About PARQOR
PARQOR is the handbook every media and technology executive needs to navigate the seismic shifts underway in the media business. Through in-depth analysis from a network of senior media and tech leaders, Andrew Rosen cuts through what's happening, highlights what it means and suggests where you should go next.
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I’ve been thinking lately about this quote from the recent book on Blockbuster Video, “Built to Fail” [1]:
The video rental industry also launched and funded an unprecedented independent film movement. Films that previously would have never been made found an enthusiastic audience in the video store. As Quentin Tarantino put it: “From 1988 to 1992, people [movie producers] were all of a sudden getting $800,000 or $1 million or $1.2 million to make their little genre movie.”4 Tarantino’s first film, Reservoir Dogs, was released in 1992 and is considered by many to be the best independent film ever made. It was produced on a shoestring budget for just $1.5 million and may have never been made without the built-in customer base provided by video rental stores.
There was obviously a long list of other factors that contributed to the success of Reservoir Dogs and other 1990s independent films. The basic takeaways here for the purposes of this essay are economics and product market fit. The rental video market under Blockbuster changed the economics of movie productions because:
it generated more revenues for producers to fund more productions, and
it also aggregated the target audience at scale.
So, the additional revenue catalyzed the supply of productions, and Blockbuster’s model catalyzed the demand for those productions.
I think this is a helpful lens on the four trends in media that PARQOR will focus on for Q4 2022:
Media companies have consumer credit cards on file. What happens next?
Linear channels seem doomed. What happens next?
There is no such thing as a TV household anymore. What happens next?
Hollywood’s future lies in the creator economy. What happens next?
I’ve since had a few conversations that have focused more on the economics of each of these trends: “What is the economic catalyst behind each of these trends? And what is the marketplace dynamic between consumer and distributor that’s accelerating them?”
[NOTE: I am writing about #1 today, and barring any surprise headlines over the weekend, I’ll write about the creator economy on Monday.]
Key Takeaway
It's a weird dynamic around growing ARPU: if you're looking for profits as a supply-side catalyst, they don't exist; and, if you're looking for a demand-side catalyst, there's nothing in place to engage legacy media streaming subscribers beyond streaming.
Total words: 1,300
Total time reading: 5 minutes
Numbers 2 and 3 have the obvious answers: the economics of the cable bundle are dying as cord-cutting accelerates.
As I wrote back in May, “The networks are no longer gatekeepers to scarcity—if audiences aren’t watching TV, they can be found while they’re doing something else like gaming or scrolling social media.” So linear audiences at declining scale ultimately translate into lower revenues from affiliates and lower advertising revenues. As that dynamic accelerates, it acts as a catalyst in the post-production marketplace (by reducing the total number of productions), in the advertising marketplace (by reducing the scale and value of linear advertising), and in the consumer home (by driving consumption to connected TV devices where streaming is a substitute for linear).
But- there has yet to be a catalytic economic event to push media companies into additional DTC models. Also, they have product market fit in streaming (arguably, more on that below) but it’s not clear whether that fit is scalable and therefore viable. In other words, there are and aren’t the conditions for the type of catalytic event like we saw from the impact of Blockbuster Video's paradigm shift on film production.
1. Media companies with consumer credit cards on file
Catalytic Event
As I wrote last month, legacy media companies with streaming services now face the question from Wall Street: “OK, you have consumers’ credit cards. Can you milk these cash cows?” Meaning, there should be some catalytic event that drives media companies with streamers to figure out additional ways of monetizing streaming subscribers. So why hasn’t that happened yet?
Streaming has indeed changed the economics of movie (and TV) productions, but unlike the production model in Blockbuster's days - when revenues were incurred in multiple theatrical and post-theatrical distribution windows - all streaming revenues are incurred for producers upfront (almost always, and starting to see it less so). Also, unlike Blockbuster which had 30% profit margins, these streaming businesses are not profitable and have been losing billions of dollars, to date. Even market leader Netflix is now struggling to meet its promise to investors of reaching positive free cash flow for 2023.
That dynamic plus stagnating growth is forcing investors to demand higher average revenue per user (ARPU). As Disney has been proving to investors with its “Disney Prime” rollout - an Amazon Prime–style sales pitch to subscribers of “Come for the streaming service, stay for the deals” - there are multiple benefits to an ecosystem of a media business with a credit card on file to monetize the same consumer in multiple ways.
But Disney appears to be the only legacy media ecosystem benefitting from the changing marketplace dynamics that favor this model.
Product Market Fit
This is due in large to Disney having product market fit across theme parks, cruises and streaming - each and all meet the needs of their target customers, and both Disney+ and newer technology like Disney’s augmented reality (AR) will create new meet new consumers needs, as he told Ryan Faughnder of The Los Angeles Times: “Ninety percent of our consumers around the world will never have a chance to experience our Disney parks.” So, Disney's objective with AR and also virtual reality (VR) is “to give people the ability to experience digitally, something that’s akin to a physical experience that they necessarily can’t be at that place in that time”, as Chapek told Deadline.
Beyond Disney and niche brands like Crunchyroll (which I wrote about last month), every other legacy media company—Paramount, Lionsgate, AMC Networks—lacks other, nonstreaming direct-to-consumer offerings. They have no products, but they have audiences aggregated at scale and those audiences’ credit cards in a database. That means they now have to either build them or buy these products. Neither is an immediate solution, neither is guaranteed success, and none has the in-house DTC expertise in senior management.
Whereas Crunchyroll is an independently operated joint venture between U.S.-based Sony Pictures Entertainment and Japan’s Aniplex (both part of Tokyo’s Sony Group) that specializes in all things anime. The company makes money through multiple channels: first-party streaming and theatrical releases of new anime content, sales of home entertainment products (e.g. DVD box sets), merchandise licensing, and secondary distribution. The first three of those make up a flywheel and the membership very clearly drives those line items (or CDP business logic).
First-party releases and secondary distribution already exist for these legacy media businesses so the question becomes what would catalyze home entertainment sales and merchandise licensing into DTC businesses. These aren’t big businesses but that’s not the point: if management's objective is ARPU, shifting those to DTC businesses can boost ARPU and lay the foundations for monetizing the streaming consumer in additional ways in the future.
Real disconnects
I think the real question of the potential impact of a catalyst is what these media companies would do differently if they were:
Profitable, and
Structured closer to a Disney or Crunchyroll.
Because in both instances a catalyst would presumably create a supply-side spark for these businesses to build out business segments towards a consumer flywheel of increased demand - where the momentum of happy customers drives referrals and repeat sales - as Crunchyroll has (but without the focus on a niche genre).
But these businesses basically are telling shareholders that without profit there is no real path to a flywheel in streaming. In other words, they cannot invest additional capital in building out their DTC businesses because they are already struggling to monetize them (a case Warner Bros. Discovery management has been making). But I would argue that's management avoiding the reality that they don't understand the new businesses dynamics: DTC back-ends have become commoditized - it requires minimal effort to set up a Shopify site, so an employee could set up a DVD or merchandise store that enables e-commerce, tomorrow. Flywheels are not only inevitable, but with a consumer credit card on file, they're that much easier to build.
The Blockbuster Video lens suggests that there are too many disconnects within these businesses for either an economic catalyst to surface and/or the product market fit to accelerate them. It's a weird dynamic for legacy media companies trying to grow ARPU: if you're looking for profits as a supply-side catalyst, they don't exist; and, if you're looking for a demand-side catalyst, there's nothing in place to engage legacy media streaming subscribers beyond streaming.
Footnotes
[1] I last wrote about “Built to Fail” in a July essay “Are Legacy Media Streaming Efforts ‘Built to Fail’ Like Blockbuster Video?”, in which I made the “ imperfect but fair” comparison of legacy media streaming efforts to Blockbuster’s path to failure.