Netflix vs. Disney and the New Ad Tiers

 

Over the last two weeks, many media analysts and stock market touts have been falling all over themselves to praise the tactics used by Netflix in their embracing an advertising model as of 11/3/22.

 

Long an opponent of advertising, Netflix co-founder Reed Hastings has finally accepted it. The new deal is that, if you accept advertising on Netflix, you no longer are required to pay approximately $16 per month for the service. The new ad supported Netflix will only set you back $6.99 per month. Sounds too good to be true, doesn’t it? Well, this crusty curmudgeon has some questions:

 

1)  The appeal of streaming besides some great content was that there were no commercials. Many of us have been spending an increasing amount of time with streaming options and are getting “spoiled.” You watch what you want, where you want, on the device that you want and there were no commercials. Anecdotally, several people have told me that they will happily pay the freight to NOT see commercials. Also, HBO thrived for years as many people basically bought it for SEX IN THE CITY or THE SOPRANOS. No commercials but 1^st rate content that seemed to elude traditional broadcasting and most of cable. So, how many people will enjoy paying less after being conditioned for some time to not have commercials on their favorite viewing venues?

2)  Will Netflix cannabilize itself? If the recession that pundits say is either already here or surely coming in 2023 is a doozy, will millions paying $16 now for commercial free Netflix, jump to the new $6.99 tier? If you lose your job or a spouse does, entertainment options are limited, so many may go with the low-cost version of the streaming service.

3)  Some analysts are saying no problem to item #2. Netflix may be able to garner a higher C.P.M. (cost per thousand) than other video options as they can offer pinpoint targeting in many niche vehicles. The ad dollars will more than make up for lost revenue on subscriber fees. This may be true, but the jury will be out for a while.

4)  Netflix’s ad tier will NOT have all content. In press releases they used the somewhat murky (to me) term of “licensing restrictions” preventing using their full library on the new tier. Perhaps they can work that out quickly.

5)  The commercials will be a mix of :15’s and :30’s (longer units may find a home at some point) and will be seen in series and older films. Importantly, and I think wisely for all new Netflix films, commercials will run ONLY before the movie starts.

6)  Netflix has a fabulous database. They have been tracking their viewers for years and their recommendations for programming that a subscriber may like are very good. This is a big positive as they put together advertising packages.

 

Okay, a few comments on the Disney approach. Back in 1996, Bill Gates wrote an article for the Microsoft website entitled “Content is King.” His argument was that it was content not the distribution channel that would dominate the Internet. Even today he is widely given credit for coining the popular Content is King term. Actually, Sumner Redstone used the term many years before that and, as an old media hand, I assure you that he popularized it. Regardless, the statement is absolutely true. So, to me, Disney is the content king in entertainment. They appear to be keeping their focus there and are releasing programming frequently with a built-in audience. It is not just for families with small children. Disney + raised prices a buck a month recently and I could have seen them easily doing that for some time to come. When their ad tier launches soon, the charge will be $7.99 per month with 4-5 minutes of advertising per hour and the ad-free plan will jump to $10.99 per month. I do not seeing them losing many subs with the $10.99 price point.

 

Who will win? I believe there is room for both in the streaming world. Amazon and Apple could buy either company, but the FTC would surely quash the deal. There will be a consolidation for sure among minor players in the coming years.

 

Netflix was built on content—good content. Now they have shifted gears to focus on subscriptions and ad support. Perhaps they had to as for years they borrowed billions to produce or buy the rights to programming. To me, Disney still is working on the premise that Content is King and focusing there.

 

Somewhere, Sumner Redstone is probably smiling.

 

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com or leave a message on the blog.

$1,000 Car Payments?

 

Some 35 years ago, I put together a presentation entitled “The Real American Consumer.” I used it internally at my various jobs to make sure that staffers understood that there is a world beyond their own nose and that of their family and friends.

 

For decades, I updated it every six months and once took a copyright out on it (long since expired). It basically covered income, net worth, education figures and stressed how a median was a far more meaningful statistic to a marketer than an average was. If you were to be a successful marketer, you needed to know the pulse of the people to whom you were selling. Sadly, many at ad agencies thought that they were “Everyman” and all of America were as comfortable financially as they were.

 

One statistic that I always used often generated a big surprise  reaction and sometimes disbelief from my audience. It stated that most of the time in the U.S. some 30 of the 210 Nielsen Designated Market Areas (DMA’s) had many households where their car payment was higher than their mortgage payment!

 

People on the east and west coasts often blurted out “impossible” or some other negative comment. In smaller markets in the Midwest or South, the seasoned players tended to nod and smile.

 

Well, recent events in the automotive market and a growing softness in real estate in some DMA’s has led to an actual increase in this little-known phenomenon.

 

Last week Phil Lebeau, the excellent automotive analyst on CNBC, provided a brief segment on the average car loan in the U.S. had a payment of $730 per month and some 16% were over $1,000 per month. Watch it here --https://www.youtube.com/watch?v=7x1PCA2qAbk&t=8s (if you cannot open it on your laptop, go to You Tube and ask for "$1,000 car payments, CNBC).

 

Also, the three year car loan is becoming something of a relic as struggling middle class buyers have in recent years stretched payments out to seven years and a few are incredibly doing 10 year vehicle loans.

 

With supply chain problems regarding computer chips and a shortage of used cars exacerbated by Hurricane Ian’s flooding, this situation could last for some time.

 

Many of us forget that there are many markets in the back-roads of America. The cost of living, particularly housing is lower there, but jobs are scarce, and pay is far below what we earn in major markets. Yet, car prices are relatively the same everywhere. So, if you have been in a home for several years in Waterloo, Iowa or Cumberland, Maryland or any number of smaller markets, your mortgage is often less and now substantially less than your current car payment.

 

Is $1,000 as a car payment just a psychological barrier in an inflationary era? Yes, to a certain extent, but a 10-year car loan gives me pause.

 

Also, if we move into a recession as many are forecasting for 2023, will there be a flood of repossessions as increased unemployment will make it impossible for many to continue to pay the hefty auto payments? Yet, if you do not have a car, you cannot get to work easily in most of America. So, a Catch-22 could emerge for a few million Americans next year.

 

I applaud CNBC for devoting time to this issue. It could implode in the next 6-12 months.

 

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com or leave a message on the blog.

 

 

 

Crony Capitalism

 

Increasingly these days, one reads or hears about how the capitalistic system is failing, dying or totally unjust. These are not new comments but, with the rise of social media, they are becoming louder.

 

Clearly, I do not embrace such thinking. The fault to me lies not in the capitalistic (free market) model but rather with the growing scourge of Crony Capitalism.

 

Let us define the term. Crony Capitalism is hardly a new phenomenon in the contemporary world but it occurs when there are very close ties between leading business people and politicians. The political class does favors for their friends in business via special tax breaks, government grants, and eliminating regulations that stifle their activities of their pals in specific fields. Many critics single out the United States these days as large political contributors appear to get special consideration from members of both major political parties. This tends to lead to more income inequality over time.

 

Now, over the years, I have mentioned in MR that any country that has a semblance of a free-market orientation will have evidence of income equality. Some people work harder, others are cleverer than most of us, some are in the right place at the right time, and yes, some are just plain lucky.

 

Yet, things seem to be getting more extreme. A few years ago, it was noted that the three wealthiest Americans has a net worth equal to the bottom 50% of the population.

 

This skew to a few appears to cause more than simple jealousy and envy. Canadian economist Miles Corak has done detailed work illustrating how as income inequality increases in a nation, upward mobility decreases. This idea gets a good bit of traction when polling indicates that many young adults do not see themselves ever living as well as their parents.

 

Others sarcastically call the current wealth skew “The Great Gatsby Curve”, an illusion to F. Scott Fitzgerald’s 1920’s novel about the elegant lifestyle of Jay Gatsby and his acquaintances.

 

Some examples of Crony Capitalism are:

 

1)  Inversions—large American companies with a high volume of international sales change their headquarters to a foreign jurisdiction with much lower taxes. Or, they run a subsidiary in the tax friendly location and attribute U.S. sales to that subsidiary. Their taxes due to the IRS plummet. Legal, yes but ethical, highly unlikely. International legislation is pending to combat this.

2)  The Carried Interest Trade—this one really gets my blood boiling. Carried Interest is “a share of profits earned by general partners of private equity, venture capital and hedge funds.” This is especially beneficial to hedge funds as their normal fees are baked into carried interest so they may pay only 20% tax vs. the 37% that we poor normal slobs pay for our income. Warren Buffett and hedge fund chief Bill Ackman have been strong supporters of ending this loophole. Buffett has claimed that a fund can hold shares for only a minute and the tax is only 20%. You or I would pay a much higher rate for such a short-term trade. It strikes many as ridiculously unfair and only applies to a tiny group of people among the 330 million Americans. In the recent “Inflation Reduction Act”, an early draft had the elimination of the carried interest loophole baked into the cake. Krysten Sinema, an Arizona Democrat, would only support the bill if the Carried Interest provision was left intact.  Her vote insured the passage of the bill. It turns out that she has received substantial donations from investment banks and hedge funds.

3)  Too Big to Fail—we heard a good bit about this after the 2008 financial debacle. It happens when government funds are used to socialize losses without any cost to those who caused the losses. In other words, management or their traders made very risky bets and got rewarded when they succeeded but were bailed out by hapless taxpayers when they failed. Some brass lost their jobs but no one went to prison.

 

There are many other examples including barriers to entry which government enacts to protect friendly entrenched players, government grants to key companies, coercive monopolies where anti-competitive measures are passed  by legislatures, and a blind eye that ignores existing regulations that applies to companies with solid political contacts.

 

The role of government in a free-market economy has long been said to get out of the way of business. Okay, but what about rule #2 which is to enforce the rules of the game and try for a level playing field that encourages competition?

 

Capitalism is not a perfect system but it is not nearly as flawed as its critics say. If it goes down in parts of the western world at some point in the future, to me it will be because Crony Capitalism not authentic Capitalism has ruined it.

 

You may reach Don Cole at doncolemedia@gmail.com or leave a comment on the blog.

 

 

 

 

 

 

The Post Covid World and The New Reality

 

While the Covid 19 pandemic is still very real, many feel that it is beginning to wind down although rational people do fear a resurgence at some point. Many of us plan to get booster shots later this year and perhaps annually for many years to come.

 

I receive a great deal of e-mails from readers commenting on how things have changed for them over the last 30 months. Some actually see it as a surprise positive. A few ad agency principals have written that they have negotiated lower rental costs for their shops and others have saved by moving to smaller digs. With fewer staffers appearing in the office five days per week, some companies of all stripes have given each staffer a locker to store necessary items. They have conference rooms and a few traditional offices for very senior team members. Everyone else comes in several days per month.

 

It sounds great at first blush. Yet, what is it doing to some cities? Yes, you save money on rent. Most of us would not shed many tears for landlords but commercial real estate is getting hit hard in many localities. Members of cleaning crews have been laid off as you do not need a big staff when you are nowhere near full occupancy. Some say office space can be converted to residential apartments. Yes, but that will cost millions and may take years to transition.

 

Many humble services have disappeared and not just in top 10 cities. Food trucks are fewer and scrappy street vendors have moved on as well. Delicatessens often cannot survive with fewer people in nearby offices daily and mid-priced restaurants are struggling more than ever. Retail has been savaged by Amazon but noon time shopping in major metropolitan areas is but a memory in most instances. Mass transit has to be losing more money than ever these days although accurate data has been hard for me to find. Uber drivers? A mixed bag market to market.

 

The financial media provides detailed coverage of Apple, Amazon, Microsoft, Alphabet (Google) Tesla, Meta (Facebook), Disney, Netflix, and Berkshire Hathaway. I devour it daily. Yet about 50% of all jobs come from small businesses and they account for 42% of Gross Domestic Product. What happens when these smaller businesses get hit hard and then find that the seismic change since the Covid outbreak is likely not to be temporary?

 

The new reality is about to arrive. And, there is a body block that is likely to add to the discomfort. Federal Reserve Chair Jay Powell came on strong during a brief but tough speech at the recent Jackson Hole wing-ding for billionaires. He sounded as if he were Paul Volker 2.0 (Volker was Fed chair in the late '70's up to the mid-1980’s who burst the inflation bubble with record high interest rates that triggered a deep recession. I admire his courage tremendously). Powell pledged to keep raising rates and admitted that the Fed’s stance would cause some pain in employment markets. Whether the Fed will stay the course or blink is above my pay grade and perhaps yours as well. Yet, a possible/likely recession on top of this shift in commuting and work practices could really hurt. My guess is that such a recession would be shallow but might linger for a long time as the economy would need extra time to adjust to this new reality.

 

Surprisingly, some ad agencies and other types of service and tech firms tried giving staffers a locker but no formal office 20+ years ago. Results were mixed but top management often felt that they could not monitor staff effectiveness well. Now, in a digital age it works well in many situations with the big bitch being that newcomers want to work remotely from the get-go without learning corporate culture or basics. Also, they do not know the personalities or real role of key players in leadership.

 

All of us know that the only constant is change. My opinion is that Covid 19 sped up the rate of change in many areas significantly.

 

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com or leave a message on the blog.

Creative Destruction Revisited

 

Joseph Alois Schumpeter was an economist from Austria who settled at Harvard University in the last two decades of his life. He was colorful and controversial. One of his lasting legacies is that he was perhaps the first major economist who focused frequently on the role and importance of entrepreneurs in a free market economy.

 

From this interest in entrepreneurs in a capitalistic model came a concept that he popularized if not invented. It has become known as Creative Destruction. Simply put, it states that innovation constantly destroys the existing old structure and creates a new one in an industry or even an entire economy.

 

Entrepreneurs bursting with ideas created significant increases in productivity and this leads to the demise of older, less established players or industries.

 

I have always loved this concept and we can see both historically and recently how it rings true in many situations. The industrial age took over from the agrarian economy and then electricity and automobiles changed the face of the world and how we lived. Yes, buggy whip manufacturers went broke in the early 20^th century but the automotive industry opened up millions of jobs throughout the western world and triggered the growth of suburban life.

 

With the word “destruction” as part of the term, clearly, everyone is not a winner when the winds of change roar through an industry. Yet, over the years, when one door closes due to creative destruction a few new ones open up which creates jobs and prosperity for many. Certainly, some people lose out as their skills are no longer needed. Politicians always promise job re-training plans but they never seem to live up to expectations.

Pressure groups are a different story. Affected industries lobby their congressmen and ask for protective tariffs or tax breaks if foreign players are upsetting their pot of gold. Sometimes they succeed and the consumer suffers.

 

Why do I say revisit Creative Destruction? Well, to me this time it is different as a result of globalization. When jobs are eliminated increasingly new ones are not created that are equal or higher paying. Shoe manufacturers went abroad years ago and those jobs were not replaced. Consumers may grouse about wishing to buy American made but do they really want to pay $220 for a pair of athletic shoes? That would be a reasonable price if many more were made in the United States. So, once a job leaves the West these days, it almost never returns due to outsourcing (producing overseas for lower cost of labor, land, capital or energy).

 

Creative Destruction is not limited to heavy industry. Amazon has killed thousands of retail jobs and small retailers and robots are a bigger presence in their distribution centers. Newspapers got hurt by the 24 news cycle in cable and then by social media as did many magazine titles. Streaming video has taken a huge bite out of advertiser supported TV and cable channels.

 

“Experts” say that the solution to lost jobs is simple—education and retraining. Well, some people resist it and others cannot move from their locations. Also, does this still work when we are in a global economy where high skill levels are readily available via an internet connection for an often tiny fraction of the salary required in the U.S., Canada, or parts of Western Europe.

 

Creative Destruction has always tied into my sunny view of the future. Advances in technology and medicine will make life better for most of us and in tech areas will also help fight climate change perhaps faster than legislation.

 

Yet, in a global economy will the level of displaced people working in dying or soon to be obsolete jobs be out of luck as no door will open for them within a few thousand miles?

 

The major media have rarely addressed this topic meaningfully. It is not a simple issue and cannot be addressed in a 30 second sound bite.

 

If you would like to contact Don Cole directly you may reach him at doncolemedia@gmail.com or leave a message on the blog.

Netflix and Advertising

 

Over the last few weeks, the media world has been buzzing about Netflix discussing their plans to accept advertising on their service. For years, management has said that they would NEVER have advertising on their programming. Well, I suppose that even the brilliant Reed Hastings has learned never to say never. Other services such as Warner Brothers/Discovery and Paramount may be changing their models as well as debt service will hit them hard in 18-24 months.

 

The Netflix announcement was greeted positively by some in the media/advertising world and even a few Wall Street analysts. The logic flow is that Netflix has perhaps up to 800 million possible viewers as many subscribing households have 4-5 users. That is quite a platform for advertisers and by careful matching of advertising with content there could be a nice fit. A very well-known media executive who pledged me to secrecy weighed in as follows (expletives deleted):

 

“Don, we are really excited about advertising on Netflix and other streaming services. Remember how 30 years ago, we talked about narrow-casting on minor cable networks. Well, this is narrow-casting on steroids. Think of the products that we can sell to young adults who love horror films or sci-fi. That may be garbage to you and me but many enjoy it. Or, how about the arcane British and Australian mysteries that you are always recommending to me? The audience has to be aged 60+, well-educated and affluent and we can target them beautifully”.

 

I confess to being a bit skeptical of my friend’s enthusiasm. We have gotten spoiled by the streamers. After years of viewing a huge portion of our video time commercial free, do people want to go back to an advertiser supported model even if they save several dollars/month? Think about it for a moment. When you go to You Tube, do you dutifully watch the 15 second spots before a video? Advertising avoidance continues to march and why should we be so accepting of it on a platform that up to now has been commercial free?

 

 

Churn

 

Young adults were way ahead of the curve on this. They think nothing of subscribing to a service for a few months. Then, they proceed to binge watch a few series that are very popular and then cancel. A year or so later, they bounce back. After a dozen years plus, I just cancelled Netflix as I found most of my viewing was on Apple TV Plus, Amazon Prime Video and British based Acorn. Will I come back to Netflix? Absolutely, at some point for sure. Yet, I am certain that I will not linger for years this time around. So, if an old geezer such as I and his ever-youthful wife will cut the services back and forth in a manner similar to millennials, that has to hurt some streaming services. Amazon Prime Video will largely be immune to churn as it comes with an Amazon Prime subscription which most consumers would not wish to lose.

 

Consolidation

 

Since 1900, there have been about 3,000 auto manufacturers begun in the U.S. By the end of the 1920’s, The Big Three (General Motors, Ford and Chrysler) had a combined market share of over 90%. The same thing will happen in video streaming with some players going under but many getting swallowed up by the solvent giants. Five to seven years from now, I posit that we will be down to 4-5 meaningful players tops.

 

Conclusion

 

The next few years will be make or break for some players in the streaming space. Some must go the advertising route as they cannot make it on subscriptions alone and continue to produce world class programming. As always, stay tuned!

 

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com or leave a message on the blog.

The Greatest Business Model

 

Over the years, I have received a great deal of mail about my Media Realism (MR) posts. Some 99% of the response comes from readers who do not post on the blog but maintain their privacy by e-mailing me directly at doncolemedia@gmail.com

 

One thing has stood out—every month or so, someone asks me what company or companies out there has a perfect business model. The simple answer, of course, is that the perfect model does not exist. Many do not accept that and ask which company has the best? Most people who write to me feel that Amazon is the best and, until recently, a number felt that Netflix was #1.

 

Here is my answer. No one has a complete handle on all the businesses across the globe of any size that could be analyzed but my “vote” goes for Costco.

 

While Amazon gets high marks who their stunning array of products, lightning-fast delivery times and customer-centric nature, I give Costco the nod when you look at all metrics (Full disclosure—I am not nor have ever been a Costco shareholder. That could change someday  ).

 

In brief, Costco Wholesale is a membership warehouse retailer that has been around since 1983. Founded in Seattle, Washington, it now operates 832 locations in 14 countries and continues to grow regardless of the state of the economy. In terms of volume, it is the 3rd largest retailer in the world.

 

Why do I admire them so? They, as is certainly true of Amazon, are laser focused on being customer-centric.  And, they resemble Amazon in that they think long term, in fact, very long term. As Costco has grown, so have the benefits to members. Costco basically caps profits of 15% on every item while most retailers go for up to 30% or more in many categories. The firm operates on a slim profit margin of 2% and makes the majority of their operating income on membership fees. You get a 5% discount on all  warehouse sales if you use the Costco Visa card. They treat employees quite well and pay better than other retailers. Shareholders benefit nicely with increasing dividends and somewhat recession resistant share prices over the years. I have tried to time visits to my nearest warehouse to avoid crowds but the parking lot is generally full.

 

Costco critics do not like that you often have to buy in bulk. This is because they can get better deals on merchandise by having a limited number of SKU’s (stock keeping units). You do not find 45 different toothpaste SKU’s at Costco, for sure. What they do have is great value. So, Costco may not be great for a single person living in a Manhattan studio apartment. I did suggest to one that he go long a few cases of tuna fish and store them under his bed. For homeowners for kids, Costco makes great sense.

 

A spectacular bargain is their ¼ pound hot dog and 20-ounce soda (plus a refill) that weighs in at $1.50 as it has been for decades. Not a healthy snack but long term customers love it.

 

These are attributes that have given Costco what Warren Buffett calls a durable competitive advantage. They are in the game for the long pull and have built loyalty among customers, employees and shareholders even though short term earnings may be suffered.

 

Speaking of Warren Buffett of Berkshire Hathaway, his long- term financial partner, Charles T. “Charlie” Munger joined the Costco board of directors in 1997. Many Costco policies to me look to have Charlie’s fingerprints of ethical treatment of all stakeholders all over them.

 

Companies of all stripes could learn a great deal by studying Costco. They move steadily but patiently forward quarter after quarter. The company has focus and the macroeconomic environment be damned.

 

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