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Thursday, January 28, 2016

Netflix Concerns

In recent years, Netflix has been a star of the media world and of the stock exchange. The company is widely credited with putting Blockbuster under (along with Blockbuster mistakes), is definitely the player that made binge viewing mainstream, and is also said to be harming cable television a great deal. Recently, when discussing Netflix with a few friends, we began to see that there may be some problems on the horizon.

Netflix is certainly a phenomenon. Speaking personally, I confess to loving the service. As an old film buff, I am able to find some hard to get titles and often stream them without waiting for a DVD to be delivered in the mail. Or, I can re-watch a film that I saw 30+ years ago. With more people becoming “cord-cutters” each month, it appears that Netflix along with Hulu or Hulu+ is an important component in video delivery for people who no longer have cable or satellite TV.

Why the concerns? It is really pretty simple. Over the years, I have observed that Netflix had an almost bullet proof business model. The viewer could watch thousands of films or episodes of TV shows on demand. If a subscriber were busy or traveling, Netflix still received their subscription fee regardless of usage.

A few years ago, Netfllix began to produce their own original programming. "Lilyhammer" was the first effort followed shortly thereafter with the wildly successful and award winning “House of Cards” and then “Orange is the New Black”. Some critics praised it as an example of vertical integration. They produced the show, put in on their system, and the service model had all users being payers. Sounds great--not unlike an Exxon/Mobil or a Royal Dutch Petroleum which finds the oil, refines it, ships it, and sells it to you at the pump. They control the whole process.

What can be wrong with that? My friends and I have a theory. The movie picture and TV businesses are rough.  One old colleague said, “It is a glamorous but really crappy business. Notice how many executive producers films have now? Some are Wall Street or Silicon Valley types who have made a bundle and have “gone Hollywood.” They may lose a few million, love being on the set, going to parties and THINKING that they matter.” Most films do not make money and over 70% of new TV series historically die in the first season. The original business model was elegant in its simplicity. Netflix paid a rights fee for their programming and consumers paid a monthly subscription fee to Netflix. Now, they are a TV network and motion picture studio. The company has announced plans for $5 billion in 2016 to be used for production of original programming. What if most of the new entries bomb? Can they raise subscription rates several dollars overnight to made up for artistic failures?

Netflix has announced a good bit of international expansion. On the drawing board is entry in to South Korea, Hong Kong, Taiwan and Singapore. Great. They may need it as growth in the United States appears stalled the last few quarters.

Look, we media graybeards love Netflix as a product and still see it as a major disruptor to the advertiser supported video world. Yet, their model has changed rapidly. If the expensively produced new series do not bring in substantial incremental subscribers or if a possible global recession slows growth overseas, their status as a bulletproof player in the media world could end very quickly.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

Thursday, January 21, 2016

Thinking Beyond Stage One

This morning I finished reading Thomas Sowell’s APPLIED ECONOMICS (Basic Books, 2009). Like all of Sowell’s books, he takes a subject that is often too dense for most readers, Economics, and make it clear and understandable.

The subtitle to the book was “Thinking Beyond Stage One.” Sowell talks about how so many ideas for economic policy are superficially appealing but often cause long term problems because most people never ask the question-- “And then what will happen?” after the policy is implemented. He gives marvelous examples of how sincere and well intentioned leaders may think hard about POLITICAL consequences but have not thought out the long term economic or social results of their actions. It is a fine read and makes you check your initial premise on an issue at every turn.

This idea of “Thinking Beyond Stage One” strikes me as relevant in the world of media strategy these days. A few young planners have contacted me in frustration about the superficial nature of what is going on within their departments or entire shops. Here are two of the best examples:

The first person was a young lady who asked me a thoughtful series of questions about TV attentiveness by daypart. I told her that 30+ years ago many of us would put probability of exposures weights on each daypart when putting together the optimum mix. For example, we might set primetime at a 100 index, late night at 75 (many asleep during programming) or early morning at 65 as viewers were not viewing but making breakfast or school lunches for kids or maybe shaving or showering. Sometimes in the ’80’s, an anchor on The CBS Morning News might have said, “If you are away from the viewing area, you might want to see this,” which was a clear admission and recognition that attentiveness had to be low from 7-8 am. My young friend was interested but her boss said she was complicating things way too much. “Just put together an efficient and affordable daypart mix and screw the research that the old man sent you,” is a sanitized version of what she was told. Being a bit of a terrier, she came back to me with the following: “Don, if you used those weights successfully 30 years ago, what would you use now? Most of us have another device going when we watch live, about half of us have a DVR, commercial free Netflix share is growing and You Tube takes up more time with many of us, so the daypart registration weights that you talked about using before I was born (I laughed out loud at that) have to be much, much lower today.” I had to agree but have not seen any updated research that truly reflects 2016 attentiveness habits to TV. We used to use probability of exposure weights for magazine ads as well depending on size and position in the book. How much of that is still done? So, it seems that even though the landscape has changed dramatically many people are not Thinking Beyond Stage One.

A young man hit me with a similar lament regarding media mix. This is an age old question but superficiality still seems to reign. How much of each medium is enough? He finds that he is using more on line and mobile and Facebook as he can track results better than with many conventional media options. “I know that 100% digital is a mistake for all my clients right now but I now lay in the digital (measurable) vehicles first. Once I have a base there, I move to TV, Radio and Print (if I have the money). If I try and discuss media mix options with my boss, he gives me 30 seconds and only asks if I have cleared the mix with the creative team.”

Young staffers need encouragement. I realize that part of management’s role is to use time efficiently and not get mired in analysis paralysis. Yet if you are a supervisor in a media group or an agency principal, try and dig a bit deeper and think about the long term consequences of your actions. Are you Thinking Beyond Stage One?

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

Thursday, January 14, 2016

The Ever Changing Top 1%

These days the press and politicians talk incessantly about the top 1% in American society. Each day, it seems, as Senator Bernie Sanders delivers his passionate and fiery stump speech, he states “and the top 1% of Americans earn 22% of the national income.” The purpose of this post is not to trash Senator Sanders. It is, rather, to dig a bit deeper in to the top 1%. What I have found will surprise many of you and perhaps shock some as well.

First, let us define terms. Numbers float around and change constantly but as I write, IRS data puts the top 1% of household income at about $394,000. It may be higher the next time the report is released or adjustments are made by an economic forecasting team. For this post, let us simply accept that.

Now, when you read comments about the top 1%, they tend to discuss these fortunate individuals as being a PERMANENT force as locked in as the 19th century British landed gentry (the Downton Abbey crowd, for example). In his thought provoking 2014 book, “Capital in the Twenty-First Century”, French economist Thomas Piketty essentially says the 1% are a world apart and “stand out in society and exert a significant influence on both the social landscape and the political and economic order.” Were he describing the top 1% in WEALTH, I would agree completely. More about that later.

The main issue that startled me about looking at the top 1% in income was how much turnover was in that group. Only half of the people with these nosebleed incomes in a given year are still there a decade later. And, it is even more pronounced among the super earners who have the 400 highest incomes in the country. Only a quarter of the top 400 last for 10 straight years. Part of that is because incomes at the high end are largely from investments which are far more volatile than virtually anyone’s salary base.

Here are some startling (to me) factoids from the Panel on Income Dynamics which is derived from rock hard IRS data:

--Some 45% of Americans will take advantage of food stamps or Medicaid before age 60.
--70% of American workers will be in the top 20% of earnings for at least one year prior to age 60.
--53% of Americans will be in the to 10% for at least a year
--11.1% will be in the top 1% for at least a year
--Only .6% of the population will spend 10 consecutive years in the top 1% of earners

Are these numbers real? I assure you they are. How is it possible? We live in a country with a relatively free market. So, we have what economists may describe as a fluid economic order. People have good years and bad.

Before you say that you will never reach the top 1% in a single year, consider this.  If you have owed a house for 10 + years in a suburb of New York, Boston, Washington, San Francisco or just about anywhere in Hawaii and sell the place this year, the odds are overwhelming that for, this year, you will be in the top 1%. Do you have an aging parent or aunt or uncle? If they pass away, and leave you a reasonable inheritance you will join the lucky top 1% for 2016 when the inheritance is added to your household income. Next year, you are back in the pack. Ever get lucky with a tech stock that explodes upward like a Roman candle? Same thing. You have a big year.

So each year, many thousands come in and out of the top 1%. A few years back, SPORTS ILLUSTRATED published a stunning and sad piece about how 78% of NFL players declared bankruptcy within two years of retirement. Impossible? Remember, most players do not make it past four years and are ineligible for an NFL pension. Their income plummets and they fall from the 1% abruptly. Some may wind up on food stamps or some kind of assistance.

How about the top 400? Why the turnover? Well, some 40 people made over $1billion last year. Many were hedge fund managers. This year, some may lose money so they will have a negative income despite significant passive income (dividends and interest). Their net worth may be just great and they may still be billionaires in net worth. Yet they have fallen from the top .01% to the bottom with zero net income.

So the real issue for the reformers, politicians and even some Nobel laureates who should know better is to look at the concentration of wealth and not at income stats which I hope to have shown are very erratic at the top end. If a confiscatory income tax were put in to effect against the top 1% in the United States it would hurt many who were striving for accumulation of wealth (many of you younger readers). Those who already had significant wealth via an enormous asset base might find higher taxes an annoyance but it would not hamper their lifestyle or influence much at all.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com