Friday Mailing: Netflix In Curse of the Mogul Territory, Disney's New Software Savvy
There have been two stories from the past week that tie into past PARQOR mailings and are worth teasing out.
First, Netflix is now in Curse of the Mogul territory; and
Second, Disney’s recent announcement reinforces a point I made about Smart TV software in my past essays on sports streaming and User Interface (UI)/User Experience (UX).
1. Netflix & Curse of the Mogul
With Netflix’s stock down 70% since its 52-week high of $700.99, it is reasonable to conclude that Netflix’s highest paid creators - including its worst performing creators like Ryan Murphy - have had better returns than Netflix’s investors.
In fact, every creator on this list assembled by What’s on Netflix’s Kasey Moore has had a better year than Netflix shareholders.
I have never believed that the Curse of the Mogul framework applies to Netflix. This framework highlights instances where media company CEOs may be rewarding content creators at the expense of shareholder value. A lack of transparency from management is usually a “tell” of whether the framework should apply.
Netflix has rewarded shareholders over the years and its model is a simple direct-to-consumer model. As Co-CEO Reed Hastings laid out in his book, “No Rules Rules”, management is as transparent with its metrics with investors as it is with Netflix staff.
But I did begin to wonder back in April - in Disney+ Hotstar & Netflix Face Two Different Paths to Growth in India - whether Netflix’s international growth strategy invited the Curse of the Mogul lens:
[T]he growth stories for all streaming services in 2022 and beyond almost entirely rely on international growth. But, we know very little about most markets, and none of those markets require public disclosure of subscriber numbers.
That puts the future of streaming back into Curse of the Mogul territory, where a lack of transparency implies media company CEOs may be rewarding content creators at the expense of shareholder value. That critique certainly applies to Netflix, which promised "the next 100 million [subscribers]” from India back in 2020. That didn’t happen for reasons Netflix still seems frustrated by and has not shared.
In retrospect, I’m not sure this was a fair critique of Netflix. In its Q2 letter, it revealed to investors “ARM in APAC was -2% year over year on a F/X neutral basis, due to the impact from our price decrease in India last December as well as plan mix, which was partially offset by higher ARM in Korea and Australia. Excluding India, it’s Asia Pacific (“APAC”) Average Revenue per Membership (“ARM”) grew 4% year over year on a constant currency basis.”
Investors are also able to see Top 10 best-performing films and series in India on top10.netflix.com. So transparency isn’t the issue.
But the economics of India is the issue: the APAC region grew by over 1.1MM subscribers and has 35MM members as of Q2 2022. It delivers an ARM of $9.02 YTD. Meanwhile, the U.S. and Canada region (UCAN) lost 1.3MM members and has 73.3MM members as of Q2 2022. It delivers an ARM of $15.43 YTD.
In pure revenue terms, Netflix earned about ~$30MM in Q2 2022 from APAC growth and lost $60MM from UCAN losses. In that light, any APAC-focused growth strategies for Netflix’s future still seem to reward content creators more than shareholders. That is why the Curse of the Mogul looms large, and perhaps a bit unjustly, for Netflix management in 2022 and beyond.
2. Disney & Software
Yesterday Disney announced that Marvel’s “Deadpool”, “Deadpool 2”, and “Logan” are coming to Disney Plus today. In the announcement, it included the line “subscribers are invited to revisit their parental controls settings to ensure a viewing experience most suitable for them and their family.”
Parental controls settings were recently added in the US back in March with the arrival of Marvel’s The Defenders series (e.g., “Daredevil”, “Jessica Jones”, “Luke Cage”) from Netflix. Parental controls had launched within the European versions of Disney Plus with Star in early 2021.
Notably, parental controls are a software-based alternative to Disney’s past cultural and operational bias towards Disney+ only hosting “family-friendly” content. Shows like “Love, Victor” and “High Fidelity” were controversially moved to Hulu in 2019 - and a “Lizzie McGuire” reboot was put on hiatus - because the shows did not meet Disney’s “family-friendly” standards.
Now, Disney+ software enables users to make that choice themselves, and I think this is significant in the U.S. marketplace. It tells us that legacy media is becoming savvier about how software “regulates” consumer behavior by enabling and preventing decisions that, in the past, would have been “regulated” by corporate decision-makers.
This mirrors a point I have made about Disney’s own challenges with sports distribution in Connected TV:
I think Disney is proving with its Masters broadcast on Hulu and ESPN+ that what needs to happen in sports streaming is a solution with fewer clicks between the broadcast and the consumer. Effectively, Disney and other legacy media sports rights holders need the home screens of Connected TVs to offer instant, one-click tune-in to sports events from more expensive rights deals like the NFL, La Liga matches or the NHL.
It’s not clear yet how we get from here to there - Smart TVs control the last mile to the consumer, and they can extract rent for better distribution. But there is a lot of friction that still exists between the streaming consumer and the streaming sports broadcast that even the Disney bundle UX fails to solve within Hulu.
In short, software increasingly matters for success in streaming. It makes possible the iterative solutions that corporate morality and C-Suite risk aversion have historically impeded legacy media businesses (like Disney) from meeting customer needs in digital media.
The other takeaway is the speed at which a software fix impacts millions of subscribers - meaning, yesterday ~40MM Disney+ subscribers did not have access to R-rated Marvel movies - and now they do. But that speed contrasts with the institutional willpower to make those changes: it appears it took a year-long test in Europe for Disney to conclude a Parental Controls solution would make sense in the U.S.