Financiers Second Guess Business Model, Film Crew Stuck – Deadline


The reverberations of Jeffrey Katzenberg and Meg Whitman’s stunning Quibi shutdown are being felt both in financial circles — where the $2 billion failure cements itself as a cautionary tale — and in Hollywood’s beleaguered creative community where many believe Quibi’s demise will make it harder for the next big idea to hook funding.

Post mortems are underway on both coasts, questioning everything — from the decision to launch a service geared to consuming content on the go a month after a global pandemic locked everyone at home, to perhaps the worst brand name since Tronc (the short-lived moniker for Tribune Publishing), to Quibi’s inability to connect with its target millennial set.

Quibi

Quibi is short for “quick bites.” “It’s not a bad name. The Q is a good image,” said one Wall Streeter. “But it might have been hard to pronounce. Is it ‘cubee’, ‘queebiee?’”

Exclusive Q&A: Quibi’s Jeffrey Katzenberg & Meg Whitman Detail ‘Clear-Eyed’ Decision To Shut It Down

One seasoned Hollywood dealmaker who watched a presentation Katzenberg made to the agencies late last year to draw talent marveled at the platform’s well publicized limitations in areas like social media sharing. The dealmaker wondering if executives sat down with actual millennials to see if they really wanted quick-bite scripted mobile programming, or if “it was these two 60-ish titans going, ‘Boy, are the kids going to love this’!”

The quake will be felt among the 15 or so sharp creative executives who took a leap and placed their faith in the reputations and confidence  Katzenberg and Whitman who will be among over 200 that will be jobless at the beginning of November. And the ripples are as far reaching as Kiev where today, the 100 cast and crew of a Mark Molloy-directed 2016 election fixing drama This Is Clickbait continued to shoot despite being told by Quibi to shut down and come home.

Drama in Ukraine

They were filming the last scenes they had money for today, a pivotal scene involving an actress who will have to report to work on another movie. But the production needs about 20 days to finish. Producers at Stampede and at The Batman director Matt Reeves and Adam Kassan’s 6th & Idaho are attempting a Hail Mary: told to shutter on Monday, they’ve sent the script and a hastily assembled 15 minutes of footage to potential financiers in hopes of raising the low-seven-figure bridge funding needed to finish a drama that would be repurposed as a traditional indie feature.

Cast and crew are holing up in a Ukraine hotel, hoping the money materializes before everyone scatters in the next few days, which might doom the project that’s based on the true story of Macedonian teens who manipulated the 2016 U.S. presidential election. The filmmakers were ostensibly told to stop because of a COVID test that sources close to the production said turned out to be a false positive.

A source close to the This Is Clickbait production described the call from Quibi as “devastating” and said the shocked crew milled around a hotel lobby dumbfounded and full of questions as Katzenberg and Whitman announced Wednesday they were pulling the plug. The Quibi app’s last day of operation will be December 1.

Back Stateside is a wave of second guessing, dissecting flaws in Quibi’s strategy and the viability of its platform. Should Katzenberg and Whitman have waited to flick Quibi’s “on” switch, some investors wondered, instead of launching into a full-blown pandemic that made it impossible to accumulate enough paid subscribers to allow a well-funded startup to last only six months?

While Katzenberg months ago placed Quibi’s launch problems squarely on COVID-19 for blunting the service’s main appeal – filling downtime moments for on-the-go 25-35 year-olds – he and Whitman acknowledged to Deadline in their first interview after the shutdown and subsequently that it wasn’t fair to blame the virus as the sole reason for failure.

But their abrupt decision to close has revived that obvious question: Why did they start Quibi during a pandemic when its self-described business model was, for better or worse, based on viewers in line at Starbucks, on mass transit, living life at a million miles an hour and craving content in the down moments in between. Quibi launched April 6 in the midst of a total shutdown that started in mid-March.

“Even then I thought it was a mistake,” said one Quibi investor who asked not to be named. “You had a time in April when there were 800 people dying a day in New York City hospitals and my view was, is it the time to launch an entertainment revolution? You could have waited, delayed, slowed down. You could have flipped the switch at any point.

“At the time, their view was, ‘Everyone is sitting in their houses and they do not have a lot to do and other streaming services were going to run out of content,’ ” he said, referring to Katzenberg and Whitman. “It was huge mistake. It was a major pivot.”

Evolving To “Freemium” Model Too Late

Along with a lack of strategic clarity, the platform’s miscalculations include: overspending, no hits like The Handmaid’s Tale that put Hulu on the map, no library, and charging consumers a high monthly fee for unproven product. Early decisions to not allow viewers to share content on social media or watch Quibi on TV hurt, as did ineffective marketing. And Quibi could still have learned more from the best and brightest in mobile video even if its scripted content was worlds away from TikTok, Snapchat or Instagram.

Quibi is “the WeWork of entertainment,” one high-profile producer marveled. “The difference is, it’s not fraud. It just didn’t work.” (Investors are suing WeWork for fraud in connection with a failed IPO.)

Insiders said Quibi had been evolving toward replicating the “freemium” strategy employed in its launch in Australia, which gives access to programming with commercials for free with the option to pay a premium subscription rate for programming without commercials. But by the time this was being seriously considered, it was becoming clear to execs that the writing was on the wall. That was clear when Katzenberg focused on the business side and became less involved in content, a signal things were growing desperate. As Katzenberg and Whitman acknowledged, nothing was going to change its fortunes anytime soon as the initial raise of funds was running out.

“Has any entertainment company ridden to promise, and then dissipated this quickly? I cannot think of one,” said Gene Del Vecchio, adjunct professor of marketing at USC Marshall School of Business.

Quibi investor“It surprised me that there was no transaction. They are not selling the whole company, but are winding down, and still selling content. It didn’t seem to have been an emergency, enough that they had to shut down.”

Still the abruptness of the end was a surprise. An investor who attended the virtual meeting Wednesday where Katzenberg and Whitman revealed Quibi’s demise said the call was “like a presentation,” no Q&A. He was surprised that Katzenberg and Whitman didn’t pursue, say, merging with a SPAC (Special Purpose Acquisition Vehicle) or clinching a deal to sell Quibi’s content, before announcing the end. The founder and CEO say they plan to sell rights to the programming. It’s complicated, however. They can sell the programming to a streamer after two years but all rights revert back to the content creators after seven years.

“It surprised me that there was no transaction,” the investor said. “They are not selling the whole company, but are winding down, and still selling content. It didn’t seem to have been an emergency, enough that they had to shut down.”

In Hollywood, there was palpable disappointment at the loss of a viable outlet to sell projects and make talent deals at a time when the major studios are overhauling and making less as they lean into streaming and reel from the damage the coronavirus has done to their theatrical-bound properties.

“Give them credit for taking a rise, because we need big swings like this right now,” said an industry player who made deals with Quibi. “They were paying real money, essentially financing and licensing content that left opportunities for real ownership stake and own the content outright after seven years. [But] the name didn’t help and it seemed off. Why didn’t they start with subscription fees at a dollar or two until they built a content library and customer loyalty, and then raise the price over time? But really, the pandemic just crushed them.”

Quibi

Another dealmaker recalled Katzenberg’s staging a presentation late last year for all the agencies, hoping to draw top talent for its next wave of projects. Each agent was given a smartphone pre-programmed with Quibi content to watch highlights before Katzenberg spoke.

The reaction in the room, said the agent, was that while some of the programming seemed pretty good, it felt awkward watching it on such a small screen. Even then, the agent said, many believed Quibi might be short-lived, if only because of the many content alternatives and the likelihood that if millennials had spare moments in their on-the-go day, they would likely use them to check emails and social media platforms, and not watch content broken up into 10-minute segments.

Said one seasoned producer who resisted overtures to make projects at Quibi, “Just the target demographic of 25- to 35- year-olds seems naïve because people at the low and high end of that live completely different lives. The 25-year-olds are more compatible to 16-year-olds with their obsession with gaming and pursuits that 35-year-olds are beyond that.”

“It is hard to find the key to what young people obsess over, as evidenced by the young people who are making fortunes with unboxing videos. But it’s clear from streaming successes that what most people want is to binge 40 episodes of something, and not to watch 10 minutes of something and then go back and try to remember where they left off,” the person added.

Anger in town

“This was flawed from the start, down to the idea of financing content and then giving it back to the creators after a few years. There is anger in town right now, because it just makes it harder to raise money,” the producer said.

Quibi raised $1.75 billion in three rounds from dozens of investors including media companies like Disney, Comcast and ViacomCBS; hedge funds; and Katzenberg and Whitman personally (their investments said to be, respectively, $10.5 million and $5.5 million, according to website The Information).

Comcast declined to comment on Quibi. Reps for ViacomCBS and Disney didn’t respond. Neither did Madrone Capital Partners, the Menlo Park, CA-based private equity and venture capital firm managed by Gregg Penner — son-in-law of Walmart scion Rob Walton — which chipped in a reported $200 million, perhaps the biggest single chunk.

WndrCo, a holding company that invests in consumer technology — and whose founding partners include Katzenberg and Ann Daly — invested a reported $100 million in Quibi.

The outlay from media companies ranged from $5 million-$50 million. For the big ones, these are small enough to be considered “rounding errors,” said one analyst. Whitman had been CEO of Hewlett-Packard and eBay and campaigned for California governor. Katzenberg’s tenures at DreamWorks, Disney and Paramount are the stuff of Hollywood legend. Katzenberg is a master salesman, resolute in his vision, and an indefatigable marketer. He is so well regarded in the industry that many bought into his infectious enthusiasm and didn’t want to miss out on his next big thing.

Quibi

Quibi’s Jeffrey Katzenberg and Meg Whitman
Denise Truscello for Quibi

As they prepared to fold their hand, Katzenberg and Whitman said they became convinced Quibi would not become a viable stand-alone business. Investors agree that keeping it going would have required more cash, which would have been harder to raise. The duo’s ownership in the venture would have been increasingly diluted. And it would have been a long, hard road. With legacy content businesses suffering from a pandemic that might not end anytime soon, a startup relying on young people on the go remained a tough proposition.

Katzenberg and Whitman said they preserved about $350 million in cash to return to investors, plus the prospect of proceeds from content – though, again, that will be a challenge since Quibi’s licenses are ticking clocks that will expire. In an interview with CNBC on Thursday, Katzenberg and Whitman called the closure of Quibi the “honorable thing” to do — to “return some money to investors and also try to give employees some cushion on the way out the door.”

Noam Wasserman, Dean of Yeshiva University’s Sy Syms School of Business, called that “remarkable.”

“The usual inclination is for founders to keep persisting until the money runs out. Part of that comes from founder overconfidence in their prospects and passion for their ideas, from the ways in which founder persistence is celebrated in the culture,” he said. “It’s impressive that Quibi’s founders and executives were able to realize that persistence might be a vice rather than a virtue, and then to shut down the company” while it still had money left.

Advertisers left holding the bag?

A group that also appears to have lost out is Quibi advertisers. The platform’s 10 initial ad partners — including Taco Bell, Pepsi, Anheuser-Busch and Walmart — bought up all available inventory before launch for about $150 million. Unlike venture firms or other investors, though, ad buyers will likely not see that money again.

One media buyer told Deadline many of the ad deals were struck between company executives and Katzenberg and Whitman directly, leaving their agencies — which usually hammer out deal terms — exposed once the service failed. As early as May, many advertisers were agitating for make-goods or concessions when they saw the weak initial take-up of the service.

“The way the deals were cut gave the agencies very little leverage,” the buyer said. “It’s hard to see how they get whole.”

Brian Wieser, global president of Business Intelligence for GroupM, said he hopes the Quibi debacle doesn’t scare advertisers looking to innovate. “Hopefully this doesn’t deter them,” he said. “If anything, they should be doing innovative things more often, especially given the weakness of traditional television. There need to be more alternative avenues to pursue.”

Overall, Quibi’s founders “were making assumptions that weren’t based in reality” and brought “no proof of concept” to the process. “Investors were just persuaded that this was going to be a good idea instead of seeing it actually connect,” he said.

One studio chief conceded to never being “able to get my head around the idea of what they were doing. They all seemed well-intentioned but there was just something slightly off about it.”

Other red flags, Wieser said, included Katzenberg and Whitman investing only a sliver of Quibi’s overall pie – unusual for founder-led startups – and also the costly flops of go90 and Vessel, which were similarly focused on mobile video.

In Wieser’s view, “people will pay for content they really want, so it wasn’t that they charged money, it was that they didn’t demonstrate the demand.”

As for the Quibi execs who bought into the Katzenberg-Whitman dream, one insider said everybody who worked there learned a lot in a short time as they generated almost 100 scripted, unscripted and docu shows, along with reams of daily news and sports programming. Even though Katzenberg and Whitman’s successes were a main draw, everyone came in knowing this was a launch of an unproven concept and that it could fail. The insider believed that the executives would be given a cushion, and will land in other jobs quickly.

Around Hollywood, players worry that the Quibi flop will make it harder for other startup companies in the space to find funders.

“I’ve got to get on that horse and find the next mountain to charge up,” Katzenberg told CNBC. “It’s the only thing I know how to do and I’ve got a lot to prove.”



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