What is an Entertainment Company in 2021? And Why Does It Matter?

Source: https://www.matthewball.vc/all/what-is-an-entertainment-company-and-why-does-the-answer-matter

Theodore Levitt was a Harvard Business School professor and resident economist who developed his theory of marketing myopia in the 1960s. He believed that companies are defined more by their products than what they do. This idea was largely renamed “job to be done theory”. These companies are vulnerable to disruption and displacement due to their mindset. This is evident in the case of the petroleum industry. It has been too focused on fossil fuels and has lost out on renewable, nuclear, and geothermal energy. Another focus is on the major railway companies in the early 20th Century, who missed out on cars and trucks due to their emphasis on transport.

Management theories are in and out. Conglomerates were especially hard hit in the 1990s, when many of them struggled to reap the benefits of strategy creep. Although synergies sound great and marketing myopia is bad, blue-chip companies have more shareholder returns if they focus on addressing uncertain, if not always insurgent adjacencies. Conglomeration has become a more popular option in the digital age (e.g. Amazon), but for the most part market leaders tend not to be generalists (e.g. Facebook, not Google+. Shopify and Stripe are not Amazon Pay. TikTok is not Instagram. Tinder is not Facebook Dating.

These ideas are fascinating when you consider the current entertainment industry. We have always defined entertainment companies around their core offerings. Marvel was a comic-book company, Mattel was a toy company and ESPN a sports network. People often mistakenly refer to the Disney flywheel, which Walt invented in the 1950s. It is still a popular obsession among Hollywood executives today. It was actually “Creative Talent of Studio / Theatrical Movies”. Walt Disney described Disney as a movie studio.

These company definitions no longer work today. The world’s best theatrically-oriented film studio, Disney, is undoubtedly the best. It had three times as much revenue as the #2 player and nearly twice the margin in 2019. But, Disney’s parks and entertainment division generated twice as much revenue and profit than its studio division. The future of Disney hinges on a direct to consumer video platform, which is primarily growing through TV series and not feature films.

Hasbro purchased eOne in 2019 to ensure that its merchandise lines, such as G.I., could be sustained and even built. Joe, Transformers, and Battleship are now part of a growing cinematic universe that spans TV and film. Mattel is also driving the adaptations of top franchises like Barbie, Hot Wheels and Magic 8-Ball. Major sports leagues see NFTs, sports betting, as key to their growth. Casinos are expanding and purchasing lifestyle content publishing companies. For nearly 30 years, Marvel and DC weren’t comic book-first.

After years of avoiding the question “is Netflix tech or media company?” Reed Hastings, Netflix founder and co-CEO, recently stated that “we’re really an entertainer company”. What is this, and why does it matter? And what’s the conclusion?

Entertainment businesses do three things at their core:

  1. Tell stories.
  2. These stories can be shared with love
  3. Make money for your love

Disney is a great way to find out more about it.

Disney Leads because It’s Best at 1-3-2

Storytelling and Creation

Disney hasmany the greatest stories, but it is also the best at telling them. The Marvel Cinematic Universe of Disney consistently outperforms both the Marvel films of 21st Century Fox, Sony and comic book films of Warner Bros. In 2016, Sony’s film chief stated that “we have deferred [on Spider-Man] the creative lead to [Disney], since they know what they are doing.” George Lucas, who has spent decades denying he would ever sell Star Wars, said heto sell Lucasfilms to Disney because of its success with Marvel. Lucas did not solicit any other bidders — and Fox, which has distributed Star Wars for thirty-five year, didn’t even realize his company was up for sale. Many argue that Disney “has all of the IP”, but the contrast in fan reaction to Disney’s Marvel films and those made by Sony or Fox is striking. Millions of Disney fans are thrilled that Disney now has Fantastic Four, the X-Men and “so they can do it right”.

The two Harry Potter films that were released in 2012 and 2013 were among the worst performing of the Wizarding World’s ten films. However, the global box office had grown by 150% since its first release. Over the past 20 years, there have been many attempts by a dozen studios adapting Western classics that aren’t under copyright. Two Tarzans and two Robin Hoods, two King Arthurs and three Draculas and two Little Red Riding Hoods, as well as three Draculas and two Little Red Riding Hoods. These films were barely profitable. Most lost a lot. It is hard to argue that Disney wouldn’t have enjoyed greater success. We’ll soon know! Disney is currently developing live-action adaptations of Robin Hood, Peter Pan, and The Little Mermaid. While IP matters, execution determines profit/loss.

Building Love

Disney excels at instilling love for IP. Marvel Cinematic Universe is an excellent example of this. The first few films weren’t very successful because Marvel couldn’t launch its CU without its most beloved comic book characters (which Sony and other competitors owned). However, as brand equity built, the average performance increased even though output almost tripled. The Marvel Cinematic Universe produced an average of 1.2 films per calendar year (“Phase 1”) and earned $291MM (inflation adjusted). The MCU has been releasing 2.75 films per annum since 2016 (“Phase 3”) and has averaged $450MM per movie. The MCU has produced 12 sequels to date. These titles out-grossed the predecessors by an average of 31%. Only one was less. The only film to drop was the second Avengers movie, which was the sequel of the third-highest-grossing movie of all time. However, it still managed to be the sixth-highest-grossing movie in history. Five years later, the third Captain America was released and made 2.5x.

Disney also leads in sustaining/transitioning love generationally. Think about how many families keep Disneyland photos of their children with Woody or Mickey on their fridges. These photos are often kept by these children decades later, and they now recreate the moment with their children or compare it to their spouse’s.
Jacob Navok in 1986 with his father; Jacob Navok in 2020 with his son

I explained in “Disney IP” and “Returns To Marginal Affinity” that love is an essential part of storytelling. It is the most significant, intangible differenceiator.

The intangible type of operating leverage is what makes businesses based on storytelling franchises so successful. It doesn’t ‘cost more to make someone love your content more, but the value of this love is substantial. Companies like Disney enjoy huge “returns on marginal affinity em>

This is something we see in many ways. The correlation between a film’s CinemaScore (or its multiple) and its “multiple” is an example. The film’s “multiple”, which is its lifetime gross, divided by its opening weekend haul, is the film’s CinemaScore. CinemaScore, on the other hand, reflects how audiences react to films and can be used as a proxy for word-of mouth and rewatchability. A CinemaScore score of at least 8.0 is indicative of a higher multiple. Another example of the power of love is the ability of a fan’s love of a master franchise to be transferred into new blockbusters that have limited success stories or awareness. The MCU launched mega-hits Guardians of the Galaxy, and Black Panther. Windowing success is also determined by how much a fan enjoys a franchise. Do we wait to see it on home video or go to the cinema? For home video, should we rent, buy, or wait for it to become free on Netflix? The deeper the viewership goes, the more dramatic the ARPU decreases

When media products are scarce, the value of love can be even greater. Although there is no limit on TV viewers or movie tickets, Elsa dresses and attendance at theme parks are limited. Marginal increases in love can lead to significant pricing power. Parents whose daughter requires an Elsa gown or a Disneyland ticket are not very price sensitive are also not as price-sensitive. You can make a lot of money with a little more love, which will result in a significant increase in revenue and profits.

Of course, very few people create memes, GIFs and fan-edits. These behaviors can be powerful content and marketing tools (they even led to a movie being remade!). For example, a number of Game of Thronesfans worked together to create a simulacra of King’s Landing within Minecraft. The fully immersive map is larger than Los Angeles and extends Westeros in ways that the series cannot. It has been viewed millions of times. This kind of behavior is rare and valuable.

Monetizing Love

Disney has the best ability to monetize their love. There are many options for monetizing your love: theme parks, cruises, Broadway, retail shops, merchandise, TV and many more. There are more ways to get love than any other media company. The first hyper-optimized microtransactions game in the world is probably at the theme parks. Jungle Cruisephoto there, Mickey cupcake dort, click to purchase a FastPass+ and try on an Avengers Academy shirt within. Update: Disney announced that the new Spider-Man ride would include purchase upgrades like better web shooters and powers, as well as personalized gear. Only Spider-lovers are eligible to apply. ().

Of course, it is possible to love DC or Transformers as much as, if not more than, Marvel, even though these franchises have fewer opportunities/mediums to build fan love. The owners of these franchises can’t still monetize their love to the same extent.

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It is equally important to be aware of areas where Disney does not monetize. Although The House of Mouse is the most successful licensing company for consumer products, its financial performance is still quite modest. The division accounts for only 10% of Disney’s overall consolidated profits. Because Disney doesn’t actually make most of its profits from consumer products, this is why it has a low percentage. Instead, the people who design, manufacture and sell these products make most of it.

Disney could expand its role in consumer product manufacturing and distribution, thus capturing more profits. What really matters is that little girls can choose to wear Elsa dresses or Frozen pajamas, or even a Cars bed if they want. This is an incredibly powerful way to build love and mindshare. This requires little storytelling and can be extremely difficult for one company to cover. Some people are looking for Star Wars rugs while others love Mickey Mouse and the New England Patriots.

Disney hires a third party to handle production and distribution. They then pay them with most of the profits from merchandise and apparel sales. Disney then uses this passion to make money in other areas that are more lucrative. A light saber’s $10 licensing revenue is small compared to the value of a child who spends dozens of hours fantasizing that they are a Jedi Knight.

 

Even if you don’t see them right away, there are still costs to getting love wrong

Every story should, in theory, build love. It is not a “required”, however, at least not in the short-term. Again, Disney is a lesson.

From a monetization (#3) perspective, the direct-to-video strategy by The Walt Disney Company in the 1990s was hugely successful. Aladdin 2 and Aladdin3 were stories. They were also arguably love withdrawals, not deposits (#2). This is evident in the fact that many still love Aladdin , the Lion King and Bambi fifteen- to twenty-five decades later. However, few remember or even love their sequels.

Disney’s direct to-video strategy didn’t just ignore audience love. It also ended the “Disney Renaissance”, and ultimately decimated Disney Animation Studios. The group’s theatrical sales had dropped by the 2000s and its critical reviews were poor. A few films even failed to make the cut. DAS had been operating at a lower standard for fifteen years, which had sapped its creative energy and led to many top animators and writers leaving. This resulted in Disney not being able to capitalize on the growth of computer animation, even though it was the pioneer of many of the greatest advances in animation in the 20th century. Pixar Animation and DreamWorks Animation were regularly breaking Disney’s long-standing records. Six months after becoming CEO, Bob Iger purchased Pixar and gave DAS to Pixar’s management. Pixar would fix storytelling which would lead to love which would bring DAS back to monetization.