The last week of April 2019 — make a note of that week, because it was the week that the subscription video on demand (SVOD) market got very interesting.
SVOD Wars 2: The empire strikes back but will there also be a new hope?
In the world of marketing, they used to say ‘content is king’. It’s not such a popular phrase anymore, except in one area — the SVOD market. It’s so easy to enunciate that phrase incorrectly and it doesn’t really sound right; it’s an unsexy word to describe a market that literally creates sexy content. But it is emerging as an important area for investors to consider having exposure to — after-all, it is one of the few B2C (business to consumer) markets to currently enjoy rapid growth.
Since I covered the SVOD business recently, I don’t want to go over the same old ground, instead I want to talk about the last week of April 2019, something called regression to the mean and why they are both so important.
The fact that the leading player in this business (Netflix) has 139 million subscribers, gives an indication of scale.
It is hard to put a value on all of the key players, as, for most of the contenders, the parent company has interests in other areas. But we can say that Netflix is worth $166 billion and Disney $241 billion. In fact, shares in Disney are up by more than a third over the last 12-months, Netflix is up 11 per cent, but back in July 2018, Netflix had a higher market cap than Disney.
In the final week of April 2019, Disney (the empire I refer to in the headline) released what may well turn out to be the most successful film ever. Meanwhile HBO, owned by Time Warner, owned by AT&T, released perhaps the most talked about episode of a TV series ever.
Aside from the fact that the third episode of season eight of Game of Thrones is mainly shot in the dark, and the side of lightness applied some awful military tactics, I think the episode did in fact provide just about the most dramatic 88 minutes of TV drama I have ever seen.
As for Disney’s movie, Avengers: Endgame, it was one of the most hyped films in history, yet I think it did something extraordinary, it managed to live up to the hype.
And the two big players in the SVOD market, Netflix and Amazon didn’t even get a look in.
Okay, the Disney movie was released at cinemas, so it is not a SVOD product yet, but even so, the company that gave Mickey Mouse to the world is winding up nicely for its assault on the SVOD market
Regression to the mean
In the long run, we are average.
We do, broadly speaking, live in a transparent age. We know how Apple managed to become so successful, we know what companies did to become market leaders. If their dominance is down to a network effect, meaning their success breeds more success, then such companies can appear invulnerable. But flashes of genius — such as the iPhone — are rarely repeatable, in the long run.
The world’s mightiest companies do fail. Of the 100 largest companies at the beginning of the 20th Century, by 1988, 19 were still in the top 100, 28 had survived and became bigger after allowing for inflation, and 29 had experienced bankruptcy or something similar.
Fund managers can fall victim to regression to the mean, as once seemingly indomitable fund managers experience one bad year after another.
Some manage to avoid the curse of regression to the mean over an extended time — Warren Buffett — some deal (or dealt) with the threat of regression to mean by experimenting, changing image, and learning to move on if it doesn’t work — David Bowie and Madonna.
But in the movie business, regression to the mean is a curse which some try to overcome through lack of originality.
The movie whose titles inspired the headline to this article is an example. Star Wars was actually a rip-off of a Japanese movie called Hidden Fortress from director Akira Kurosawa, but set in space. But George Lucas was open about this, he even went out of his way to introduce Kurosawa to the great and good in Hollywood. But Star Wars added to this some fairy dust. What did Lucas do? He got lucky discovering Harrison Ford, and he was lucky that John Williams was in such form with the music. And he also created a mysterious fictional religion — Jedi — which just appealed to the imagination of millions. I say this to illustrate regression to the mean. The second and now almost complete third trilogies have not re-captured the Star Wars magic. Why? Because of regression to the mean.
Disney and HBO — And thus AT&T — are now basking in the halo created by The Avengers and Game of Thrones respectively. Disney itself is losing out to regression to the mean via Star Wars and temporarily rising above it through Marvel.
But it will strike.
The solution lies with quantity — throw enough of that brown stuff against the wall and some of it will stick — and lack of originality; Netflix is throwing money at zombie shows and shows about having to be silent or something bad will get you. Lack of originality is a method of playing it safe.
They are applying formulae and throwing money at this. But sooner or later luck will smile and Netflix will find its own Game of Thrones/Avengers: Endgame. Then that will become its new hope.
What lesson can investors make? Right now, Disney and HBO’s parent’s parent (AT&T) sit on very valuable assets — they will be able to cash in from these assets for years.
But don’t write Netflix off, it’s time temporarily rising above regression to the mean will come, in the meantime, even without this, it is doing pretty well.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees