One poetic data point from 2023 is how $2.47 billion in operating income from Disney’s Sports division was seemingly subsidized by $2.45 billion in operating losses from its Direct-to-Consumer division. That is not actually how accounting within the media conglomerate works. But, it is one way to spin the math.
Until recently, the market perception was that this story reflected the past (linear, theatrical) subsidizing the future (streaming). Fubo’s successful preliminary injunction against sports streaming app Venu Sports—a bundle of Disney, Fox and Warner Bros. Discovery sports channels (mostly)—has flipped that perception. A federal judge ruled that “it is difficult to avoid the conclusion that, on balance, [programmers’ bundling practices], are bad for consumers.”
The executives who bet on streaming now face the unenviable task of balancing the existential need to deliver EBITDA to shareholders with the existential need to find growth with innovations that will kill that source of EBITDA. In one sense this is Clayton Christensen’s “Innovator’s Dilemma” in practice, where investment in disruptive innovation will undermine existing products.
But, in another sense, the wrong products are being built: Venu and Peacock arguably need to be broader offerings than streaming, only. They must become platforms that get subscribers addicted to watching their own local and favorite sports teams. Instead, they are not and EBITDA is being improperly allocated and shareholder value is being destroyed.
That presents two challenges for management teams:
To build the “right” products and
Deliver EBITDA
The problem is that none of these management teams have a background in product development to solve the first challenge.
Key Takeaway
Can either Warner Bros. Discovery CEO David Zaslav and new Paramount owner David Ellison build the “right” product and deliver EBITDA to shareholders? Their answers should force a generational shift in management teams and philosophies.
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“Ill-Suited” To Run The Business
If these two challenges sound familiar, it is because Warner Bros. Discovery CEO David Zaslav has been battling them. Its Networks division provided 88% of the adjusted EBITDA for the entire company. In 2022, $8.72 billion in adjusted earnings before interest, depreciation and amortization (EBITDA) from linear networks ended up cushioning $1.5 billion in direct-to-consumer losses and nominally was almost 100% of total annual adjusted EBITDA.
Zaslav has tried to convince investors on recent earnings calls that both its Max streaming service and its games division were growth engines. But, Bank of America’s Jessica Reif Ehrlich raised a thorny question last Fall: Is the growth in streaming “enough to offset these linear challenges” given that linear is Warner Bros. Discovery’s “biggest business?”
Her point was that if there is growth and EBITDA in streaming and games, is this the management team that can deliver those? Can it build a scalable competitor to Netflix and YouTube (and now Tubi) and create cash flow from gaming?
The obvious counter question that Zaslav and his team could have asked is “If not us, then who?”
There are three problems with that question. First, it concedes that they are “ill-suited” to run these businesses. Second, it concedes younger, more product-savvy managers in their place would do a better job building the Max streaming product and running the WB Games business.
Third, the streaming-savvy and games-savvy WarnerMedia management team—which Zaslav ousted and threw under the bus on multiple earnings calls—had this unique skill set because they had previously built Hulu and had over a decade of experience in direct-to-consumer media business models. Bringing them back is not an option, nor is it reminding investors that they may have thrown out the right team at the wrong time.
Otherwise, the few managers that do have a background across the cable television business, product development and gaming are employed at other streaming services. None have the track record of success that would make their hiring compelling to management or investors.
David’s Choice/The Davids’ Choice
Another "David" now entering the fray is Skydance’s David Ellison. He owns a gaming business (Skydance Interactive) and his studios have been producing content for streaming since 2018 (when Apple bought the rights to a series adaptation of Isaac Asimov's science fiction book series “Foundation”). When the deal closes—projected to be within the next six months—he will face the same questions as David Zaslav.
But, unlike Zaslav he is younger and more gaming-savvy. The challenge is that he is not product-savvy: His business has succeeded in producing movie, TV and gaming content for platforms. But, it has not built one.
So, both Davids face the same dilemma: Can either build the “right” product and deliver EBITDA to shareholders?
One answer is that these are mutually exclusive businesses and each must pick one over the other. But, that choice is not simple for either.
For Zaslav and his team, without streaming or gaming the remaining business is a private equity type of enterprise with cash flows from theatrical, cable networks and licensing. For Ellison, the remaining business without streaming is similar to Warner Bros. Discovery but adds back gaming (from Skydance, only). Neither offers investors a growth story or sufficient EBITDA to justify current market valuations.
Without cash flow from streaming, both Davids will have to squeeze additional cash flow from elsewhere. I argued last month that the opportunity may be in “licensing the IP to millions of creators who are hungrier to succeed with the IP than existing management teams.”
But, if that is not the opportunity, then what? Investing in consumer-facing products still seems the best bet for achieving a scalable and profitable business.
A Generational Divide
All available data suggests that on the internet, media consumers value personalized user experiences (Netflix, YouTube, Tubi) and/or “sub-scale, dynamic and product-oriented models” (Crunchyroll) more than they do access to large libraries of content. That requires executives with a product-first mindset.
The last two decades of direct-to-consumer business seem to have created an entire generation of product developers who understand how to build a great product for consumers and manage the e-commerce conversion funnels for them. The talent is out there: There are nearly 2 million apps in Apple’s App Store and 3 million in the Google Play Store.
The big questions now are when and why they will emerge. Because the business challenges the Davids face should force a generational shift in management teams and philosophies. That is not happening. The most obvious culprits are media gerontocracies, but the complexities of media fragmentation are also to blame. There are more incentives to build outside walled gardens than within them.
To solve for both EBITDA and build the “right” product, the Davids and other C-Suites must change those incentives today. But, if they build those incentives, will the new generation of talent come?
It may simply be that if they cannot be the "David" (meaning, CEO), they probably will not emerge.