Honey, we blew up the Hollywood business model

a person in a canoe paddles toward an ominous, glitchy horizon

By Ryan FaughnderCompany Town Senior Editor

Feb. 28, 2023 6 AM PT

Welcome to the Wide Shot, a newsletter about the business of entertainment. Sign up here to get it in your inbox.

James L. Dolan, the interim executive chairman of AMC Networks, has been perking up some of our sources’ ears with his frank assessments of the state of the entertainment business as studios and TV giants adjust to the realities of streaming.

“As I’ve said in the past, the current mechanisms for monetizing content are not working,” Dolan said during the company’s earnings call this month. “The content industry needs to reorganize itself. We’re seeing this now with most media companies beginning to course correct to better monetize content and improve the economics of their business.”

In other words, the business model is broken, and no one seems to have a clear idea of how to fix it.

The challenges should already be familiar for regular readers, but here’s a quick summary. The explosion of streaming services that started in 2019 created an expectation among audiences that they could get loads of premium film and TV content for a monthly fee that made it feel as if they were getting it for almost nothing.

The 2020 COVID-19 pandemic led more people to sign-up, including older consumers who were still paying for cable and satellite. Studios overspent on shows and weren’t charging enough to make up for it, while also doing damage to their traditional ways of generating revenue. Now, services are turning their focus to profitability. But this pivot comes at a time when household budgets are squeezed by inflation and recession fears.

Faced by pressure from Wall Street, companies are mainly adapting by cutting costs, raising prices and returning to economic models that served them well in the past, including release windows, commercials and third-party deals.

Warner Bros. Discovery is an excellent example. Chief Executive David Zaslav cut jobs, threw some expensive and risky content overboard and is now licensing shows to Roku and Tubi rather than keeping everything in house, in a way that somewhat resembles the old syndication model. Every dollar counts when you’ve got nearly $50 billion in debt.

And it seems to be working? Warner Bros. Discovery’s direct-to-consumer business (HBO Max and Discovery+) lost $217 million during the fourth quarter, which sounds like a lot but is much better than the loss of $728 million the services recorded during the same quarter a year before. It’s also significantly less than its rivals are losing (Disney’s streaming unit just lost $1.1 billion in one quarter). But pursuing a less aggressive streaming strategy comes at the cost of growth. WBD’s streaming business gained just 1.1 million subscribers globally during the three months that ended in December.

The Warner Bros. Discovery transformation provides a good window into what the next few years of the streaming business might look like. Higher prices, tougher competition and more disciplined spending on movies and shows will result in smaller increases in the number of subscriptions each year.

U.K.-based MIDiA Research projects that global subscription video revenues will reach $322 billion in 2030, an increase of 145% from this year. However, Mulligan points out, annual growth rates will shrink significantly. In 2030, sales are expected to increase 12% from the prior year, down from 24% in 2023. And much of the growth will come from emerging markets, particularly in Asia, where the populations are often more digitally sophisticated than in the U.S. because they haven’t had what we think of as the traditional model of cable bundles.

In a new report, MIDiA analyst Tim Mulligan argues that the slowdown in subscription revenue will not simply be made up for with advertising, which, to borrow his phrase, is “tolerated rather than enjoyed” by viewers and “increasingly anachronistic.” The current trouble in the advertising market is part of the business’s cyclical nature, but that people don’t enjoy ad breaks is an ongoing issue, especially now that viewers have more choice from their entertainment options. Mulligan predicts that media and entertainment companies will have to get more innovative and try to boost sales and profits by experimenting with newer ways of making money.

Many of the ideas he suggests are already common in the video game industry and in emerging markets where most of the subscription video growth is happening. New lines of revenue could include digital merch, flexible pricing plans that allow customers to pay for content a la carte with digital wallets, watch parties for marquee shows and technology that allows viewers to shop for real-world products that appear on-screen. Some of these initiatives are already happening at the studios. NBCUniversal recently said it would extend its “shoppable” TV function to Peacock.

Some of this stuff is bound to elicit scoffs. While Gen Z and gamers are already comfortable with in-app purchases, others will have an almost allergic reaction to the idea of purchasing digital goods through streaming services, especially after the whole NFT thing (Mulligan says to think of the concept more in terms of Fortnite “skins” than NFTs, for what it’s worth).

Mulligan acknowledges that there may be psychological hurdles among many consumers, including older audiences. Still, there’s growing acceptance among consumers, especially the technologically savvy. More than two-thirds of consumers do not spend money on in-game purchases, according to MIDiA. But among people who pay for two or more video services, 38% spent money within a game in the fourth quarter. This suggests the possibility of growth from “third way” businesses — not subscriptions, not ads, but something else.

“This is where we need to be a little bit brave about the potential upside,” Mulligan said in an interview. “A lot of this would ostensibly appear to be a negative scenario for traditional players, especially ones focused on cost cutting and increasing margins. But the positives are, you can create a whole new experience around things such as this.”

Different companies are better positioned than others to take part in such innovations. Matthew Ball has spoken at length about the opportunities for the Walt Disney Co. to combine its powers in both physical worlds (Disneyland) and digital ones (Disney+). Warner Bros. Discovery has a significant lead on its rivals when it comes to gaming, as seen with the sales numbers from “Hogwarts Legacy,” which reached $850 million in its first two weeks. Mulligan cites Amazon as a company that could do a lot more to use its Hollywood ambitions — including its ownership of MGM content and intellectual property — to drive retail sales.

Other companies are far less equipped to adapt to the changes. AMC Networks, to go back to that early example, is at a disadvantage, with so much exposure to cord-cutting and a limited content library with which to grow and maintain AMC+.

But Dolan’s diagnosis is not wrong, even if many of AMC’s problems are specific to AMC. Further, he makes the case that these are not problems that can be easily solved through consolidation — often an industry’s go-to response in times of stress as smaller companies look for the exit ramp. Plenty of prognosticators (including us) have predicted some wave of mergers and acquisitions during the next phase of the streaming wars. Not so fast, said Dolan.

“I don’t think you’ll see the industry pursue a strong consolidation movement, because the industry doesn’t yet know how to monetize the content,” Dolan said. “Once they reorganize themselves, et cetera, and start to get a better handle on that and a better strategy with that, then you could see consolidation, because it will be consolidation around building stronger products and stronger offerings for the customers... I don’t see anybody who has the answer to this yet. And without that answer, I don’t get the rationale for pursuing a consolidation strategy.”

Granted, when analysts talk about the likely consolidation of the entertainment market and which companies probably can’t go solo long-term, AMC Networks is typically at the top of the list, alongside Lionsgate and all other standalone entertainment companies. Dolan does have a point, though. If your business is a canoe headed toward a deadly waterfall, jumping into a bigger boat probably isn’t going to help much.

Stuff we wrote

— Rupert Murdoch knew Fox News hosts endorsed false election fraud claims, deposition shows. Murdoch’s testimony reveals he was aware falsehoods were running after the 2020 election, but the network was also concerned about losing its Trump loving viewers.

— Beyond ‘Wednesday’ and ‘Outer Banks’: How Netflix is looking to be the new CW for Gen Z. Netflix is investing in young adult content, as titles like “Stranger Things,” “Wednesday,” “Bridgerton” and “Ginny & Georgia” have soared in popularity.

— Hollywood studios plan for a writers’ strike — even before negotiations have started. How studios and producers are preparing for a possible work stoppage, a month before negotiations are set to begin with the Writers Guild of America.

— Don Lemon is back on ‘CNN This Morning.’ But can he last? The CNN anchor, who will return to the air Wednesday after making offensive comments about women, will enter a sensitivity training program.

— On the calendar: Netflix launches its first live comedy special, starring Chris Rock, on Saturday.

— ICYMI. Former MoviePass executive arrested for allegedly embezzling $260,000 for Coachella party. Alec Baldwin pleads not guilty to involuntary manslaughter charges in ‘Rust’ shooting case. Historic movie lot that gave Studio City its name to get $1-billion makeover. ‘Rust’ production reaches settlement with New Mexico Health and Safety Bureau.

Number(s) of the week

The aforementioned “Hogwarts Legacy” role-playing video game sold 12 million units in two weeks to hit $850 million in global sales, a record for Warner Bros.’ gaming studio. It’s hard to find directly comparable numbers for other titles, but it’s safe to say the results are massive. This, of course, comes amid the ongoing controversy over J.K. Rowling’s comments on transgender issues, which her critics have described as transphobic. To say what kind of an effect this discourse had on sales would be complete guesswork.

More movies, more box office. Ticket sales from the U.S. are up 47% so far this year, according to Comscore, thanks to a more robust slate of films as studios get closer to business as usual after the pandemic. And no, it wasn’t just “Cocaine Bear.” On the flip side, it doesn’t seem as if renewed optimism is sparking some massive bidding war for the Regal theater chain. In other exhibition news, AMC Theatres’ share conversion plan is still making waves.

“Ant-Man and the Wasp: Quantumania” held onto the No. 1 spot domestically with $32.2 million from Friday through Sunday, but that represented a 70% decline from its opening. That’s a big drop, even for the Marvel franchise, which is often front-loaded with die-hard fans buying tickets to avoid spoilers. Yes, the movie seemed basically review-proof at first, but it seems that poor audience scores may have been a factor here.

Best of the web

— Todd Field writes about bringing Lydia Tár to life in a movie that is still fun to discuss with your film geek friends, whether you actually enjoyed watching it or not. (LAT)
— A.O. Scott on the A.I. nightmare that no Hollywood movie bothered to predict, because it’s so banal. (New York Times)
— The Ankler gets the Vanity Fair profile treatment, complete with the film noir-ish photo shoot. That’s how you know you’ve made it.
— Need a cargo plane for your film set by Friday? Better call this couple. (Hollywood Reporter)
— Newspapers are done with ‘Dilbert’ after its creator’s racist nonsense. (AP)