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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”.
[Author's Note: My latest Medium Shift column went live yesterday afternoon. In “How Generative AI Threatens Hollywood’s Walled Gardens”, I wrote about how we are at the dawn of valuable 20th-century intellectual property (IP) entering the public domain. “Steamboat Willie” Mickey Mouse is the first Walt Disney creation to enter the public domain. The question is whether anyone will be able to monetize it better than Disney has. ]
The big news leading into today’s earnings call for Warner Bros. Discovery is an agreement with Disney for a Max-Hulu-Disney+ bundle offering. It would seem that CEO David Zaslav and Disney CEO Robert Iger are now willing to opt for coopetition over competition. Perhaps each has reached some level of desperation in their respective failing streaming strategies given high churn rates and slow growth.
Deloitte’s 18th annual Digital Media Trends Report for 2024 specifically recommended not going down the bundling path: “...going direct-to-consumer with SVOD services demands more than just repackaging the pay TV experience.” But, like the end of the 1991 movie “Thelma and Louise”, the two CEOs seem to have reached a mutual decision to spend their remaining days in the C-suite driving off a cliff together, hand-in-hand.
This bold move may define David Zaslav’s legacy (and Iger’s) in retail-first, consumer-first media. Perhaps, but that seems unlikely. There is a stronger case to be made that Zaslav defined his legacy back in August 2022 when he announced to investors: “We have no intention of being beholden to anyone in particular or to a specific business model.”
That announcement discarded the prior WarnerMedia regime’s strategy of keeping its library exclusive to HBO Max, and halting new content licensing deals to third parties. It led to the licensing of major Warner Bros. Discovery library titles like “Lord of the Rings” and “Batman” to third parties.
In having done so, Zaslav and the media CEOs who followed his lead may have unintentionally opened a Pandora's box of problems that will kill the walled-garden model of media conglomerates.
Key Takeaway
There is growing demand for IP outside of the walled gardens. Media conglomerates may inevitably need a Spotify-like solution for licensing IP to ensure they get paid by creators, gaming companies and generative AI platforms alike.
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Total time reading: 7 minutes
The Walled Garden Rationale (A Brief History)
Walled gardens exist because linear and theatrical models offer economies of scale and require valuable IP to succeed. So, the larger a media conglomerate is, the more economies of scale can be achieved across multiple business lines. Since the 1980s, the linear business and the post-theatrical pay windows have generated billions of dollars in “free money”. Some have described the linear business as the “financial backbone” of Hollywood. In turn, those businesses have funded the expansion of U.S. media conglomerates into owning distribution channels across international markets. U.S.-produced IP could be monetized at a marginal cost.
But, those models were wholesale: Someone else owned and managed the customer relationships. The streaming model flipped that dynamic, forcing TV and Hollywood executives running media conglomerates to solve for churn and direct-to-consumer marketing. The assumption was that Internet distribution created a Total Addressable Market of billions globally. There was a shared belief amongst a younger generation of digital media executives that at least one streaming service would reach 1 billion subscribers. Above all else, there was the shared belief that enormous libraries of popular IP like Marvel or DC Comics would be defensible value propositions on the Internet.
This belief drove Disney CEO Robert Iger's rationale for spending $71.3 billion to acquire the film and TV assets of 21st Century Fox, and Paramount Global controlling shareholder Shari Redstone to merge Viacom and CBS. The larger the library, the more competitive a legacy media company would be in the streaming era.
Zaslav seems to be the first to realize that this conclusion was wrong. His team removed titles from HBO Max to cut expensive residuals and rights payments.. His competitors have since followed his lead and seen healthy returns. NBCUniversal’s “Suits” went from largely unwatched on Peacock to the most-streamed show in the U.S. in 2023. Paramount Global recently shared a new Licensing line item in its Direct-to-Consumer business that doubled from $4 million in Q1 2024 to $8 million in Q4 2023.
Changing Demand (A Brief History)
I recently wrote in “Investors & The Unsentimental Media Consumer” that in a retail-first, consumer-first marketplace, the challenge is “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 the assumption that video was the only format in which they valued that IP was wrong.
Gaming may be the biggest driver of that correction. Gaming research firm Newzoo has been pushing this story for a few years now, but Iger only acknowledged this shift in Disney’s Q1 2024 earnings call, telling investors he was “stunned” that the amount of time “Gen Z and Gen Alpha and even millennials” spend in terms of their total media screen time on video games is “equal to what they spend on TV and movies.”
Disney’s recent partnership and $1.5 billion equity stake in Epic Games is intended to capture that demand. The agreement will create a “ new persistent universe” powered by Unreal Engine where “players, gamers and fans will be able to create their own stories and experiences, express their fandom in a distinctly Disney way, and share content with each other in ways that they love.”
A key detail in this agreement is that Disney will be licensing its IP to Epic, enabling users to play with Disney characters in ways that Disney creatives likely would not. Users already can purchase Marvel character “skins” for their avatar to wear when playing Epic’s online game Fortnite, and the agreement will expand the possibilities of how they use Disney IP.
“Back to the People”
This is but one moving piece in a broader transformation in demand that I recently described in “Après Iger, Le Deluge”:
The reality after Netflix’s first “What We Watched” report is that streaming audiences have a lower bar for creativity and imagination. But, in this era of online gaming platforms like Epic’s Fortnite and Roblox, audiences beyond streaming have a higher bar for creativity and imagination. Consumer intent has fragmented beyond the traditional formats of video and news articles, and “mass appeal” is no longer the outcome of plug-and-play distribution via movie theaters and then television.
As “mass appeal” fragments, there are four broad buckets of “back to the people” models being funded by investors private and public:
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)
Gaming seems to be the only working business model within media conglomerates. Disney has built a successful licensing business and Warner Bros. Discovery has found some success with the role-playing game “Hogwart’s Legacy”, which generated over $1 billion in 2023. That said, today it reported it lost $200 million on its recent release of “Suicide Squad: Kill The Justice League”.
We are still in the very early days of conglomerates monetizing new models that capture mass appeal.
Cracks in Financial Foundations
As the linear model suffers a decline from cord-cutting—less than 50% of U.S. households now have cable, compared to over 55% in 2021—and theatrical suffers from declining demand—projected to be down 3% in 2024 from $33.9 billion to $32.3 billion—there will be less revenue for the media conglomerate. There will also less profit and less “free money” from post-theatrical pay windows, there are fewer reasons for the media conglomerate to exist. Meanwhile, streaming makes up about 86% of total home entertainment spend, according to the Digital Entertainment Group, while the residuals and “free money” economics from DVDs and VHS rentals and sales declining towards less than $1 billion per year.
One of the advantages of having a large library of valuable IP within the media conglomerate model is that the library is protected by copyright law: Various stories, animations and artwork are protected for 95 years from the date under U.S. copyright law. They are also protected by well-funded and savvy in-house corporate legal teams. “Steamboat” Willie” Mickey Mouse is the first of many early iterations of the famous Disney Mouse.
As revenues and profits decline so will the resources to defend large libraries of IP. Lawsuits may not make or break a media conglomerate’s future. However, a media conglomerate that is increasingly resource-constrained may be better off licensing IP for short-term revenue rather than devoting increasingly precious capital to long-term copyright litigation. The permutations of those four “back to the people” models risk death by 1,000 paper cuts, something analogous to what the music industry went through in the early 00s when Napster and other MP3-hosting platforms emerged.
Spotify & Pandora’s Box
Gavin Purcell—a producer and host of the podcast “AI for Humans”—told me that he believes we are in the middle of a generative AI-led creative revolution that will only produce more threats to copyright. Rights holders will need to get paid, and platforms like Spotify can ensure they get paid. Spotify’s model calculates and distributes royalties based on net revenue from Premium subscription fees and ads.
The question is how do we get from here—no market solution as licensing becomes more in demand—to there—a Spotify-like solution for creators, gamers and generative AI platforms to license IP—outside of the music industry?
One precedent may lie in the fact the two labels—Sony Music Entertainment and Universal Music Group — continue to jointly own between six percent and seven percent of Spotify. Another lies in the opinion essay former WarnerMedia CEO Jason Kilar wrote for Variety last Fall, which argued Hollywood needs to build a “digital everything product” to replace the disappearing consumer experience of cable television viewing. He envisioned a business like Hulu, “owned and controlled by major entertainment companies” to become “a no-brainer of a purchase decision for 9 out of 10 consumers.”
The common ground in both precedents is a platform with a rights-management back-end in which media conglomerates have an ownership stake. The platform contrasts with Kilar’s vision because it discounts streaming as the core value proposition and creates both permeable walled gardens and an insurance policy for ensuring rights holders are paid. They may be paid less than in the cable-era, but they will be paid. It is ultimately the foundation for “back to the people” business models where individual consumers can license the IP to create their own content.
Something like this platform inevitably will be necessary as walled gardens crumble. Because, as I wrote last month, “the media conglomerate model of the 20th century is no longer capable of generating the same value for shareholders and consumers in the 21st century.” And, as I wrote yesterday, "great ideas will increasingly come from outside the walled gardens of Disney and other legacy media companies".
So, streaming may ultimately have been a fool's errand for media conglomerates. The irony is the guy realized it first—David Zaslav—may be most responsible for why the conglomerate will disappear. There seem to be more and better business models that enable creators to do more with licensed IP and with fewer resources.