This week Members exclusively received Why Growth in Streaming May Be Too Expensive for Shareholders [1], where I wrote about how:
The backdrop of both Netflix's and Spotify's tactical pivots – both focused on software – creates a stark contrast to legacy media companies doubling down on their streaming strategies. It ends up highlighting how, after user growth plateaued in 2021, legacy media companies may be increasing their execution risk and not solving for it.
This was the second member mailing in the past two weeks about this question of growth, the first one having been Is Growth in Streaming Driven More By Content or Software? before Thanksgiving. That piece argued:
if "understanding user intent has been the difference between success and extraordinary success in legacy media and streaming" (as I wrote in The Metaverse, Dotdash, & Serving User Intent), then better software that better understands user intent will lead to growth.
The common theme to both is, obviously, growth in streaming. Last week's essay tackled it from the angle of how growth in streaming:
requires new software in addition to an investment in new content, even with standardization of the technology. Understanding "user intent" increasingly needs to be part of the value proposition.
This week's tackled it from the angle of how legacy media continues to be on increased content spend for growth while Netflix – a direct competitor – and Spotify – an indirect competitor – are both betting on alternative content formats and the software to support those formats.
One could say the difference is legacy media companies are defining user intent around one variable – content spend – and software companies are expanding their definitions of user intent to be multivariable.
Meaning, Netflix now sees its streaming consumers as both streaming and gaming consumers, and Spotify sees its music consumers as podcast consumers, too.
I feel like both essays do a good, thorough job of attacking this question from two different angles. You can sign up to read them both in their entirety by clicking the button below.
If I were to make a self-critique of both essays, it is that I went too narrow in my definition of growth.
The basis of this critique is the streaming multiple, which I last wrote about in Disney ($DIS) and the Netflix ($NFLX) "Streaming Multiple" in November 2020.
Investors believe legacy media companies that successfully build out streaming services merit the same Price-to-Earnings ratio as Netflix (currently ~55X).
There is one very good reason why this is a comparison made in the marketplace:
Netflix's source of revenues is streaming subscriptions, only. So, what it invests in content now can be directly tied to growth in streaming subscription revenues.
But, in the instance of Disney, what it invests in a blockbuster movie like Black Widow or Shang-Chi needs to be recouped via theatrical, PVOD, and SVOD revenues, in addition to other distribution windows, merchandise sales, and theme parks.
Netflix is playing by a narrower set of rules than Disney for generating revenue off of distribution. That means for Netflix, growth results in more subscribers and therefore more revenues, but for Disney growth is many-headed.
This difference particularly plays out with talent, as we saw with Scarlett Johansson and Black Widow this past summer: streaming creates new and difficult questions for upside in talent deals with Disney.
Growth at a legacy media company ties into talent deals that involve sharing upside, and in streaming, that puts talent in a position to demand future upside from streaming growth. That was the point of The Entertainment Strategy Guy's You Can’t Split The “G”, an essay from August built upon PARQOR's Curse of the Mogul framework and which I quoted in this week's essay.
The challenge is, as both Netflix and Disney have proven, streaming is not a profitable business. Meaning, the expectation of future revenues in revenues is variable, and the expectation of future profits even moreso.
But, at Netflix, upfront payments based on algorithmically projected outcomes (and other factors) solve for those problems at the pre-production phase.
Also, Netflix has proven that growth requires content spend and marketing that creates "ubiquitous access". Legacy media companies, including Disney, are ramping up the former but still on a learning curve for the latter.
One implication of this is that because legacy media DTC marketing is weaker than Netflix's, growth is not guaranteed from content spend alone. But also, the more inefficient marketing spend is, the more the future revenues trend towards less profit if not an outcome of loss in streaming.
In the case of a Black Widow or Shang-Chi, that means expensive talent deals on top of inefficient marketing spend that leads to sub-optimal outcomes can end up being brutal financially for Disney, especially relative to past theatrical distribution models.
For Netflix, they can cost-effectively market a movie, and if it fails, simply write off the failure and move on to find growth elsewhere (see: Jupiter's Legacy). Also, unlike Disney, it can be rewarded for having zero to negative free cash flow, while Disney would be punished by investors accustomed to seeing it.
The point is not that Netflix is playing by a different set of rules, as we know this already. Rather, the point is that shareholders incentivize Netflix (or Spotify) management differently than they incentivize legacy media management despite the promised reward of the streaming multiple.
So, looking at something like "user intent" ends up being a helpful lens on marketing, but it discounts why legacy media management focuses on selling Wall Street on content spend to earn a streaming multiple on their stock.
Also, looking at something like content spend ends up being a helpful lens on a legacy media company's streaming strategy, but ignores key moving pieces of recoupment and profit-sharing.
Focusing on growth, alone, without a structure for evaluating the trade-offs it involves ends up being a bit myopic.
[1] In the past I have sent previews of Member Mailings to the free tier. You can access a preview by clicking on the description, above, or here.
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