Sony, Alamo DraftHouse & The Value of Being Sub-Scale, Dynamic and Product-Oriented
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With Sony’s acquisition of dine-in movie theater chain Alamo Drafthouse, we have entered a post-Paramount Decrees world. The 1948 Paramount Decrees prohibited studios from owning theatrical distributors. The practice was a problem when theaters were the only distribution option for movies. Vertical integration made it all but impossible for smaller theaters to compete. A federal judge ended the decrees in 2022 at the request of the Department of Justice.
Sony announced the acquisition “reinforces [Sony Pictures Entertainment’s] long-held commitment to theatrical exhibition and continued initiatives in experiential entertainment.” Alamo is a chain of 35 smaller cinemas, whereas AMC Entertainment owns and operates 900 theatres and 10,000 screens worldwide. The question is what this small-scale bet from Sony will mean in practice.
I wrote last month that “theaters are consumer touchpoints that price 'big IP' independent of the existing relationships consumers have with each company via streaming services and theme parks.” Technology-first platforms like Netflix and Amazon help consumers to stretch their dollar across more offerings. Netflix includes gaming with no ads and no in-app purchases as part of a membership. Amazon Prime offers free tickets to its members for exclusive advance screenings of Amazon movies and series at AMC Entertainment theatres. If Sony offered something similar, that “would go a long way to driving more attendance at the theaters" at a time when annual ticket sales are at barely half of pre-pandemic levels.
But, unlike Amazon (200 million Prime members) and Netflix (271 million members), Sony Pictures Entertainment does not have a subscriber base at an extraordinary global scale. It mostly gave up on streaming in 2019 when it sold a majority stake in ad-supported streamer Crackle. Instead, it owns Crunchyroll, a niche service for fans of anime with over 13 million subscribers worldwide. In the Crunchyroll model, these fans are monetized across a portfolio of distribution options like theatrical releases of new anime content, sales of home entertainment products (e.g., DVD box sets), licensing and secondary distribution.
Against the backdrop of Sony’s Hollywood competitors struggling to figure out viable subscription streaming models, an important question looms: Why is the lone major Hollywood studio to bail on streaming now the first to connect the dots between traditional wholesale and newer digital retail media business models?
Key Takeaway
The best foundations for dynamic, growing media businesses in a consumer-first, retail-first media marketplace are agnostic to the objective of achieving scale in any one vertical. Instead, they achieve a smaller scale across multiple distribution channels.
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The Business of Cultural Passion
The question is similar to asking why The New York Times—the “Old Gray Lady”— has been the lone legacy media publisher to connect the dots between traditional wholesale and newer digital retail media business models. The accomplishment seems more impressive against the backdrop of The Washington Post’s recent revelations that it has lost over 50% of its audience since 2020 and $77 million in 2023, alone. In contrast, The New York Times digital subscriber base grew by 10% year-over-year in 2023 and its subscription revenues grew by 5%.
Its success emerged from management’s realization that in a retail-first, consumer-first world, certain offerings within the bundle were more valuable to the consumer than the “bundle” of the newspaper itself. General interest audiences have value, but they do not value a subscription product the same as an avid Crosswords fan values its Games app, or sports fans addicted to coverage of favorite sports teams value The Athletic app. The passion for a single cultural offering that creates consumer delight is a doorway to opportunities to upsell and/or bundle related products for a marginal fee.
Presumably, this is the path that Sony Pictures Entertainment will take with Crunchyroll and Alamo Drafthouse. In a post-Paramount Decrees world, consumers no longer need theatrical distribution as an outlet the way they did in the 1940s or the 1980s. But, they are seeking outlets for their passions and will pay bundled experiences around that passion. It seems like exclusive experiences built around dine-in theater-going will be something that will delight Crunchyroll fans.
The Problem with Scale
A common theme of my past essays is the question of why we do not see more consumer-first success stories like The New York Times or Crunchyroll. The obvious answer is that both reflect the rejection of broadly shared market assumptions: After two financially painful decades in the 2000s, The New York Times realized consumer passions like games and cooking were better offerings for a subscription model than news. That was a contrarian belief, then, and still seems contrarian to much of the publishing market, now.
Sony acquired Crunchyroll from AT&T in 2021—two years after it spun out Crackle—and merged it with Funimation, another streaming service for anime that Sony had acquired previously in 2017. Sony saw more opportunity in scaling a service for a passionate fan base across multiple distribution channels that it controlled than in attempting to build a Netflix competitor.
Both bets also operate at a fraction of the scale of Netflix (271 million subscribers), Amazon (200 million plus subscribers to Prime) and even market laggard Paramount+ (71 million subscribers): The New York Times has 10 million subscribers and Crunchyroll has only 30% more. There are two logical conclusions:
Smaller and nimbler is a better model in 2024, or
The rationale for the massive scale of publishing and legacy media conglomerates is now gone.
Product and Technology
In either case, all roads lead back to the individual consumer. That is the underlying business logic. In the cases of both the tech behemoths (Amazon, Netflix) and the smaller digital players (Crunchyroll, The New York Times), that is also the logic of the technology.
I have touched on this point in the past, writing about Customer Data Platforms (CDPs). I have also highlighted how “product improvements and [customer relationship management (CRM)] improvements” helped to drive faster growth” for sports betting service Draftkings, which has 3.4 million monthly unique players in Q1 2024. Competencies in product development and customer acquisition are as critical in sports betting as they are in media subscription models.
Effectively, the most successful models have a ruthless focus on increasing the nodes of a relationship with a consumer who is regularly spending money on a platform. They do so through expanding and improving the product and leveraging those improvements to create a multi-faceted relationship with the consumer. More relevant touchpoints equal more bang for the consumer's buck.
That said, both Amazon and Netflix have struggled to expand their relationships with consumers into gaming. Last week Gamesindustry.biz learned that Netflix's VP of Games Mike Verdu is taking on a new role “as the company ramps up its ambitions in the video games space.” Given Co-CEO Greg Peter’s “crawl-walk-run” mantra, the implication may be that Netflix is exiting its “crawl” phase of its gaming strategy—which saw “GTA: San Andreas” become Netflix's most downloaded game of all time with nearly 10 million downloads since its December 2023 launch.
As for Amazon, its attempt to link the release of its TV series “Fallout”—based on the popular game of the same name—with its Luna cloud gaming platform was a poor user experience for Prime members. It fell flat.
Media's Future Is Sub-Scale
The implication is that it is hard—though not yet proven impossible—for the tech giants to expand the consumer relationship across media formats and distribution channels (neither Amazon nor AMC Entertainment has revealed any data about the success of its free previews). The tech giants and the legacy media giants are all starting from the same place—proprietary databases of consumers with email addresses and credit card numbers—but at a different scale.
It seems counterintuitive to write that Sony’s Crunchyroll and The New York Times are increasingly more dynamic and multi-faceted *media* businesses than the media businesses of the tech behemoths. But, it seems increasingly true. The best foundations for dynamic, growing media businesses in a consumer-first, retail-first media marketplace are agnostic to the objective of achieving scale in any one vertical. Instead, they achieve a smaller scale across multiple distribution channels.
That is what Sony seems to have figured out.
Looking Ahead to H2 2024
This conclusion mirrors what I wrote at the end of last Thursday’s essay: NBA, NFL, WWE and Olympics fans are going to need more from Peacock than just broadcasts, but Peacock is not on a product development path to deliver that.
The signals from the market are telling us that a new, Post-Paramount Decrees future for the media business is going to be sub-scale, dynamic and product-oriented. The obstacle lies in the customer acquisition—Amazon will always have lower marginal marketing costs than Crunchyroll, The New York Times or any of its fellow legacy media competitors because of its enormous scale. Netflix possesses the same advantage.
For this reason, Sony’s acquisition of Alamo Drafthouse raises the interesting question of whether and/or how it will leverage the scale of its broader conglomerate. Sony Pictures Entertainment is its own division. Sony’s interactive division has 118 milion monthly active users of PlayStation consoles, but those are separate from Crunchyroll subscribers (Sony Pictures Entertainment) and Sony Electronics (900 million devices worldwide). Both offer marketing advantages for zero marginal cost, but for Sony more broadly and not only Sony Pictures Entertainment (which will have pay the other divisions).
Also, with the emerging four broad buckets of “back to the people” models I identified back in April—gaming, blockchain, Generative AI tools and creator economy—it is hard not to reach the conclusion that sub-scale and dynamic are the most important factors. If the end to the “tyranny of big IP” is indeed here—and also the end of the regional newspaper monopoly model that protected The New York Times and The Washington Post—scale matters less than dynamic relationships with the registered users powered by product development and simultaneous cost-effective, ROI-positive customer acquisition.
That is a wonky way of looking at the emerging consumer-first, retail-first media marketplace. At the end of the first half of 2024, it is increasingly hard to avoid the conclusion that it is the best way, too.