Quibi’s Slow Start Puts Pressure on Katzenberg to Boost Cash

(Bloomberg) -- Quibi, one of Hollywood’s most ballyhooed startups, is having a rocky first year.

Founder Jeffrey Katzenberg  envisioned an app that would entertain people during the odd, in-between times in their lives — while commuting, say, or waiting in line at the bank. But when the April launch date arrived, Americans were in lockdown due to the coronavirus, meaning such moments had all but disappeared.

On Sept. 21, the Wall Street Journal reported that Quibi has so far failed to reach its subscriber targets and is working with advisers to assess its options, including a possible sale or a capital raise.  

A lot can change in the future. Quibi could have a wildly popular hit show that lures in millions of new subscribers. A nation of smartphone consumers venturing back into the world could embrace the service as their daily commutes return. Or the changes that Quibi has made, such as enabling users to watch Quibi on TV sets and to screenshot shows, could increase its popularity. Still, Quibi faces a formidable challenge. The company declined to comment for this article.

By compiling Quibi’s reported and public statements about content spending, advertising, subscribers and more, a picture emerges of a company headed for financial distress after a tough first year. In one scenario, if little changes, the company faces a funding shortfall of about $1.8 billion by 2024 and $6 billion by 2030. Katzenberg, who has made a career selling stories of characters beating the odds, has said he’s up for the test.

Content

Quibi launched in a year of fierce competition, compounding the difficulty posed by the pandemic. Well-known brands, from HBO to NBCUniversal, started competing streaming services and existing ones, led by Netflix, were better positioned to adapt to the moment. 

On its first day, Quibi got 300,000 people to sign up for a free trial, according to researcher Sensor Tower, a relatively strong start. But downloads of Quibi quickly declined. Some users complained there just wasn’t enough content. Quibi charges $8 a month for an ad-free version of the app and said it will have 175 shows in its first year. By comparison, a basic Netflix subscription costs $9 a month, and users get almost 2,000 movies and 3,800 shows, according to researcher Reelgood.

Unlike many of its competitors, Quibi doesn’t own its content in perpetuity. After seven years, Quibi relinquishes the content back to its creators, setting it up for additional programming expenses down the road. 

Cash Flow

Quibi’s content is expensive to produce, and the company has had to spend a lot on marketing to build up its brand recognition. As a result, the service needs a lot of people to sign up to be cash flow positive. In a pitch deck to investors before its launch, Quibi suggested that its best-case scenario would be to attract 70 million subscribers after five years, which would allow it to spend $2.6 billion on programming by 2024.

But Quibi is now tracking closer to its worst-case scenario: 11 million subscribers in five years. The app’s pitch deck suggested that under such a scenario, it would decrease its spending on content to $618 million by 2024. Currently, Quibi has a reported $1.75 billion in funding. Based on these figures, and publicly stated marketing costs, advertising revenue and subscriber mix, Quibi is on pace to exhaust its cash balance in 2021 and will need to raise $1.8 billion by 2024.

Churn

Even without raising capital, Quibi has some options — none of which look ideal. It could spend more on marketing, in the hope of attracting new subscribers. But an increase in spending would likely make its funding shortfall worse. Quibi could also choose to cut its programming budget, keeping more money in the bank. But such a move could make it even harder to attract and retain subscribers.

One important variable will be Quibi’s churn rate, the percentage of subscribers who drop the service each year. If it tracks closer to that of Netflix, often estimated to be less than 10% annually, the company will face much less fundraising pressure. If it tracks closer to last year’s industry average of 35%, according to researcher Parks Associates, Quibi’s problems would grow significantly. By 2030, the company could be facing a shortfall of greater than $10 billion.

©2020 Bloomberg L.P.