What Is an Entertainment Company in 2021 and Why Does the Answer Matter?
In the 1960s, Theodore Levitt, a resident economist and professor at Harvard Business School unveiled his theory of “marketing myopia”. Specifically, he postulated that too many companies define themselves through their products rather than the need(s) they fulfill (this idea has been largely remixed as “job to be done” theory). This mindset exposes these companies to displacement and disruption. The classic example here is the petroleum industry, which, in its obsession with fossil fuels, has missed out on solar, nuclear, geothermal, etc. Another focuses on the major railway companies of the early 20th century, which missed out on buses, cars, and trucking due to their focus on trains not transportation.
Management theories go in and out. The 1990s were particularly harsh on conglomerates, most of which struggled to show the benefits of strategy creep. Synergies sounded good and marketing myopia bad, but ultimately, most blue-chip companies delivered greater shareholder returns through focus rather than tackling uncertain (if occasionally insurgent) adjacencies. The digital era has made conglomerization a little more popular (e.g. Amazon), yet for the most part, market leaders tend to be specialized (e.g. Facebook not Google+, Shopify and Stripe not Amazon Pay, TikTok not Instagram, Tinder not Facebook Dating).
These ideas are interesting when one considers the modern-day entertainment industry. Historically, we defined an entertainment company around its core offering. Marvel was a comic book company, Mattel a toy company, ESPN a sports network, etc. When people think of the classic Disney flywheel — which Walt himself devised in the 1950s and which is the current obsession of every Hollywood executive today — they typically misremember the center of this flywheel as “IP”. It was actually “Creative Talent of Studio / Theatrical Films”. Even Walt described Disney as a movie company.
It’s clear today that these company definitions are no longer right. Disney’s theatrically-focused film studio is inarguably the best in the world (it had roughly twice the revenue and three times the margin of the #2 player in 2019). However, Disney’s parks division generated more than twice the revenue and profit of its studio division. Disney’s future, meanwhile, depends on a direct-to-consumer video platform that’s mostly growing through television series not feature films.
In 2019, Hasbro bought eOne so that it could sustain, if not build, its merchandise lines such as G.I. Joe, Transformers and Battleship into an ever-growing cinematic universe spanning TV and film. Mattel, too, is driving adaptations of its top franchises, including Barbie, Hot Wheels, and Magic 8-Ball. Most major sports leagues now see NFTs and sports betting as the key to their growth, while casinos are building out and acquiring lifestyle content publishing businesses. Marvel and DC haven’t been comic book-first companies for nearly thirty years.
And after years of dodging the question “is Netflix a tech or media company?”, Netflix founder and Co-CEO Reed Hastings recently declared, “we’re really an entertainment company”. So, what is that, why does it matter, and what’s the takeaway?
At its core, an entertainment business does only three things:
Create/tell stories
Build love for those stories
Monetize that love
A good way to learn about this is through Disney.
Disney Leads Because It’s Best at 1-2-3
Creating and Telling Stories
Sure, Disney owns many of the best stories — but it’s also best at telling them, too. Disney’s Marvel Cinematic Universe consistently outperforms the Marvel films of 21st Century Fox and Sony, as well as comic book films of Warner Bros.’ DC. Back in 2016, Sony’s film chief said, “we have deferred the creative lead [on Spider-Man] to [Disney], because they know what they’re doing.” George Lucas, who had spent decades claiming he would never sell Star Wars, has said he chose to sell Lucasfilm to Disney based on its treatment of and success with Marvel. To point, Lucas solicited no other bidders for the company — and Fox, which had distributed the Star Wars franchise for thirty-five years, didn’t even know his company was for sale. Although many argue Disney “has all the IP”, the fan response to Disney’s Marvel films versus those of Sony and Fox is in stark contrast. As is the fact that millions of fans are happy Disney finally has Fantastic Four and the X-Men “so that they can do it right”.
The last two Harry Potter films were the lowest performing in the Wizarding World’s ten films, even though the global box office has grown 150% since the franchise’s first release. There have been dozens of attempts from a dozen studios to adapt classic out-of-copyright Western tales over the past two decades (e.g. a Tarzan, two Robin Hoods, two King Arthurs, three Draculas, two Little Red Riding Hoods, three Snow Whites, a half dozen Greco and Egyptian epics, two Jungle Books, two Hercules, A Dr. Jekyll and Mr. Hyde). At best, these films broke even. Most lost a lot. It’s hard to argue Disney would not have had greater success. And we’ll soon find out! Disney is currently working on live action adaptations of Peter Pan, Robin Hood, and The Little Mermaid. While IP matters, execution determines profit/loss.
Building Love
Disney is also best at developing love for IP. Here, the Marvel Cinematic Universe is a great example. In part because Marvel couldn’t launch its CU using its most popular comic book characters (which competitors like Sony owned), the first few films were relatively modest performers. Yet as brand equity was built, average performance soared even as output nearly tripled. Over its first five years (“Phase 1”), the Marvel Cinematic Universe released an average of 1.2 films per year and grossed $291MM (inflation adjusted) per film domestically. Since 2016 (“Phase 3”), the MCU has released 2.75 films per year and averaged $450MM per film. To date, the MCU has released a total of 12 sequels. On average, these titles out-grossed their predecessor by 31%, with only one grossing less. And the one film that declined was the second Avengers film, which was the sequel to the third highest-grossing film of all time and still went on to become the sixth highest-grossing film in history. The third Captain America came out five years after the first and grossed 2.5x.
Disney also leads in sustaining/transitioning love generationally. Consider, for example, how many families have Disneyland photos of their kids with Mickey or Woody on the fridge. Or how many of these kids have kept those photos decades later — and now as adults, they recreate the moment with their kids or compare their photo to that of their spouse.
