Power

With nothing left to watch, the entertainment business turns on itself

Relations between content companies and distributors were strained before. COVID-19 is pushing them to the breaking point.

Drive-in theater showing Trolls World Tour

AMC Theatres has taken NBCUniversal's words about "Trolls World Tour" as a declaration of war.

Photo: Vic Micolucci/AFP via Getty Images

The gloves are off in the movie business: AMC Theatres announced late Tuesday that it will not show any films from Universal Studios in any of its 1,000 theaters around the globe going forward. The threat came just hours after reports broke that Dish and other TV service providers were feuding with Disney over hundreds of millions of dollars in fees for ESPN — the most expensive cable network, and one that has become a lot less valuable with live sports shut down.

Conflicts between content production and distribution companies are nothing new. But while the two sides have ultimately always made peace in the past, these latest spats may be a sign that some of these relationships, and the business models they are built on, may not survive in a post-coronavirus world. It's yet another example of the way the current crisis could reshape the power balance between old and new media.

AMC's boycott threat comes after Universal revealed that it had generated around $100 million with premium streaming rentals of the movie "Trolls World Tour," which it released online earlier this month just days after its official theater release date due to the COVID-19 shutdown. "The results for 'Trolls World Tour' have exceeded our expectations and demonstrated the viability of PVOD," NBCUniversal CEO Jeff Shell told The Wall Street Journal, using industry shorthand for premium video on demand. "As soon as theaters reopen, we expect to release movies on both formats."

AMC took Shell's words as a direct attack on the theatrical window — the time a movie is shown exclusively in theaters before making its way to internet and cable on-demand distribution. "This radical change by Universal to the business model that currently exists between our two companies represents nothing but downside for us and is categorically unacceptable," said AMC CEO and President Adam Aron.

"Jeff's comments as to Universal's unilateral actions and intentions have left us with no choice," he added. A Universal spokesperson shot back later Tuesday, telling Variety that it was "disappointed" by AMC's statement, alleging that the theater chain was looking to "confuse" its position.

The back-and-forth between AMC and Universal happened just hours after the New York Post reported that Dish was looking to skip the $80 million to $100 million it is supposed to pay Disney for the right to carry ESPN this month. Dish isn't the only operator unhappy about the April ESPN bill, according to Lightshed Partners analyst Richard Greenfield. "We believe multiple [TV service operators] informed ESPN that affiliate fees should not be paid starting in April 2020 because sports content is not being delivered as specified in their affiliation agreements," Greenfield wrote in an analyst note this week.

Cable subscribers pay around $10 per month for ESPN and Disney's other sports networks, a fact that has long bugged TV fans who are not interested in sports. All together, Greenfield estimated that close to half of a $100 cable bill is going to sports channels — channels that haven't been showing live sports in weeks.

Disney has reportedly rebuffed any demands to reimburse operators, but the conflict isn't likely to go away anytime soon. Outlining plans for reopening his state, California Gov. Gavin Newsom said Tuesday that live sports with audiences won't return until all of the stay-at-home restrictions are lifted, which could take many months. Even sporting events produced for TV without live audiences are being classified as a higher-risk workplace and won't be allowed soon.

The same is true for movie theaters, which will likely have to institute significant social distancing measures before getting the go-ahead to reopen in California and a number of other states. And if there's a second wave of COVID-19 in the fall, as many health experts predict, chances are that most of us won't see the inside of a theater until well into 2021.

That's bad news for AMC, which recently announced that it was raising $500 million in debt to keep the lights on, leading Greenfield to quip on Twitter that "no movies will be released in theaters until after [AMC] files for bankruptcy."

At the core of both disputes are long-simmering conflicts over the business agreements between content companies and distributors, which have a lot to do with the emergence of the internet as an alternative distribution channel. Theater chains have, for instance, long boycotted Netflix for its insistence on releasing movies simultaneously on the big screen and on its service, resulting in the streamer buying its own theaters just to qualify for awards.

Similarly, TV operators have long balked at the fees they have to pay studios to carry their networks, especially as cord-cutting, prompted by cheaper streaming options, is accelerating. This has regularly led to retransmission disputes, with cable networks going dark on some operator services for days or weeks. In the past, networks have had the upper hand in these disputes, but that power dynamic is quickly shifting. Not only is the current crisis, and the economic outfall from it, likely going to accelerate cord-cutting, media companies like Disney are also finding that sports networks, their erstwhile sports network crown jewels, are a lot less valuable these days.


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At the same time, Hollywood is set to benefit from a power shift on the theater side. Studios like Universal aren't just finding premium video rentals that have consumers paying $20 for one-time-access to a newly released movie to be increasingly profitable. Many media companies are now also running their own video subscription services, with NBCUniversal's Peacock set to launch in July. The widening rift with theaters could accelerate plans to boost the subscriber base of these services by streaming movies to paying subscribers — something that Disney has already begun to do with films like "Artemis Fowl."

Outlining his plans to open up California, Newsom cautioned that we will have to face a new reality once the shutdown is over. "Our stores will look different. Offices will operate differently," he said. And if this week is any indication, the business of media, sports and entertainment will look very different as well.

Image: Yuanxin

Yuanxin Technology doesn't hide its ambition. In the first line of its prospectus, the company says its mission is to be the "first choice for patients' healthcare and medication needs in China." But the road to winning the crowded China health tech race is a long one for this Tencent- and Sequoia-backed startup, even with a recent valuation of $4 billion, according to Chinese publication Lieyunwang. Here's everything you need to know about Yuanxin Technology's forthcoming IPO on the Hong Kong Stock Exchange.

What does Yuanxin do?

There are many ways startups can crack open the health care market in China, and Yuanxin has focused on one: prescription drugs. According to its prospectus, sales of prescription drugs outside hospitals account for only 23% of the total healthcare market in China, whereas that number is 70.2% in the United States.

Yuanxin started with physical stores. Since 2015, it has opened 217 pharmacies immediately outside Chinese hospitals. "A pharmacy has to be on the main road where a patient exits the hospital. It needs to be highly accessible," Yuanxin founder He Tao told Chinese media in August. Then, patients are encouraged to refill their prescriptions on Yuanxin's online platforms and to follow up with telehealth services instead of returning to a hospital.

From there, Yuanxin has built a large product portfolio that offers online doctor visits, pharmacies and private insurance plans. It also works with enterprise clients, designing office automation and prescription management systems for hospitals and selling digital ads for big pharma.

Yuanxin's Financials

Yuanxin's annual revenues have been steadily growing from $127 million in 2018 to $365 million in 2019 and $561 million in 2020. In each of those three years, over 97% of revenue came from "out-of-hospital comprehensive patient services," which include the company's physical pharmacies and telehealth services. More specifically, approximately 83% of its retail sales derived from prescription drugs.

But the company hasn't made a profit. Yuanxin's annual losses grew from $17 million in 2018 to $26 million in 2019 and $48 million in 2020. The losses are moderate considering the ever-growing revenues, but cast doubt on whether the company can become profitable any time soon. Apart from the cost of drug supplies, the biggest spend is marketing and sales.

What's next for Yuanxin

There are still abundant opportunities in the prescription drug market. In 2020, China's National Medical Products Administration started to explore lifting the ban on selling prescription drugs online. Although it's unclear when the change will take place, it looks like more purely-online platforms will be able to write prescriptions in the future. With its established market presence, Yuanxin is likely one of the players that can benefit greatly from such a policy change.

The enterprise and health insurance businesses of Yuanxin are still fairly small (accounting for less than 3% of annual revenue), but this is where the company sees an opportunity for future growth. Yuanxin is particularly hoping to power its growth with data and artificial intelligence. It boasts a database of 14 million prescriptions accumulated over years, and the company says the data can be used in many ways: designing private insurance plans, training doctors and offering chronic disease management services. The company says it currently employs 509 people on its R&D team, including 437 software engineers and 22 data engineers and scientists.

What Could Go Wrong?

The COVID-19 pandemic has helped sell the story of digital health care, but Yuanxin isn't the only company benefiting from this opportunity. 2020 has seen a slew of Chinese health tech companies rise. They either completed their IPO process before Yuanxin (like JD, Alibaba and Ping An's healthcare subsidiaries) or are close to it (WeDoctor and DXY). In this crowded sector, Yuanxin faces competition from both companies with Big Tech parent companies behind them and startups that have their own specialized advantages.

Like each of its competitors, Yuanxin needs to be careful with how it processes patient data — some of the most sensitive personal data online. Recent Chinese legislation around personal data has made it clear that it will be increasingly difficult to monetize user data. In the prospectus, Yuanxin elaborately explained how it anonymizes data and prevents data from being leaked or hacked, but it also admitted that it cannot foresee what future policies will be introduced.

Who Gets Rich

  • Yuanxin's founder and CEO He Tao and SVP He Weizhuang own 29.82% of the company's shares through a jointly controlled company. (It's unclear whether He Tao and He Weizhuang are related.)
  • Tencent owns 19.55% of the shares.
  • Sequoia owns 16.21% of the shares.
  • Other major investors include Qiming, Starquest Capital and Kunling, which respectively own 7.12%, 6.51% and 5.32% of the shares.

What People Are Saying

  • "The demands of patients, hospitals, insurance companies, pharmacies and pharmaceutical companies are all different. How to meet each individual demand and find a core profit model is the key to Yuanxin Technology's future growth." — Xu Yuchen, insurance industry analyst and member of China Association of Actuaries, in Chinese publication Lanjinger.
  • "The window of opportunity caused by the pandemic, as well as the high valuations of those companies that have gone public, brings hope to other medical services companies…[But] the window of opportunity is closing and the potential of Internet healthcare is yet to be explored with new ideas. Therefore, traditional, asset-heavy healthcare companies need to take this opportunity and go public as soon as possible." —Wang Hang, founder and CEO of online healthcare platform Haodf, in state media China.com.

Zeyi Yang
Zeyi Yang is a reporter with Protocol | China. Previously, he worked as a reporting fellow for the digital magazine Rest of World, covering the intersection of technology and culture in China and neighboring countries. He has also contributed to the South China Morning Post, Nikkei Asia, Columbia Journalism Review, among other publications. In his spare time, Zeyi co-founded a Mandarin podcast that tells LGBTQ stories in China. He has been playing Pokemon for 14 years and has a weird favorite pick.

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