Quibi Will Be A Multi-Billion Dollar Company

This essay was written and researched by Adam Keesling and Nathan Baschez.

A couple months ago, at an MGM casino in Las Vegas, Jeffrey Katzenberg marched onstage to fire the opening salvo of Quibi’s CES keynote presentation. The song in his intro video had a familiar melody borrowed from an old gospel song, but with lyrics updated to match the occasion. “You’ve got the whole world in your hands.”

When Katzenberg reached the podium, he pushed up his sleeves and, without any unseriousness or excess excitement, delivered his opening lines:

“What’s the next big opportunity in entertainment? That’s the question I’ve been asking myself pretty much my whole career.”

The crowd leaned forward to hear the answer.

“What you see when you look back at the great technological leaps in entertainment history is that every evolution has been driven by the relationship between creativity and technology. Behind every innovation we see brilliant minds pushing the limits of science to create new entertainment technology, but these new platforms require the creativity of storytellers using their tools in ways that the inventors had never imagined.”

Quibi’s betting that they can supply the creativity needed to unlock the smartphone’s unfulfilled potential as a vehicle for entertainment — and that they’ll build a multi-billion dollar business in the process.

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Of course, on the face of it, it feels absurd! This is a company that raised nearly $2 billion dollars before launching their product. And why did they raise all this money? To spend it on creating 6-10 minute videos that can be viewed in landscape or portrait on a mobile phone. That’s it. That’s the big innovation.

How will they make money? By charging $5/mo for a version with ads, and $8/mo for a version with no ads. That’s right, they think people will pay to watch Quibi instead of the millions of free, extremely compelling videos on YouTube, Instagram, and TikTok.

So what makes them so confident in their content?

Because it comes from hOLLyWoOD! It has CeLEbRItIEs!

Ok fine, everyone loves TV and movies. But on your phone? In 6-10 minute increments? Unclear.

And let’s keep in mind, Quibi’s content may not represent the best of Hollywood. A couple billion might seem like a ton of money for a tiny startup to spend, but if you compare it to Netflix’s $17 billion content budget for 2020, you can see how it might feel like barely enough. And that’s just Netflix. When you think about Disney, Amazon, NBCUniversal, WarnerMedia (which owns HBO), and Apple, it may become hard to see how Quibi could possibly stand out.

To make matters worse, Quibi’s production process is in shambles, thanks to Covid-19. The US is facing record unemployment, leaving many workers without spare cash to shell out to a non-essential entertainment app. And now that we’re all at home all the time, there may be far fewer “on the go” moments that Quibi is designed for.

At least, that’s the consensus view. But is it true?

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Some of the biggest wins in business come when a team with specific domain expertise figures out a way to apply their skill to a seemingly unrelated market, in order to create a superior experience.

For example, the iPhone is what you get when a design-centric computer company decides to make a phone. It was revolutionary because Apple had totally different DNA than incumbents like Nokia and Motorola, and this difference put them in a dominant position to make a better product.

Quibi believes they’re doing the same thing. They think their Hollywood DNA gives them unique capabilities that tech companies like Instagram, YouTube, and TikTok can’t compete with.

Here’s how Meg Whitman, Quibi’s CEO, explained it in her section of the CES keynote:

“When we look back at the great leaps forward in entertainment, what we often see is the initial attempts at using a new technology aren’t anything like the ones that last. For example, when television made its debut, creators had no idea how to take full advantage of the new platform. Some early television shows simply featured announcers reading from radio scripts into the camera.”

The question is: who’s the radio announcer here?

Quibi would like you to believe it’s Hollywood, packaging feature length films and TV shows into smartphone apps. But maybe Quibi is the radio announcer. Maybe the old, outdated model is Hollywood itself, and the new, superior, mobile-native model is user generated content.

It’s hard to predict success for any startup, especially one that launched their product literally last night. And we understand that most people reading this are probably skeptics. When we started researching this post, we thought we’d write a list of reasons they were likely to fail. But the more we learned, and the more we thought through the strategy, the more we began to change our minds. We’re now convinced Quibi will succeed.

(To be clear: we have no financial skin in this game at all — no ownership stake in Quibi, or even in any of Quibi’s investors, except a few token shares in Disney. This is purely an intellectual and reputational exercise.)

Let’s tackle each of the bears’ arguments in turn.

Objection 1: They raised too much money

Many people are comparing Quibi to tech startups that raised gobs of money and flopped, like Color, Clinkle, Juicero, and Magic Leap. But Quibi isn’t a tech startup. It’s a media business. And that turns out to be an important distinction.

Quibi was founded in 2018 and raised $1 billion in August of that year. Then, in March 2020, they raised an additional $750 million, bringing their grand total to $1.75 billion raised before launch. 

When you compare their funding to “normal” startups, it seems insane. But in order to judge it wisely, you have to go deeper than gut reactions. Remember, it also seemed insane to many people when Facebook spent $1 billion on Instagram, but that turned out to be one of the greatest acquisitions of all time. In order to judge Quibi’s valuation, you need to set aside the sticker shock, and think it through from first principles.

So, why would they raise so much money at such a high valuation? For a very good reason: Hollywood talent is expensive, and the entire premise of their strategy rests on it. They literally couldn’t have started the company on much less.

How do you cheaply test the hypothesis that people want to watch 6-10 minute videos with Hollywood-style production values? You can’t, because such content doesn’t exist. In theory you could take a film, cut it into 10 minute segments, and broadcast it through Quibi. But that wouldn't work. Storytellers design content to fit the container; when you change the container you must change the content.

The way Quibi wins is by having the best experience. That’s the only way they’ll be able to attract subscribers. Launching with a mediocre experience would be missing the point, and not a valid test of the theory.

And it’s not a dumb theory. People choose to pay for quality all the time. Why do so many people buy iPhones when they could save money and use an Android? Why do we pay for Netflix when we could watch YouTube videos for free? Why does Blue Bottle coffee even exist? Because people like nice things. It’s not crazy to think the same logic would hold true for mobile short-form video.

If you look at the success and failure of various TV shows and movies over time, there’s a clear relationship between “amount invested” and “amount returned.” Of course, it’s not perfect. There are many expensive flops, and cheap successes. But as a general rule, quality can be bought with decent predictability. In fact, there is a stable positive correlation (.744) between budget and box office gross revenue! (source)

This statistic illustrates why entertainment is a totally different world from technology. Quibi is still risky, but has much less risk than your average tech startup. Technology startups bet on totally new behaviors, and often flop despite having lots of cash, or explode in popularity despite raising hardly any money. 

Quibi’s thesis is more constrained: they know people watch short videos on their phones, and are betting they’ll want Hollywood quality there just like they do on their TVs.

When you consider the predictability of media, plus the fact that they had to raise that much money to test their hypothesis, it makes a lot more sense that they raised $1.75 billion.

Objection 2: They raised too little money

We’ll call this The Scott Galloway Objection. He predicts that Quibi is dead on arrival, because they’re “bringing a squirt gun to a howitzer fight.” The idea is that $1.75 billion isn’t nearly enough to compete with Netflix, Amazon, Disney, HBO, Apple, and their ilk.

The central mistake in his analysis, which he never grapples with in any of his writing, is his assumption that Quibi is competing in “the streaming wars.” They’re not.

Most people don’t watch TV or movies on their phones while they’re on the go. Quibi CEO Meg Whitman said that mobile only represents 10% of streaming viewing. Don’t believe her? A few years ago, Netflix reported that 70% of viewing happens on TVs. (Much of the rest of it was on laptops, we would imagine.) But regardless of the exact number, clearly mobile short-form is a tiny minority of the SVOD market.

So, what do people watch on their phones, if not Netflix? They watch user generated content on platforms like YouTube, Instagram, and TikTok. That’s the real competition. The amount of money Netflix and the rest spend on the streaming wars is (mostly*) irrelevant.

(*It‘s irrelevant on the demand side, but not on the supply side. The streaming wars have inflated prices for Hollywood talent. Quibi is a price taker and has had to get creative with IP terms in order to afford content.)

Quibi thinks if they create shorter content, then people will prefer Hollywood-style video on their phones for the same reason most people watch premium video more than YouTube on their TVs. This may or may not be true, but $1.75 billion is enough to test the theory.

Objection 3: The content isn’t good enough

Quibi segments their content into three categories: 

• Movies in chapters — feature-length films made to be watched in small chunks
• Episodic, unscripted, and docs — sort of like cable TV shows
• Daily essentials — most frequent and cheapest to make, tends to focus on news

When we downloaded the app last night, it took us some time to find anything we loved, and honestly most of the shows didn’t feel as compelling as the best stuff we’ve watched on other platforms. Maybe it’s because we were watching on our phones? Maybe it’s because Quibi’s creators haven’t learned “internet pacing” yet? But compared to spending more time on Twitter, it felt like an interesting alternative.

The one clear standout was “I Promise,” about a public school in Akron started by Lebron James that focuses on kids that are at risk of falling behind. It’s a fascinating and genuinely moving examination of the role schools can play in a society, and it’s not hard at all to imagine it becoming a breakout hit.

But, at its worst, Quibi reminds us of the default content you get in the back of a taxi or in an airplane seat. There’s a limited selection and they’re trying to please everybody, so it feels sort of “lowest common denominator.”

This is a real risk. If Quibi fails in the first year, that will be why. But if they can attract enough subscribers to survive, the problem will only get easier as they grow. The basic dynamic that governs this business is scale: the more subscribers you have, the more you can invest in content, the more subscribers you attract, etc.

Quibi has enough money to last at least 18 months. Only a fraction of the content in their pipeline is currently available in the app. As long as they can survive and maintain a scale advantage over any competition that comes along, the dynamics of the industry will work in their favor, and the content will get better.

Plus, they have something no one else does: premium content designed for 6-10 minute chunks. It’s hard to overstate how big a deal this is. While everyone else in the streaming wars has accepted Hollywood’s traditional formats that emerged when movie theaters and TVs were first invented, Quibi is actually working with creators to design content meant to work on a phone.

This isn’t something you can do in an editing room. In order to fully integrate content to the container and create the best experience, writers need to begin with the time and attention constraint in mind. Directors need to film with the smartphone in mind. The whole product has to change. And those changes will matter to users.

6-10 minutes may not seem like a big deal at first, but it enables viewing in a host of new contexts, and requires huge adaptation on the part of creators. If it works as we expect it to, this puts Quibi in a dominant position in the value chain, between creators and consumers, because they undertook the herculean task of getting Hollywood to design for a new standard.

Objection 4: People prefer social media

Gone are the days where we all sit around the TV at 6 p.m. every night and watch the same show with the same actors. Everyone has their own favorite now. Increasingly people are segmenting based on niche interests. A good example of this: the 2020 Oscars had viewership of 18.7 million, down from 23.6 million in 2019 and 29.5 million in 2018. 

That said, you could also make the case that celebrities have never had a better time. Social media allows them to directly connect with fans in a way that wasn’t possible even ten years ago. But, either way, there’s a strong argument to be made that people prefer unscripted human authenticity to staged Hollywood content.

Our view is that people want both, and that they are complements, not substitutes. Of course everything that requires attention is competing in a certain sense. But as long as they play different roles in our lives, we may want one or the other depending on the circumstance.

Based on our experience using Quibi so far, it seems like a more zoned out, relaxing way to spend time than most social apps. You don’t have to think as hard. You get lost in a story in a way that never happens on Instagram, Twitter, or TikTok, and rarely happens on YouTube. So depending on your mood, you might choose one or the other.

What makes Quibi feel so different? Two things:

First is the consistency. Quibi is to YouTube as books are to the internet. Both have their place. The advantage of consistency is it makes it easier to try new things, because the quality floor is significantly higher, and the attention required is standardized. That said, it can’t serve every niche. If you’re looking for something very specific, Quibi can’t compete with YouTube. But, overall, we think many people are missing the importance of consistency for moments when you just want to zone out.

Second is the fact that, unlike social media, Quibi content is created by professionals that are getting paid to serve you. On social media, people create content for free in order to elevate their status. This has mixed results in terms of entertainment value, and can feel stressful at times.

One other observation that makes us bullish: if people’s TV habits tell us anything, it’s that user generated content tends to lose when pitted against Hollywood. When you have a few hours to spend in front of a TV, you’re probably watching something on it, rather than just scrolling through feeds on your phone the whole time.

Of course, the 6-10 minute mobile video format is unproven, and Quibi’s initial content isn’t as compelling as HBO or even Netflix — but it doesn’t take much imagination to see where they are headed.

Objection 5: Their product choices are bad

There’s no Quibi app for your TV. You can’t access them from your laptop.

Why? Because Quibi’s shows weren’t designed with long viewing sessions in mind. They know they don’t compare favorably, so they choose not to compete. Instead, they want to focus on the times when you’re on the go and have time for a short break.

This is frustrating for some people, and I’d imagine in the long run Quibi might loosen up on this, but it’s a wise choice to launch this way. It sends an important signal to help people understand how Quibi is supposed to fit into their lives. 

Some people also complain that “turnstyle” — their feature to make videos viewable in portrait or landscape mode — isn’t that useful. But this is missing the point. The most important innovation for Quibi is the length of the videos. Everything else is just icing on the cake. 

And honestly, we were surprised by how much we liked turnstyle. When you’re holding your phone for a while in the same position, your hand gets tired. The ability to easily rotate and still have a good experience makes for a more comfortable experience.

Most other aspects of the app are unanimously praised. If Quibi flops, it’s not going to be because of the app’s design. (Which, let’s be honest, was the easy part. We’re sure it took a lot of hard work but it’s much less risky and complex than the content side.)

How the next year will play out

Given all the hype, celebrity partnerships, marketing budget, 90-day free trial, and partnership with T-Mobile, we think Quibi will attract single-digit millions of subscribers this year. That’s far fewer than Disney’s first-month total of 28 million, but it’ll be more than enough to attract follow-on capital and get the flywheel going.

Once that happens, they’re off to the races. Growth begets growth, as they turn subscriber growth into higher quality content, which attracts more subscribers.

The only way Quibi fails is if all their initial content is a flop with viewers, and their growth is so abysmal that they fail to attract further investment and are forced to sell for cheap. But even if that happens, it’s likely that a buyer (such as Amazon, Netflix, or Disney) would re-invest in the shorter format and restart growth.

Short form premium video is almost certainly here to stay. And that’s a huge change in the world that few would have predicted.

It reminds me of the Katzenberg’s line from the CES keynote: 

“New platforms require the creativity of storytellers using their tools in ways that the inventors had never imagined.”

I doubt the team at Apple were thinking of something like Quibi when they released the iPhone a dozen years ago.

But now that it’s here, it feels inevitable.

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