5 KEY TAKEAWAYS - Evolution Media Capital

5 KEY TAKEAWAYS
Platforms Are Putting The Creator First

For years, the giant social platforms have faced little competition from emerging start-ups. Even well-established
companies like Twitter and Snapchat have struggled to close the gap on Facebook (and Instagram). Despite
reaching over 1.5 billion people per day, Facebook continues to add more daily active users in a quarter than these
other social networks are adding in a year. The sheer scale of Facebook has provided a moat as the network
effects make it difficult for users to truly leave, even as they spend more time on other platforms. Users will still
log-in to Facebook to see what they might have missed, either from friends and family or with their favorite fan
pages, or local businesses. Communities and groups are becoming the focal point of the platform, rather than the
standard newsfeed. Facebook’s dominance is seeing some of the first signs of weakness, which sounds hard to
believe considering they grew revenue over 20% in 2020 to $85 billion.

The meteoric rise and staying power of TikTok has clearly had an impact in the U.S, with younger audiences
flocking to the new app and bringing it towards the forefront of pop culture. This has resulted in the greatest
compliment a tech company can receive: a clone of their product. Instagram quickly launched Reels in August
2020, adding yet another video product inside their app (to go along with IGTV, stories, etc.). It was immediately
flooded with original TikTok videos (which are easy to identify from their watermark), and verified
brands/accounts. In essence, it avoided a lot of the features that make TikTok so enthralling. Anyone can go viral
on the For You Page, the feed adjusts to your content preferences as you engage with content, and there is a suite
of advanced, yet simple editing tools to facilitate creation. Snapchat, launched their own competitor, Spotlight, in
November, leveraging AR-focused features to make the product feel native to the platform. With their lenses,
they have unique creator tools that can be utilized to make the content standout. Additionally, Snapchat has kept
their focus on privacy and safety with their manual review of all videos submitted, rather than developing a feed
that can display any video created. But the most important thing Snapchat did was offer $1 million per day to the
creators of the most popular videos (based off user views and engagement). They realized the need to incentivize
users to become creators on the platform, and the best, and perhaps only way to truly do that is by paying them
directly. These social networks have built up the value of their platform through the volume of user-generated
content without paying any of these creators that aspire to build large followings. These audiences have been
vital, as the only way to monetize is through branded content, or sponsored posts, which turns the creator into a
business. This isn’t necessarily bad, and many creators have used their digital clout to build successful businesses.
But it’s not a route that everyone can take, or wants to take, to generate revenue from their work. Now, these
platforms are starting to provide ways for users to directly monetize their content through payments from the
audiences.

There is emerging competition from start-ups and new types of businesses, such as Substack and Patreon, but
these platforms lack the built-in audience, networks effects and discovery tools to keep the flywheel going.
Instead, users will take to Twitter, TikTok, or Facebook to advertise their Substack page or direct monetization
method (i.e. link in bio). Now, these large social platforms are building similar tools, whether its Twitter acquiring
newsletter service Revue, or Facebook creating tipping features called Stars. With this growing array of products,
users with large followings have no reason to leave the platform. It’s important to note that these direct
monetization tools can be immediately used by established creators, but the real value comes from the discovery
side. The platform needs to incentivize the long-tail of creators by allowing anyone to start creating and building
an audience. The user creates the content, and the platform aids in the discovery, leveraging all the data they
have on their user preferences and interests. If new creators don’t feel they can build an audience, or be
discovered, then they will not be incentivized to create, even if the monetization tools are available. For most of
these platforms, the top echelon of creators will earn the overwhelming majority of the revenue, but there needs
to be a possibility for a user to grow to that level, as well as an opportunity for the smaller creators to earn
sufficient revenue, whether it’s just a side hustle, or enough to replace their current income.

While a lot of the attention is focused on these social networks, they aren’t the only platforms for creators. In
gaming, Roblox has seen its valuation skyrocket the last few years as it has been able to prove out the network
effects of its users and developers. Roblox itself doesn’t create any of the games/experiences on the platform, but
instead provides the tools for anyone to develop, and allows them to keep 70% of the Robux they earn through in-
app purchases. Many of these developers are former, or current, players that are looking to turn their
engagement into revenue. If creators want a less exhaustive way to make money, they can simply develop digital
items for the Avatar Marketplace, although there is a smaller revenue split (30%). The developers are incentivized
to create more engaging experiences, which in turn attract more users, of which some will go on to become
developers, creating a continuous loop.

In music, Spotify is doing its best to enable independent artists and reduce their reliance (and payouts) to the
major record labels. The Marketplace strategy is still relatively nascent, as labels have been reluctant to get fully
onboard and jeopardize the cannibalization of their value to artists. Still, there are elements emerging that signal
potential change, with new features like linking to virtual events or allowing artists to select certain songs to
amplify in Spotify’s recommendations. Still, some of the biggest hits on Spotify are because they became popular
on TikTok. Spotify needs to improve its discovery for emerging artists, but this can be hard when they are
indebted to the small group of major labels providing 80% of the streams. But Spotify is more than a music
company, and their creator strategy is really coming to light on the podcast side where they can have more
influence. They have made it clear that they see 3 different business models: subscription, advertisements, and à
la carte. This last model is new, and is based around allowing creators to charge their listeners directly, with
Spotify taking a share of the revenue. While there are limited details around how it will actually work, this should
be a catalyst for more creators on the platform, which should boost the other two other revenue streams.

This will be important as momentum grows around audio as a new frontier for creators. Live audio provides a
similar, but differentiated experience than podcasts, yet a lot of the skillsets for creators are the same. The
emergence of Clubhouse over the past year, with clones by Twitter (Spaces) and soon enough Facebook, show that
there is a potential for a new type of social network. There has been a rush of users, who don’t necessarily have
large followings on other platforms, coming to Clubhouse and trying to build up their brand and audiences, and
take advantage of being an early mover. By building large audiences, they can look to monetize through
traditional methods of sponsorships and branded content. But Clubhouse has recognized the value of its creator
early, and is already looking to develop direct monetization tools and accelerator programs, just 1 year after
launching. This is a radically different approach than before, where many platforms would focus on scaling user
bases (and eyeballs) for years, and building up ad revenue, before even thinking about monetization features for
their user base. The internet has made it easier than ever to create and distribute content to billions of people
around the world. There will be more platforms emerging that look to help this growing class of creators build
audiences and monetize their work. But for a lot of these new platforms, the emphasis will be supporting the
supply side of the market, where identifying the demand is just one component of adding value to their customers.

Films Return To Theaters, But Not Exclusively

Towards the end of Q3, there was hope that the movie industry would swiftly return to normalcy with Tenet and
Mulan finally being released in theaters. However, the box office performance for these blockbusters were
underwhelming, not just in the U.S., but across the world. At the time, COVID cases were still rising as part of the
second wave, with many locations in the U.S. still closed (most notably, NYC and LA), and those that were open still
had seating restrictions. Christopher Nolan’s adamant decision to only release Tenet in theaters resulted in
lackluster results. While eventually it grossed $360 million worldwide, which isn’t bad considering the
environment, it was well below the expectations. This provided the spark for newly appointed WarnerMedia CEO
Jason Kilar to make some radical changes. They quickly announced that Wonder Woman 1984 would be released
day/date with HBO Max on Christmas day, finally putting an end to the constant delays. Soon after, they shocked
the Hollywood industry by announcing that their entire 2021 slate would be released theatrically with a
simultaneous release on HBO Max (available for 30 days). The blowback was expected, as those enriched by the

theatrical model were never going to quietly transition to a streaming platform without the same type of potential
economics. Jason Kilar has been at the forefront of media disruption, with Amazon and Hulu, and this was a
necessary move to start putting their new DTC service front and center. Disney has also taken this time to
experiment with how to use Disney+ for their films. The box office performance of Mulan, which was only
released in countries where Disney+ was not available, was poor, generating only $67 million, and just $40 million
in China. But that only tells part of the story, as there was optimism it could generate substantial revenue through
the Disney+ Premier Access Window. While it’s tough to say exactly how well Mulan did, all indications (or lack
thereof) signal that it was not a resounding success. Studios took notice and immediately started delaying their Q4
releases into the Spring of 2021 (or later), with many films actually being postponed for a 2nd (Top Gun: Maverick)
or even 3rd time (No Time To Die). This was especially true for the studios that didn’t have a streaming platform
(Sony), or ones that lack scale (Paramount+, Starz). But other major studios have taken the opportunity to
experiment further with the theatrical release model. And even with many theaters closed, Christmas Day
encapsulated the state of the industry. As previously mentioned, Warner Bros. released Wonder Woman 1984 in
theaters (domestically; international release started 1 week earlier), and on HBO Max. It earned $16.7 million in its
opening weekend, which was the highest since the onset of the pandemic, and has subsequently moved past $150
million globally. It’s still paltry considering how well the original title fared a few years ago, but success is no
longer defined by just box office. Disney eschewed the theaters and chose to release Soul directly on Disney+ in
markets where it was available. The goal was clearly to see how a Pixar film can attract new subscribers as well as
drive engagement. While it’s unlikely that Soul was able to generate a substantial profit (if any), it seemed to
highlight how new films can be beneficial to Disney+. As a result, it was a little surprising to see Disney revert back
to the Premier Access Window for the March 2021 release of Raya and the Last Dragon. The big difference from
Mulan being that it will also be released in theaters in the countries where Disney+ available, giving the consumer
the choice as to how they want to watch.

While many movies moved out of Q4, there was one movie that actually moved their release date up, as The
Croods: A New Age switched its December release for a November one. Universal has signed agreements with
several of the major circuits to create a PVOD window where they can offer films on-demand after 17 days (while
still playing in theaters). Considering the relative VOD success of Trolls World Tour at the onset of the pandemic,
there was hope they could replicate that performance with another kid-friendly, animated sequel. By moving the
date to November, they could align the VOD release with the holiday period, which is an active time for movie
viewing with family get-togethers. It’s unclear how much revenue it generated on VOD, but the domestic box
office has displayed positive results. It generated $24 million in the 24 days it was available exclusively in theaters.
But with limited competition, it had legs, grossing $30 million in box office during the next 60 days, even while
available on-demand. It was a positive sign for Universal’s PVOD strategy, showing that consumers will still enjoy
the theatrical experience even if the film is available at home. Increasingly, studios are moving away from the
exclusive 90 day theatrical window, and trying to provide ways to give consumers more choice to how they want
to watch movies. There is no defined playbook, and each studio is taking a different approach, and experimenting
with different types of releases. The one major unifying theme is that they all want to be flexible and give
consumers more choice. As a result, it’s hard to imagine going back to the traditional theatrical model once
moviegoing normalizes, but this isn’t the collapse of the movie industry either.

Thus far, we have just focused on the U.S., but films are released worldwide, and international markets make up
~75% of the global box office. While Disney and Warner Bros. may release films directly to their streaming service,
they are not yet available globally (HBO Max is only domestic), so there is still a need for a theatrical release in
some markets. For many Hollywood films, the buzz of a domestic release, with its red carpet premiere and word
of mouth marketing, can help the film get off to a strong start in international markets. However, without any of
that promotional velocity, it’s been tough for films to see much success around the world, especially in smaller
countries with limited marketing efforts. Even some of the major European countries have difficulties, as they
have seesawed back and forth between opening and closing locations due to the pandemic. This is another
element that has factored in to executives’ decisions to delay films.

China, and more broadly, Southeast Asia, has been one of the few regions where the coronavirus has been under
control, and theaters have remained open (although still at limited capacity) for some time. China was the 2nd

biggest box office market in 2019 and has become an increasingly important market for Hollywood releases. For
studio executives, there was a hope that these films would perform well enough, where even with a 25% split, they
could help steer the film towards profitability. However, this wasn’t the case, as both Tenet and Mulan
underperformed in September, and WonderWoman1984 faced the same result in December. There are a couple
factors at play here. First, the simultaneous release on OTT platforms provides a high-quality digital version, which
is the holy grail for piracy (compared to shaky camera rips) that is so prevalent in the region. Studios tried to
combat this by starting with rolling international releases, and have the U.S. (streaming) market be the last to
release a film, but that hasn’t really worked as well as they’d hoped for. Second, over the past few years, there has
been a waning interest in Hollywood films. While some tentpoles, such as Avengers: Endgame or F9, can still
perform extremely well, they are making up a smaller proportion of the top grossing films in China. Instead,
Chinese audiences are increasingly watching local language films. This is a crucial point, as the quality of local
language films has greatly improved over the last decade, and cater to the unique tastes and culture of the region.
In China, multiple movies generated over $100 million in box office in Q4, with My People, My Homeland topping
the bunch with $422 million. This clearly shows that the demand for movies is there, and perhaps led to some
false hope for the December releases of Wonder Woman 1984 ($18.7M opening weekend; $25M cumulative) and
Soul ($5.5M opening weekend; $58M cumulative). But it is not just China where this is happening. In Japan,
Demon Slayer the Movie: Mugen Train, a local language anime film, became the highest grossing film ever in the
country, generating over $350 million.

Yet while both of these demonstrate domestic success, neither has been able to generate significant revenue
outside of the country, (96% domestic). The next step for these local language films will be traveling
internationally. However, this should improve over the next few years, thanks in large part to Netflix. The
streaming giant has built their strategy off of local language TV shows, and is bound to start applying those same
principles to movies, where they anticipate releasing over 70 films in 2021. These won’t all be Hollywood films,
and they will cater the content to each market that they are in. However, they’ve been able to adeptly take
foreign TV shows, such as Casa De Papel, or Dark, and turn them into popular series in the U.S. The next step, will
be doing that for films, and it seems likely that APAC will be at the forefront of that. They’ve only just reached
double digit penetration in South Korea and Japan, and are now looking to spend $500 million on South Korean
content this year. Considering the elongated production cycles, it might not happen in 2021, but 2022 might see a
breakout year for Asian language films.

Gaming M&A Goes Cross-Platform

It’s no question that the video game sector has seen explosive growth in 2020, as engagement (playing and
viewing) has skyrocketed with many people confined to their homes for most of the year. The ongoing shift
towards live services has allowed publishers to continually monetize the player base through season passes and
microtransactions without the need to release any new titles. As a result, many of the largest publishers
generated record levels of bookings in 2020, leading to even larger amounts of cash on hand. With minimal debt,
these publishers have had the capability to be acquisitive in their pursuit of scale, but haven’t been too active in
the space. The preference to focus on organic growth has changed over the past months, although they probably
have waited too long to make the shift. The rise of gaming hasn’t gone unnoticed, fueling investor interest in the
space, and resulting in higher valuations for private companies, and a need to pay larger premiums for any public
company. This is encapsulated in the battle between EA and Take-Two for the acquisition of UK publisher
Codemasters.

Codemasters is a video game developer and publisher that focuses on car racing games for PC and console,
including a license with Formula 1. It could easily fit in a portfolio at EA alongside its sport franchises, such as
Madden or FIFA. It would also work well at Take-Two, complementing the strength of NBA2K. The key rationale
for both publishers was that Codemasters had successful games, but did not do a great job of monetizing through
live services. That constant in-game monetization is the lynchpin behind the success of EA’s Ultimate Team and
2K’s recurrent spending. Both publishers saw immediate ability to quickly increase their scale and margins. Take

Two initially reached an agreement to acquire Codemasters for ~$980 million, but less than a month later, EA came
swooping in with a bid for $1.2 billion, which was a 30% premium over its valuation at start of the acquisition talks.
Take Two ultimately conceded, unable to justify the returns for paying a bigger premium, especially compared to a
publisher with 2x the market cap.

The most interesting part of this deal was that both EA and Take-Two felt a need to increase its dominance in their
established space of PC and console. Just like in other businesses, scale matters. But it’s quite obvious that mobile
is the next frontier for these publishers, and there is a need to diversify, with only around 10% of their revenues
coming from that platform. EA has recognized their deficiency, and followed up with another sizable acquisition,
this time strengthening their expertise in mobile. In February, EA acquired Glu Mobile for $2.1 billion, which was a
36% premium at the time. With Glu, they are nearly doubling their annual mobile revenue and gaining access to
established games and IP, but most importantly, they are getting talented development teams. EA brought back
Jeff Karp (formerly at Big Fish Games) in July to lead their mobile division, and this was a big first move from the
new executive. There will be an acceleration in mobile development, with plans for multiple mobile games around
soccer, some of which will probably be based on the FIFA license. Soccer is a global sport, and mobile is the
preferred gaming platform in most of the world, especially in emerging markets. With multiple games, they can
cater to different types of audiences from casual to hardcore, and hope to step players up in experiences (either
within mobile, or to PC/console) over time.

The need for console publishers to establish a mobile presence has been long overdue, but the path to cross-
platform is a 2 way street. In fact, mobile publishers might be even better suited to make the transition to
consoles and PCs. As previously mentioned, console and PC games are increasingly being monetized through live
services (and in some cases, free-to-play) rather than upfront purchases. This has been the established business
model for mobile games for some time, where data science and analytics are constantly applied to keep their use
base playing, and paying. The longstanding success of the Candy Crush is one example of a billion dollar mobile
game franchise. Additionally, there has been a greater shift towards casual games on PCs and consoles, as
evidenced by the recent success of Animal Crossing, Fall Guys and Among Us. These games don’t require high
fidelity graphics, advanced gameplay mechanics, or a long learning curve. Players can quickly jump in and play
without needing hours of tutorials and practice, but that also means it easier to leave. The other crucial element is
that video games are increasingly social experiences, so the players aren’t just playing against a computer, but
more so interacting with friends. These are all the components of successful mobile games.

Zynga, a leading mobile publisher has recognized this opportunity, and is looking to make the step up to PC and
console games. NaturalMotion, acquired in 2014, is the studio leading their efforts and are set to release a few
titles in the end of 2021. In addition, they recently acquired Echtra Games, giving them access to some talented
developers behind action RPG franchises, such as Diablo and Torchlight. This will allow Zynga to not just create PC
and console games, but create cross-platform games, where a mobile player can compete directly against
someone using a PC or console. This expands the TAM, especially as they move internationally, where they are
seeing success with their early inroads in Japan and South Korea.

It’s not just publishers that are riding the tailwinds of the industry’s growth, but also game engines and platforms
that are making the development of games easier than before. While the AAA publishers will use their own
proprietary software, many indie developers are using Unreal or Unity to create mobile and PC games. Epic
Games, owner of Unreal, has made their goal of creating a metaverse clear, and they have been steadfastly
acquiring technology companies that add value to their portfolio of game creation tools. These aren’t necessarily
game-play related, but instead technology that can be used to capture facial expressions, reduce game loading
times, or improve 3D scanning. These tools are very much about creating virtual users and building virtual worlds
that closely mimic real life. Roblox is often misunderstood as a gaming publisher for kids, when in reality it is
another platform that working towards building a metaverse. Roblox doesn’t develop any games itself, but instead
provides tools for users to create games inside Roblox based of the programming language of Lua. Many of these
Roblox games, aren’t really games, but virtual spaces for these players to interact and experience together. Their
recent acquisition of Loom.AI will offer more tools to develop the next-generation of avatars, which are just
important for their player base as the actual games. With their direct listing IPO complete, it will be worth keeping

track of Roblox’s performance, as they sit at the nexus of these gaming trends of social, cross-platform
experiences.

The Future Of Sports Media Starts To Take Shape

While cord-cutting trends improved in Q2 and got even better in Q3, it was always going to be temporary as
subscriber losses started to worsen in Q4. It’s tough to pinpoint a specific reason for the inflection, but it’s most
likely a combination of promotions/subsidies ending, the decline in live sports after the restart, and the conclusion
of a tumultuous political and news cycle. 2021 should see a resumption, and perhaps an acceleration, in the cord
cutting trends that were happening at the end of 2019. Comcast is already guiding that way, expecting 1.5 million
video subscriber losses over the course of the year as they remain content to provide Flex boxes and Peacock to
meet the video needs of their broadband customers. DirecTV has (finally) been sold to private equity giant TPG,
and if the past is any indication, that will lead to even further subscriber declines as the mature business gets
managed for cash flows. Charter actually gained video subscribers in 2020, which is incredibly impressive, no
matter how they did it, but it’s definitely not sustainable. These are the 3 biggest MVPDs, representing ~70% of
the traditional linear customer base, so they will dictate the rate of cord cutting.

Virtual MVPDs also have an impact on cord-cutting trends, as a way to catch subscribers who don’t want the full
cable bundle, and make up ~15% of the Pay-TV audience. These lower-priced offerings have proven beneficial
over the summer as they (for the most part) offered the same major networks, including a lot of the sports
networks (and RSNs), as the traditional MVPDs. These sports networks were crucial as most of the Tier 1 sports
leagues (NBA, NHL, MLB, MLS) returned to action around the same time. Without any long-term contracts, sports
fans could easily sign up for a few months to watch their favorite team, and then cancel. There was significant
growth in subscribers during Q3, with Hulu alone adding 700,000 subscribers, but that has subsequently flattened
in Q4, with Hulu losing 100,00 subscribers (See Chart of the Week). The reason is quite clear as all the biggest
virtual MVPDs raised prices (yet again), but also dropped the Sinclair RSNs from their packages following the
conclusion of the sports season restarts. RSNs are primarily the only way to watch your local sports team, and
without them, it’s tough to sell the platform as a valid alternative for the sports fans. As a result, vMVPDs have
become a way to only pay for 100 channels instead of 300 channels, when all you want to watch is a few networks.

The most fascinating disconnect has been between the relatively modest decline in linear subscribers and the
extreme ratings performance, both good (news) and bad (sports) during 2020. Entertainment content ratings have
been paltry for years, with premium content going exclusive to streaming services. Additionally, the production
shutdowns resulted in a dearth of new content and glut of repeats, making it difficult to make any apt
comparisons. The news cycle was non-stop high octane for most of 2020, building up to the Presidential election
in Q4, and all the cable news networks saw record ratings. Rather than a steep drop post-election, the contentious
nature of the vote lead to an elongated cycle in Q4, all the way through the inauguration in January. With many
people working from home, it seems like the news has become the background noise, and/or the new primetime
programming. It’s important to establish this growth, in the context of looking at sports ratings.

With people still confined to their homes, and major sports leagues on television every night, one would think that
ratings would improve, or at least become relatively stable. However, the performance was abject for all of the
major sports. While it makes sense for ratings to go down as more people cut the cord, it is a worrying sign if
ratings decline accelerate as a subscriber losses moderate. Obviously, the nature of playing games in bubbles or
empty stadiums is a very different viewing experience, and might not draw the same type of interest from the
casual fans. The NFL, the king of all sports, experienced regular season ratings declines, although they were
relatively modest (-7%), especially in a presidential year. But looking at the Super Bowl, there seems to be
evidence that they aren’t immune from the decay (See Chart of the Week). With the NBA and NHL starting their
2020-21 seasons, many will be scrutinizing their ratings, even if it is difficult to make distinct comparisons, to the
re-start or prior seasons. The hope is that viewership will return to pre-pandemic levels as the leagues resume

their normal course of play towards the end of 2021. But sports media executives must have a lingering suspicion
that some of these sports viewers are not coming back.

So, what happens next? The writing on the wall is clear that betting will become an increasing component of sports
fandom. All of the major media networks have signed partnerships with the leading sportsbooks, with the goal of
driving awareness and acting as customer acquisition tools. There will be more shoulder content around sports
betting, more references to gambling on-air, and even dedicated telecasts (as part of megacasts). Eventually, the
sportsbooks will be integrated into the broadcast so viewers can seamlessly bet on the games they are watching.
This is a crucial component of the strategy at FuboTV, even as it seems years away from being properly executed.
But does this gamification of sports really solve the problem with sports viewership? Remember, sports betting has
been available in 15+ states during the restart of sports, and the ratings still plummeted.

Sports betting will be a way to increase engagement, and hopefully ratings, but it is more dedicated to the
hardcore sports fans. These aren’t really the audiences that are tuning out in masses. Additionally, the leagues
don’t really have a way of participating in this monetization of super fans. They prefer reaching a broader
audience, which can translate into higher media rights payments, which are the revenue backbone of all these
leagues. Casual fans are increasingly finding ways to stay up to date through social and digital platforms, where
content (video, audio, text) is abundant. These audiences can also find the personalities/creators that provide
content that match their interest. So, if you just care about highlights, there are pages for that; if you care about
analytics, there are creators for that; if you care about betting, there is content for that. All a click away, at any
time, on a mobile device.

Sports leagues hoped they could go direct-to-consumer and monetize these superfans themselves with the
introduction of annual subscriptions such as NBA League Pass, NHL.TV, or Sunday Ticket, but it’s becoming
increasingly clear that the market is not that big, and it requires skills outside of the core competency of these
organizations. The WWE was one of the first to go direct-to-consumer, but they have plateaued around 1.5 million
domestic subscribers, unable to continue growth, and burdened with the extra costs and skillsets necessary to
expand the audience. That resulted in the pivot back to licensing content, and focusing purely on content creation.
The streaming platforms will become a home for more sports offerings as they look to build out their services,
starting with the hardcore fans that are stickier. Peacock added WWE to its roster of EPL soccer, skiing, rugby, and
other niche sports, and while they aren’t massive in size, they provide a base to start layering in more content.
Paramount+ is also utilizing soccer as a way to attract fans, and using the robust entertainment product to retain
them. As more sports content gets distributed on OTT services, these direct-to-consumer platforms will start to
look like the linear networks they are replacing.

The Early Innings Of The Pivot To Streaming

The 4th quarter saw the latest, and perhaps final new entry (Paramount+ launched in March, but is essentially an
updated version of CBS All-Access) into the “streaming wars” with the reveal and subsequent (1/1/21) launch of
Discovery+. All of the major legacy media companies now have a direct-to-consumer platform as they look to
reach the growing cord-cutting audience. While Netflix has become the clear leader in the space over the past
decade, it is interesting to see the differing strategies that media companies have taken as they make the
transition to OTT. In the cable bundle, media networks were a B2B business that could primarily focus on
producing and programming content, while negotiating distribution agreements with just a handful of the large
MVPDs. The transition to DTC isn’t just taking the same content and putting it on streaming services – it requires a
whole slew of new skillsets. New pricing models (and promotions), UI/UX design, content discovery, streaming
technology, and data science are all new elements that need to be taken into consideration as legacy media
companies seek to establish and maintain direct relationships with their customers.

It shouldn’t be underestimated how big of a transition it is for these media companies to make, as this is first time
they really have had to decide between what business model to support. Previously, all the content would make

its way into the cable ecosystem, either through one of their O&O networks, or by selling shows to 3rd parties.
Now, executives must decide whether a piece of content should support the emerging streaming platform, which
generates little revenue and loses money, or if the content should go on linear TV, which still throws off a ton of
cash, but has a rapidly declining audience. The more content that goes to streaming, the quicker the Pay-TV
ecosystem erodes, resulting in rapid deterioration of profits. While networks will want to have their cake and eat
it too (OTT subscriber growth and affiliate revenue growth), it’s going to be increasingly difficult to manage the
transition with cannibalizing revenues.

The playbook for this evolution seems to be pretty clear, although perhaps heavily influenced by the late arrival
into OTT. Media companies are starting with a direct-to-consumer service that is low priced, and heavily reliant on
library, and as they are able to add more original content, there will also be subsequent price increases, with the
goal of retaining subscribers as they scale. It’s not an easy feat to pull off, as there needs to be established value
to the audience to ensure they won’t churn right away. Netflix has proven they are capable of increasing prices
without losing customers, which results in significant upticks in revenue growth. They’ve recently raised prices
again in the U.S. and other parts of the world, just as the competition from other streaming services intensifies.
It’s pretty clear they are not worried about losing subscribers, especially when they’re providing the most new
content over the past year (in part due to pandemic-related production stoppages). Disney implemented its first
price increase ($4.99 to $5.99) at ESPN+ last year, but that decision was more of a tactic to drive people into their
mini-bundle (ESPN+, Disney+, Hulu) which kept the same price. However, in Q4 they announced a $1 increase for
Disney+ in the U.S., along with a $1 price increase for their mini-bundle, marking their first notable price increase.
Disney also announced a €2 increase in Europe as they’ve bundled Star into the Disney+ as the 6th brand tile,
adding a plethora of general entertainment content that is targeted more for adults. These price increases
coincides with the growing slate of original shows/films (many based on tentpole franchises) that will be available
on the service over the coming years, as outlined in their Investor Day in December. With 95 million Disney+
subscribers (as of 12/31/20) and a tremendous slate of franchise content, Disney has clear confidence in their
ability to retain subscribers (See Chart of the Week).

But subscriber count really should not be the key metric for these services, even if investors seem to be focusing
squarely focusing on that. Case in point, Disney+ has 95 million subscribers, but their global ARPU is $4.03 because
1/3 of their base is using Disney+ Hotstar in India and Indonesia and paying less than $1 per month. It’s easy to
grow subscribers when you’re not asking them to pay. On the other hand, HBO Max only has 37 million subs, but
its higher retail price point ($14.99) results in an effective ARPU of $11.70. As a result HBO Max generates $440
million per month compared to Disney ($382M), despite have a subscriber base that is less than half the size.

HBO Max’s high price point limits the total addressable market, especially when considering Netflix’s most popular
plan costs $1 less, and is one reason for the forthcoming introduction of an AVOD tier this summer. It’s quite
noteworthy that all the streaming services from legacy media companies will have an ad-supported option (Disney
with Hulu). This highlights the reluctancy to move away from a dual revenue stream, and some hesitancy that they
can meaningfully scale subscribers to compete with Netflix on a global basis. Media companies are relying on their
B2B expertise to help make the transition easier by continuing to work with their established linear advertisers.
These are long-standing partnerships, and these brands increasingly need to reach younger audiences who are not
Pay-TV subscribers in a brand-safe environment. While these partnerships might not take advantage of the
inherent benefits of OTT, they are mutually beneficial in the near term as both parties adjust to new economic
models. Advertisers still have the opportunity to leverage more established AVOD platforms with better targeting
ability through Roku, Tubi, and/or Pluto.

These AVOD platforms are growing in importance and are steadily evolving into more than just a dumping ground
for old linear content. Roku has over 50 million active accounts, and just acquired content rights from Quibi as it
begins to explore offering more original/exclusive content on their platform. This gives them more inventory to
sell inside The Roku Channel, and can help differentiate the service. These AVOD services also serve as a valuable
promotional platform and funnel for other businesses. FOX is leaning heavily into Tubi, and will use it to air some
of their Fox programming, and is making it a key component in all of their Upfront discussions. Pluto is also
involved in Upfronts, and will be utilized to funnel viewers into Paramount+ or Showtime, or catch them when they

pause their subscription. These platforms still don’t generate a lot of ad revenue, but they all have lofty
aspirations as the OTT ecosystem matures. As more viewing transitions to streaming, advertisers will quickly
follow the eyeballs and shift larger portion of their budgets from linear to OTT.

5 IMPORTANT DATA POINTS
•   Activision Blizzard is in the midst of a transformative shift in strategy as they increasingly focus on their
    biggest franchises and find new ways to expand the audience. The recent success of Call of Duty has
    demonstrated that the playbook works, and it will be applied to other franchises in the coming years.
    Activision Blizzard had 3 franchises generate over $1 billion in net bookings in 2020, and they expect at
    least 2 additional franchises will reach similar scale over the next couple of years. In order to
    accomplish this, more content needs to be developed to keep players engaged, and content-related
    investment in 2021 will be almost 40% higher than in 2019.

•   The New York Times provided insight into their podcast segment for the first time, earning $36 million in
    podcast advertising revenue in 2020, which was up $7 million from the prior year. Audio will be a crucial
    component going forward, with The Daily averaging 4 million downloads, the added rights to sell
    advertising against This American Life, and further investments in their recent acquisition of Audm.

•   Verizon was a launch partner with Disney+ in 2019, using the new OTT service to drive subscribers to
    step-up into unlimited plans. This proved mutually beneficial, with about 5M Disney+ subscribers coming
    through Verizon at the end of 2019. As this early cohort of Disney+ customers have come off of the
    initial free 12-month period, more than 2/3 have maintained their subscription, either through their
    Verizon direct billing relationship or by opting into a newer Mix & Match plans with the Disney bundle
    included

•   Cinemark doesn’t have the same type of presence in major cities as some of its competitors, which has
    benefitted them in 2020. With theaters unable to open in NYC, LA, and San Francisco, there has been a
    shift in market share. During the fourth quarter of 2019, Cinemark theaters represented 7% of the North
    America industry screens and generated 13% of the overall box office. In Q4 2020, Cinemark constituted
    11% of the industry screens with over 20% of the domestic box office.

•   DraftKings is quickly integrating SBTech into their platform, allowing them to have a vertically integrated
    sportsbook. Owning the underlying technology gives them more opportunity to differentiate their
    service, which is important as iGaming starts to become available in more states. There are early positive
    signs as DraftKings is cross-selling over 50% of their sports betting customers into iGaming. In their
    recent launch in Michigan, they were able to get 70% of sportsbook players engaging with their iGaming
    product.

5 RESONATING QUOTES
“We're going to see a very crowded theatrical field as we get into late 2021 and early 2022. And we don't
believe that magically just because there's more content showing up in theaters all at the same time that, that's
going to dramatically increase the size of the moviegoing population at that time.”

John Stankey, AT&T CEO

“We have some great game development tools, and we think over time, there might be an opportunity to share
those with our communities and allow them to create new content with those tools over time. It's certainly a
developing area of our industry. It's something that Gen Z players are really gravitating towards. And when we
think about developing a social network for Gen Z plays around each of our major franchises, we think about
user-generated content as a very central strand of the DNA of those experiences in those communities.”

Andrew Wilson, EA CEO

“Strategically, it's important for us to have a little more control of our own destiny in terms of the operating
systems and platforms that all of our services operate on, so we continue to be very focused on this and
optimistic about what we're seeing.”

Mark Zuckerberg, Facebook Chairman & CEO

“We expect to win in AVOD and be the leading AVOD player in this country. And secondly, we expect to be able
to do it by reinvesting our profits, but not by losing billions of dollars in programming costs or other costs in the
time it takes to breakeven. Because of those 2 things, we will drive Tubi very aggressively. We will hit $1 billion
in the medium-term or near-term in revenue, and the business will ultimately become a very profitable one for
us.”

Lachlan Murdoch, Fox CEO

“The growing scale of The Roku Channel allows us to do deals like this where perhaps we couldn't have done
them a couple of years ago. We expect that to continue. As the scale grows, we'll continue to look more broadly
at all the different types of content that we can acquire, and we'll be disciplined about making sure that, that
content purchase price whether it's licensed or purchased or whatever the financial details are fit into our AVOD
business model.”

Anthony Wood, Roku Chairman & CEO