Firms Vying as Next Netflix Face Looming 'Day of Reckoning,' DEG Told

Warner Bros' decision to release its 2021 film slate simultaneously to theaters and its HBO Max subscription VOD service was an “overcommitment,” Wedbush analyst Michael Pachter told a virtual Digital Entertainment Group Expo Wednesday. “AT&T bit off way more than they could chew when they bought Time-Warner.” Pachter said the media company is “trying to package HBO Max and sell it and maybe later sell the studio.” AT&T is trying to shore up the value of HBO Max “because they think they’re going to get a Netflix multiple on that,” he said. The company is making "bad decisions for the creatives,” he said, trying to maximize profit for the content "by shoving it onto HBO Max.”

Taking a swipe at AT&T CEO John Stankey, Pachter said, "It’s hard to get in the head of somebody who actually doesn’t know what they’re doing” saying the former WarnerMedia CEO is “in way over his head.” Stankey didn’t respond to a request for comment Thursday.

The current direct-to-consumer trend, driven by theater closures during the pandemic, “is a profit deal” for media companies, said Pachter, comparing the rush to D2C services to the Steve Martin movie, The Jerk: “It’s all about giving away a bunch of crap and hoping people will pay for it.” Universal tried to “split the baby” with a 17-day theatrical window, and Disney this week announced day-and-date release of Black Widow in theaters and on Disney+ for a $30 rental fee. Deadline reported Warner will have a 45-window of theatrical exclusivity at Cineworld’s Regal chain starting in 2022; this year, its films are being released simultaneously on HBO Max and in Regal theaters.

Pachter disagreed with John Calkins, CEO of transactional over-the-top video platform company Row8, that D2C trends were already in motion, then accelerated by the pandemic. “I think that the studios are going to maximize the theatrical window again,” said the analyst, theorizing a shorter 45-day window vs. a 70-day window. Pachter believes once the pandemic eases, exclusivity will return to movie theaters because of “all the constituencies” in the film industry value chain. “Directors like to win Best Director” and actors like the visibility they have on shows like The View or Access Hollywood, driven by new film releases ahead of a theater run. “When you release a movie like Bird Box direct to Netflix, what does everybody get paid? It’s impossible to actually track how much revenue that actually generated,” he said.

Release of a single high-profile title like Black Widow or Mulan won’t drive SVOD subscriptions, Pachter maintained. Consumers might open their wallets for the entire franchise, such as the Star Wars movies, but there won’t be a spike in subscriptions after the Black Widow release, he said, expecting studios to abandon the strategy “pretty quickly.” He said studios would be better off pricing premium VOD releases in stages, with prices decreasing the longer out a movie is held. Consumers aren’t going to pay $20 for most movies, though they would be willing to wait longer and spend $6, he said.

Studios have fallen into “lockstep pursuit down the subscription streaming dream,” said Row8’s Calkins, though there are different approaches. He speculated D2C subscription offerings are driven by the “Netflix stock multiple” or Disney’s early success with its Plus service. “Everybody’s feeling like they’ve got a shot at that brass ring,” he said, questioning whether the model is valid or sustainable long term. When the “newness of subscription streaming wears off,” there could be a “day of reckoning,” he said. Pachter compared media companies’ rush to offer a D2C service after Disney+ launched to “Tesla getting such a crazy valuation and then the next thing you know, every car maker has an electric vehicle.”

Economic models are less favorable for studios in D2C, said Pachter, citing the sum of theatrical box office, DVD sales and rentals and VOD in the traditional model. “If you start substituting an $85 cable bill for a $15 Netflix subscription, somebody lost $70,” he said, saying retransmission fees generate most profit, not MVPDs. In the D2C world, if a consumer spends the same $85, subscribing to five services and consuming three times as much content, “somebody loses.” Creatives and their publishers can’t be paid if the total pie stays the same but people consume more, said Pachter. “It’s in the best interest of everybody in the value chain to maximize profit, which means theatrical followed by DVD, followed by PVOD or VOD -- and then make the streaming guys wait three years."

Consumers are lost and confused in the D2C environment, Pachter said, citing his own experience watching The West Wing in December and then seeing a Netflix banner saying it was leaving the streaming service soon. He went to Peacock since it was an NBC show, but it wasn’t there, so he Googled and discovered it on HBO Max. Consumers “get frustrated easily, so somebody’s gotta be the aggregator,” he said, noting that has traditionally been MVPDs' role. “I don’t know who it is going forward.”

Looking ahead, Pachter said most TV content doesn’t have to be viewed live, aside from sports and certain shows where immediacy is important, such as American Idol or The Bachelorette. “Short of those, pretty much everything can be archived and provided on demand.” The analyst believes virtual MVPD services such as YouTube Red or fuboTV “will take over, and cable is doomed.”

Pachter blamed the cable industry for allowing Netflix deals, saying it “cut its own throat.” Consumers “have been trained that you can just watch anything you want on demand,” he said. “People are pissed” when they have to wait a week to watch the next episode of a show like WandaVision from broadcast TV “because we’ve all been trained to expect to binge it.” NCTA didn’t comment.

Calkins noted “some stall” in vMVPD subscriptions and that prices keep “creeping up,” making the streaming model not much different from traditional pay-TV. On what will drive success for vMVPDs, Pachter said content owners should “get religion and decide they can’t afford to give content away” and “just withhold it from all these people.” The only way to watch ABC would be to tune in to ABC, he said. “If they did that, they could keep retransmission fees high. So far, they’re all really stupid,” he said, citing a “race to the bottom.”

“Everybody thinks they have to have a streaming alternative,” said Pachter, predicting a “tipping point where cable just dies.” That would be bad for content creators but “great for consumers” who will get content “below cost,” he said.