Punching Up Business

Media Finance FOCUS 2020

CONFERENCE ROUNDUP

The second part of TFM’s recap of the annual Media Finance Focus conference looks at video games, alternative revenue and new consumer habits.

BY JANET STILSON

Among the live events Turner Sports held in 2020 before COVID-19 struck was the ELeague FIFA Ultimate Team (FUT) Champions Cup Stage III.

Esports’ Unique Propositions

TO UNDERSTAND THE UNIQUE WAYS THAT VIDEO GAMES

are interacting with consumers and addressing advertiser needs, look no further than the streaming service Twitch, which is owned by Amazon.

“One of the goals of Twitch is to allow conversations to happen between viewers, streamers and the games,” explained Drew Smith, senior strategic development manager at Twitch, during an MFM conference session.

Within the company’s toolchest is something called extensions. They involve overlaying information on the screen, which might take the form of polls or statistics about a game. In the case of Borderlands 3, a role-playing shooter game developed by Gearbox Software, the extension on Twitch allows viewers to interact directly with the game and the streamer.

“Viewers can enter simple things on their screens,” Smith said. “They don’t need to do anything after that, but it would have some material effect on the game, such as a mini boss that the player would need to fight.

“With the innovation that Gearbox put in, on top of the extension tools that we have, we were able to put something together that became truly different,” Smith added.

“In comparison with streams where no extensions were active, we saw there was almost double the viewing time on channels that had an extension going,” said Cullen Sweet, formerly of Gearbox. “That’s massive when you consider that the average viewing time for a lot of these people is an hour and a half. Now we were seeing that we captured their attention for almost three hours.” Another way of providing interactivity with viewers is to create a “badass” creature, and then select a lucky viewer to take ownership of it. “Immediately, they would see their name above that creature with the celebrity or influencer’s game,” said Sweet.

“The rest of the viewers can then vote on how to make that enemy even stronger, to try to beat the influencer. It’s led to all-around silliness that the influencers enjoyed and the viewers enjoyed,” Sweet said.

We saw there was almost double the viewing time on channels that had an extension going. That’s massive. — Cullen Sweet, Gearbox

Dissecting Gamer Data

STATISTICS FROM DELOITTE

add to the picture of how sticky games can be. Forty-eight percent of all U.S. consumers have done some kind of gaming since COVID-19 forced them to largely stay home. Among members of Gen Z, the figure rises to 75%, and among Millennials, it’s 69%. Gen X, the first group that grew up on videogaming, are behind that, at 56%.

Hanish Patel, managing director of Deloitte Consulting, sees big correlations between binge video viewers and binge gamers. He pointed to data showing that 38% of U.S. consumers binge video content on a weekly basis, and 29% binge on gaming in an average week. “What’s interesting is there’s a distinct overlap between binge gaming and binge watching: 57% of binge gamers are also binge watchers on a weekly basis,” Patel said.

In a Deloitte study conducted during the pandemic, members of younger generations stated that gaming has actually helped them get through a difficult time, Patel reported. “A total of 27%, across all generations, have stated that it actually helped them stay connected with other people. That number is significantly higher for Gen Z and Millennials,” he added.

More games information was offered up by Jennifer Dill, vice president of esports at Turner Sports, in a separate session. “Internal research tells us that everyone, in one form or another, is a gamer,” she said. “There’s not a stereotypical gamer.”

While there’s certainly a concentration of gamers among Gen Z and Millennials, there is a lot of diversity within them, in terms of what they watch or play. “We look to make our content on their terms. We might have a television offering, but many available options are on VOD [video on demand] or live game play,” said Dill. “We always make sure its immersive.

“Many people who game might not necessarily call themselves gamers. People might spend most of their free time gaming, and they skew male. But there are others you would consider more casual, who love to watch others play, who skew female,” Dill said.

COVID-19 hasn’t really slowed production down. Dill said that videogame productions were adapted to be fully remote. “Our talent and guests are highly adept, not only in tech needs, but at handling many of the production elements themselves.”

“Long term, I think there will be adjustments to competition formats, until there’s ability to travel again,” Dill added. “For certain latency reasons, teams need to be able to compete in the same space. So world championships might take a different form, thinking of things from a more regional level, so there’s no complication there.”

Games Economics

THE VIBRANCY OF THE GAMING SECTOR FROM

a valuations standpoint was made clear during a Duff & Phelps presentation. Mark Mondello, a managing director who is part of the firm’s valuation advisory practice, referenced data from PricewaterhouseCoopers (PwC) showing that the social/casual games sector is likely to have a compound annual growth rate (CAGR) of 6.3% between 2019 and 2023.

Digital/online console games are expected to have a 10.0% revenue lift, and digital/online PC games are likely to move up 7.6% in the same period. On the flip side, physical PC games are likely to drop 13.9% and physical console games will move down 4.3%.

The whole global gaming business is expected to rise from $123 billion last year to $154.3 billion in 2023, according to PwC.

“We’re getting closer to the new consoles being released. Some of the monetization of the new cycle has been impacted by COVID because of delays in production, but generally speaking the video game industry has been immune to all the disruption,” said Arya Rahimian, a vice president in Duff The higher price point for NBA 2K21 marks the & Phelps’ technology, first time that games publishers have hiked media and telecommuretail rates in 15 years. Others are likely to nication practice. follow suit, said Mark Mondello, Deff & Phelps. Mondello pointed to one of the underlying reasons for future software games growth: “TakeTwo [Interactive] announced that they’re raising prices on their NBA 2K21, which will have a suggested retail price of $70. It’s the first real boost in retail pricing in this sector in about 15 years,” he said, noting that in the past the price point has been around $60. “Most of the analysts see that [rise] as positive and expect the other gaming publishers are going to follow with that pricing. A lot of that increase will drop to the bottom-line profits,” Mondello added.

“Long term, I think there will be adjustments to competition formats, until there’s ability to travel again.”

— Jennifer Dill,

Turner Sports

Arya Rahimian, vice president, Duff & Phelps

STREAMING SHIFTS WITH COVID-19

The stay-at-home world we’ve been living in has certainly impacted how consumers have responded to video streaming services. That was made clear during a presentation by Mark Orne, executive vice president, cross-platform group, at the research company Screen Engine/ASI.

Comparing survey data from the last half of 2019 with a survey in the first half of 2020, Screen Engine found there was a slight uptick in subscription video on demand (SVOD) popularity: ■ The average number of SVOD services used by consumers moved from 2.4 to 2.7. ■ The maximum number of SVOD services respondents were willing to pay for went from 2.5 to 2.6. ■ The number of SVOD services actually paid for rose from 1.8 to 2.0.

However, Orne questioned how many subscribers would stick with newer services after their initial free-trial period expired, given the economic uncertainty.

Screen Engine’s surveys in the last two second quarters (2019 and 2020) showed that the average number of hours spent weekly watching free streaming/advertising supported VOD services rose from 6.5 to 8.0. And SVOD hours rose from 6.3 to 6.7. On the other hand, live TV and DVR viewing declined, from 9.3 to 7.2.

Venturing Beyond Newspapers

NECESSITY HAS ALWAYS BEEN THE

mother of invention. But the COVID19 pandemic became one heck of a “mother” prompting some significant reinventions within two Gannett Co. businesses that fuel the newspaper conglomerate with alternative sources of revenue.

So explained Jason Taylor, president of the Gannett Ventures division, who spoke at a Media Finance Focus session. While it had produced virtual events in prior years, the company ramped

them up significantly as the pandemic gripped the world.

Gannett’s live events business was on track to rope in some $120 million this year before COVID-19 hit. Social distancing made the in-person events impossible, needless to say.

However, “this past quarter alone, our virtual events helped us carry 65% of our budgeted revenue for the quarter, which is significant when you consider that most companies that rely heavily on events were averaging about 3% of revenue they had budgeted for the quarter,” said Taylor, referring to the second quarter and companies like Live Nation and the Ironman Triathalon.

For Gannett, high school sports have been a big event opportunity. In the past Gannett’s ESPY-type high school sports awards were bestowed during red-carpet events across the country, with one well-known sports figure as a keynote speaker in each market. “[This year] we brought people into a portal where they could watch a show with prerecorded elements and live elements that was hosted by ESPN personalities and had the biggest names in sports in every category.”

Because Gannett could record some segments in advance and didn’t need to fly celebrities into various markets, it was able to increase the level of star wattage. It created an hour-long broadcast with segments specific to 59 markets. All told, it garnered 14 million shares online, and about 200,000 people live-viewed it across the country.

Gannett didn’t charge attendees,

and because of that it was able to keep all its sponsors. The events were “very profitable,” Taylor said.

Meanwhile, Gannett’s promotions unit has also revved up its efforts with sweepstakes, contests, quizzes and special recognition programs. Taylor noted that a backyard makeover contest –where the ugliest backyard undergoes a transformation – is a great lead-generation opportunity for advertisers, such as landscape companies. Promotions is a highly profitable division for Gannett, with a database of some 5.6 million consumers.

Among the other promotional ideas Taylor threw out during the session was the creation of a bundle of merchandise specific to a certain geographic area of the country, delivered once a month to participants, or on a one-time-only basis.

“People are looking for something to give them joy,” Taylor said. For Gannett Ventures, the trick is to find out where the joy resides and figure out how its team can tap into it.

Gannett Ventures’ virtual high school sports award event garnered 14 million shares online, and about 200,000 people live-viewed it, according to Jason Taylor.

SHIFTING —Continued from page 25 Light of the Ongoing COVID-19 Disaster.” It directed Treasury Secretary Steven Mnuchin to defer the withholding and payment of the employee share of Social Security tax. The deferral applies to any employee whose wages are less than $4,000 during any bi-weekly pay period. The amounts deferred are not subject to any penalties or interest.

The memorandum further directed Mnuchin to issue guidance to implement the deferral and to also explore avenues, including legislation, to eliminate payment of the deferred taxes.

After weeks of speculation about how the deferral would be implemented, the Treasury issued guidance in the form of IRS Notice 2020-65, “Relief With Respect to Employment Tax Deadlines Applicable to Employers Affected by the Ongoing Coronavirus (COVID-19) Disease 2019 Pandemic.” The notice provides that the due date for withholding Social Security tax (or the equivalent railroad retirement tax) on “applicable wages” is postponed until the period Jan. 1, 2021 through April 30, 2021.

Applicable wages are defined in the notice to mean wages paid to an employee on any pay date during the period Sept. 1, 2020 through Dec. 31, 2020, but only if the wages for a bi-weekly pay period are less than $4,000 (or the equivalent threshold for other pay periods).

Consequently, only employees with annual compensation of less than $104,000 are eligible for the deferral, for the most part. However, the determination is made on a pay-period-by-pay-period basis. For example, employees that receive more than the threshold during one pay period may still be eligible for the deferral in a subsequent pay period in which they receive less than the threshold.

An “affected taxpayer” (i.e., the employer) must withhold and pay the total applicable taxes that were deferred ratably from wages paid between Jan. 1, 2021 and April 30, 2021. Employers “may make arrangements to otherwise collect the total applicable taxes from the employee.”

While Notice 2020-65 provided much needed guidance, it also raised many new questions. Among them: are employers required to participate in the deferral, and, if so, can employees opt-out? The IRS has since explained that employers are not required to participate in the deferral (even if their employees do want to participate).

Notice 2020-65 also makes clear that employers are responsible for payment of the deferred Social Security tax even if the employee is no longer employed when payment is required.

Even with this clarification, many issues remain. The IRS has released a draft revised Form 941 (Employer’s Quarterly Federal Tax Return) on which employers report Social Security tax. The draft form contains a line item for the deferred taxes, and a subsequent revision will likely contain a line for the payment of such deferred taxes.

The IRS may need to revise Form W-2 as well, as Social Security tax withheld (reported in box 4) will not reconcile with Social Security wages (reported in box 3).

Organizations that participate in the employee Social Security deferral will need to implement new information reporting, as well manage payroll systems to ensure the deferred tax is withheld during four months of 2021 by double withholding of Social Security.

NEW 1099 RULES

There have also been due-date changes that relate to the Protecting Americans From Tax Hikes Act of 2015 (PATH Act). It required Forms 1099-MISC reporting nonemployee compensation (NEC) in box 7 to be filed by Jan. 31 whereas the reporting deadline for Forms 1099-MISC reporting other types of payments remained Feb. 28 (or March 31 if filing electronically).

The separate boxes relate to the different types of outside workers that trigger 1099 filings, such as independent contractors as well as payments to attorneys for legal services. Consequently, Forms 1099-MISC had different due dates depending on the type of income being reported thereon. The PATH Act also eliminated automatic 30-day extensions to file information returns that report NEC.

The bifurcated due dates caused much confusion and noncompliance. There’s a $50

penalty for a non-intentional failure to file an information return up to 30 days past its due date. It increases to $110 if the return is more than 30 days late, but before Aug. 1. And the penalty rises to $270 if filings are made on or after Aug. 1. This penalty is for each information return! If that penalty scheme doesn’t seem punitive enough, the IRS can also assess the penalty a second time for failure to provide such 1099 filings to the payee at the required time. Filers with otherwise impeccable compliance histories were shocked to receive IRS notices proposing to assess hundreds of thousands (and even millions) Filers … were shocked to receive of dollars for late-file Forms 1099MISC reporting NEC. IRS notices proposing to assess To avoid confusion and reduce hundreds of thousands (and even issues that resulted from requiring taxpayers to separate Forms 1099millions) of dollars for late-file MISC filings into two categories, the Forms 1099-MISC reporting NEC. IRS created an entirely new form for the purpose of reporting NEC, appropriately called Form 1099-NEC. That began in calendar year 2020. For information return filings starting in 2021 (for calendar year 2020), Form 1099NEC will be used to report NEC that was reported on Form 1099-MISC in box 7 previously. The due date for Form 1099-NEC will be Jan. 31, while Forms 1099-MISC will be due Feb. 28 (or March 31, if applicable). Given the new Form 1099-NEC compliance obligation and deadline for payments made in calendar year 2020, organizations must ensure that their payee data is properly segregated so that NEC can be properly categorized; provided to the tax department; and reported on the new form by the earlier deadline. While I have cherrypicked three critical issues to monitor as we head into 2021, there are myriad other tax developments that require your attention. If you report to your company’s tax department or are otherwise integral to its tax compliance processes, it is important to stay abreast of these issues as the stakes are higher than ever. Reach out to your tax department; monitor outside tax counsel’s website and social media; sign up for webinars; and – as in all things related to tax – stay on your toes. Nicholas Sanchez is a tax attorney who is a partner in Miller Kaplan. He can be reached at (415) 217-4900 or nsanchez@millerkaplan.com.