The Divorced Cashier, Netflix, and Breakeven Point
“Ken Boyd…my ex-husband’s first name was Boyd.”
The cashier smiled as she handed my debit card back to me.
What do say at this point? Two ideas:
1- “I always thought your ex-husband was a jerk- you did the right thing.”
2- “See you next time!”
I went with 2.
Perceptions can be a tricky thing, and they may not have much to do with reality. The Hollywood Actors and Writers Strike- sadly- is a good example. The reality is very different from my perception of the strike, and the strike’s impact is a great way to explain breakeven point, which I’ll get to in a moment.
Let’s start here.
No one is producing TV/ Movie/ Streaming content
False.
To explain, let’s separate US content production from overseas activity.
In the US, many independent studios are producing film and TV content. This NY Times article notes 39 independent projects that received exemptions from the unions. As the Times explains: “To be considered, productions must agree to temporarily follow the terms of the latest proposal that SAG-AFTRA has put on the table during negotiations.”
Makes sense.
If you’re giving the actors and staff the pay and conditions that the union is fighting for, let the people involved keep working- it means fewer people out of work.
For everyone else, we’re starting to see some cracks in the wall of support.
Bill Maher is going back to producing his Real Time show without writers. His logic is that the entire staff (union and non-union) have been without pay for months. Why not let some people get paid again until the strike is resolved?
OK, what about overseas?
Foreign content production keeps going
On his Prof G podcast (highly recommended), Scott Galloway points out that Netflix has thousands of people working on content production in Madrid. Overseas production continues.
So what’s the accounting impact? The breakeven formula is a great way to analyze the strike’s impact.
Explaining the breakeven formula
The breakeven point is the level of sales required to cover all costs, and breakeven can be analyzed by units sold, or in total sales dollars. You can assess breakeven for an individual product, a company division, or your entire organization.
Simply put, your first sales goal is to cover all of your costs and not lose money.
The formula for the breakeven point can be expressed in several ways, but the most common version is:
[(Sales price per unit) x (Units sold)] – [(Variable cost per unit) x (Units sold)] – (Fixed costs in total dollars) = $0 Profit
Note these points regarding the formula:
Sales price and variable costs are stated per unit, and then multiplied by the units sold
Fixed costs are stated in total dollars, and it’s important to avoid looking at fixed costs on a per unit basis. To calculate breakeven, you need to cover all of your fixed costs, regardless of the number of units sold
Profit is set to zero, so that the formula provides the level of sales that covers all costs (variable and fixed), and generates $0 in profit
You can think about breakeven point in terms of the number of units you need to sell, or as the total dollar amount of sales needed.
How the strike impacts the breakeven formula
When it comes to costs, there’s good news and bad news for studios that cannot produce content. The good news? They’re not incurring the variable costs to pay writers and actors.
What about the bad news?
The studios still incur variable costs for thousands of people who aren’t actors of writers.
AND
Studios have huge fixed costs for buildings, equipment, and fixed contracts for services that can’t be immediately cancelled. You can’t easily cancel the contract with the office cleaning company, if it doesn’t expire for 6 months.
Finally, there’s the even worse news.
No revenue.
A studio executive explains that, if the strike isn’t resolved soon, the entire fall schedule of new TV episodes will be cancelled. “Sources tell TVLine that it will take scripted shows roughly eight weeks to get back into production once the strikes are resolved.”
Without new scripted shows, there will be far less interest from advertisers- and revenue will drop sharply. Who want to pay high ad prices for reruns?
The fallout?
Networks won’t have enough revenue to cover fixed costs, or the variable costs that aren’t related to the strike. Losses will increase- making it even more difficult to produce new shows when the strike ends.
Here’s hoping the strike gets resolved soon.