Startups raising seed rounds rarely make the news but this one did, for a reason. In October 2018, a US startup called Quibi raised a massive $1 billion seed round, which is 1000x the average seed round for startups. You might be thinking how and why they got so much funding. To find out I listened to an interview with the Quibi founders. Not only did I find the answers I was looking for, but also got insights on video history, storytelling, unit economics and consumer preferences.
Quibi is founded by Meg Whitman, former CEO of HP, and Jeffrey Katzenberg, the K in Dreamworks SKG. I’ve transcribed parts of the interview I found most interesting, along with my commentary on some key points.
The Pitch
Meg Whitman opens with the elevator pitch for Quibi.
[Whitman] What we’re trying to do is to bring the best of Hollywood and the best of Silicon Valley together in a way that’s never been done before. And it is really bringing right-brain, non linear thinkers, storytellers together with left-brain engineers and what we’re trying to do is create a platform where we offer short form, I’m going to describe that in a minute, short form video of Hollywood production quality built for mobile, and mobile first, mobile only honestly. It’s a very unique use case because today you leave your home every morning with a television in your pocket and you have these in-between moments during the day, 10 minutes here or there, and today you’re checking you know instagram or social networking, you’re playing casual games, you’re surfing the internet and what we’re going to offer is a step-function improvement in quality and storytelling and user experience because as Jeffrey said, the content needs to be as differentiated as the tech platform and doing it in a way that has never been done before. So, we’re excited, the name of the company is Quibi, for a long time it was called New TV, that was never actually the name, and we kept referring to this kind of content as quick bites, quick bites during your day..and one day we looked at each other and said ‘quick bites!’ we should called it Quibi, and it stuck, so that’s the name of the company and we’re off and running.
Next, Katzenberg describes the market for Quibi and compares it to HBO, along with a lesson on storytelling and history of video entertainment from the 90s until now.
[Katzenberg] And maybe just to help people understand from a content standpoint, I think there’s three kinds of things to describe to you that if you go back to.. So today as Meg said, if you’re 25 to 35 years old, which is our core audience, who we’re targeting on this, you’re watching 70 minutes of short form content a day. It’s going up like this — it’s over 30 minutes year over year. So, people love what they’re seeing. There’s nothing wrong with short form content, it’s just highly differentiated from the kind of production and quality we’re able to invest down here. The analogy I would make is if you go back to television in the late 80s early 90s, which is when network TV was literally at its pinnacle. There were multiple TV shows that had audiences from 30-40 million people a week watching them — Seinfeld, Friends, ER. HBO comes along and says we’re not TV, we’re HBO. They weren’t being derogatory, that wasn’t a pejorative statement, it just said we’re going to be differentiated. So they eliminate commercials, they change the form and format of storytelling, they’re not beholden to 30 minutes, 60 minutes, 13 episodes and 26 episodes. That alone is almost kind of revolutionary in narrative storytelling. Also, they’re not beholden to standards and practices, so things that you literally could not put on network television, you know language, sex, violence, nudity. So you have Sex and the city, Sopranos, the Wire, none of those shows could air on network TV. And then, finally, they invest in and put a level of capital to work to support the level of production that ads-supported simply could not afford. so, in 2002 they ordered 10 episodes of Band of Brothers for $125 million, if you translate that to today it’s close to $30 million an episode, so far above and beyond what any body else was doing. So, if they say, we’re not TV, we’re HBO, what we would say is we’re not short form we’re actually Quibi. And, a way to think about this in terms of storytelling, in terms of our lighthouses, the things that we think will be brand-defining for us, there’s an analogy to give you in another form of story telling that has actually already tackled this and done it in a remarkable way — so, novels, pretty much for ever, many many many hundreds of years, a typical chapter in a typical novel will be 20-40 pages long. Simple reason — when an average person sits down to read — a page a minute — in 30 minutes your eyes are tired. So, publishers have been saying, and editors have been saying to their authors for ever — if you don’t want somebody to stop in the middle of a chapter, don’t write them longer. I’ve yet to meet that author who thinks that it’s a good idea for us to stop up in the middle. An author comes along, about 16-17 years ago, and actually goes at this — and he’s not the only nor is he the first but he’s the one that got the attention to me. Dan Brown writes the Da Vinci code – 464 pages long, 105 chapters. The average chapter is less than 5 pages. And, I would argue there’s not a single thing about the DaVinci code that’s lesser other than the length of its chapters. He told a great story with all the complexity of it and so that analogy is what we’re setting out to do — telling things that you would think of are movies 2-3hrs in length, a tried true, tested form of narrative, and that we’re delivering them in these act breaks which are under 10 minutes. Now, again, delivering an act break is something that Hollywood has been doing for 70 years — every time you turn on a TV and watch a network show, they are delivered an act break. So, if you’re watching This is Us, the first act break comes at 8 minutes and 30 seconds, every single time, every single week. And, the show length is 42 minutes, it’s not 42 minutes and 3 seconds, it’s not 41 minutes and 41 seconds, it’s 42 minutes to the second. So, as storytellers, we have a talent pool, who for many many decades has perfected this idea of writing to these prescribed act breaks. So, we’re converging, it’s not new science, and actually applying tried, true, tested ways into what creates a new format.
We’ve learnt what Quibi is doing, but a big question remains.
Why start with a billion dollars?
Katzenberg goes into the economics of video. TL;DR: there is no available library of high-end short-form video content, Quibi has to build it from scratch.
[Katzenberg] The way to think about the market is you look at the evolution of the YouTube platform, which is truly one of the most spectacular media platforms, certainly at scale, ever created. And they’ve really done a remarkable and brilliant job here. So, this is literally now 13 years old, and it started with cat videos, seriously. And now, through this tremendous capital investment, many billions of dollars, into both the platform itself and scaling it on a global basis and then opening it up and bringing monetization to it. There are so many things that they have accomplished with it, they have 1.9 billion montly active users watching more than a billion hours of content every day. When they put this monetization in place, they actually created an amazing opportunity for entrepreneurs and creative and innovative people who really built this entire new ecosystem. And a new form of engagement with audiences. And it’s been very successful to a point. So, we started with user generated content and about 5 or 7 years they brought this monetization, any body could actually get ad support for their content. They would take a 45% distribution fee, and they would actually sell programmatic advertising. The result of that was, this now amazing professional class that grew into this, and I’m going to say this in a good way, please don’t turn this phrase into a negative, it’s now a semi-professional group of storytellers and creators, who have done extraordinary and very imaginative things. They’re doing an amazing job with very limited resources. So, let me just put this into context so that you understand in a way why I so admire what they’ve done. In terms of the amount of money that you can invest in a piece of content and actually recover that money, if not make a small return on it, is a couple of thousand dollars a minute. So, you went from user generated content which is 0 cost, and now when it went into this professional content, which ranges from about $500 a minute up to a couple of thousand dollars a minute. You know I was involved at Dreamworks where we had awesome TV, we had a very successful company and brand, and our content ranged in that $500 to $1500 a minute. There are few things we did that are more than that. Look at $3000 as sort of the top amount that is being spent, Go90 came along and actually doubled that. So there are few people that have dabbled in it. Well an average scripted hour of television today whether it’s on cable, broadcast or streaming videos, is a $100K a minute. A movie is a $100K a minute. You know you can be really talented and really gifted and really interesting and all those things, at $3000 a minute vs. JJ Abrams at $100K a minute, I’m sorry it’s just a different content and it’s a different quality.
[Whitman] The reason there’s this whitespace out there, of this very high quality short form content where no one is doing it, is because if your only monetization mechanism is advertising you can’t make it pay the $100K a minute times 10 minutes, you’ve got a $1 million piece of content. Even YouTube cannot sell enough advertising to generate a return on that. So, we’ve got to monetize this with subscription and advertising, more subscription than advertising. And that changes the economics dramatically.
[Katzenberg] That’s why networks couldn’t compete with HBO when they went out and made Band of Brothers.
We are in the middle of a golden era for video entertainment, there are more high quality shows produced today than ever before. In contrast, the music industry has gone into decline. Katzenberg attributes the decline to unfair music pricing.
Why the music industry caved in but TV did so well
Katzenberg compares the music and video entertainment industries in terms of their price-value proposition.
[Katzenberg] I think the television movie industry has done a much better job of always looking to create a price value proposition for its customers that created incremental values. So, whether it was going from movie theaters to network then to cable, then to VHS, DVD, every decade or so there is a new way in which our content is packaged, repackaged, and offered up to consumers in a great price-value proposition, which obviously Netflix is the latest, most spectacular version of that. The music business actually has not done and did not do as good a job. If you go back to the Jurassic era, when I started listening to music, when you would buy an album there were 3-6 songs on that album of 10-11 songs that were actually hits. I go back to literally Saturday Night Fever and Grease, about things that were movie driven, Flashdance, Footloose, Good Morning Vietnam, there’s movie after movie after movie soundtracks, multiple tracks and that was true of an album. You bought a Beatles album or a Rolling Stones album, there were many. Then, CD disc comes along, and I’m not sure who was driving what here, they eliminated the singles business, and you had to earn an album. You had to put out multiple singles and if you had successive successes in a single, then you actually earned an album and an album came out. What the record companies ended up doing is, let’s just skip all that, one song put it on an album and now sell an album for $15. You didn’t have to earn an album any more. There were multiple instances where the music industry took advantage of its customer and as it always happens in any business when you do that, ultimately customer is going to win, and is ripe for disruption.
If you’re interested in listening to the whole interview, you can play it below.
In conclusion, Quibi is 1) building a library of high-quality short form video content that doesn’t exist and is expensive to make and 2) it’s floated by tech and entertainment industry veterans. Quibi is coming soon, get ready to microwave some popcorn.