Hollywood’s Ultimate Values

Be honest. When you read the words “ultimate values” did you think of morality? Don’t be naïve. We’re talking about money, cold hard media cash. But stick around; the two meanings of the term “values” have odd ways of converging sometimes.

Studio executives making veiled references to “the Ultimate” may sound mystical, but it’s a purely practical insider’s term, a studio’s secret estimate of the present and future value of every movie and show they own. Suppose Apple wants to buy Warner Bros Discovery, or NBCUniversal buys Paramount Global to combine their two middling-successful streaming services. Coming to agreement on how much things are worth, the act of setting a price is the essence of the market, of capitalism itself.

In fine detail, it means being able to look at a complicated mosaic and make credible guesses about how much each of thousands of individual properties are worth—films? New ones, old ones? Television shows for broadcast and cable? Plus remake rights? Franchises? How much more will Harry Potter or The Big Bang Theory earn for Warners over the remainder of their lifetimes? How much are 20-year-old episodes of The Dennis Miller Show or 30-year-old episodes of The Nanny worth? Nobody knows exactly. As with real estate, you can make an informed estimate based on accepted professional standards.

But also like the real estate business, unpredictable change can affect those valuations. Big city retail outlets and office towers, for instance, have suddenly lost a surprising amount of value. Cultural trends can and have done the same, in the distant and recent past, to media properties that act as collateral for current and future investments.

Ricochet member Clavius has spent the past thirty years as an IT executive for some of the biggest of worldwide entertainment companies. How do people inside the studio gates talk about total valuation?

“For a studio without a major streaming service, say Sony Pictures, the 'ultimate' is the whole deal, from greenlight to run out into the long trail of TV (streaming included). The ultimate is the lifetime (10 years for accounting purposes) estimate of the revenue and expense for a title”.

“The issue for the in-house production arms of the streamers is that putting a title on a streaming service does not generate revenue for that title. Sure, you could estimate some amount based on viewership, but viewers buy the service, not the title. Completely different from people going to a movie, buying a DVD, or a network/cable channel/streamer licensing a title.”

“To be honest, this is the biggest issue for the entertainment industry today. If I can’t tie revenue to a title, how do I judge its success? As far as I can tell, the tech streamers like Netflix and Amazon don’t care.”

Here, we should acknowledge the business insights of The Ankler, a user-supported media insider’s website that’s a rare, successful alternative to traditional Hollywood, trade paper-legacy linked sites. While everyone else in Hollywood seemed frozen in pandemic-era fear, The Ankler was a rare voice warning that almost every studio’s (except shrewd Sony) vain attempt to overwhelm Netflix with sheer spending would result in setting vast pyramids of Hollywood’s money on fire. It was not, shall we say, always a welcome voice. It is now widely, if grudgingly, conceded to have been right.

Taking the theatrical side for granted was a mistake. Streaming at home is great, it’s here to stay, but it’ll never entirely replace the social aspect of kids, families, couples, laughing and weeping in public together. Memories of those cheering in-person crowds give a title its lasting magic, even when its theatrical release is now ten months, or 10 years, or even 47 years ago.

Another industry-wide mistake was allowing the slow neglect of linear (non-streaming) television, both broadcast and cable, still the most reliable revenue stream that Hollywood has ever known. A lot of money was hoovered up by studio spending on buying up libraries of films and TV shows, to beef up their inventories for entry into streaming. Or so I’ve read. But @Clavius clued me in on a subtlety I didn’t realize.

Says Clavius: “Amazon bought MGM mainly for the underlying IP that MGM owned — the rights to make new movies, episodic content, etc. — from what MGM owned. The library was secondary. And at the time of the acquisition, the ability of MGM to license content was not relevant.”

In other words, they aren’t buying a chunk of the past for its own sake, but for what they can make out of it in the future.

“The only thing I might add is that the environment re: Streaming has evolved in the past six months. At a certain tech-company streaming service, earning real revenue from third parties on titles is now a significant part of the "get to profitability" strategy. So the purchase of MGM now has value because it has the theatrical and licensing people and systems to make money on content, not just because of the library and underlying IP.”

Like its streaming rival, Apple, Amazon doesn’t need to rely on the success of films and TV. They owe their breathtaking wealth to other industries. This makes them different than Netflix, the biggest streaming giant, which lives or dies on this business alone. For Amazon and Apple, the enormous costs of making media might as well be a rounding error filed under “subscription service expenses”. But other than an occasional theatrical run for prestige, Apple has stayed in streaming and has not built much of its own library.

Amazon, by contrast, has a Netflix-like production line for their own original shows. They aren’t just making the product for themselves, either. Taking a page, perhaps, from Sony’s strategy, who jokingly calls it their “arms dealer” doctrine, Amazon/MGM will sell as well as buy. With the addition of MGM, they’ve chosen to become a full service, full-fledged movie studio.

Clavius nods. “So that is the question. Will the studios keep all their content for their in-house streaming services or will they also license that content to other broadcasters? And if they will only stream the content, a library has only value in adding or keeping subscribers, which is not title ultimate based valuation”.

At this point in our online discourse, @Muleskinner asked “So the whole may not be greater than the sum of its parts? And @Clavius replied, “It all depends on how you value the content”. That’s Hollywood’s trillion-dollar question. Any sudden, market-wide loss of faith in the underlying values, any collapse of confidence in the collateral that props up an entire industry, can cause wider events like the Great Recession of 2008-2014. Could it happen in the culture industry? Media seismologists can identify a couple of past events that offer some potentially disquieting clues to the present.

One of them was something most people under 65 have never thought about: the jump from black and white to color. It was financially fateful for Hollywood’s vast libraries of films rented to television. Once color TV took off, stations and syndicators sharply devalued all black and white movies and shows, with a few nostalgic exceptions, like I Love Lucy and The Honeymooners. For a few years, Hollywood’s deal collateral wasn’t worth quite as much at Wall Street’s pawn shop. But soon, everyone was making money again, color films and TV alike. The industry shrugged off the loss.

A few years later, Hollywood absorbed another loss in the collateral value that underlies the creditworthy-ness of film and television production. It’s what happened to the assessed valuations of all the various “square” pre-Seventies films and TV that now had steeply waning value in syndication because they were now culturally out of sync.

(@JimKearney, Ricochet’s other veteran Hollywood exec, is our expert in the history of television syndication as well as a lot of other media history. Ideally, he should step in to take the steering wheel on this subject. In the comments, I hope.)

Almost all older shows gradually lose their value, but times of changing tastes make the old shows depreciate faster. In the age of Welcome Back, Kotter and Dallas, reruns of old fashioned, family-friendly TV like The Donna Reed Show and The Rifleman were worth less than they’d been only a few years before. (At least for the time being. When room opened on Nineties cable systems, Boomer-friendly ad-supported channels mined some more residual value from old shows.)

Purely as a thought exercise: What if something like that change happened in reverse? What would happen if the country or the world came to broadly retreat from substantial parts of the culture and the entertainment of the past dozen or so years? Just hypothetically speaking? How might that work out, what would it look like?

Non-Western media libraries tend to be conservative. Chinese, Japanese, South Korean, Indian, Russian, and Turkish TV would not be much affected by a cultural shift. Let’s ruefully specify that by and large a retreat on some major aspects of modern media life, the ones we commonly consider woke, would primarily affect English speaking films and shows, especially US ones. A drop in the (hypothetical, back-of-the-envelope) estimated ultimate value of all Western media properties held by every global corporation from, say, today’s ebullient 1.77 trillion dollars to a wised-up, slimmed down 1.52 trillion dollars wouldn’t be big enough to cause an economy-wide earthquake on Wall Street. But it would certainly be an extinction level event for much of today’s Hollywood.

I’ve watched crime dramas about people willing to kill over $50,000. Imagine what a handful of like-minded men would do to ward off a loss of $250,000,000,000. They wouldn’t like to see that happen. It’s not personal. It’s business.

Before we sign off, let’s give one and a half cheers for streaming. Whatever problems it has brought to Hollywood, it has brought plenty of cultural gatekeepers down to size. The result has been a fragmented, sometimes trivialized culture. But it’s also made access to the world’s viewers freer and more open than ever. Not that everyone likes that openness, of course. With National Public Radio much in the news lately, you might enjoy this prescient bit of futurism from 31 years ago.

One of the first mentions of what we’d now call “streaming video” is found in this June 24, 1993 article in the Chicago Reader. “One of the most telling moments of my ordeal-by-NPR came while Linda Wertheimer was interviewing a computer developer on what will happen when computers are linked into televisions—the so-called intelligent TV. He predicted the development of literally hundreds of new interactive television networks and services “that would give the individual TV viewer an incredible amount of power to program for their own tastes rather than have to rely on these programming guys.”

Replied a perturbed Wertheimer: “Is there any way we can dodge this bullet?”