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Covid-19: Big shifts in the entertainment industry

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Bargaining power is shifting across the entertainment industry in a lockdown world. This is not just about the growth of streaming and Netflix. The larger story involves a fundamental rejig in bargaining power across the entertainment value chain.

This version of the newsletter looks at one of the biggest shifts in entertainment, currently underway:

1. Why in-home entertainment is poised for it’s biggest shift in content programming

2. But the largest shifts will be seen in the entertainment value chain

3. Why subsea cables become more important in a world of Zoom and Netflix

4. Disney – Reimagining the amusement park

And right at the very end, you can access the Covid19 access codes for The Platform Institute.

But first…

Just Netflix and…

Everyone seems to be on Netflix… we’ve all seen the growth graphs by now.

Streaming is going to increase. We don’t need to look beyond the present to see that there’s a mass conditioning underway as people stuck at home binge-watch content.

But it’s usually the less obvious shifts that are more interesting.

big shifts

Streaming is poised to win big during lockdown not just because of demand-side effects but also supply-side effects.

With lockdowns, two key sources of content production are out.

First, TV networks primarily differentiate themselves through live content like sports and concerts. With live events out, the content edge for traditional TV will likely go down further as users migrate to streaming platforms.

Second, studio production of content is at a standstill. TV networks will likely have to rely on Amazon and Netflix for their content library as well during this period, exposing the streaming platforms to more non-users and traditional TV consumers.

Both of these factors will quite likely drive new user acquisition beyond what we’ve seen so far in the first few weeks.

Always… look for the value chain impact

A shift in consumer behavior can often impact bargaining power between actors across the value chain. We’re going to see some of that happen here as well.

For one, the closure of movie theatres during lockdown could potentially increase bargaining power for streaming sites.

The closure of major theater chains across the country is driving studios to break what’s known in the industry as the “window” – the three-month period between when a movie hits the big screen, and when it’s offered for video on demand purchase or rental, and then on streaming devices.

Studios are already moving titles to streaming channels.

Universal was the first studio to take these steps, announcing on Monday that it will make movies available at home on the same day as their global theatrical release, starting with “Trolls World Tour,” which had been scheduled to open April 10 in the U.S. Three Universal films that had been in theaters before they closed — “The Hunt,” “The Invisible Man,” and “Emma” — will be available for a 48-hour rental starting Friday.

This isn’t your average temporary channel shift. The “window” is the one big moat protecting theatre revenues. By eroding the “window” even for a bounded period:

1. Studios will get to test success of movie releases on streaming platforms and use that to negotiate post-lockdown. Though theatres won’t go away, their negotiating power certainly will.

2. The longer the lockdown, and the more the hits released away from the theatres, the more likely we are to see new social viewing use cases develop around movie releases.

We’re likely going to see new revenue models emerge as well.

Huanxi Media’s partnership with Bytedance in China offers some clues…

Huanxi Media Group’s shares surged after it announced Douyin’s parent ByteDance would pay it at least 630 million yuan (US$90.8 million) for new movies and dramas to stream on its top video platforms as a viral outbreak in mainland China forces cinemas to close.

With this deal, ByteDance gets exclusive access to a portfolio of Huanxi movies and TV shows for the $91M + a share of the advertising revenues.

Within two days of the deal, Lost in Russia – one of Huanxi’s movies – was released on ByteDance and gathered 600M views.

And then… look for the infrastructural impact

Netflix also had to reduce its streaming bit rates as consumption goes up. The crisis again shows us that in a connected world, data infrastructure is more critical than transportation infrastructure. I mentioned in the last newsletter that cloud players would be big winners with this conditioning but that applies equally further down the data infrastructure stack to data centers, wireless infrastructure, and even subsea fibre infrastructure.

In a lockdown world, we’re realising that our work and play is way more dependant on data infrastructure than on physical infrastructure like transportation and oil pipelines.

We are going to see the rise of new consumption habits, shift in bargaining power across the value chain, and eventually the rise of entirely new business models

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    The monetization of feel-good

    Reimagining the amusement park

    Entertainment industry revenues have fallen off a cliff because of Covid-19. Companies like Disney have been some of the hardest hit.

    Amusement park shutdowns hit Disney deep.

    Disney’s Parks & Attractions segment generates nearly 100% more revenue and 60% more profit than Disney’s studio division (which already generates nearly three times the revenue AND three times the gross margins as its primary competitors). By turning hit films into theme park attractions, not only does Disney generate more “upside” from a hit than its competitors do, Disney’s breakeven point for these films is also much lower. But the parks are much more than this direct financial benefit. There is nothing that can compare to the impact of a child being hugged by her heroes.

    And Disney has perfected ‘the business of hugs’… which is way more complex than it appears at first glance.

    Giving real hugs to kids is incredibly dangerous — doing this reliably, safely, and positively millions of times per year requires enormous training (the parks also operate hospitals, pet day care and police services, too!). In addition, these parks must cater to a wide variety of different customers with different needs, physical capabilities, and developmental maturity. In contrast, a film or TV show has only one version that lasts forever and is infinitely repeatable with 100% consistency. There is no other “medium” in the entertainment industry that requires melding more art forms (e.g. live performance, set design, music, engineering) with a smaller margin for error, and at such a great scale. The benefit, though, is a rich, hard to replicate and intimate understanding of the consumer.

    So all of that amusement park advantage to the Disney ecosystem goes out the window in the current crisis.

    But if we view Covid-19 as conditioning – towards a future normal with new use cases, rather than as disruption – of the current normal, this is an incredible opportunity to reimagine user experience.

    For example, what would an amusement park look like with social distancing? What core elements of the amusement park experience can you reconstruct in a virtual world? What hybrid experience would that then lead to in a post-Covid19 world where distancing ceases but users have been conditioned?

    For decades, the only real way to experience a digital world with agency and an individual sense of self was to go to the theme park. Games have been on the cusp of these experiences for years, but in 2020, they’re well under way. These are “games” like Minecraft, Fortnite, Roblox, to a lesser extent GTA Online, and Pokémon Go.

    These titles offer many unique advantages compared to their analogue analogues. For example, they are always “open”, “everywhere”, “full of your friends”, and impervious to COVID-19. These games also boast an even larger (i.e. infinite) number of attractions and rides, none of which need be bound by the laws of physics or the need for physical safety, and all of which can be rapidly updated and personalized. These digital parks also allow for much greater self-expression (e.g. avatars, skins).

    Minecraft reverse-engineered Disney, starting from a virtual world, creating character IP, and eventually licensing them to physical amusement parks. Can companies like Disney, coming in from the other side, enter Minecraft’s turf?

    Gaming is on the rise in a world of lockdowns. The longer the conditioning, the stronger the new behaviors. If amusement parks have to give up ‘the business of hugs’, virtual worlds will become important. Before we start predicting great things for VR headsets, a virtual world can be experienced in many different ways and the dynamics of virtual worlds are more important than the visual experience. In many ways, Zynga created thin-experience, thick-dynamics virtual worlds. Minecraft takes it to another level on both counts.

    Given Disney’s strong IP and it’s ability to create worlds through multiple forms of media, this is an important opportunity for the entertainment giant to reimagine ways in which it connects with its young fan base.

    Or at the very least, license its assets to those who can.

    The monetization of boredom

    Clay Shirky calls it cognitive surplus, I call it – more crudely – the monetization of boredom: The process through which periods of boredom create new pockets of user attention which can be harvested through high engagement experiences to create massive businesses. All social media fundamentally monetize boredom.

    Opportunities abound in the time of crisis. And this one comes with a massive user base under lockdown, being daily conditioned to new use cases. That’s a lot of cognitive surplus, and a lot of boredom, that will be monetized through a platform that aggregates the attention.

    We are going to see the rise of new consumption habits, shift in bargaining power across the value chain, and eventually the rise of entirely new business models.

    State of the Platform Revolution

    The State of the Platform Revolution report covers the key themes in the platform economy in the aftermath of the Covid-19 pandemic.

    This annual report, based on Sangeet’s international best-selling book Platform Revolution, highlights the key themes shaping the future of value creation and power structures in the platform economy.

    Themes covered in this report have been presented at multiple Fortune 500 board meetings, C-level conclaves, international summits, and policy roundtables.

     

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