While the rest of the entertainment world tries to get its head around the idea that Lebron James could sell his one-year-old production company, The SpringHill Company, for $750 million and Reese Witherspoon is considering unloading her Hello Sunshine production company for about $1 billion, Barclays media analyst Kannan Venkateshwar wrote Friday that streaming distribution has turned the way companies value programming on its ear.
James reportedly started SpringHill with a $100 million investment and has been fielding interest from several possible suitors, including Nike, according to The Information. Best known for the just-released Space Jam: A New Legacy film and the HBO series The Shop (it also owns a small marketing arm) a $750 million sales price represents a more than robust premium, even for an NBA legend.
Academy-Award-winning actress Witherspoon’s Hello Sunshine has produced the hit HBO series Big Little Lies, Little Fires Everywhere for Hulu and The Morning Show for Apple TV Plus. According to a report in the Wall Street Journal, Hello Sunshine is working with investment bankers to determine its options, and there is no guarantee a sale will take place. No revenue figures were available, but other reports have said the production company is expected to turn its first profit this year. AT&T is part owner of Hello Sunshine, through its Otter Media unit.
But whether a sale happens or not, the lofty valuations placed on these assets seems to fly in the face of tradition. It used to be that a company had to accumulate a big library, establish a proven track record of hits and have a management team that could practically foretell the future before attracting Lotto-type valuations. Now, in the streaming era, that model is quickly becoming obsolete.
In his research report, Venkateshwar notes that every content library is valued differently, and rightly so. Volume alone doesn’t determine value, but the analyst said another factor -- distribution channels -- also is rising in the mix. But Venkateshwar added it isn’t the number of distribution channels available to a piece of content that determines its value, but the type of distribution.
“Unlike legacy channels for content distribution which were purely focused on content alone, today, the consumer value proposition of a given content distribution channel may actually have nothing to do with content,” Venkateshwar wrote. “In fact, the value of content may ironically be higher in channels where content is only a secondary offering, unlike the past where the more focused a distribution channel was on content, the more it could charge (theatrical, TV bundle etc.).”
He used Amazon’s Prime Video offering as an example. While Prime Video has a lot of content -- which should increase after Amazon agreed in May to buy movie studio MGM at a price ($8.5 billion) some have estimated is 37 times its annualized cash flow -- it’s main function is to serve as a complement to the Amazon Prime service, which offers customers free shipping on their Amazon retail orders. According to Venkateshwar, the real value of the video offering is in its ability to increase the value of the platform as a whole.
“Other emerging content distributors like Apple are also more oriented to use content to enhance the value of their broader platforms rather than as an end in itself,” Venkateshwar wrote, adding that the same holds true for audio, which has taken advantage of new distribution channels like Peloton, Fortnite and Tik Tok which is becoming an increasingly important driver for music labels.
“However, not every new distribution channel is a platform and therefore most new streaming services will have to justify the economics of a given piece of content or a library based on its ability to drive subscriber growth, engagement or pricing power. This is why it may make more sense for Netflix to spend $8 billion-plus on creating more local language programming across its footprint rather than buying a company like MGM.”
Specific windows for theatrical, pay per view, premium, cable and broadcast content were also a key factor in the way programming was valued previously. But streaming threw theatrical windowing, well, out the window as distributors either ignored them totally, like Netflix, or created a new day-and-date release strategy for movies like Disney Plus.
While Venkateshwar wrote that the new strategy could be good for consumers, who can switch between distributors for specific content without penalty, it ultimately will hurt lifetime valuations for that content.
The analyst pointed to Disney’s latest day-and-date release, Black Widow. While that film had a strong opening box office weekend of $80 million in North America and generated more than $60 million for Disney Plus, the drop off in box office after opening day (40%) was significantly greater for Black Widow than any other Marvel film, Venkateshwar said.
“Therefore, what will be interesting to watch is the overall collection for Black Widow across its entire theatrical and Disney Plus run and its impact on Disney Plus sub growth once the movie hits the normal subscription window (although Disney may not make these numbers available),” Venkateshwar wrote.
The elimination of multiple windows also could affect the cultural import of certain content, the analyst said, wondering aloud if Star Wars would have been as culturally significant over the past several decades if it had been released exclusively on Netflix rather than in theaters. Venkateshwar argues that marketing plays a huge role in not only promoting films but letting potential viewers cut through the clutter to discover programming they want to watch.
“A movie release tends to be akin to a high-profile new product launch, with franchise movies spending $100 million-plus on marketing alone,” Venkateshwar wrote. “Netflix’s movie releases, on the other hand, rely significantly on its own content discovery algorithms. While the latter may be more efficient in the short term, it limits the duration of cultural relevance of a given piece of content, especially in a world with significant content clutter. This is why we believe Netflix’s strategy of shunning theatrical windows may drive a lower return on investment for its franchises than, say, Disney.”
Venkateshwar goes on to consider ad-supported streaming (best to monetize library content) and the benefits of binge-watching (which highlights the value of original programming), but it all boils down to the fact that valuing content is hard. And you can’t point to one deal or even a series of deals as a blueprint for the rest of the business. So Lebron James and Reese Witherspoon may indeed have hit the content lottery with their respective content endeavors, or maybe not. Amazon may be spending too much on MGM -- there is still the question of regulatory approval -- or it may end up being considered a bargain 10 years down the road. Venkateshwar pointed to how many analysts thought Disney paid way too much for Pixar and Marvel back in the day.
The key, he wrote, is being willing to continually reinvest in what you buy, no matter the price. Buying a studio or a production company or what have you has to be the start of the investment cycle, not the end.
“In hindsight, however, the last decade of Disney’s growth including its streaming pivot and therefore its valuation has largely been fueled by these anchor assets,” Venkateshwar wrote of Pixar and Marvel “Valuation context, in other words, is a function of the post-deal strategic path of these assets more than a point in time estimate of asset value of a given studio.”
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Mike Farrell is senior content producer, finance for Multichannel News/B+C, covering finance, operations and M&A at cable operators and networks across the industry. He joined Multichannel News in September 1998 and has written about major deals and top players in the business ever since. He also writes the On The Money blog, offering deeper dives into a wide variety of topics including, retransmission consent, regional sports networks,and streaming video. In 2015 he won the Jesse H. Neal Award for Best Profile, an in-depth look at the Syfy Network’s Sharknado franchise and its impact on the industry.