LAnd of the Undead

5-min read

Jack Warner, co-founder of Warner Brothers, built an empire that birthed films including Casablanca, Batman, and The Shining. Warner built a 13,600-sq-ft Georgian-style mansion in the 1930s, supposedly, and unlikely, with the wood floor that Napoleon was standing on when he proposed to Josephine. It was often the site for a who’s who of the golden age of Hollywood, the archetypal studio mogul’s estate. 

David Geffen, who likely amassed a larger fortune from music than any 20th-century figure, purchased the estate in 1990. In 2009 Mr. Geffen, no joke, called me on my cell and asked if he could buy the New York Times (I was on the board). 

The most powerful men in Hollywood have occupied this residence, and still do. Jeff Bezos now owns this storied address as he constructs the greatest collection of man caves ever assembled. I’m fascinated by Mr. Bezos’s midlife crisis, and how the streaming wars embody the perversion of our democracy and economy. The idolatry of innovators infection continues to spread. 

What tech has done to retail, is unfolding in media. Each year thousands of young people move to LA to pursue a career in entertainment. And each year, tens of thousands move out — the land of broken dreams. No other region has a monopoly over an industry the way LA has assembled the greatest talent in entertainment. Up until now, the culture of creativity and domain expertise have served as shark repellent for the inhabitants of Malibu. No more. Jeff Bezos has the money to break a lot of dreams. 

What happened in retail, over the last decade, is about to happen in entertainment media. This juggernaut of an industry, with hundreds of billions in value and cultural influence like no other industry in the world, is being featurized as an accessory to sell batteries and toilet paper. 

Most large entertainment media firms (Comcast, AT&T, Verizon, Netflix, Fox, Sony, etc.) will cede value to Amazon and Apple over the next decade. Similar to Walmart, Disney is the only incumbent with the assets, leadership, and shareholder base to land counterpunches on the  purveyors of paper towels & AirPods. 

Variance

This week I shared my take on the streaming wars with 700+ people tuning into our livestream. We constructed a framework to separate winners from losers.

In the streaming wars, everyone offers great content. If you were on a deserted island with nothing to do except watch streaming video on demand, any of the players would keep you occupied. The value of the services is incredible, offering $1 billion of content for less than $1 per month.

My colleague Sonia Marciano teaches that to achieve success, the best strategy is to find the dimension with the greatest variance — the biggest delta between best and worst. In the streaming wars, both flywheel and distribution offer the greatest variance, and monopolies dominate those categories. Most of the above terms are self-explanatory, except flywheel. 

A flywheel is a disk that stores kinetic energy and then spins it out to a nearby engine. In the context of business, as the flywheel rotates it increases output or revenue without increasing input or cost. The ultimate flywheel is Amazon. Amazon Prime attracts shoppers who want a wide assortment of products with rapid fulfillment. These subscribers also enjoy the benefits of services like Amazon Prime Video, which increase the stickiness of Prime and time spent on the platform. 

My colleague Aswath Damodaran says Amazon isn’t an ecommerce company or a cloud company, but a disruption platform that through great execution and unparallelled access to cheap capital, uses the flywheel effect to spin into completely different industries. 

The sheer volume of people on Amazon (82% of households in the US) makes the platform more appealing to advertisers. Amazon Media Group is now a $15 billion business, the third-largest advertiser in the world behind Facebook and Google. More advertising results in more products, which leads to more purchases, which leads to greater investment in Amazon Prime Video to continue to increase the stickiness … and the wheel flies. 

This flywheel is now the mother of all chainsaws wielded by a bald 56-year-old in a hockey mask.

Apple owns distribution via iOS (the wealthiest 1.4 billion people on the planet). That’s the island all survivors fight on. Apple collects a toll on every SVOD service via the app store. In addition, the Cupertino firm has greased the rails they own, and can remove most of the friction from the 19 steps needed to download and sign up for Netflix on your iPhone (vs. 3 steps for Apple TV+). People will opt for a sh**ty seat in coach on an Airbus A330 vs. a first-class cabin on the Queen Mary 2 to get from London to NYC.

In the context of the streaming wars, SVOD adds momentum to the flywheel. Movies and entertainment evoke powerful emotions. The connective tissue of the flywheel is increasingly emotion. The NPS score (consumers’ emotional connection to a company) is negative to zero for ecommerce and internet companies, but it’s strong for SVOD companies. Loving Fleabag means you’ll buy your next toaster from Amazon, not Target or Williams-Sonoma. 

The result? In the last 13 months Apple and Amazon have added Disney, AT&T/Time Warner, Fox, Netflix, Comcast, Viacom, MGM, Discovery, and Lionsgate to their market capitalization. Read the last sentence again.

Get Out

I’m not even sure Netflix gets out alive. Netflix is now the US economy, vulnerable to a spike in interest rates as it takes on increasing amounts of debt to fund staggering investments in original content. The original gangster can’t rely on gross margin dollars from Mandalorian action figures, handsets, or paper towels (no flywheel). The key question is can Netflix’s first-mover advantage/skill be replicated in other markets.

The Worst-Performing Unicorn in History

No, it’s not WeWork, but Quibi. Founded in 2018, Quibi boasts a first-ballot hall of fame tech leader (Whitman) and one of industry’s great storytellers (Katzenberg). The firm has raised $1.4 billion from some of the most sophisticated, value-add investors and partners. Quibi will be stillborn. Between founding and launch, slated for next month, the streaming wars have gone from the shelling of a Polish garrison at Westerplatte to full-blown WWII. Since Quibi was announced 24 months ago, Apple, Amazon, and Netflix have spent approximately $40 billion on original scripted content as Whitman and Katzenberg do interviews with Variety trying to explain their non-strategy strategy. Over before it started.

Back to Jack (Warner)

Ironically, the company controlled by the original occupant of Bezos’s new home, Jack Warner, was subject to antitrust action by the DOJ in 1948. Warner Brothers was forced to separate production and distribution of movies from showing them in theaters.  

Fast-forward to today, when the only thing standing between Hollywood and the Night King is Assistant Attorney General Makan Delrahim, who oversees the DOJ’s antitrust division. Put another way, Los Angeles is about to become the land of the undead.

Valentine’s Day

My favorite philosopher, Alain de Botton, says love is not an emotion but a skill. As a guy I’ve tended to be more focused on solutions, and on fixing, rather than listening. Other people’s feelings, especially women’s feelings, have been overwhelming for me, in any amount. Did not want them to feel any negative emotion, especially on my account. Always managing, vs. investing and partnering. To get to the other end takes skill — tools I wasn’t taught as a young man and that I’m trying to learn now. Just ordered Alain’s The Couple’s Workbook. Can’t wait for chapter 28, “How to Complain.” 

Happy Valentine’s Day. 

Life is so rich,