In Defense of Quibi
We’ve all seen the punditry, hot takes, and joyful schadenfreude in the media regarding Quibi, the short-form video content app created by consummate Hollywood insider Jeffrey Katzenberg:
Two Veteran C.E.O.s Risk $1.8 Billion on a Streaming App. In a Pandemic. Is Anyone Watching Quibi? After 6 months and $1.8 billion, Quibi wants a new owner. That will be a hard sell.
To some degree, I understand the pleasure many take in seeing Quibi fail. For starters, the media loves nothing more than tearing itself apart, and Katzenberg, an old-school-cocky studio exec, is a prime target. Secondly, the hubristic elevator pitch for the service—“quick bites” of high-production-value vertical video—seemed absurd on its face to those aware of the existence of YouTube, Netflix, and Tiktok. And, finally, the sheer amount of money raised for a product that had a strong chance of failing seems anathema to the “make small bets and iterate” conventional wisdom in Silicon Valley today.
So, perhaps, Quibi was destined to fail. Certainly, its pre-launch cash burn on content and technology was several orders of magnitude higher than most startups ever get the chance to do.
But I submit that Quibi could have succeeded, and will spend this article attempting to sketch out an alternate future in which they did. If nothing else, it might serve as a useful thought experiment for other content-driven businesses.
As with all companies, the whole ballgame comes down to a fairly simple equation:
Revenues – expenses = profit
Now, of course, many businesses don’t make profit for a while. Since we have the formidable Katzenberg on our team, we have $2 billion in cash on day 1, so we can lose that much before we go bankrupt.
Based on publicly available data, we are spending approximately $500 million per year on content and personnel (insane!). So our goal is to get to $500 million in revenues, plus whatever we spend on advertising, to break even.
$500 million in revenues a year is $41.67 million per month. With Apple’s 30% cut of mobile subscriptions, we make about $5.60 per $8 subscription, so we need about 7.5 million active subscribers to pay our content costs.
How many downloads will it take to get to 7.5 million subscribers? If we assume “industry average” conversion rates of 5-10%, let’s say we need 100 million app installs.
How much are we going to pay in advertising for that 100 million downloads? Well, probably something like $2-10 per install, based on ballpark Facebook costs-per-install for mobile apps.
Now, this is the tricky bit—we can very likely hit the low end of that cost-per-install range, but only if the shows are good.
If the shows are good, a) We don’t have to pay for every single install, because customers tell other customers to check out our app (free installs), b) our ads will perform better because people have heard of the shows and want to watch them, thus making them more likely to install and c) our subscriber conversion and retention increase, because people want to pay to watch the shows.
So the crux of our business is creating shows people want to install our app to watch (duh).
At one extreme, we pay $10 per install, users convert to subscription at 5% (or lower), and we spend 1 of our 2 billions on paid acquisition, plus another $500 million on content. We go out of business very quickly. (I imagine this is somewhat akin to reality.)
At the other end, we pay $2 per install, users convert at 10%, we spend $200 million on paid acquisition, plus $500 million on content, but we have 10 million subscribers! ($670 million in revs, almost profitable!)
To be clear, I’m sure Quibi understood this equation—if you listen to interviews with Katzenberg, he repeatedly hammers the point that “pretty good, but not great” content is the key to the business. I’m also sure that a lot of shows were meant to target the market for “pretty good, but not great” content that is somewhat underserved—folks who watch “filler content” on daytime TV like “Judge Judy” and “Cake Boss”.
But it seems that Quibi wasn’t able to make the math equation work. Cost-per-install was too high, conversion-to-subscription was too low, and subscriber retention was weak.
And at the end of an article “in defense of Quibi”, I have to hold that against them. Apps like Calm and Headspace have millions of subscribers with content you could produce in a reasonbly-well-outfitted garage, and, based on 3rd-party data, are able to perform well on cost-per-install advertising and subscriber conversion.
Quibi simply didn’t give itself enough runway to crack the content nut, but that doesn’t mean the concept of high-quality, short-form video for mobile, financed via subscription, is fundamentally flawed.
