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Comment by jmyeet | Hacker News Reader

The VC funding model just isn't appropriate for game studios. I'll go even further and extend that to any content business. Why? Because games specifically and content in general don't scale with how much money you have or spend. We've seen countless examples of this.

Remember Angry Birds? Rovio took VC funding. How did that work out?

Netflix arguably may have run itself into insolvency by overspending on original content to the point where it enters a death spiral of losing subscribers and raising subscription prices to compensate.

Just because you create 1 successful game or TV show or movie doesn't mean that if someone hands you a large check you can't create 10 more just as successful. It doesn't even mean your organically successful original content will remain successful.

Of course there are successful franchies in gaming (eg Call of Duty, Halo, Assassin's Creed). These may end up being worth something and do have an inbuilt audience so they scale better ut they still take significant work.

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> Netflix arguably may have run itself into insolvency

Neither the balance sheet nor the income statement or cash flow statement supports your statement.

The story that I saw is that they have a lot of loans kicking in the next couple of years that will totally wipe out their profit margins.

Looking at [0] it looks like it's.... manageable but you still need the money. If you're making 1.5 billion in profit and the next year you have 2 billion in debt to payoff...

[0]: https://www.fool.com/investing/2022/04/21/netflixs-mountain-...

related reading from when things felt more rosey in 2019:

[1]: https://www.ft.com/content/cf0f0bd6-4596-11e9-a965-23d669740...

> If you're making 1.5 billion in profit and the next year you have 2 billion in debt to payoff...

You refinance...of course. Debt is always cycled like this. Yes, interest rates are higher than before but they are still incredibly low.

I meant more that if this is the consistent case, then in practice you’re going to have problems in the midterm.

I understand that cash flow issues can be resolved with corporate debt, but it requires convinced counter parties and, honestly, future revenue to bargain with. “Our subscriber count isn’t really going up and we need to borrow more money consistently every year” is not the same as “we are immensely profitable” (though I don’t think it’s a doomsday scenario in itself)

They're pivoting to including an ad-supported tier. Microsoft is on board for providing the ad-platform. I wouldn't worry about Netflix going away within the next few years. Whether it tops the markets like it did the past 10 years is another story, but I wouldn't worry about insolvency.

What are the prospects on those rates?

Last quarter they reported 1.6B net income. Not even close to insolvency.

This excludes future obligations. Netflix is obligated by both customers and contracts to produce more content in an increasingly competitive landscape.

How different is Netflix from paramount plus?

Netflix has 180 million more subscribers that Paramount Plus, which probably means 10 times the cash flow, which means it can produce more content, which means it can attract more subscribers.

You just fell for the "in goes more money, out come more hits" fallacy.

As OP said: the content business is not normal. You can't assume that big budgets == big success.

They said more content not more hits. In the content world quanity gives best chance at finding that rare hit.

Make 29 original shows, feel great if one becomes mainstream popular.

This is true, but it fails to take into account back catalog the legacy media companies such as Paramount, Disney, NBC Comcast, and to some extent even HBO have to fall back on. They gain subscribers simply to watch the content they made 20+ years ago, and then on top of that, have in many cases just been running sequel and spinoff series on things they already know work. Sure, not every spinoff series works, but it's sort of like they're throwing darts at a known dartboard in a well lit room; Netflix is throwing darts in the general vicinity of where it believes a dartboard to be based on the sounds its heard from getting lucky in the past in a pitch black room. The consequence is that Netflix pays a lot more money finding its hits than its competitors do.

This isn't insurmountable, and Netflix has shown itself to be full of innovative means of handling this reality. But while the bulk of the last 10 years was just gathering subscribers to pay for other peoples' content (remember, until recently, The Office, Friends, Star Trek, and Disney movies were ALL on Netflix), the next 10 will require them to do more in the way of finding original content that works, and acquiring things from smaller/foreign studios (a la Squid Game). They've got practice, but they've lost their money printer.

it might help if they didn't kill shows a week after they are released so the get the chance to become mainstream hits.

Rarely does a show get killed halfway through a season unlike network tv where your favourite pilot only lasts 4 weeks.

The problem is rarely does a show last more than a few seasons and that is mostly because of how contracts are written where you pay low for an unknown actors for 2/3 seasons and when those contracts are up for renewal you move on.

On network tv after 4 seasons it can be sold for syndication so many shows get cancelled. For netflix the money spent on new seasons keeps existing customers but does nothing to attract new ones. This forces netflix to create new shows that hopefully attract new subs.

If it were this easy, why wouldn’t paramount have done this for the last century?

Paramount has done just fine for the last century. If you mean as a streaming platform, they only recently started even trying...and thanks to Star Trek, they've had a pretty decent start.

Who’s making the shows and what are the shows?

It’s not as simple as throwing poop at the wall and hoping a bit of it sticks.

I feel it goes without saying that big budgets = more (and better odds) opportunities for big success because you can afford to take more cracks at it.

I mean, it’s not that dissimilar to VC funding: you make ten bets and hope that one makes it big.

More money in is more rolls of the dice though which is important. It’s also leverage to build/buy brands around successes which is basically the play all the big content publishers have made lately.

Technically, to check for insolvency, you need to look at the balance sheet, not the profit & loss statement. But that sounds like some extremely handsome profits.

VC firms, game studios, and movie studios all operate using the same “blockbuster business model,” meaning they expect the profits from one of every ten deals to pay for the losses of the other nine.

Maybe the lesson is that multiple blockbuster models interfere with each other when combined into one venture? It seems kind of like how you can’t make an infinite chain of hypervisors.

With VC funding, though, once they find that one blockbuster business, they expect it to be able to grow exponentially because it has a defensible, unique "special sauce" that is scalable.

With games, though, one successful game or franchise rarely guarantees additional successful games or franchises. In some ways it's "catching lightning in a bottle", and very difficult to repeat, even if you have the same inputs (designers, programmers, funding).

The problem is that they almost never actually have the same designers, programmers, artists, writers, or funding or anything.

From what I've heard, the game industry is notorious for laying a lot of the staff off after a game project before they even know if the game is successful or not. Then they might bring those people back for a sequel if they are still available when they start making it.

One of the things that killed my interest in working in the industry is the working conditions, and the expectation that many employees are actually one person company contracting for the next gig.

So on top of all the known issues, one can be let go at any time.

> catching lightning in a bottle

I think in our oncoming age of batteries that this expression could have new meaning.

I think it's that the "blocks" are much smaller for games/movies than for tech companies.

A great game or movie can make a ton of money. But a great tech company can make 2-3 orders of magnitude more.

> Remember Angry Birds? Rovio took VC funding. How did that work out?

They have branded toys and merch everywhere in the universe and even had a movie.

Whether they’re making money, I have no idea, but from a naive point of view they seem to have been pretty successful.

Most content isn’t funded through a VC model though but a more traditional publishing one where you get advanced the money to make the content with a contract that lets the publisher recoup first and then take a percentage of revenue.

Netflix is a publisher in this context but only sells through its own channels so is more analogous to console manufacturers in games. Their problem is basically having a low barrier for competitors to enter and they all own more compelling first-party content.

Most VC funded companies are doing more than producing content or are opening markets. Which isn’t to say the games investment hype cycle hasn’t been very silly lately but it’s more often a bet on technology and/or a potentially emerging market.

A quick Google search indicates that $4B has been invested by VCs in video game companies since ~2010 [1]. The fact that these businesses are "hits based" actually aligns very closely with the power-law nature of VC returns. In fact, Electronic Arts was backed by Sequoia in the 1980s & does $7B in annual revenue today. Lots of other "successes" (defined by achieved liquidity for early VC investors) include Zynga, Tencent, Roblox, etc.

https://www.crunchbase.com/hub/video-games-companies-early-s...

HN is wild lol, if this is correct then Disney wouldn't exist.

Disney has organically grown over the better part of a century. VC funding is predicated on way higher growth rates.

Look at any movie studio, Disney, HBO, etc and you'll find this same story repeated time and time again. Every one of them grew at much slower growth rates. There was no 10x'ing of revenue in a few years (when in the billions).

Even outliers like Pixar existed for 20 years before becoming a significcant component of Disney.

Book publishing? Same deal.

No original content business has followed a VC growth trajectory like tech companies have. Not one. You might be tempted to argue Netflix has but Netflix has taken on a ton of debt and raised a ton of VC funding and used their profits to throw money at this problem with mixed results.

But you're just mapping the funders/producers/etc in a way that happens to support your narrative. Disney and HBO aren't startups or even young companies and lots of things in the 'content business' are funded and developed in ways that's quite similar to the way VC funding works.

It's a relevant mapping for a comparison to Niantic. It's not just a convenient one. "Turn Niantic into Disney (or even EA, if you prefer) in the span of 10 years" is a bad bet for a VC. The argument here is that you can't simply scale the effort to the next hit(s).

"Turn this handful of people into the next Niantic" is a far better bet, but it's not relevant since Niantic was already there! That's the similarity to Hollywood - "let's make a bunch of movies or a bunch of pilots and see which one is the moneymaker." But not many of the production companies behind those shows or movies have gotten 10x more profitable in the future by scaling horizontally.

Niantic is too afraid to move fast and break things, as a famous robot once put it. They started with an interactive game that included location based chat and ultimately even made way for the ability to track players actions on an intel map. They then immediately became afraid of the implications of their own creation and have spent the last 10 years backtracking. Pokemon Go never had a chat. They imposed all manner of restrictions to try to stop people from playing while driving, and, in doing so, also basically hobbled players who use bicycles (because of speed constraints). Harry Potter...well, they handed far too much control to WB, who didn't know the first thing about this sort of game design, and got left with a mess nobody wanted to play. And then there's Pikmin, which I frankly was excited for when I heard it announced, as the console games were a pretty neat concept that I didn't think got nearly the attention they deserved. There's almost no game whatsoever. Next to ZERO interaction with other players (fine...you can see flowers they plant). It's a glorified pedometer app.

I'm not sure if it's an overly cautious legal team they're dealing with or what, but someone should remind John Hanke that start ups don't break through by playing it safe. And to boot, casual players aren't the ones that dump money into games. Maybe they need to add age verification in to satisfy the lawyers before making a game that's actually fun to play, but this backing away from doing what they're in the business of doing is sad to watch and frankly pretty pathetic.

The argument is more general than that, though, from the topcomment - "The VC funding model just isn't appropriate for game studios. I'll go even further and extend that to any content business."

That seems obviously not right? If anything, the model in 'content' predates the technology VC business.

How do you think Hollywood works, if not by taking a group of actors and directors and producers that previously made a successful film and giving them a bunch of money to do it again?

Content absolutely does scale with budget--you can make 10,000 films that cost $10,000 to produce but they will never match the box office of a film that you spent $100M on. This should be obvious: you can't even afford to pay an actor with $10,000.

When's the last time Hollywood film studios 10x'd their revenue? Even looking at global box office, it increased from 23.1B in 2005 to 42.3B in 2019 pre-Covid.

That's not a growth rate that would attract a VC. Not a lot of new VC-founded studios, as a result. Would you count Quibi?

Netflix, HBO Max, Hulu, Amazon, cable networks, and movies are all competing for a finite set of attention, and there are more other things competing for that attention than ever before too. Netflix has aggressively expanded to compete globally in a way US cable never did, but that still has a ceiling.

If you ten-x'd the amount of 200-million-budget films made in a year you'd similarly hit a wall. At a certain point all you're doing is raising the bar necessary to attract consumer attention, vs attracting new attention and dollars.

> When's the last time Hollywood film studios 10x'd their revenue?

We actually don’t know. They veil the real numbers for each movie in complicated shell and subsidiary corporations and private arrangements that can’t be audited by the public.

Your claim now is that not just the internal PnL for films is obfuscated but both global box office numbers + public company reporting top-line revenue is as well?

If you want to raise a bunch of VC money to open a movie studio because of that, good luck to you, but... doesn't seem like you'll get a lot of bites.

> Your claim now is that not just the internal PnL for films is obfuscated but both global box office numbers + public company reporting top-line revenue is as well?

Where did I make a claim about the top line numbers?

> If you want to raise a bunch of VC money to open a movie studio

Wut? At this point I’m not sure you’re actually responding to my comment but cheers

>Where did I make a claim about the top line numbers?

The claim I made was about "their revenue" - that's the top-line number. You disputed that by saying we don't know.

Their revenue is hidden in shell and related companies. What revenue are you looking at the public profits of Disney?

I should’ve been clearer. I meant the 10x part. Apologies.

It’s not VC money but you pretty much described Amazon, Netflix, and so on. If they are dumping money hand over fist into original content they probably have a good economic argument for it.

..? Hollywood film studios don't 10x their revenue the same way VCs don't 10x their revenue. VCs bet on companies that 10x their investment, and studios bet on movies that 10x their investment. The wins are so big that they enable risk taking on bets that might be flops. It's no different in book publishing or the music industry.

I don't think the holds. When Sony bought Columbia there's an apocryphal story of the USA executives explaining the business to the new Japanese owners and saying "We make 20 movies and only 1 is profitable". The Japanese executives talked to each other in Japanese and then replied "Please only make the 1 profitable movie". In other words, the mis-understood that the USA executives were trying to tell them they don't know which of the 20 movies is going to be a hit.

Going back to 2019 (so taking COVID out of the consideration), "Dark Phoenix" tanked, cost $200 million. "Gemini Man" tanked, cost $172 million. Plenty of 30-70 million dollar movies that didn't do well.

This page list 680 movies that came out, no list of budget but only around 1/6th made 10 million and I'm sure there's a long list of the ~500 that made less than 10 million that cost more than 10 million to make.

https://www.the-numbers.com/market/2019/top-grossing-movies

> apocryphal story

I kinda love the “it’s definitely wrong or taken out of context, but once I’ll have finished telling the story we’ll have forgotten about that caveat” vibe that comes with this disclaimer.

Sony is no stranger to throwing spaghetti at the whole to see which stick, I mean they have are a movie studio in Japan too, and no they’re not throwing homeruns after homeruns all year long.

Also that’s a pretty good joke reply I think.

Here's a good example of the problem. Marvel vs DC.

Both of these companies have significant (ie decades) of original material to draw upon. For the last 20 years, superhero movies have absolutely dominated the theaters.

But no one would look at this situation and draw any conclusion other than Marvel has trounced DC. Is the Marvel source material just that much better? IMHO it isn't to a significant enough degree.

What is different is execution. Marvel IP has just been better managed and they've had and built a better organization around it. It's drawn on Disney's extensive pedigree in this business.

Producing original content is difficult. It requires a culture of putting up with the 10 flops for that 1 breakout hit. There is no formula for that 1 breakout hit. A million factors go into why that hit became a hit and it's not a formula that can be copied and reproduced as the VC funding model demands.

And Marvel went bankrupt in the 1990s, which to your point, is all about IP management. Disney I would argue has absolutely done VC-enviable returns on its Marvel acquisition.

It spent $4 billion on the company in 2009. They’ve easily made $100b off of the films, TV shows, comics, merchandise, theme park rides, etc.

I wholly agree with your point re: content that it has the culture of 10 flops for every hit. But that studio model, which has always existed in Hollywood, is the same model and a VC fund. Instead of going public, you get sequels or branch into other IP.

Are the returns the same? Generally no. But a good acquisition, like Marvel and Star Wars for Disney and Harry Potter (and to a lesser but historically significant degree, DC Comics) for Warner Bros, can pay dividends the exact same way as investing in a future tech titan.

Hollywood has a near infinite supply of original writers and source material to take from and adapt to film.

It could be argued that it’s less about creating content than transforming content (craft mastery and artistry is still required, but the concept is pretty different).

That’s also where I think Netflix isn’t that much in trouble based only on its business model.

But it doesn’t work with game creation. You can’t just transform source material (original or not), it needs completely different innovative elements.

To note, game franchises also exist, but while they are wildly profitable I’d see that as a well guarded niche.

I know you just meant “very many” here, but the phrase “near infinite” sent me off for a bit of a think. Thanks, brain.

I meant that Hollywood has many many original scenario writers that will come up with original ideas, but if they were to magically all disappear tomorrow:

- it could still take any best seller book from the past 5 centuries and make it a script

- it could take any ancient story / non controversial religion gods / legend and turn into a script

- it could autogenerate stories from an AI until something that makes sense comes out and adapt that into a movie

I really think the input part is a solved problem, as long as there is enough talent to make it into a decent movie, and this part is move forgiving of "deja vu" and repeating the same techniques (nobody's gonna throw a fit because the director reused a shooting angle from a previous movie, at most it will be a meh moment)

> Content absolutely does scale with budget

Wrong, unless you measure "content" by "minutes of screen time."

If you measure it by box office, then we can easily prove you wrong. Many of the other commenters have already done that.

Completely agree. I think the prevalence of sequels in Hollywood underscores the point; successful content begets popular content at a higher rate than a complete unknown.

"Sequels" are the opposite of "just spend ten times as much money to make ten times more" - in that exponential-growth VC-model type strategy, you'd need to be spawning new franchises in parallel so you could have sequels to ALL of them at the same time, not just wait one by one. Sequels are "do the same thing again" not "be able to do more of them at once."

For every MCU there's a Fantastic Four standalone or a Universal Monsters Universe or a Percy Jackson or a Golden Compass or Narnia or other never-to-be-finished would-be franchises... or even just a Star Wars: Solo on the "hmm this isn't paying off after all actually even if it's not a bomb" front. And those were all existing IP, even!

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