Day: April 29, 2020

While it is impossible to predict exactly what businesses in the (broadly defined) entertainment space will benefit from Coronavirus and which are likely to fail, some basic and timeless principles help understand the likely winners and losers. There are two keys for successful entertainment company.

First, an abundance of content is the biggest revenue driver. While quality is obviously important, nobody wants to consume bad content, quantity is also critical. Content is a consumable and once it is consumed people look for more, if it is not available they will find something else. Successful operators constantly deliver new quality content to keep customers engaged.

Second, the subscription model is emerging as the dominant model in the entertainment space (not necessarily a new phenomenon, as Netflix and Amazon Prime have been around for years), growing from its existing stronghold to other parts of media. Additionally, subscriptions driven by Coronavirus are more likely to stay resilient in the aftermath of Covid19 as they will require action to cancel rather than asking people to continue making purchases.

Using this filter of abundant content or a compelling subscription model, it becomes easier to ascertain what companies and products will emerge from the Coronavirus situation in a good position.

Winners

There are likely winners that will emerge from the current situation. Those that I consider most prone to benefit include:

• TikTok. While TikTok was already experiencing amazing growth, Coronavirus provided the rocket fuel. TikTok is a video sharing network used to create short dance, lip-sync, comedy, and talent videos. Since it relies on user-generated content, its increased traffic driven by Covid19 has led to increased content, creating a network effect that makes it an even more compelling destination for customers.
• Houseparty. Houseparty is a social networking service that enables group video chatting through mobile and desktop apps. Since Houseparty relies on users to create content, in this case chats and virtual parties, it enjoys the same benefits as TikTok, increased use has led to increased content. Already a winner as it was acquired last month by Epic Games (Unreal, Fortnite, etc.), Houseparty is poised to grow its first party base and spread into Epic’s family of games developed using Unreal.
• Netflix. It is hard to say the largest streaming media company can benefit further, but Netflix is likely to see a long-term benefit. With the broadest range of programming including a plethora of original programming, Netflix cemented its value to existing customers while bringing in new subscribers. One only has to hear the words Tiger King to know how Netflix has won.
• Amazon Prime. Amazon Prime, Amazon’s streaming video service, which also includes free delivery on Amazon purchases, is likely to enjoy the same benefits as Netflix due to its abundance of content. Given its huge library of third-party content coupled with a large amount (though less compelling than Netflix) of original content, very few customers (if any) are likely to have become satiated. New subscribers are apt to continue their subscription while existing customers are less prone to churn as they have experienced the value of their Prime subscriptions.
• Steam. Just as video streaming services with abundant content like Netflix and Amazon Prime will benefit, Steam will profit in the video gaming space. Steam describes itself as the ultimate destination for playing, discussing and creating games. Like Netflix and Amazon, it has the largest catalog of quality PC games and its library continues to grow faster than customers can consume the content. This ever-growing library will help it sustain the growth from Covid19.
• Coursera. Electronic learning was already a sector in its ascendancy and the increasing number of people looking for options to stay busy while in lockdown or quarantine sped the adoption of this sector. Coursera has the most courses from top learning institutions and given the importance of breadth and depth of content, it is thus likely to be the biggest winner in its space.
• Udemy. Udemy is similar to Coursera in that it is an online learning platform. Unlike Coursera, however, Udemy crowd-sources its content, allowing individuals and companies to create content. This crowd-sourcing strategy helps it offers thousands of courses on a huge variety of topics. With quantity of content paramount, Udemy is likely to benefit greatly in the aftermath of Covid19.
• Hit Free-2-Play games. Early data has shown that Coronavirus has increased downloads almost across the board for mobile and free-to-play games but the revenue increase is more localized to the top games. This phenomenon reflects that most hit games already have a deep reservoir of content, giving players many options and incentives to spend. This growth is likely to sustain after Covid19 as the more players spend in the game, the more invested they feel and are thus less likely to churn.

Losers

While there are multiple winners in the entertainment space, Coronavirus is also likely to highlight the companies with a flawed value proposition.

• Quibi Quibi is a new streaming service focused on delivering professionally created content in 10 minute episodes. Founded by Jeffrey Katzenberg and Meg Whitman, it has raised almost $2 billion. Quibi’s lack of content spells disaster, despite what you may think of Quibi’s business model, execution or ability to raise investment. While Netflix and Amazon Prime have had years to develop original content, Quibi has had less than two years and it shows in a very non-compelling catalog. Due to its model, Quibi also needs to create six episodes (at about 10 minutes each) for every episode of original content a competitor creates (at 60 minutes each) to deliver the same value to the customer. Moreover, as both Netflix and Amazon were able to launch and grow their businesses using third party content to supplement their initial offerings (in the early days it was their initial offering) and give a broad catalog to customers, as Quibi is introducing a new format there is no third party content available. Moreover, while TikTok can generate almost unlimited crowd sourced content, Quibi has shunned this option. This lack of content spells doom for Quibi.
• Apple Arcade and Google Stadia. Apple Arcade and Google Stadia are two streaming games services on Apple’s iOS and Google’s Android
  platforms, respectively. While both are subscription services and should thus benefit, content dooms them. Although they both offer a somewhat large number of games, they must compete with the near unlimited number of games on their own app stores. Layering on to this challenge is that most mobile games are free-to-play, you can enjoy the games without ever making a purchase, so they do not have a compelling value proposition for their subscriptions.
• Movie theatres. One segment of the entertainment space whose existing challenges were accelerated by Coronavirus are movie theatres. Unlike streaming services like Netflix or Amazon Prime, theatres do not have a plethora of content or offer a subscription service. Thus, they are unlikely to recapture many of the customers they have lost.
• edX. edX is an online learning platform similar to Coursera, founded by MIT and Harvard universities. Unlike Coursera, though, edX has a much more limited catalog of courses. Given the importance of content, it is likely to fall behind its more robust rivals.
• Mediocre Free-2-Play games. The rich get richer. While the hit games are enjoying a big boost in revenue due to players staying at home, mid-tier games are not seeing a similar uplift. While their downloads have increased, it is not translating into more in-app purchases. In part, this activity is driven by the top games having a very deep pool of content, be it virtual goods, levels, battle passes, etc. Their success allows them to create even more content as content creation is resource intensive. In the aftermath of Covid19, the gap between the haves and the have not games is likely to have increased while customers who sampled games with limited content are probably done with those games.

Maybe

There is one entertainment offering that I am not willing to call a winner or loser yet, Disney+. There are mixed signal using both the content and subscription screen.

While Wall Street has lauded the initial subscriber numbers for Disney+, I am not convinced it will be a long term success. In only a few months, more than 50 million people subscribed to the service, exceeding even the most optimistic projections. Given these subscriber numbers, it is easy to assume that the service will be a long-term success approaching the value of a Netflix.

The concern, however, should be the depth and breadth of content. Unlike Netflix and Amazon Prime, Disney+’s content is limited to the Disney family (Disney, Star Wars, Marvel, National Geographic and Pixar). While this is very compelling content for many (about 50 million) initially, will it sustain? People consume content and even this large back catalog of offerings will be old to many of the 50 million in a few months or a year. Relying on first party content, will Disney be able to keep a sufficient content flow not only to appeal to new customers but keep from churning a big portion of these 50 million subscribers.

Key takeaways

1. While streaming and digital entertainment has enjoyed a windfall from people staying at home, winners and losers will emerge in the aftermath of Covid19.
2. The winners will be the companies that have a very deep and broad content offering (either by first party development or crowdsourcing) and leverage effectively the subscription model, while losers are likely to have limitations on their proposition.
3. Among the likely winners are crowdsourcing champions TikTok and HouseParty as well as streaming services like Netflix, Amazon Prime, Coursera and Steam. Likely losers are Quibi, edX, Apple Arcade and Stadia who either have limited or less compelling content. The jury is still out on whether Disney will have enough content to make Disney+ a long-term winner.