Good afternoon!
The Medium delivers in-depth analyses of the media marketplace’s transformation as creators, tech companies and 10 million emerging advertisers revolutionize the business models for “premium content”.
On Tuesday, I was quoted in a terrific piece by Deadline’s Katie Campione on why we are seeing free ad-supported TV (FAST) services like Tubi, Roku Channel and Pluto grow and continue to outperform Paramount+, Max and Peacock, collectively.
It is a product-centric piece within a Hollywood trade. Campione also interviewed Heads of Content from Roku and Tubi. Their explanations for their successes focus more on the consumer-facing product and “the entirety of the user journey” than their content libraries. The article is proof in the pudding of something I wrote back in May: “The next generation of consumers value the user experience (UX) as much as the content.”
This is no small thing. Key players in film and television will be spending an estimated $132.7 billion on content in 2024. But, FASTs are beating legacy media subscription services because they are “products first, and walled gardens for content last”, as I told Campione.
It could be argued that FASTs present a compelling case that the content increasingly serves the product. That concept is not unusual: It is the entire premise of Marshall McLuhan’s rationale that “the medium is the message”. However, Hollywood’s business model is 100% oriented towards a collective belief that “content is king” and therefore walled gardens are both a competitive advantage and will drive shareholder value. In streaming, alone, FASTs are now disproving that and proving instead that the product is the business.
This has implications that reach far beyond streaming and particularly for Disney.
Key Takeaway
YouTube is a video distribution platform, first, but its business model has evolved to include multiple digital conduits for niche fandom. Disney needs to build more digital conduits for fans of its powerful library of IP on the Disney+ platform.
Total words: 1,500
Total time reading: 6 minutes
Fragmenting Demand
I recently wrote in “Investors & The Unsentimental Media Consumer” that in a retail-first, consumer-first marketplace, a key challenge is that “consumers seem increasingly more sentimental for the intellectual property of media companies more than they are the formats.” Meaning, the assumption that audiences at scale valued the IP was correct, but assuming that video was the only format in which they valued that IP was wrong.
YouTube gave up on building a proprietary walled garden back in 2021 while Netflix largely has given up on investing in expensive IP to become a Disney-like walled garden.
The problem that fragmenting demand creates is that—much like the growing list of FAST services, especially on connected TV platforms (e.g., Roku, Google, LG)—there will also be a growing list of products from creators, gaming companies and generative AI platforms. The more of those apps achieve success, the less of the rationale for a walled garden makes sense and the more a Spotify-like licensing platform for walled garden IP may be the best model.
Disney’s Dilemma
A Wall Street Journal story about Disney’s challenges in its streaming business captures a core problem of this dynamic. Disney+ is now neck-and-neck with Tubi, according to Nielsen's The Gauge. In May, Tubi surpassed Disney+ in viewers.
Disney has responded in recent months by focusing on improving its Disney+ platform into “a more Netflix-like streaming experience.” This is a change of course from management’s original belief that a walled garden is what would drive subscribers who were “more likely to show a clear preference for one or more of the company’s themed content portfolios—like Marvel, Star Wars, Pixar or National Geographic—and click on them without prompting.”
Minus some accounting magic from a deal with Charter, growth rates for Disney+ have been stagnant while Netflix continues to grow. The dominance of a handful of older movie titles (e.g., "Moana" from 2016) and third-party shows (e.g., Bluey) in Nielsen ratings have also proven these assumptions wrong.
Tubi’s success seems to be a particularly painful lesson at a time when Disney needs to build a better story of user engagement for advertisers. But, even if Disney somehow manages to evolve Disney+ closer to a more sophisticated Netflix-like platform, Nielsen data shows consumers would rather spend their precious TV time on free services watching TV and movie content that is not owned by Disney. The Disney brand halo around its content is weak. Another more product-oriented solution is necessary.
An Alternate Path
A notable detail in the article was that Disney’s streaming technology team comprises about 8,000 employees. This total includes those who also work for the company’s traditional TV networks, in advertising tech and for other apps.
If it is true that “consumers seem increasingly more sentimental for the intellectual property of media companies more than they are the formats”, then the question is whether 8,000 employees solving for Disney+ is the best allocation of resources in the short-term and the long-term.
It is the same question I raised in “Media Conglomerates At A Crossroads: Invest In The IP or The Tech”: Is the decision to invest in four emerging technologies where the IP might be valuable is a better model than continuing to invest in the IP?
Those four business models are:
Gaming (e.g., licensed third-party character “skins” in online games like Fortnite and Roblox)
Blockchain (e.g., non-fungible tokens (NFTs), memecoins)
Generative AI tools (e.g, learning language models that learn from data and produce content autonomously); and,
Creator economy (e.g., media companies partnering with influencers for promotion)
Disney is already part of the way there:
It invested $1.5 billion in Epic Games as part of a broader partnership in March;
It has dabbled in blockchain with its Disney Pinnacle platform for Disney, Pixar and Star Wars NFTs;
With generative AI, Iger has been publicly pushing the business to “embrace the change”'
Last month, CNBC reported Disney leaders are discussing YouTube daily in strategic meetings and “have considered adding user-generated content to Disney+, though it’s not on the immediate roadmap.”
However, the sense has been that these have individual band-aids more than elements of a broader, more product-oriented vision from the C-Suite.
Elegant Solutions
Ultimately, Disney is stuck on solving for streaming, only, for financial reasons: It spent $3 billion to acquire BAMTech, which powers Disney+ and ESPN+, and Hulu is anywhere between another $27.5 billion and $40 billion, depending on what a financial advisor ultimately decides. Under Iger Disney will have spent somewhere between $31 billion and $43 billion on its streaming efforts—or 16% and 24% of its market cap on streaming—with its flagship service losing to free services without walled gardens.
Iger will not want the stain of an expensive streaming failure on his legacy at Disney. Nor will shareholders who have stuck with Iger through thick and thin—including a recent activist shareholder campaign—want to see that destruction of shareholder value (though the stock has dropped 20% since April).
Improving the product should improve engagement. But, the growing success of FASTs implies that these solutions will matter increasingly less to consumers because Disney’s TVs and movies matter less to consumers who consume video on TVs.
Lucia Moses reported for Business Insider that in April, Nielsen estimated kids 2 to 11 watched three times as much YouTube as Disney+ content. She includes a quote from a researcher who noted that “YouTube meets [kids] where they are and meets their passions in nuanced ways. It really has shifted the entertainment landscape." In other words, the YouTube product delights the consumer with content, and not the other way around.
YouTube-ify Disney?
For this reason, the question is whether Disney’s 8,000 streaming employees would generate more value in solving for the Venn diagram overlap between YouTube’s Partner Program for creators and Disney streaming.
Over the last three years, the YouTube Partner Program has paid out over $70 billion to creators, artists, and media companies. Part of that is advertising revenues shared with creators and part of that is revenues audiences being able to pay for merchandise (both creator-owned and third-party-owned products), for Super Chat (having messages highlighted for the creator), for Super Thanks (effectively, tips for content), and for channel memberships (exclusive perks and content for monthly paying members).
In short, YouTube is a video distribution platform, first, but its business model has evolved to include multiple digital conduits for passionate fandom. YouTube promises creators the ability to “create, connect and grow”, and that is where there may be Venn diagram overlap with Disney and its superfans. Disney needs to build more digital conduits for passionate fans of its powerful library of IP on the Disney+ platform.
Disney might have to build the technology from the ground up, but it would not have to build new line items. It has a $4.4 billion consumer products business within its Experiences division, and it generated $2 billion in operating income in 2023. It has a D23 membership. All these services are in place and Disney simply needs to connect the dots via the Disney+ platform. All that is missing is a conceptual rethink and rebuilt of Disney’s technological architecture—one that former CEO Bob Chapek seemed to be pursuing before he was putsched.
A Netflix-oriented version of that is happening now. Could a more YouTube-oriented pivot happen before Iger appoints a successor?
Maybe, because Iger seems obsessed with his legacy before he steps down in two years. It would be a good move. But, with succession looming, Iger may not have many new moves left.