in the streaming era to this framework
Recent stock price declines for ViacomCBS, Netflix and Disney suggest investors seem bearish on the streaming business model
But, A-list creative talent are effectively telling the market in recent business deals that they are reaping less value than in previous decades
The deeper question is what will happen to the broader Hollywood ecosystem if investor sentiment remains cool to increased content spend?
One of the best ads of the Super Bowl was Larry David's appearance for FTX.
It seems to have been received more warmly than Matt Damon in his recent ad for Crypto.com, which was parodied in the first episode of South Park's 25th season in this exchange:
Eric Cartman: “What does Matt Damon say in the Bitcoin commercial? ‘Fortune favours the brave!’”Clyde: "My dad said he listened to Matt Damon and lost all his money."
Cartman: “Yes, everyone did! But, they were brave in doing so!”
The appearance of Hollywood A-List celebrities controversially hocking cryptocurrencies comes at the interesting intersection of two trends.
First, it coincides with the emergence of A-List celebrities openly worrying about streaming deals now standardizing higher upfront payments and lower back-end with talent. We have seen it implicitly with recent deals by Blackstone-backed Candle Media with production companies owned by Reese Witherspoon and Will Smith. We saw it explicitly in a recent interview by The Hollywood Reporter's Kim Masters with actor Bradley Cooper, who shared this take on these deals:
“On a personal level, how I can make a living has completely changed,” Cooper said, adding that he’s bet on himself for films (like American Sniper and A Star is Born) that required sacrificing upfront fees for a share of the backend. “The upside, if it was successful, is that I would be paid a lot more. Those days are completely gone and there is trepidation I have with that. No question, no question.”
Second, it coincides with growing content spend from all streamers. This includes yesterday's announcement from ViacomCBS that it will be spending $6B per year by 2024 on direct-to-consumer content (up from $2.2B in 2021). ViacomCBS's boost in spend follows Netflix's announcement that it plans to spend over $17B in 2022 after ~$13B in 2021, and Disney intends to spend $33B in 2022. The implication is more spend will lead to more growth.
Both trends do not add up, and not just because the stock prices of each of those companies has declined by double-digit numbers in recent months. Meaning, more money may be going to A-List talent up front from streamers now and in the foreseeable future, especially because there is inelastic demand (a trend Blackstone's Candle Media is betting on).
But, big names like Matt Damon and Bradley Cooper are openly telling the marketplace that they need to look at additional sources of income (Cooper told Masters, "Maybe it’s opening up a pizza shop? I really don’t know") - perhaps even at the risk to their personal brands, because the economics of the upfront payments model are worse for them.
In other words, these two reflect an emerging market dynamic that seems like the Curse of the Mogul, where media company CEOs may be rewarding content creators at the expense of shareholder value, but in this dynamic neither creative talent nor shareholders are reaping value.
The question now is how much longer this dynamic can continue in the face of both growing investor skepticism of the streaming business model and growing Hollywood fears around how streaming economics are evolving.
Here are a few recent mailings on The Curse of the Mogul framework:
Hello Sunshine, Curse of the Mogul & "G" (August 2021)
Is Spotify Pivoting Away from Expensive Talent Deals? (September 2021)
Jason Blum's Bearish Prediction from August 2021
I wrote about these dynamics before in A Short Essay on Talent Trade-offs in Streaming vs. The Creator Economy, where I dove into Kim Masters’ interview of Blumhouse producer Jason Blum on The Business podcast.
Blum raised the red flag on the end of deals that share revenues on the back-end (an issue in the since-settled Scarlett Johansson lawsuit against Disney):
“How are we going to come to terms with the fact that streamers don’t share on streaming?”
He thinks:
“the consumer is better off - meaning, movies and TV shows are better - if the people involved those movies and shows participate in the success and failure of those shows.”
Meaning, there is a trade-off emerging between talent’s incentives for creativity and streamers' business need for a lack of transparency.
Blum also highlights how getting paid upfront - like the $400MM he received from Universal for The Exorcist trilogy - hits on this question of incentives for success. Any back-end profit participation is already accounted for because the deal price assumes all three movies “already have been released and have been huge hits”.
Blum doesn’t think this upfront model is sustainable: “it’s completely madness”. But, “if that is what the market is bearing”, he is going to take advantage of it.
Another worry is that if this upfront model starts assuming movies are not “huge hits”, streamers will offer lower salaries for talent “across the board”.
All of these dynamics may explain why Matt Damon ended up in a commercial for cryptocurrencies and why Bradley Cooper is openly imagining opening in a pizza shop. But, Blum's last point - what happens when the upfront model starts assuming movies with A-List talent are not “huge hits" - may be the better explanation.
Candle Media & Inelastic Demand
The Financial Times' Anna Nicolau and Antoine Gara recently dove into why private equity shops like Apollo and Blackstone are taking advantage of this inelastic demand and investing in production companies like Legendary and Hello Sunshine:
Private equity has waded in at the same time that investors are scrutinising the sustainability of streaming as a business model. Netflix, Disney, WarnerMedia and others are spending unprecedented amounts of money to feed their streaming services — the FT calculated that the top eight US media groups plan to spend at least $115bn on programming this year.Most of these services are losing money because the business is so costly.
But their loss is the gain of anyone that can make content for streamers. There has never been more money available to bankroll new shows, say entertainment executives. “The competition for content is at its highest level I’ve seen in 26 years,” Endeavor chief executive Ari Emanuel told a conference in September.
As a result, “valuations [of content] have risen substantially over the past year, to two or three times where we thought they would be”, said [David Sambur, co-head of private equity at Apollo].
The key implication is that A-List Hollywood talent and their production companies are at the top of the pecking order. In other words, Damon, Cooper and Witherspoon all should be fine, anyway.
But the rationales from Private Equity shops suggest they can do more than fine, that we are now in Curse of the Mogul territory. So, the best position a content creator can be in, especially an A-List talent, is being first-in-line for almost-guaranteed production budgets. An even better position to be in is first-in-line and backed with the financial and operational resources of a private equity shop to drive more cost efficiencies in spend (something Blackstone highlighted in a recent blog post)
That said, the loss of back-end deals is the loss of incentives or annuities over the long run. Private equity has seemed to figure out that the game is now to maximize the returns on upfront returns over the long run. That is more about financial engineering than contractual incentives.
But, Blackstone's Candle Media's vision for Hello Sunshine entering live-shopping and more interactive, influencer-based models reflects some implicit skepticism around the bets on streaming, too. As I wrote in A Big PR Push from YouTube & Hollywood-Meets-Creator-Economy:
The bet is generally on the creator economy business logic compensating, if not over-compensating, for whatever income Hollywood talent is losing as streaming shifts the Hollywood model away from revenue-sharing.
Candle Media co-founder Kevin Mayer has been telling the market:
“We have a thesis, and that thesis is content, community, and commerce. We feel that high-quality content with high-quality creators at the right brands create great connections in social media with large audiences.”
One Candle Media bet that reflects this thesis is the emergence of livestream shopping, as I wrote about last month in Why YouTube Sees Hollywood’s Future in the Creator Economy.
A recent blog post by YouTube Chief Product Officer Neal Mohan suggests that live shopping is a trend to accelerate this year:
One of the most anticipated opportunities we’ll bring to our brands this year is Shopping. This new experience taps into the deep trust creators have built with their communities to help our partners expand into the booming world of e-commerce. We’re thinking about shoppable videos, Live Shopping, and, more broadly, how shopping appears across the app. With shoppable videos — like this partnership for Black-owned Friday — users can shop tagged items in their favorite creators’ videos.Live shopping offers viewers an interactive setting where they can engage with creators while they drop new products, unveil exclusive deals, or discuss their latest shopping haul.
So, Candle Media's thesis implies it is not unreasonable to imagine other YouTube-savvy celebrities with creator economy, live shopping initiatives in 2022, too.
The Curse of the Mogul?
The basic premise of the Curse of the Mogul is that content creators reap more value than shareholders when leadership at a media company believes a media business is not subject to traditional financial, operational or strategic analysis.
But, there have been a few key twists in the streaming era to this framework. First, streaming is a direct-to-consumer business model whose inputs and outputs are measurable with traditional financial, operational or strategic analysis.
Second, media companies in streaming offer transparency but also tend to be selectively transparent. For instance, while Netflix continues to set market standards with its top 10 lists and evolving standards (total households who watched at least 2 minutes ⇢ total hours viewed), no other service will share data to that granularity. Instead, they will issue press releases telling shareholders and the media that a show was the #1 or #2 "most-watched" show or movie, to date.
Third, and perhaps most importantly, shareholders have incentivized the emergence of these market dynamics by promising leadership at media companies the reward of a streaming multiple - which is some multiple reflected in the stock price that is based on revenues or earnings or P/E ratio.
So, everything ViacomCBS presented yesterday - a path towards 100MM streaming subscribers despite increasing losses of operating income (over $4B of OIBDA losses on streaming between 2021 and 2023) and declining Average Revenue per User (ARPU)- was an outcome that shareholders have been driving management towards. Even $6B in content spend But, ViacomCBS's stock dropped 22% since its earnings call yesterday.
The premise of the Curse of the Mogul was that legacy media CEOs were effectively abusing both shareholder trust and shareholder value in their pursuit of legacy media businesses. But, ViacomCBS Bob Bakish and his team have built the story that shareholders have been actively asking them to build with the hope of reaching a Netflix-like multiple that reflects growth (e..g, a P/E ratio that was as high as 64 in November 2020).
The same is true of Disney CEO Bob Chapek and his team, who brought a story of an additional 12MM subscribers in growth (though mostly in India at $1 ARPU). Disney's stock is up 1% over the past month after dropping 12% pre-earnings.
In short, media CEOs and their management teams have been working hard to deliver the opposite of driving Curse of the Mogul outcomes and now shareholders are punishing them and their stock prices for having executed well against those objectives. But, the outcome is not good enough: as Hedgeye's Andrew Freedman has long argued, the unit economics simply do not make up for the secular decline of linear revenues (affiliate and advertising).
This could conceivably be a short-term trend, but Netflix's 50% drop in stock price following a subscriber miss reflects strong-enough bearish sentiment about streaming that this sentiment seems here to stay.
Conclusion
We do not ultimately have enough information as to why A-list talent like Matt Damon chose to hawk cryptocurrency in a commercial, or why Bradley Cooper feels the need to open a pizzeria to make up for lost back-end. They may have other financial constraints in their lives that they need to solve for, and it would not be unreasonable to assume so.
That said, the timing and context still matters, and right now creative talent is perceived to be reaping more value than shareholders. But, A-list creative talent like Matt Damon, Bradley Cooper, Reese Witherspoon and Will Smith are effectively telling the market in recent business deals that they are reaping less value than in previous decades, and that is impacting them financially.
So, when the market and/or media react negatively to Matt Damon shilling crypto coin or Witherspoon's production company being valued at $900MM, they are all missing the backdrop of declining economics for A-List talent despite near-inelastic demand for more content.
The more likely reality is all these A-list stars and their management are foreseeing signals of what producer Jason Blum predicted last summer: because the unit economics of streaming are bad for legacy media companies already, that poses a risk to talent of declining upfront payments. And, if both Disney's and ViacomCBS's declining ARPU are bellwethers, the challenge after Q4 2021 earnings will be whether that risk is now escalating.
For the record, I think these fiscal results do reflect the inferior unit economics of streaming and the declining stock prices reflect bearish investor sentiment for the unit economics of streaming. Both suggest that risk is now escalating.
One obvious takeaway is that Matt Damon is not the exception, but the rule: we should foresee more A-list celebrities hawking cryptocurrencies (and that's happening, including Hello Sunshine and Reese Witherspoon in a Twitter Spaces yesterday). We may also see them pursuing businesses that seem tangential to their brands.
Another obvious takeaway is that we may or may not see the likes of Bradley Cooper opening pizzerias, but with live shopping set to take off, we will see more versions of the Hello Sunshine model where celebrities hawk e-commerce lines of their own or as spokespeople.
In other words, what happens when inelastic demand suddenly displays elasticity because investors no longer buy into the premise that streaming no longer drives shareholder value?
In that instance, arguably the worst bet will be expensive legacy media content and the best bet will be more cost-effective creator economy content. Why?
Because in that scenario, if MrBeast's success with Squid Game is any precedent, the creator economy will be better than Hollywood's model as being able to deliver similar if not better outcomes at a lower cost.
We may be witnessing, in real time, a paradigm shift in media business models.