The Breakdown - Surveying The Carnage: Movies, Sports, and Education in Crisis

Episode Date: May 15, 2020

  This is the second in a series of episodes on how the economic crisis is challenging and transforming different industries. NLW looks at: Movies Direct releases are already making more than box office counterparts AMC is on the verge of bankruptcy (or buyout by Amazon)  Production is on hold and even when it resumes, likely to have strict rules on how it is carried out Sports Depending on your study, between 61% and 72% of people surveyed say they’re unlikely to go to live sporting events even after lockdowns are lifted Colleges losing $18B+ in sports related revenue  eSports alternatives surging - with conversations on Twitter up 71% Advertising Industry took 8 years to recover from Great Financial Crisis Ad spending already down massively in March/April - down 38% in digital, 41% on TV, 45% on Radio, 51% on outdoor.  Education Of public schools, only 22% are offering any live instruction  Before crisis, college debt had increased 107% between 2009-2019 Since the 80s, cost to attend college had grown 8x the growth in wages  Estimates of 15% fewer enrollments and $23B in lost revenue

Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond. This episode is sponsored by ArisX.com, the Stellar Development Foundation, and Grayscale Digital Large Cap Fund. The Breakdown is produced and distributed by CoinDesk. Here's your host, NLW. Welcome back to The Breakdown. It is Thursday, May 14th, and today we are doing the second in our series of surveying the Carnage. Now, this is a series basically that is looking at the economic fallout of the coronavirus crisis and the shutdowns across a number of different industries. And the purpose of this is to move beyond our analysis of what second and third order effects might occur to actually understand which second and third order effects are occurring

and how they are playing out in specific industries. In the first episode, which I released last week, I looked at three industries. travel first, one of the more obviously impacted by coronavirus and COVID-19. I looked at music and the concert industry, one of the industries that is likely to feel the impacts of this for the longest period of time and the most completely. And finally, I looked at real estate from both a residential and a commercial perspective. In this updated edition of surveying the carnage, we're going to look at the film industry, at sports, at advertising, and then at one, which I think is potentially the highest impact to the way that the world is organized in the long-term,

higher education. So let's dive in. We started last week with the music industry and entertainment space. So let's start this week with the film industry and the sports space. The film industry, from the standpoint of movie theaters, was already hurting. Over the last three years, movie theater stocks and companies like AMC were down roughly 75%. So there were already big questions about the future of movie theaters, particularly as it relates to the surge in streaming, this long-term secular trend and shift in consumer behavior away from

movie theaters and towards at-home releases. Now, studios already wanted to experiment with direct releases. Many of these studios were involved with some of these streaming projects and had seen the potential, seen the power, but they didn't want to compromise their relationships or they were battling to not compromise their relationships with the theaters, right? When this coronavirus crisis, when these shutdowns happened, that shifted the calculus and a pretty big way. One of the first breaks occurred as Universal decided to release trolls to World Tour directly to streaming instead of doing the cinematic release. And this is a different model, right? Instead of a $9, you know, dollar rental or a $5 rental or whatever it was,

months after it had been in the theaters, it was put out as a $20 rental for premier access for a short period of time because you were getting that movie theater experience in terms of the timing, but at home. And interestingly, it did really, really well. It made $100 million in three weeks, which was more than what trolls one made in five months at the box office. So this was a hugely important sign. Now, it also got AMC to say that they were going to ban Universal movies, so obviously created more of that tension. But at the end of the day, money talks and bullshit walks, and $100 million in three weeks is money talking. Disney followed suit with Pixar's onward, and they just announced.

that Hamilton is being moved up a year and coming out direct to Disney Plus in July. So big, huge shifts in terms of where the movie industry fits vis-a-vis movie theaters. There's a couple other things going on here that I think are worth noting. One is that movie theaters are likely one of the last industries to open. Just like we talked about last week with the music industry, the reality is that these types of experiences, concerts in the case of music, movie theater experiences in the case of movies are both, one, completely optional, and two, events that have a high density of people closely packed in next to one another, right? This isn't something where you can easily

do social distancing. I mean, I guess you could have a movie theater setup where it's only one out of every four seats or something like that is actually sold, but it just sounds like a logistical nightmare, and it sounds still like you're operating on a fraction of the profit. So unlikely to make a difference, right? It's, unlikely for politicians to be willing to clear this type of behavior when it's so clearly optional. What's more, and this is something that's really important across almost everything that we can talk about in these second order and third order effects, consumer behavior might shift as well, particularly in terms of their willingness to put themselves at risk

for these voluntary activities. The Democracy Fund and UCLA Nationcape Project surveyed 6,700 U.S. adults in the last week in April and found that 61% said that they definitely or probably would not go to the movie theaters after this. So that's a huge, huge net loss for theaters, even if they were allowed to open. This has created havoc for these companies. Amc is now in bankruptcy talks, and actually when news broke that Amazon might be courting them, AMC's stock spiked 56% on that news. So this is a really key moment, and likely the movie theater industry does not come out looking exactly like it does now for all intends and purposes.

Now, there's another dimension of the film industry as well, which is that literally nothing is being made right now, right? Film production, TV production, these things are all called off, and that hasn't hit us yet because of how far out production schedules are relative to when we actually see that content. But the reality is that there's going to be some period in the future in which there's just this gap in content and that could be its own set of impacts. The impact of this in the short term has to do with workers, right? Netflix has set up a $100 million relief fund for people who work on production on its productions, but that's a unique thing in the industry pretty much. And there's

huge numbers, tens of thousands of people who are out of work in this industry from a production standpoint. What's more on the other side of this, people are anticipating that the way they actually have to produce movies to produce films to produce TV is going to change as well. There could be constraints that are mandated by governments in terms of things like how many extras they can actually use. You know, you're not going to get the same big, crazy Battle of the Bastards at Game of Thrones if there's a cap to the number of extras. And ultimately, that concerns me less because this industry is filled with creative people who are going to find ways to use CGI, to use digital effects, to use alternative strategies to make that work. But the point

here is to recognize that there is disruption to both the consumption and production side of film that will have long-lasting impacts. So that is number one, the film industry. Let's shift now to sports. And I think sports are going to have an important place in the long-term story of the US's response to coronavirus. If you'll remember, in mid-March, there was a Monday during which Trump tweeted out that the flu still was killing more people than coronavirus and made that comparison. And by Wednesday, he had declared a state of emergency and everything had changed. And in the span of about 60 to 90 minutes on that Wednesday evening, we had Trump declare that state of emergency. We had Tom and Rita Hank say that they were infected with coronavirus.

And we had the NBA shut down the rest of the season. So the NBA, was kind of a third leg of that stool that made a really big impact. It was the first major publicly visible industry that went not just into slight disruption mode, but complete shutdown mode. And it just so happened to happen at the same time as Trump was making this announcement. So I think it was a really instructive and important moment in the way that the U.S. started to actually grapple with the urgency of this disease. So that's neither here nor there, though, in the long term of this industry. Sports is a $71 billion industry with tens of thousands of employees, and like music, like

concerts, it is likely to be one of the last to open, at least when it comes to live sporting events. Like music and like movies, there are significant barriers for consumers to be willing to put themselves back in harm's way by going to those events. Same survey that I referenced before, the same percentage, 61% said that they are definitely or probably not likely to attend a sporting event, a live sporting event, even once the lockdowns are lifted. This is the second highest result in that poll behind only concerts, stadium concerts, which polled at 64% of people being unwilling to attend even if lockdowns were no longer in effect. Now, a different study from Seton Hall had this percentage even higher, said that something like

72% of people would be unwilling to attend a sporting event even after these lockdowns. lockdowns had ended. And this is a huge economic fallout, right? Live sports are a 19 billion a year industry. Now, there are proposals around for sort of half versions where at least you get televised sports, but there's no one in the stadiums. But those carry impacts in terms of how players are organized, right? Mike Trout has been vocal about how that feels like it might not work, because what happens if your wife is pregnant and you have to go see or do you have to be quarantined for 14 days? There's all these challenges logistically of, you have to have to having this at all. So there's a lot of serious questions about when live sports come back and what

they come back as and whether people will be willing to go. And this is to say nothing of the fact that we're going through an unprecedented economic crisis in terms of people's actual wallets, their own resources. They may not be able to spend the huge amounts of money to actually go to these live sporting events with their high ticket prices, inflated concessions prices, etc., etc. So a huge number of impacts just in the industry. But it's not just the industry itself. There are significant knock-on effects where sports spills into other spaces. Spring sports get something like $2 billion in advertising that evaporated overnight, right, with huge impact on the advertising industry, which we're going to talk about in just a minute.

College sports is a huge area, right? Colleges make $18 billion a year from sports, and that has nothing to do or it says nothing of just the huge licensing deals that come from apparel companies. While those apparel deals are out the window, that revenue stream is out the window, and colleges, as we'll discuss at the end of this clip, at the end of this episode, are already facing huge budget shortfalls and structural challenges even beyond this. So there's the college sports area. Lastly, there is the fact that consumers are not going to wait around for sports as their primary entertainment. They're going to go find other things to do with their time. And boy, are we seeing that. Already, even before this crisis, e-sports were on the rise. There's no denying

that, and there's a million good reasons for it. I could do a whole episode about why I think esports makes so much sense, right? The connection that you had to sports as a kid when you could watch your favorite baseball players or soccer players and then go play that sport on a regular time, imagine that, but you can be playing concurrently to watching. You could be playing against your favorite gamers live via Twitch. It's a transformational medium in so many ways. But That has only increased. So in the first quarter of 2020, Twitch reported all-time highs for hours watched, hours streamed, and average concurrent viewership across games.

Twitter has reported a 71% increase in conversation volume and a 38% increase in unique authors in gaming content. And that's just the second half of March, right, before the first full month. Verizon has seen a 75% increase in gaming usage since quarantines went into effect. And again, these are lagging statistics. This is from about a month ago. So, e-sports is exactly as you would expect ascendant in this time of corona. It's also e-sports betting.

So Quentin Martin, who's the CEO of Luckbox, which is an esports gambling site, says that turnover had risen almost 13 times since November 2019, with deposits up 10x. What's more the average size of the bet is doubled since February. So basically, you not only have more people playing gaming and being a part of e-sports, you have people more gambling on it. these are core behaviors formerly organized around sports that move back into this realm. Now, when it comes to sports, I think that the area that feels most likely to be long-term impaired is that live sports experience, is that stadium experience.

But, you know, these industries are at various levels of financial success and are already dealing with, again, long-term secular trends in terms of consumer preferences. And anything that knocks out huge sets of behavior that takes out big rafts of consumers is going to be a challenge. And it wouldn't surprise me if we see major restructuring around at least one of the major sports league. So sports is in a tough spot, no doubt. Let's just briefly touch on advertising now because I think as you see from sports, advertising is an industry that is kind of not unto itself. It's related to everything else. And advertising tends to be particularly impacted by these crises. In the great financial crisis, advertising loss

something like 60 billion in revenue and it took eight years to recover. And there are huge indications that advertising is in for a very challenging time. Overall spending on digital ads from March and April was down 38% from what companies had expected it to be. Ad spending on TV has fallen 41%, 45% on radio, 43% in print publications, and 51% on billboards and outdoor platforms. So this is all from the industry association, the IAB. We're already seeing really, really significant impact on the advertising industry. And the crazy thing is that on the one hand, you have more content consumption than ever. But on the other hand, advertisers simply aren't willing to spend what they were before

because, A, people can't buy things in many cases, right? You don't have people going out to buy cars. Auto sales in the UK and April were down 97% year over year. You don't have people going out to buy clothes and going to traditional retail. retail is expected to lose $2.1 trillion this year. 50% of people, according to a global web index survey, say they won't return to brick and mortar shops for some time to a long time after lockups have ended. So there's no cause for these people to advertise, right? There's no benefit to them. You have an industry that employs 500,000 people, roughly 480,000 people in America that is just

going to be cut to its knees. And this gets to something that Danielle DiMartino Booth talked about, about when she was on the show a couple weeks ago, which is that a key economic indicator to watch for is the second round of white collar layoffs as these second and third order effects come home to roost in these other industries like advertising. So that's kind of what I'm watching is how will it impact these big agencies that employ such huge numbers of people and how will the advertising industry rejigger its offerings? Will it be lower CPMs? Will it be totally different methods. I mean, there's a huge number of things that could happen, but it's sure that something is going to happen because the model that we had before simply will not be sustained at a time

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Now, lastly, let's talk about education. This is an area that I've spent a huge amount of time thinking about. Those of you who don't know, I was a venture capitalist at a firm called Learn Capital for a while in San Francisco, which was one of the earliest education-focused pure play venture firms. And what I mean by that is that it wasn't a social impact fund or a double bottom line fund. It was judged on IRR and the rate of return just like any other venture capital firm would be, but was focused exclusively on education. And so I had a front row seat to see many of the shifts that were happening right in front of our eyes. We were an early investor in general

Assembly and many other education companies that you've heard of. And I think that already education was in a tough spot. There was a growing disconnect between the cost of education and the outcomes in terms of actual real wages. And this to me is going to be a massive, massive accelerant in what could amount to this dismantling of the education system, in particular the higher education system as we know it. But before we get into higher education, let's talk about a different part, the earlier education, right, primary education and secondary education. I think that the clear and deleterious impact of these shutdowns in this circumstance is that you're going to see what was already highly unequal outcomes between public and private schools massively accelerate.

There's an idea already in education called the summer slide, which is basically the percentage of things that are retained as students move from, you know, one grade to the next. And in many cases, this is one of the best, one of the strongest arguments for a shift in our education model to get rid of the traditional summer season because we basically have kids who we send off and they lose meaningful percentages of what they've learned around reading comprehension, particularly around math, right? So they have to spend the first period of time of each new school year just catching up, which they wouldn't have to do if we design the system differently. But either way, we're talking about now a summer slide exacerbated on a huge,

huge level. You have kids who may not even be able to go back to school in the fall in some cases. And what we're doing in terms of at-home education is highly unequivalent between public and private schools. In private schools, they are racing to adapt distance learning technologies and live instruction via Zoom and things like that, because their business model relies on parents not pulling them out, right? It relies on parents continuing to pay for their very expensive services. Private education is a luxury good that needs parents to continue to be willing to pay that luxury good price. And private schools are aware of the fact that in a time of economic turmoil, when there is another alternative, even if not a desirable alternative, they could be one of the

first things on the chopping block. So they have shifted their model aggressively into this distance learning model that involves live concurrent instruction. Public schools don't have that benefit, right? Only something like 22% of public schools are doing any real-time lessons at all across all grades, and only 10% of public schools are doing real-time learning across all grades. So what I mean by that is that 22% are maybe, you know, older kids are doing it at some parts of high school, but younger kids aren't. Only 10% of public schools have real-time instruction in any way, shape, or form across all of their grades. That means that 90% of students are not getting any sort of real-time concurrent instruction, right? They're basically just living in a homework world where they're

left to their own devices. Maybe their parents are helping, but their parents are stressed out trying to figure out what they can do at home, too. And this is a potential disaster. You're going to see, again, the outcome gap, the learning gap between those kids who have access to private education, those kids who don't, just explode, explode, explode, explode. And of course, the people who are going to suffer the most are the kids who are already the most vulnerable, right, who don't have parents who can afford to take off a huge amount of time, who maybe live in single parent households. Those are the kids that are going to be the most left behind by this. So you basically have a situation where we're pouring fuel on a fire of already unequal outcomes as it comes

to education at the lower levels. Then you have the university system, and the university system is a fascinating case study in what happens when you prop up an industry with cheap debt and how expensive it gets. So I'll get into what that means in just a minute, but basically the price of higher education has been increasing hugely for years and years and years. Between 2008 and 2018, the average, average tuition at four-year public colleges increased across in every state. On average, tuition increased by 37 percent during that decade. This reflects itself in the growth in student debt. At the end of 2009, Americans had roughly $772 billion in student loans. A decade later, at the end of 2019, that total had spiked to approximately $1.6 trillion, which is an increase of 107%. This is the

largest chunk of debt outside of housing debt. It's bigger than credit cards by almost 2x, right? So it is a huge, huge drag on the American economy that students have to pay this huge amount of debt. But here's the really important thing. Since the 1980s, the cost to attend a four-year university grew 8x as compared to the growth in wages. That means you are paying eight times as much as the benefit that you could hope to or expect to accrue from wage increases at the same period. This is why, or one of the reasons why people feel like they are getting farther and farther behind, because they literally are. They actually factually are. So this is all going into the COVID-19 crisis, right? This is before. We were already

in the midst of seeing, I mean, look, technology deflation, for those of you who listened to the Jeff Booth episode yesterday, technology, should be radically decrising the price of learning. We have the most amazing educational tools that we've ever had in the entire history of the human experience on Earth. We can zoom people to places far away, to experts that they never would have had access to. We can record the greatest lessons ever experienced. We can design amazing new interactive types of lessons for cheaper than ever before, yet college has continued to rise in price. And why? It's because of the plent availability of cheap debt. When we live in a cheap debt world, which is the exact premise underlying

our inflationary economic policies, what it does is cheap money available increases the ability for colleges to increase those prices, right? If you have a comparative increase in debt, well, colleges are just going to increase because the debt's going to cover the difference, right? Debt will cover the difference between the cost of going to school and what people can actually afford to pay. Never mind the fact that it's totally not commensurate anymore with the expected benefit on the other side, the ROI on the other side, as that changes dramatically. This is what it looks like to be in fiat world in this land of cheap debt. And so you have, again, cheap debt propping up a system that would be massively changed by technology-based deflation. And frankly, we're seeing,

or we have been seeing that the technology-based deflation nibble around the edges, the increase recent coding boot camps and these kind of different models, right? That was already happening in advance of COVID-19. But whatever the case, there was a clear disconnect between the ROI and the value proposition of a four-year college education and the actual cost, even before this crisis. We are about to see the single biggest crisis in higher education business models that we've ever seen. Cal State, which is the largest public four-year university system in the country, has announced that it's going all online this fall. That's 480,000 undergraduates who will be basically all online. You have 50% of colleges who, as of 2018, had no formal online anything,

so who are completely unprepared for this. If this goes on to the beginning of 2021, if colleges aren't really able to open up in the fall, which many are worried that they're not going to be able to, the gap between projected revenue and costs, something like 50% will face it, 10% or more greater gap between projected revenue and costs, and 25%, 26% will have a more than 20% gap between their projected revenue and costs. What's more, that's presuming they can get college students to continue to pay these exorbitant prices for a now online education. But you're already seeing class action lawsuits at places like Wash U and Brown and many others of students saying, this is not what we signed up to pay for. We're not going to pay you

anywhere near this, right? We want our money back. That will be not only a legal cost to fight that, but if things go badly for colleges, that could be another huge reduction in their revenue. Then there's all the new students who might be coming in, who are reevaluating this in a huge way. One, they're reevaluating their decisions to go to a private versus a public university. Two, they might be even reevaluating their decision about the ROI of a college education going into a recession anyways. when they start to see white-collar jobs being laid off as well. So it is a bad time, right? One higher-ed industry group estimates that we're going to see a 15% drop in enrollment in the fall,

costing colleges something like $23 billion. And then there's other issues as well. Since the Trump administration began, there's been a 10% decline in international students, which are often some of the biggest moneymakers for colleges because they pay full price, especially at the graduate levels. these set of students continue to go down, and that's only going to be exacerbated by travel restrictions, right? So higher education has all of these issues. And this is one where it's very clear that COVID is not the bubble, it's the pin prick.

But man, it's more like an arrow shot at a thousand miles an hour into that balloon than just a pin, because the dramatic nature of the shutdown's impact on higher education, you will start to see more and more stories of colleges simply not reopening at all. And it might not be this fall, but you will start to see it. We already started to see colleges shut down over the last couple of years. I think there's going to be an absolute culling in the middle. I think that the top tier of colleges that have massive endowments and can claim brand, can claim alumni networks, et cetera, et cetera, will be fine.

Those will continue to be a desirable luxury good with many more people competing to get in them, then can get out of them. They will continue to be able to support themselves through massive research budgets, right? You got to remember that for research universities like my alma mater, Northwestern, university tuition is only 25% of revenue. 50% or more comes from patents that come out of research, right? So they have another business model that can continue to function even as enrollment changes. So like I said, that top tier of research universities, of high-brand universities will likely be fine. What's more, you've got to imagine that public education will shift again. We will figure out different models as more and more demand for cheaper types of

education moves down the thing, right? People will decide not to travel as far away from college, right? There could be all of these big, again, secular trends that bring people closer to home and more to localize colleges, community schools, et cetera. I do think that those schools will adapt, even if there's some pain along the way. It's going to be that middle, right? The people who were charging the same prices at these incredibly expensive universities, these elite research universities, trying to offer the same outcomes that just won't be able to defend that model anymore. I think that that middle tier of schools is just going to be absolutely decimated by this crisis and by the larger trends that it's accelerating. Now, if there's any good news in the realm of higher

education, I think that we were already in a modality where we needed to start having third paths, right? There needs to be third paths between, on the one hand, just not going to college, and on the other hand, buying into the model of a four-year university education. And that middle path seems to me to be vocational training around a number of different industries. Mentorship, apprenticeship, skills training. There are so many domains in which you'd be better suited with some sort of old-style guild model of learning a trade. And by the way, I mean things that we think of as white-collar as trades too, right? I guarantee you there could be better advertising programs funded by publicists

than you could have at even a Medill School of Journalism, at, again, my alma mater, Northwestern. So this idea, though, of guild-style training, of specialized training, I think is poised for a renaissance. And I think one of the other outcomes of the coronavirus crisis could actually accelerate that, which is a return to domestic supply chains. I believe that one of the things that you're going to see is a major national push for the return of domestic manufacturing and production capacity around a lot of the key parts of our experience where we don't simply want to outsource those things to China. This is going to require a lot of highly specialized manufacturing capacity, highly specialized skill sets and talent. and I think that there will be a burgeoning industry of new types of at liaes and studios

and vocational programs and boot camps and et cetera to train people up in those areas. And I don't think that their economic model is going to look the same as these four-year universities. I think they're going to be more directly tied to economic outcomes on the other side. And I think that that could be a really positive advancement. So it is clear to me that the higher education bubble has to pop in a major way. And I think the coronavirus is going to do it. frankly, I'm not that after the first kind of period of pain. I'm not particularly pessimistic about what comes out on the other side. I think that almost anything, if it involves some amount of this third path, is going to be better net net for individuals and better net net for

society than what we have now. All right, guys, deep into this one now. I was going to do another industry today, but I think I'm going to save at least one more of these surveying the carnages for this broader idea of supply chains, but particularly in the context of food and some of these other areas that are really important from a national security perspective. So I don't know if that'll be next week or the week after, but I will do an episode on feud, on restaurants, and on supply chains more broadly and what the impacts might be. So anyways, guys, thanks as always for listening. I hope that you enjoyed this episode. And until tomorrow, be safe and take care of each other. Peace.