Date: 02/28/2023
Author: Mr. X
One of the surprises of the Russian-Ukrainian war is how similar it seems to the First World War. Despite drones, tanks, and advanced communications and satellite technology, the conflict has mostly focused on artillery, infantry in trenches, and battles over key geographical features. The most important have been lines of supply and geographic features that allow bombardment. Many high-tech weapons systems have essentially canceled each other out. It’s far more similar to Verdun than the blitzkrieg Russian command thought they were waging at the beginning of the conflict.
Corporate wars are following this pattern of trench warfare. We have social media, advanced communications technology, Artificial Intelligence, and countless more variables previous CEOs had to consider. Nontheless, the creative potential of many of these things may be exhausted. It’s unthinkable today for ordinary people to become YouTube stars, the way it was when the platform was first developed. Everything is top-down, with culture driven by the same companies and powerful individuals who were deciding what people should see even before the Internet. New companies – Amazon (AMZN) and Netflix (NFLX) for example – are making their alliances with old ones. Amazon acquired MGM about a year ago and Netflix has acquired cultural properties like the works of Mark Millar and Roald Dahl.
Of course, it’s debatable whether this leads to better content. Probably not. For example, there’s a raging controversy because those who own Dahl’s work are rewriting the stories to fit with contemporary political correctness. The result is prose like it came out of a corporate HR department. Disney (DIS) is reportedly cutting back on Star Wars and Marvel after the company’s latest products have been of dubious quality. Nontheless, you’re not going to see companies refrain from squeezing every ounce of value out of these properties.
The trend won’t stop anytime soon. Video game adaptations are notoriously bad. Nontheless, HBO, owned by Warner Brothers Discovery (WBD) is doing well with The Last of Us. It should be noted that company also put out a video game based on J.K. Rowlings’s Harry Potter universe. Despite efforts at a boycott, the game sold 12 million copies in the first two weeks it was out. It brought in more than $850 million in revenue. Even when framed against hostile media coverage, the power of an IP brings in a seemingly automatic revenue stream. A sequel is reportedly underway.
Not surprisingly, Amazon recently purchased the rights to Tomb Raider, reportedly for $600 million. A new reboot will feature an upcoming film and television series. It seems like an extreme gamble on one character, but Amazon is committed.
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Amazon is also reportedly working to bring out a cinematic universe surrounding the sprawling Warhammer 40K mythos. Longtime fan Henry Cavill of Superman fame has been billed to head up the project. It would be a massive boon for British company Games Workshop [GMWKF], which is up more than 27% over the last six months. However, the deal has not been closed yet. Still, this is an IP that hasn’t really been tapped. Its Warhammer+ streaming service is essentially a giant advertisement saying “Someone Please Buy Us.”
Perhaps the most ferocious conflict is over the work of J.R.R. Tolkein and The Lord of the Rings. Amazon’s The Rings of Power has received mixed reviews, at best. Nontheless, it has enough momentum that Warner Brothers Discovery has reportedly green-lighted an entire series of new Lord of the Rings films. “Lord of the Rings is one of the most iconic storytelling franchises of all time, and we’re so excited,” said CEO David Zaslav. “Stay tuned for more to come on this front.”
Don’t ask questions. Just consume product and then get excited for next product.
From an artistic perspective, there are two problems with the IP model that is currently in place. First, it means that any “universe” inevitably will be “Marvelized.” Characters will be squeezed for every ounce of content and once that is exhausted, they can always be “rebooted.” Thus, nothing new is ever really created, especially because the same companies are now in charge of media distribution on platforms.
The second problem, especially to investors, is that existing products essentially become a contest over ownership. For example, Paramount+ (Paramount, PARA) signed a deal with Warner Brothers Discovery so South Park could be aired on HBO+. However, the show was reportedly aired on Paramount+ too. The result is a $500 million lawsuit. (You could almost buy the rights to Tomb Raider for that.) It’s especially ridiculous consider South Park itself mocked the streaming wars with a multipart episode.
There’s no real alternative to this. In theory, IP is supposed to expire after a few decades. In practice, companies with political power (like Disney) may be able to get legislation changed so they can retain their valuable creations. The Sony Bono Copyright Term Extension Act gave Disney more control over Mickey Mouse in his “Steamboat Willie” 1923 Iteration. That will expire relatively soon, though the character remains trademarked. Many critics attacked what they called the “Mickey Mouse Protection Act,” but the alternative is that the public can use characters however they want. For example, when A.A. Mline’s Winne-the-Pooh entered the public domain, the result was the cheap horror movie Winnie-the-Pooh: Blood and Honey, reinventing the children’s characters as murderous villains. Bloomberg accurately noted that the horror film “is a scary sight for copyright holders.”
With hundreds of millions of millions of dollars being exchanged to buy IPs, companies have every incentivize to squeeze everything they can out of existing properties and fight to restrict ownership as much as possible. The result is that the entertainment industry has become a remarkably crude business of physical ownership, with prioritizes entered on exploitation of existing fanbases and properties that people already know about. The alternative is arguably worse.
For investors, this crudeness can provide clarity. View entertainment companies the same way you view energy companies. It’s about control, supply chains, and distribution. It’s less about brand at this point because the brand of the larger company is less important than the brand of the IP itself. Rarely, in this climate, can an IP expand to bring in an entirely new audience. The Last of Us may prove to be an exception, but it is a limited one.
Going forward, every company is going to be looking to replicate the success Disney had with the Marvel Cinematic Universe. Even Disney is looking to replicate the success Disney had. However, that boom may have been a onetime event. Now, in a saturated market, it’s about satisfying consumers who are already wedded to a certain “fandom” and, in a sense, already hooked as surely as a drug addict. As drug addicts know, no high is as great as that first time, even if you spend the rest of your life chasing it.
Mr. X is an investment analyst working in the Washington DC area who specializes in the intersection of business and public policy. After fifteen years working in politics, he writes on a classified basis for RogueInvesting.com to bring you news on what those with power are debating, planning, and doing.
