Laura Martin on Netflix, Content Creation, and Creative Talent

Scott:  On today’s Two Think Minimum, we sat down with Wall Street analyst, and TPI board member, Laura Martin, to talk about the changing media landscape. As it turned out, we had only about 15 minutes, which we used talking about Netflix. Still, given that Netflix had announced its earnings only the day previously, the conversation was interesting and illuminating. So enjoy this relatively short episode of Two Think Minimum and the somewhat abrupt ending, and we’ll have Laura back soon for a fuller discussion.

Scott:  Hi, and welcome back to TPI’s podcast Two Think Minimum. It’s Tuesday, July 17^th, 2018, and I’m Scott Wallsten, President and Senior Fellow at the Technology Policy Institute. Today on our 11th episode, I’m talking to Wall Street analyst, Laura Martin. Laura is a senior analyst at Needham and Company. She received her BA from Stanford and her MBA from Harvard Business School. She began her career at Drexel Burnham Lambert in media investment banking, followed by Capital Research and Management, where she advised $100 billion and managed a $500 million portfolio of media stocks. She moved to Credit Suisse First Boston in 1994 as the senior media analyst and in 2002, she moved to Paris to become EVP of financial strategy and investor relations for Vivendi Universal. In 2004 she founded Media Metrics, LLC doing equity research on the largest entertainment cable and Internet stocks in the US where she was nationally ranked as the best of the independent research boutiques by Institutional Investorfor many years. In 2009, Laura moved to Needham and Company where she is now and publishes research on the largest Internet and entertainment companies. We should also add that Laura is a member of TPI’s board of directors.

Laura:  Good afternoon.

Scott:  Let’s start off by talking about how content is made and that Netflix was just nominated for 112 Emmys and HBO was nominated for only 108. Some people have used that to say that Netflix is becoming a dominant force in content creation, but you’ve pointed out that might be a function of what they’re spending on it.

Laura:  I’m going to make two points. I mean, I think it’s fair to say Netflix is becoming a dominant member of the content creation community because they’re spending $12 billion, which I think is if you added Disney and CBS and NBC’s budgets together, I bet that Netflix is still bigger, so by that definition, they are definitely a dominant player in the content creation business. When you look at Emmys, and they just did surpass HBO for the first time I think in seven years, HBO spends $3 billion a year on content and Netflix will spend $12 billion a year on content. So you would hope that if you spend four times as much that you can have just as many Emmys.

Scott:  But they’re not getting four times as many Emmys.

Laura:  No, not yet anyways. I’m sure they hope to someday.

Scott:  Is it sustainable?

Laura:  No, I don’t think so. I mean it depends, right? So the difference is that Netflix really does have global scale. So 65 percent of their subscriber growth is coming from offshore and they’re spending a lot of money doing content offshore. So that’s another, I would say, distinction too, right? HBO programming is predominantly for the US audience, whereas Netflix is doing a lot of local shows in France and in Germany and as they try to get into India, they’re doing more and more local language shows and then some of those travel back, especially Latin America, you’ve seen some of those Spanish language shows, like Narcos. They were made for the Latin American market actually do travel back to the US to Spanish language communities. So I think that’s their home run when they make something for a local market and then it travels to other countries and part of that, a lot of their money goes to that. So in part it’s not that they’re spending $12 billion in the US versus HBO’s $3 billion in the US, it’s they’re spending $12 billion globally on content.

Scott:  Many people talk about the sort of explosion in the number or amount of content with Netflix and Hulu and so on. But you know, there’s only a limited amount of talent. Are we actually seeing additional content or are they just driving up the price for the inputs of good content (actors and writers and so on), or are we seeing more bad content, or are they actually finding people who make good content who would not have had otherwise?

Laura:  Right. Two statistics: one is we have seen a doubling of the number of series, like TV series, being made. We now have 400 new series this year and that’s probably doubled from three years ago. We are getting more content made. The answer is there is more good content being made. The problem is consumer time. Consumer time is fixed to a 24 hour day. Reed Hastings at Netflix says, “I compete with sleep.” The 400 episodes, they may have like, 200 of them might be all great. But the problem is you run out of time so people don’t see them. It’s harder to discover them because there are so many. You have a certain number of fixed hours, so you’re going to find some of the good episodes, I’m going to find some of the good episodes, but in general what we’re doing is fracturing the viewing audience across more hours of content. For sure there’s more good content being made because there’s also more bad content being made.

Scott:  Is AT&T going to be able to work with HBO?

Laura:  Yes, they are. I mean there are going to be big cultural differences. The culture at Time Warner was very much autonomous. I think AT&T is a little more buttoned up and centralized, but so far with the press reports are saying is that AT&T wants to give HBO more money to have more series. That’s a good idea for great content makers. They should have more money to make more series. That’s a good idea.

Scott:  What do you think the future looks like? Is it going to be dominated by companies like Netflix, or is it going to be the case that the companies that have been able to get talent will remain the ones who will be able to get talent because they know the industry. They’re much more used to being in LA than in New York or DC.

Laura:  Well, I think great content creators are really rare and right now Netflix is buying those people, like a Shonda Rhimes or like a Ryan Murphy, and so they are buying those people under 3 year contracts or 5 year contracts. The answer is that those people are talented and they’ll be working for Netflix for the foreseeable future. Then the question becomes, are there new talents? Those people were established in the old world. Are there new people coming in that are equally talented, but you and I have never heard of and it wouldn’t occur to Netflix to bid? Yeah, and they’re sitting in the, let me call it the traditional world where companies have a schedule, like the CBS schedule or the ABC schedule, and they have slots they need filled in. To the extent that Netflix cannibalizes, or takes away talent from the old ecosystem, that old ecosystem has to grab somebody new and maybe take more of a risk on them. There’s plenty of talented people out there.

Scott:  So you said that at least when we were talking about it earlier with Netflix, the amount of money they’re spending on content, it’s not sustainable. The talent that they’re hiring, are those people likely to stay at Netflix? Will Netflix have a culture that allows for good content creation?

Laura:  I think that actually remains to be seen because content cultures are really difficult to manage. They tend to be very hands off, but at the same time you have, well, in the old world you had that creative conflict dialogue was really helpful to the process rather than just giving somebody autonomy. So I think that’s what Netflix is new at. I think they began in the world by giving, writing a check to Kevin Spacey’s company for House of Cards and saying go make us 100 hours of episodes and he came back and delivered the episodes. That licensing deal is in place for 5 years and now they started moving things in-house to their own studio, but that studio culture is super important and it’s really hard to replicate what Warner Brothers has on the Warner Brothers lot, which is so storied, or the CBS TV lot. These cultures that hold on for long periods of time to the most talented people are just really rarefied air in terms of being hands off and hands on simultaneously, and having a lot of creative people around to rub shoulders with and collaborate with. So Netflix has to prove out that it can create and maintain a studio system so people are on the payroll.

Scott:  You’ve spent part of your life in LA and part of it in in New York. Do you see different perspectives on Netflix and the traditional content guys in different places? Like from what you’re saying, it would seem like the industry in LA would be more skeptical. Whereas in New York they seem to, at least according to its valuation, love Netflix.

Laura:  I think they said yesterday, on the Netflix call, that Shonda was moving up to, I think, the Netflix Studios near them up in the Silicon Valley, so that is really weird, because we don’t have any content being made up there, so I’m sort of lost as where to Shonda Rhimes moved to. Maybe she moved to their LA studio, which makes more sense to me. But anyway, the answer is, there is a very successful content culture in LA. There is also a decent content culture in New York because you have theater, you do have TV, you do have filmmaking for sure. So you have a lot of different creative, you have dance here, there’s a lot of creative artistic endeavors in New York because there’s 12 million people on a Six Mile island, right? So just a lot of people in New York City, I think it will be very hard to establish a creative community in the Silicon Valley with all those algorithm driven geniuses. I don’t think that would be a successful idea, but I think LA or New York is, and New York’s gonna cost you a lot more money because the cost of living here so much higher, but, so I would say LA is better. But I think it’d be hard to do it anywhere else. Detroit? No. Austin, Texas? No. I think it’d be hard to do it somewhere else. So LA and New York is probably where I would guess content would remain centered.

Scott:  But Netflix has said, or at least the people who studied Netflix say, that they believe that algorithms can be useful in making content. They can predict what people will like, the kinds of shows they want to see and so on. It sounds like you don’t think that’s right.

Laura:  No. If you have to spend $12 billion to get as many Emmys as the HBO team for $3 billion, I think you should hire HBO’s team. It’d be cheaper for you and you wouldn’t waste $8 billion.

Scott:  Do you think that’s a possibility?

Laura:  No, I don’t because I think people at HBO really, really work well as a team together and they have a really great reputation of working with talent in a collaborative way, not a hands off, not an invasive, but a really collaborative way to make the project better. At the end of the day that’s what a content person really wants, is they want the best project and the HBO people help you get there.

Scott:  A year ago at our Aspen Forum you were talking about these issues and you were saying how important that these new companies were in content, how much they were going to affect the industry and so on, and some people were kind of skeptical. It seems like in the last year things have changed really quickly. What’s surprised you about this past year?

Laura:  They threw a lot more money on it a lot faster. Netflix has been gearing up for the last 5 years. We all saw these huge increases in content spending and they’ve been talking about this every quarter for 12 quarters, “we’re going to spend more.” And every time they keep upping their amount they’re spending on content because they’re going more global, which costs money, so that didn’t surprise anybody. I think what really surprised people is when Apple went out and bought two guys, very talented guys, TV guys from Sony TV, and is now putting $3 billion behind them. Because to Apple, what’s $3 billion? That’s a lot of money in the TV world. It’s not so much money for Apple, which will be the first company to hit $1 trillion of market capitalization. Facebook launched the Watch Tab, which is long form premium video and they’re paying people to make video, long form video content, like WWE makes content for the Watch Tab, and it’s exclusive to Facebook. They’ll spend $2 billion this year. Amazon is spending $5 billion this year, like crazy. It’s up from nothing. Okay? That’s not true, but from almost nothing. So I think the big thing that surprised us all is every one of these Internet aggregators, that sort of has been arm’s length to long form content like TV and film, has suddenly started spending billions of dollars and if you added it together, it’s the entire budget of CBS in a year, who’s the 50 year reigning champ of TV.

Scott:  On the one hand, you’re saying that with Netflix spending $12 billion, you’d expect them to get at least as many Emmy nomination as HBO, but obviously they’re not getting as big a bang for the buck. On the other hand, for a lot of these tech companies, this is just chump change. They’ve got a very low cost of capital. How does that work? Does that mean they can pour so much more money in to creating content and just overwhelm the traditional guys because they don’t need to get the same bang for the buck?

Laura:  It means they’ll spend 1, 2, or 3 years wasting money, spending $3 billion, $5 billion, $7 billion, and they’ll figure out they can’t do this because at the end of the day, you can buy people, but you can’t, it’s really hard to create a culture where they’ll stay. At the end of the day you want a positive ROI business, in theory. So I think at the end of the day, what they will ultimately decide that it’s cheaper to go buy CBS or Warner Brothers, which is now owned by AT&T, that you go buy Disney. You buy a place that has proven that it has a studio lot in an environment that can not only sort of attract, for money, but retain creative people who can work together, that give you Marvel movies, years at a time. That’s a good acquisition. Pixar, their environment has given you 10 years of movies, successful movies. That was a good return on investment. That’s what you need to buy, is the culture of the place and then the people will come and make you great movies that keep up with the times.

Scott:  It sounds like AT&T and Comcast and other companies like that that are trying to vertically integrate on the distribution side…

Laura:  Are smart, because they’re keeping the culture rather than just trying to throw money at the problem, like it’s an algorithm.

Scott:   Does that mean that ultimately Facebook has to buy Comcast?

Laura:  Well, no, I think Facebook has buy Viacom or Discovery or probably, CBS, something, but it will. My view is they will not be able to make content within the confines of their algorithmic culture. They will have to find a place where content people are kept at arm’s length with a couple of people who talk to the two entities with a narrow bridge where they meet on the bridge and everyone else stays either in a content world or in a data driven algorithmic world. They don’t understand each other. They should never have to understand each other.

Scott:  Laura, thanks so much for talking with us today and we will have you back soon.