Full-Time student Julia McInnis was mingling with a crowd of partygoers at the 2016 Sundance Film Festival when she found herself a stone’s throw away from Reed Hastings, the CEO of Netflix. It would have been daunting enough to introduce herself to Hastings alone, but he was flanked by Ted Sarandos, Netflix’s chief content officer, and the comedian Chelsea Handler, the latest star to join the streaming service’s fast-growing constellation of talent. It was a triumvirate of industry heavy hitters that can make small talk at Sundance an act of daring. “It took me a good 15 minutes to work up the courage to go over there,” McInnis said.
Fortunately for McInnis, she didn’t have to pester Hastings with a standard elevator pitch. The documentary she helped produce over the past four years, Unlocking the Cage, had already been snatched up in a distribution deal with HBO. She wanted to speak with Hastings as a curious student of the entertainment industry, and she spied an opportunity just as Handler headed for the bar. “I said to him, ‘Hi, my name is Julia McInnis, and I’m an MBA student at Chicago Booth. We just did a case study on Netflix in my accounting class. I was wondering if I could ask you a few questions about your numbers.’” Hastings laughed, McInnis recalled, and said, “‘Yeah, you probably saw we’ve had some ups and downs over the years.’”
Indeed, Netflix lost some 800,000 subscribers in a single quarter in 2011, shortly after unveiling a new pricing scheme. Subscribers would pay two separate fees, one for online streaming and the other for DVD shipments. Should viewers lose patience with those fussy red envelopes, they could easily switch to Netflix’s on-demand library. There was just one catch: customers who wanted to cling to both services would have to pay an additional $6 per month. Some 3,000 complaints flooded Netflix’s website. In a frank apology to his customers, Hastings wrote, “I messed up.”
He also had salvaged the company from a far messier future. Netflix’s DVD subscriptions plummeted by 10 million households over the next four years. Meanwhile, streaming subscriptions swelled to 75 million households. The company had untethered itself from the television set and conquered every internet-enabled device in the household. Today, 45 percent of TV-watching households in the United States subscribe to Netflix. Amazon Prime and Hulu Plus are racing to catch up, with 21 percent and 10 percent shares, respectively. A now-dominant Netflix (along with Amazon) stole the headlines at Sundance 2016, purchasing six films after only acquiring a single film in 2015, including buying global streaming rights to the film The Fundamentals of Caring, starring Paul Rudd and Selena Gomez, for $7 million.
“TV is changing,” said David Wells, ’98, Netflix’s CFO, “and the distribution direct to consumers is part of that change.” That, in a nutshell, is the seismic transition that Booth alumni across the media industry—sooner or later—must face.
Technology gave consumers the view into a world where they could buy exactly what they wanted.
The Multiscreen Shuffle
Today’s viewers defy the Norman Rockwell image of a family gathered around the television set. Their attention is now split across smartphones, tablets, PCs, and laptops—those personal devices that collectively outnumber television sets three to one, according to market research from Strategy Analytics. Today, while dad watches the game on television, mom might slip out of the living room to stream her favorite show on a laptop. The kids watch YouTube personalities on a tablet or a smartphone. Audience preferences for any given screen have changed drastically from year to year. Some 53 percent of the viewing public prefers to watch television or movies on a TV, but that figure dropped by 13 percent in a single year, according to Accenture’s annual consumer survey. This fractured viewing experience has come to be known within the industry as the “multiscreen environment,” and it has spawned an increasingly choosy generation of customers.
“You’ve got to supply media in a way that people want to consume it,” said Jay Rasulo, ’84, “not the way that’s most convenient or even more profitable for you as a media distributor.” Rasulo, a technology start-up advisor and investor and former Walt Disney Company CFO, points to the music industry as a cautionary tale for the larger media sector. Entertainment shoppers already expect to purchase music by the song rather than the album. Consumers are beginning to consider whether to buy a cable package of 189 channels, on average, even if Nielsen data show that they tend to ignore all but 17 of those channels. Media companies are revising distribution plans to address the evolving consumer demand. “We used to be forced to buy things in a packaged fashion,” Rasulo said. “Technology gave consumers the view into a world where they didn’t have to do that. They could just reach out and buy exactly what they wanted, so media companies have to be more strategic about how they distribute their product to meet this variety of viewing preferences.”
The essential question is when the swell of “cord cutters” and “cord nevers” will reach critical mass. The pay-TV industry has hardly gone over a cliff. The 13 largest providers, accounting for roughly 95 percent of the market, have shed a few hundred thousand subscribers each year since 2012, according to the latest figures from Leichtman Research Group. That’s a rounding error for an industry that boasted more than 94 million paying customers in 2015. Reports of pay TV’s imminent demise, it seems, have been greatly exaggerated.
If anything, the industry is facing a slow and tricky transition. “Whenever you see a new technology come out, the player with the traditional technology has to decide the right time to make the switch,” said Pradeep K. Chintagunta, Joseph T. and Bernice S. Lewis Distinguished Service Professor of Marketing. “You want to hang on to as much revenue as you can with the old model and you have to make sure that you don’t miss out on the new model.”
In an ideal world, media companies could predict exactly how much revenue they could gain from digital audiences to offset the losses from broadcast audiences. Good luck finding the data to make that prediction. Digital viewers are a nomadic bunch, testing out new services at new price points. They’re perpetually scanning the horizon for better services. “Bundled cable has been a good deal for the consumer for a long time,” said Netflix’s Wells. “But consumers are increasingly not convinced these days because of the annual price increases driven by content that they only partially consume and the expanding environment of customized choice. We continue to be a complement to cable, but the pressure on choice requires the cable companies to respond with more options. They are all on the evolutionary path to internet TV. Many see us, I think rightfully, as a partner.”
But what is the precise value, in dollars and cents, consumers will get from this on-demand experience? Absent a price history, media companies have to make a few educated guesses—and messes—to find out.
“We’re largely going through a phase of experimentation,” said Chintagunta. “Put some content out there, see what happens, and then test and learn.” The shrewdest players are following viewers along their digital migration paths, collecting data every step of the way. While the data can be frustratingly incomplete, Booth alumni and researchers across the entertainment industry say they’re gaining unprecedented insights into what their customers want.
We weren’t sure how [Disney’s deal with Netflix] was going to play out, if it was going to take 5 million views away from traditional TV.
Entertainment and Technology
Jay Rasulo, '84, a technology start-up advisor and investor and former Walt Disney Company CFO, shares his views on how data and technology are shaping the strategies of today's media companies.
Hot on the Data Trail
“You have to be wherever the consumer is,” said Rajeshree Shah, ’08, former senior manager of Disney’s global distribution strategy. Shah left Disney in September 2015 to take a managerial position at health-care company Abbott, but she looks back on her tenure at Disney as a time of extraordinary opportunities. “Times have changed so quickly in the last six years,” she said. Shah was tasked with surveying the digital landscape for potential distribution partners. “There’s Netflix, Hulu, Amazon, YouTube—and we wanted to be on every single platform.” In truth, Shah could easily spot the market’s strongest entrants. They would often approach Disney first. Apple TV’s service, for instance, hardly caught Disney’s negotiators by surprise. “We were in discussions for months before they hit the press,” Shah said. Her real challenge, however, was figuring out how to parcel out Disney’s content across so many rivals.
When she joined the strategy team in 2010, Disney signed its first major contract with Netflix, releasing 1,000 hours of streaming content, including episodes of Lost and Desperate Housewives. The deal would expire in one year, and with good reason. “We weren’t sure how it was going to play out,” Shah said. “If it was going to take 5 million views away from traditional TV, for instance.” Then again, Shah could envision a happier scenario, where Netflix viewers might binge watch old episodes online and eagerly tune into the newest episodes on television. Either scenario seemed plausible. What her team needed was hard data.
One year later the ratings were in, and much to Shah’s relief, the deal was a success. Disney signed a new, three-year contract, but by then, the negotiations had grown more complicated. Netflix and other streaming services began requesting exclusive deals, in an attempt to muscle out their rivals. Shah’s team, in turn, had to think about how to share their content without giving away the store. “Everybody wants to partner with Netflix,” she said. “They bring new audiences to shows, allow viewers to catch up on something they missed. But there are a lot of disadvantages that come with making them the superior product. We lose the brand that we have. We lose negotiating power. Consumers go looking for shows—Good Luck Charlie or Scandal—and we lose the ABC and the Disney Channel brands, which are a big part of our business.”
As Shah’s team attempted to assign hard values to fluid deals, Rasulo, Disney’s CFO at the time, kept a watchful eye on an even more unsettling batch of data. Audiences were no longer watching television one episode at a time. “The spectrum of media viewing has expanded dramatically,” Rasulo said. “At one end of the spectrum, there’s the binge form of viewing, where people will literally watch media for five or six hours at a time. At the other end of the spectrum is extreme short-form.” Viewers can lap up a YouTube video, for instance, in fewer than five minutes. A Vine clip would play in 6.5 seconds flat. And demand for these short-form videos was booming. One billion–plus YouTube users have increased their viewing time by 50 percent, year over year. While Disney had a strategy in place for the binge watchers, it had to make a drastic move toward the short-form end of the viewing spectrum.
In March 2014, Disney acquired Maker Studios, a collection of 55,000 YouTube channels, for $500 million. In an instant, Disney could access the viewing habits of 380 million YouTube subscribers and study the strange alchemy of what makes a video go viral. “The amount of data that was being collected by Maker for the use in business analytics around monetization and virality, and how to take things into the viral space, is enormous,” Rasulo said.
Disney, in turn, could tell Maker’s 55,000 contributors about ideal video run times and topics—or when, for instance, a video of a cat playing a piano had the highest likelihood of taking off. Such as, “Friday nights at midnight,” Rasulo said. “And there were many, many examples—by subject matter, by length, by the personality that created the piece of video.”
Of course, there are limits to what the data can reveal. “You can’t take a bunch of data and have a machine create a TV show,” said Wells. The old Hollywood studio system churns out hits more reliably than any algorithm. Netflix has a competitive edge, however, in steering content to the right users. “We’re trying to market that content to as narrow [an audience] as we think can be effective, in terms of the propensity for that person to actually watch something.”
Forget 18- to 49-year-old males. “Age is a really rough cluster,” Wells said. Instead, Netflix studies how viewers cluster within genres and subgenres. “Look at our microgenres on the Netflix site. We’ve broken a drama down to a ‘dark noir period piece with Johnny Depp.’ These are very specific categorizations that will help you find that cluster.” And the taste clusters could get even more refined as Netflix deploys machine-learning algorithms to sift through 600 billion daily events.
The metrics Netflix can monitor are incredibly detailed and available almost in real time. “We have an instant feedback mechanism in knowing what a member is watching and what they’re not watching, as well as what they bail out of halfway through and end up never completing,” Wells said. “There are a lot of signals that we have on the quality of our content that are quick and comprehensive.”
It’s a matter of finding a way to create more personal experiences for our consumers, to ‘superserve’ them.
A Global Growth Spurt
Not every enterprising network executive must search for audiences beyond the cable box, however. “There are many big markets in the world where there is a low penetration of pay TV, and that penetration is continuing to rise,” said Michael D. Armstrong, ’02, Viacom’s executive vice president of international brand development. Armstrong points to his global launch of the Paramount Channel in 2012. “We’ve gone from nothing four years ago to more than 90 million households in 10 markets around the world, and we’ve just announced our 11th channel [slated for] Thailand in May.”
Armstrong keeps an eye out for brands that have crossborder appeal, watching for consistent ratings or listening for that distinct buzz on social media. “Obviously we have social media followings in the millions across our brands around the world,” Armstrong said. “Viewers are clear to tell you what they want.”
English-speaking audiences, for instance, may remember MTV’s hit reality series Jersey Shore, but they might have missed the splash made by its international spin-offs, Gandía Shore in Spain and Acapulco Shore in Mexico. To Viacom, the demand for more “Shores,” as they say, was unmistakable.
“The success of how the talent resonated with our audiences, and how the audiences responded in kind both on social media and in the ratings, really led to the creation of Super Shore,” Armstrong said. Super Shore combined cast members from the two Spanish-language “shores” and threw in Italian car heiress Elettra Lamborghini for good measure. The show was a smash success in Mexico and Spain, fueled by a simultaneous release of the episode on Viacom’s stand-alone MTV app for Latin America. “We had millions of people who downloaded that app to watch the episode,” Armstrong said. “It converted that viewership to our linear channel where we had millions of people who started watching the episode on linear as well.”
The success of Super Shore, online and off, suggests to Armstrong that streaming and broadcast audiences can not only coexist but possibly grow together. After all, Viacom’s MTV app doesn’t just stream content; it suggests related content based on the viewer’s history. Enjoy Jersey Shore? The algorithm might present an episode of Real World. Tired of reality shows? It may serve up scripted comedies. As Armstrong refines the services on BET Play, he can glean lessons from his colleagues at MTV, Nickelodeon, and Comedy Central. They too can learn from his successes.
“It’s a matter of finding a way to create more personal experiences for our consumers, to ‘superserve’ them,” Armstrong said. “Because that’s really what it’s all about. We have fans of our brands, and our job is to work with our partners to superserve content to consumers to make sure that we grow how much they’re a fan of the brand.” Even as viewers migrate from device to device and service to service, a network can stop them cold with the right content.
Look at our microgenres on the Netflix site. We’ve broken a drama down to a 'dark noir period piece with Johnny Depp.'
The Million-Dollar Question
There’s a vague notion across the industry that at some point, someone will offer the right blend of content at the right price to lure customers away from their multichannel bundles. Dana McLeod, ’12, a finance manager at DISH Network, simply laughs when pressed to make a prediction. “That’s the million-dollar question,” McLeod said. “If I knew when that would happen, I would be set.”
For now, consumers will have to contend with a bewildering selection of new services, from the cable and satellite providers’ “skinny bundles,” to the hodgepodge of borrowed and original content on Netflix, Amazon, and Hulu, to the standalone offerings from HBO, Showtime, CBS, and even the WWE. And the list of à la carte options keeps expanding. Of the 100-plus online video services now available in the United States, 40 percent have launched in the past two years, according to Parks Associates. “Now you have to ensure the consumers are willing to explicitly search for your content,” Chintagunta said. “Unless you focus on really good content, you’re not going to be able to hang on to these consumers. It’s increasingly a pull model as opposed to a push model.”
In this less pushy, more seductive market, ratings are no longer the defining measure of success. Instead, the emphasis has shifted to customer loyalty. Just when subscribers are about to move on, an irresistible new piece of content pulls them back in.
That’s a big reason why streaming services are spending record sums at film festivals these days. Documentary producer and current student McInnis got a first-hand glimpse of the bidding wars at Sundance. “People think it’s a carefree, celebrity-studded party that happens in the mountains,” she said, “but I think there’s a lot of anxiety there.” A young filmmaker with absolutely no Hollywood connections premieres a film to rave reviews and is inundated with spontaneous offers. They can happen over a coffee or lunch. “I saw them happening in bathrooms,” McInnis said. Then a strange dance begins. “You have a feeling that the power dynamic is skewed, but it keeps going back and forth. The filmmaker realizes that this person really wants their content. The content distributor realizes that this person has options.”
And that sense of options, the multiplying paths to the consumer, makes McInnis eager to return to the entertainment industry after graduation. “I’m excited about the ambiguity of that industry,” she said. “I can’t wait to stay on that path into the entertainment industry and see where things are in 10 or 15 years.”
But first she wants to steep herself in Booth’s data-rich curriculum. She, like so many of her future peers in the industry, sees data analysis not just as a skill to burnish her resume but as a practice that will define her career. “The industry is definitely going to have an emphasis on data, and if I don’t know how to meaningfully interpret it or work with it, I’m not going to do well with an entertainment career,” she said. “I just don’t think that’s possible anymore.”
In fact, Wells suspects the voluminous data collected these days will eventually be an industry-wide commodity. The most-acquisitive data collectors may have a competitive advantage. “Television in general is moving to a direct-distribution model, online, with lots of devices that know what a consumer is watching,” Wells said. “Apple TV, Roku: they can view that data as well.” In the end, however, the benefits of data only go so far. “It’s helpful to know what those audience members have already watched and try to tailor content to them,” Wells said. “But there’s no substitute for great content creation and execution of that creation.”
—By Dan Kedmey