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Speaker 1: Welcome to another episode of Strictly Business, the podcast in

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Speaker 1: which we speak with some of the brightest minds working

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Speaker 1: in the media business today. I'm Andrew Wallenstein with Variety.

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Speaker 1: We're doing something a little different this week, revisiting a

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Speaker 1: previous episode of Strictly Business from two years ago with

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Speaker 1: some new information that will make for an interesting reconsideration

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Speaker 1: of what we heard then from my guests, a pair

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Speaker 1: of top executives at Riot Games. But the conversation was

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Speaker 1: less about the state of video games and more about

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Speaker 1: their ambitions than to produce TV and film. They were

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Speaker 1: coming off the successful launch of their first animated series

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Speaker 1: on Netflix, and we're signaling they wanted to do more

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Speaker 1: now that series is back for a second season, which

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Speaker 1: got me wondering why we hadn't seen any other entertainment

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Speaker 1: from this company. Well, now that I've done some asking around,

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Speaker 1: I've got plenty to share. Stick around. We'll be back

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Speaker 1: in just a moment with an exclusive update that goes

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Speaker 1: inside Riot Games. Welcome back to Strictly Business. November ninth

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Speaker 1: marks the return to Netflix of the animated series Arcane.

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Speaker 1: To return Piece to the City, you Must Declare Martial Law,

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Speaker 1: top side is the real enemy.

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Speaker 2: You have the chance to rally the under city together

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Speaker 2: your symbol, So what.

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Speaker 1: Are you planning? Arcane turned out to be a hit

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Speaker 1: back in season one, reaching number one among TV shows

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Speaker 1: and eighty five Netflix markets around the world. It also

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Speaker 1: swept awards in its category in twenty twenty two, including

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Speaker 1: the Emmy for Outstanding Animated Series. So when I sat

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Speaker 1: down almost exactly two years ago with Riot Games co

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Speaker 1: founder and chief product officer Mark Merrill, as well as

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Speaker 1: its lead entertainment executive Shanna Spenley to talk about their

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Speaker 1: ambitions in the entertainment space, I was not surprised to

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Speaker 1: hear they had big but preliminary plans to do more productions,

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Speaker 1: even outside in animation and even in movie form. But

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Speaker 1: two years later, yours what did end up surprising me?

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Speaker 1: Nothing seemed to come of all that ambition. So I

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Speaker 1: got to checking back with sources in and around the

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Speaker 1: company to understand just why that was. And that's what

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Speaker 1: I'll explore in great detail today, along with some excerpts

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Speaker 1: from that twenty twenty two interview with Riot Games. First,

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Speaker 1: let me just hit some of the key points we'll

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Speaker 1: be exploring further in this episode. What I learned about

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Speaker 1: Riot's efforts and entertainment was that despite hiring a team

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Speaker 1: of executives experienced in the ways of entertainment to focus

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Speaker 1: on building out a slate of programming based on Riot

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Speaker 1: intellectual property, just like Arcane, not a single project beyond

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Speaker 1: that show has been fully developed. Riot is no closer

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Speaker 1: to putting project into production as season two of Arcane

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Speaker 1: begins than when season one ended, and by the way,

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Speaker 1: there won't be a season three of Arcane either. Why

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Speaker 1: did Riot Games not end up making good on its ambition, Well,

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Speaker 1: there's a number of key reasons. When the CEO who

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Speaker 1: was driving the entertainment effort back then, Niccolo Laurent, unexpectedly

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Speaker 1: stepped down last year, new leadership pulled back on its

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Speaker 1: entertainment plans. The entertainment division also faced plenty of skepticism

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Speaker 1: up and down a company that had many who preferred

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Speaker 1: to keep Riot focused on its core competency in video games.

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Speaker 1: That entertainment division was also practically dissolved as part of

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Speaker 1: a broader restructuring that the company announced last year under

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Speaker 1: a new CEO. But in an interview with Mark merrill

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Speaker 1: I conducted recently over me email, he defended Riot's track

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Speaker 1: record in entertainment and said the company was still very

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Speaker 1: much committed to producing for TV and film, but on

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Speaker 1: its own timeline. Now, before we dig in any further,

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Speaker 1: let's provide some background about Riot Games, for which beating

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Speaker 1: Hollywood at its own game is really far from a

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Speaker 1: first priority. The bread and butter is its video game business,

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Speaker 1: responsible for driving an estimated three billion dollars in top

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Speaker 1: line revenue last year, and the allion's share of that

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Speaker 1: comes from the game that put Riot on the map

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Speaker 1: back in two thousand and nine when it first launched,

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Speaker 1: called League of Legends. Now, for those living under rocks

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Speaker 1: who have never heard of this gaming behemoth, here's Mark

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Speaker 1: Merrill from my twenty twenty two interview explaining what League

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Speaker 1: of Legend is all about.

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Speaker 3: The easiest way to contextualize what League Legends is is

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Speaker 3: really to compare it to a sport, because the game

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Speaker 3: itself is relatively simple, and that there's essentially what you

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Speaker 3: do as a player is you join up with another

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Speaker 3: four players, and you play against another team of five players,

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Speaker 3: and you essentially are choosing what we call a champion

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Speaker 3: to be for that game session, which lasts anwhere from

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Speaker 3: thirty to forty five minutes, and then the depth of

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Speaker 3: engagement really comes from the fact that you're leveling up,

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Speaker 3: you're trying to kill other players. Essentially, if you it's

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Speaker 3: sort of mode analogous to say basketball, where you know

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Speaker 3: the court and the rules are relatively simple, but every

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Speaker 3: game is different because there's so much player express creativity

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Speaker 3: and so League has you know, little over three billion

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Speaker 3: monthly hours of engagement, you know, just playing the game.

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Speaker 3: And so one of the things that's also important to

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Speaker 3: understand about League is that it is a very hardcore game,

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Speaker 3: and that it is you know, we always thought about

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Speaker 3: it as a targeting niche, and it turned out that,

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Speaker 3: especially on a global stage, you know, that niche was

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Speaker 3: much larger than we ever anticipated. And so the game

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Speaker 3: operates as a service. It's completely free, and you know,

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Speaker 3: you never have to spend any money in the game

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Speaker 3: if you don't want to. And our business has really

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Speaker 3: premised upon actually selling cosmetic virtual goods, and so it

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Speaker 3: was incredibly difficult to raise money back in two thousand

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Speaker 3: and six and thousand and seven when Brandon and I

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Speaker 3: are twenty four and twenty five start in the company,

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Speaker 3: because you know, as one VC put it. They're like, wait,

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Speaker 3: you're going to have a multiplayer online battle arena game

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Speaker 3: where college age kids are killing each other online. And

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Speaker 3: then the way you're gonna make money, they're gonna playdress

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Speaker 3: up all and we're like, kind of but not really,

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Speaker 3: and they're yeah, good luck with that, and so you know,

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Speaker 3: but it turned out to work.

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Speaker 1: So now that you understand the business model, you have

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Speaker 1: the context for understanding Arcane, a TV show adapted from

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Speaker 1: the League of Legends intellectual property. The show was the

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Speaker 1: brainchild of Christian Link and Alex Yee, members of Riot's

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Speaker 1: players support team, who had no experience producing a TV show,

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Speaker 1: but they drew from the Legends mythology, and in twenty sixteen,

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Speaker 1: Riot took a flyer on them and gave them permission

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Speaker 1: to create a pilot with a company called Fortisch, which

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Speaker 1: was a Paris based animation studio that the company had

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Speaker 1: worked with on previously, but for nothing as big as

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Speaker 1: a television show, and they were lucky enough to strike

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Speaker 1: gold right out of the gate. Our Kane was a

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Speaker 1: hit for Netflix. We're going to take a quick break,

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Speaker 1: but when we're back more on Riot Games, Our Kine

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Speaker 1: and the entertainment strategy that hasn't quite gotten off the ground.

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Speaker 1: We are back and I am going to continue my

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Speaker 1: exploration into riot games. With the success of Arcane putting

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Speaker 1: riot games on the Hollywood map, it's a no brainer

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Speaker 1: that ambition soon kicked in for more. The company recruited

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Speaker 1: some experienced entertainment executives from Disney, Paramount, HBO, Max, and

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Speaker 1: most notably Netflix, which is where SHAWNA. Spenley came after

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Speaker 1: fifteen years as a marketing executive there. She was named

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Speaker 1: president of Global Entertainment at the end of twenty twenty,

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Speaker 1: and she in turn brought other Netflix executives in to

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Speaker 1: work on this new slate of programming. Back in twenty

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Speaker 1: twenty two, I talked with Spenley and Merrill about what

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Speaker 1: it took to put together a successful team in entertainment.

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Speaker 2: So you talk about the team, I'm curious what the

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Speaker 2: infrastructure is. Do you have now a separate TV division?

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Speaker 2: Are you bringing in lots of Hollywood types or you're like,

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Speaker 2: you know, we don't want to be infected by the conventional.

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Speaker 3: Well we we if they want to learn from the

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Speaker 3: tremendous expertise. So we brought in a lot of great

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Speaker 3: people who have great backgrounds in Hollywood as well. But

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Speaker 3: getting the blend right of course is very important.

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Speaker 4: But yeah, look, I think it's funny. I remember being

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Speaker 4: in a position being in a tech company and then

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Speaker 4: bringing in a whole bunch of Hollywood, and so it's

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Speaker 4: sort of weird joining another company and being the Hollywood

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Speaker 4: running in Like that was weird for me. But I

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Speaker 4: think our focus is really clear. Games right now are

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Speaker 4: such a massive part of the entertainment ecosystem, and we

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Speaker 4: all signed up to be a part of that ecosystem.

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Speaker 4: So I think from our perspective, we're really excited to

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Speaker 4: learn and develop together with game executives, and we're coming

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Speaker 4: into it with a partnership frame of mind. So it's

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Speaker 4: not it doesn't feel odd at all, does it. I mean,

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Speaker 4: it feels like we are building a really strong team

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Speaker 4: that partners together across both.

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Speaker 3: Dimensions well, and when we're creating scripted entertainment, it's like

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Speaker 3: our players' expectations, of course, and the audience expectations aren't

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Speaker 3: just set by what we do. I mean they watch

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Speaker 3: lots of TV and great movies, and so they're set

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Speaker 3: by what everybody in this room does. And what the

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Speaker 3: whole industry does. And so you know, our challenge has

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Speaker 3: been how do we create something that can you know,

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Speaker 3: stand shoulder to shoulder with these other incredible properties, which

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Speaker 3: of course is just is really hard. And so that's

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Speaker 3: where you know, again, I think the luxury of being

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Speaker 3: able to take time and find the right team and

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Speaker 3: sort of experiment and learn has been tremendously helpful.

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Speaker 1: Spenley made clear she saw Riot as ground zero for

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Speaker 1: the inevitable intersection for entertainment in games, but pledged patients

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Speaker 1: and properly exploiting the Marvel scale trove of hundreds of

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Speaker 1: game characters at her disposal. She and Mark Merrill discussed

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Speaker 1: the incredible potential they saw in all that ip back

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Speaker 1: in that twenty twenty two.

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Speaker 2: Interview, and just a few days ago we learn in

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Speaker 2: a Variety exclusive that you has hired a live action executive.

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Speaker 1: Man and pitch her.

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Speaker 2: So clearly there's some broader ambitions here. I know you're

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Speaker 2: not necessarily going to speak to particulars, but do you

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Speaker 2: guys have a sense now like, Okay, we're we're going

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Speaker 2: to ramp up a whole slate in the next ten years,

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Speaker 2: Like what are you thinking.

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Speaker 3: Well, one of the things that's exciting is ourcane takes

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Speaker 3: place in one area in our world and with eight characters,

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Speaker 3: and we have close to one hundred and sixty characters

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Speaker 3: now in a much larger world, and so the storytelling

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Speaker 3: possibilities to develop who these characters are and the relationships

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Speaker 3: and sort of the timeline is, you know, we think

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Speaker 3: are vast and immense, and part of our challenge is,

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Speaker 3: you know, how do we do that well? And it's

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Speaker 3: been really exciting for us to cultivate this again incredibly

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Speaker 3: rich animation pipeline. But that's that's one medium, and you

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Speaker 3: know there are other, of course mediums that may be

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Speaker 3: able to do an incredible job of telling these stories also,

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Speaker 3: and those are things that we're committed to exploring.

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Speaker 2: You say that, and I immediately think of two words,

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Speaker 2: cinematic universe or marvel this field of characters, like are

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Speaker 2: you looking to companies like that in terms of like, Okay,

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Speaker 2: we've got to build this bible over X number of

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Speaker 2: characters and wine number of years.

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Speaker 4: We hear that phrase a lot inside our company too,

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Speaker 4: and I think we try to just stay patient and

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Speaker 4: pace it because we're obviously inspired by Marvel and Lord

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Speaker 4: of the Rings and and Harry Potter and Game of Thrones.

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Speaker 4: They're they're incredibly inspiring and and clearly audiences are asking

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Speaker 4: for these interconnected, intertwined universes. So we can only aspire

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Speaker 4: to tell you know, phenomenal and great stories with this

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Speaker 4: vast world that we've that you know, they've created that

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Speaker 4: I get the pleasure of working inside of our team.

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Speaker 4: It's interesting. It's like we're not trying to tell too

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Speaker 4: big of a story too quickly. We really like these

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Speaker 4: little pockets of the universe. But I think, I think

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Speaker 4: we have a very long runway with IP like this.

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Speaker 4: As you all know, Star Wars is forty fifty years old,

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Speaker 4: Lord of the Rings older, and so multi generational IP

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Speaker 4: like this should go on for fifty to one hundred years,

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Speaker 4: and so we want to be really patient and treat

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Speaker 4: it with care.

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Speaker 3: And a lot of that goes into cultivating the internal

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Speaker 3: organizational competency around how to have so many different creators

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Speaker 3: and teams work effectively in a coordinated way within the IP.

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Speaker 3: And that's quite a challenge, and you know, as we

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Speaker 3: continue to grow, you know, find in different ways to

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Speaker 3: do that. But you know, I think we're benefited again

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Speaker 3: by the ability for us to really think long term

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Speaker 3: and try to be focused on again investing in the

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Speaker 3: IP rather than exploiting the IP for sort of a

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Speaker 3: short term benefit.

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Speaker 4: There's no immediate plan for you know, three pictures in

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Speaker 4: a year kind of a thing. I mean, we're we're

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Speaker 4: not in a pipeline way of thinking we want yet, No,

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Speaker 4: we really want high quality, excellent, and it were okay

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Speaker 4: if it takes time.

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Speaker 1: So after all that planning, what did happen to the

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Speaker 1: best laid plans in terms of the ambitions that Riot

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Speaker 1: had in entertainment. Well, first thing some context. What was

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Speaker 1: notable regarding Riot's approach in terms of what they wanted

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Speaker 1: to do in entertainment was the company held onto the

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Speaker 1: intellectual property it wanted to develop and bet that whatever

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Speaker 1: it lacked an experience of producing long form video content

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Speaker 1: could be compensated for by hiring that expertise from the outside.

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Speaker 1: And that strategy was a notable deviation from an era

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Speaker 1: of video game inspired entertainment that preceded the current hot streak.

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Speaker 1: This subgenre, if you'll call it, is enjoying from everything

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Speaker 1: from Max's The Last of Us to the twenty twenty

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Speaker 1: four were hit in cinemas this year. Five Nights at

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Speaker 1: Freddy's Studios were often criticized for their ham handling, handling

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Speaker 1: of properties they didn't really understand well enough to translate

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Speaker 1: to entertainment. Prince of Persia comes to mind, Super Mario

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Speaker 1: Brothers from nineteen ninety three, and do you remember those

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Speaker 1: Dwayne Johnson that Doom movie in two thousand and five.

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Speaker 1: I barely do myself. However, what made sense and theory

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Speaker 1: didn't work as well in reality at Riot. For one thing,

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Speaker 1: there was a disconnect between the entertainment team brought in

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Speaker 1: to bring Lorentz Laurent's vision to reality and the rest

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Speaker 1: of the company. Multiple sources I spoke to noted that

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Speaker 1: there were many skeptics who never bought in from a

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Speaker 1: management team with which the entertainment division never really gelled

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Speaker 1: to the Riot rank and file, many of whom were

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Speaker 1: hardcore gamers who largely saw entertainment as a distraction. By

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Speaker 1: May twenty twenty three, the CEO of Riot announced he

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Speaker 1: was leaving, and he was replaced by President Dylan Jadeja,

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Speaker 1: who insider say immediately began to reverse course on Laurent's

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Speaker 1: entertainment expansion, citing a renewed focus on the core gaming business.

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Speaker 1: The entertainment division, which was once one of five Riot

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Speaker 1: operating divisions with the company called Pillars, was essentially disbanded.

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Speaker 1: Leaders of various parts of the entertainment business scattered to

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Speaker 1: other parts of the company. In August of this year,

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Speaker 1: the company announced a restructuring that basically split development work

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Speaker 1: on its live action and animation efforts. At the same time, SHAWNA.

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Speaker 1: Spenley stepped down, referring to her exit in a memo

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Speaker 1: as a bittersweet decision. Just weeks later, she was rehired

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Speaker 1: at HBO Max, where she is now the CMO looking elsewhere.

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Speaker 1: It is interesting to note that the cost of Arcane

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Speaker 1: was two hundred and fifty million dollars, which is far

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Speaker 1: and away making it the most expensive animated series ever

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Speaker 1: on linear TV or streaming that covers eighteen episodes over

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Speaker 1: two seasons. Now, Arcane will certainly, almost certainly, I should say,

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Speaker 1: not be profitable for Riot. It's next impossible the company

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Speaker 1: is going to be able to make up for the

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Speaker 1: fact that despite a three million dollar per episode license

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Speaker 1: fee that Netflix paid for worldwide distribution rights and another

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Speaker 1: three million that Riot's parent company, ten Cent brought in

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Speaker 1: for China. The fact is all sorts of ancillary revenue

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Speaker 1: streams that weren't available during the first season of Arcane

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Speaker 1: will probably not come up, will probably come up short

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Speaker 1: in its attempt to help recoup the deficit of season two,

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Speaker 1: though company. The company does believe that break even is

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Speaker 1: a potential scenario as well. Now in terms of that

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Speaker 1: two hundred and fifty million dollars, that is something that

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Speaker 1: is covered across programming and marketing. Sources familiar with details

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Speaker 1: of the production said that the cost of the first

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Speaker 1: nine forty minute episodes ran north of eighty million, and

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Speaker 1: the second batch of nine that are beginning to air

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Speaker 1: now on Netflix cost nearly one hundred million. That's not

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Speaker 1: even the most eyebrow raising part. It is estimated that

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Speaker 1: Riot spent sixty million dollars of its own money to

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Speaker 1: just promote the first season of Arcane, which is exponentially

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Speaker 1: more than a studio would typically spend for a show

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Speaker 1: it isn't distributing, certainly more than what Netflix spent itself.

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Speaker 1: The company reason that it was going to have to

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Speaker 1: find audiences outside of the typical places that TV watchers

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Speaker 1: discover television as much of the turbulence as Riot has

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Speaker 1: experienced in recent years trying to get entertainment off the ground.

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Speaker 1: It hasn't discouraged the company. Mark Merrill, who did agree

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Speaker 1: to respond to questions via email, did reaffirm his commitment

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Speaker 1: to continuing in entertainment, and I'll read the quote he

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Speaker 1: gave me quote. Our ambitions in entertainment haven't changed. We

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Speaker 1: were never attending to operate like a traditional studio with

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Speaker 1: traditional timelines. What did change as we learned more was

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Speaker 1: our expectations of ourselves. We realized that getting it right

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Speaker 1: takes a lot more time than we did originally expected,

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Speaker 1: and so we recalibrated our development, output goals and teams

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Speaker 1: with that in mind. And as for that two hundred

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Speaker 1: and fifty million price tag, could not get the comment,

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Speaker 1: could not at the company to confirm, but Merrill himself

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Speaker 1: did say, we're more than comfortable with the spend it

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Speaker 1: took to deliver a show that was worthy of our

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Speaker 1: player's time. So there you have it, the story of

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Speaker 1: Arcane and Riot Games and what has gone on with

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Speaker 1: an entertainment strategy that has gone basically a wall over

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Speaker 1: recent years. Who knows what the future will bring. For

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Speaker 1: more on Riot Games than Arcane, I would refer you

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Speaker 1: back to Variety dot com, where a feature story includes

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Speaker 1: many of the elements we covered in this podcast, but

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Speaker 1: also some things that we did not, including an early

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Speaker 1: negotiation gone wrong with the famous Russo Brothers, the architects

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Speaker 1: of the Avenger franchise, and more commentary from Mark Merrill

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Speaker 1: addressing all the different allegations made in this story. Thanks

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Speaker 1: for tuning in, appreciate the time, Thanks for listening.

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Speaker 3: Be sure to leave us a review at Apple Podcasts.

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Speaker 2: Or Amazon Music.

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Speaker 3: We love to hear from listeners.

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Speaker 2: Please go to Variety dot com and sign up

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Speaker 1: For the free weekly Strictly Business newsletter, and don't forget

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Speaker 1: to tune in next week for another episode of Strictly

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Speaker 1: Business