In Q1 2023, PARQOR will be focusing on four trends. This essay focuses on "The definition of scarcity is continuously evolving away from linear. What happens next?”
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Both Warner Bros. Discovery CEO David Zaslav and Disney CEO Robert Iger have been entertaining to follow in this era known as “the streaming wars”. They are big public personalities who have promised big things to investors, with the biggest being a successful pivot of the business model to streaming. To date, Iger has had more success than Zaslav: more scale and subscribers, more international launches, and better and more sophisticated technology.
So, when they admit having made the same mistake in the same week, it is worth stopping to consider that mistake and why they both made it. The overall mistake was the assumption that streaming is a one-size-fits-all model for all content.
Zaslav was the first to concede that bundling HBO Max and discovery+ is not what its target consumers need. The Wall Street Journal reported that Warner Bros. Discovery plans to keep Discovery+ as a stand-alone streaming service and not integrate it into a single supersized streaming service. It added, “The decision to keep Discovery+ is part of an effort to avoid risking losing a significant chunk of the app’s 20 million subscribers who might not want to pay the higher price to access that content, according to the people familiar with the matter.”
As for Iger, he implicitly conceded on Wednesday's earnings call that having a bundle of Hulu and Disney+ may not be what Disney’s target consumers need: “we’re going to look at the volume of what we make. And with that in mind, we’re going to be fairly aggressive at better curation when it comes to general entertainment because when you think about it, general entertainment is generally undifferentiated as opposed to our core franchises and our brands which because of their differentiation and their quality have delivered higher returns for us over the years.”
Key Takeaway
Disney's Robert Iger and Warner Bros. Discovery's David Zaslav both begin 2023 digesting the same difficult lesson: the futures of their businesses rely more on feeding consumer passion than they do on aggregating scale.
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Total time reading: 6 minutes
By “general entertainment” he is referring to Disney’s Hulu and Star services, both of which rely heavily on a content library acquired via the 21st Century Fox merger. He is saying that those services, as is, are “undifferentiated” in the streaming marketplace.
Streaming is a new and evolving marketplace, it is incredibly dynamic and fast-moving, and so mistakes and bad assumptions are an inevitable part of innovation. Even Netflix Executive Chairman Reed Hastings recently admitted to the Dealbook Conference that, because he assumed “Google and Facebook were going to mop up the world in advertising”, he had to realize that advertisers are “desperate for connected TV or Internet TV solutions” to reach 18-49 year-olds.
The mistake is actually two bad assumptions compounded into one, and these two assumptions shed some nuanced light on why streaming is not, and has not really ever been, a one-size-fits-all model.
Bad assumption #1
The first bad assumption may have been best summed up by AMC Chairman Jim Dolan in November:
It was our belief that cord cutting losses would be offset by gains in streaming. This has not been the case. We are primarily a content company and the mechanisms for the monetization of content are in disarray.
AMC Networks has been unique in pursuing a bundling strategy of multiple apps like AMC+, Shudder and IFC. Dolan admits that streaming is not a one-to-one replacement for the linear distribution model that preceded it, something both Iger and Zaslav are conceding, too.
But the more important nuance here is his statement that “the mechanisms for the monetization of content are in disarray.” It is a nuanced point about the value proposition of bundling: neither individual apps nor bundles sufficiently map to the demand for streaming. That is "bad assumption #1" of both Iger and Zaslav.
Disney & Bad Assumption #1
Robert Iger’s perspective on this point is that he now understands “general entertainment” is insufficient as a value proposition for capturing demand, and that Disney can no longer monetize that content like it did on linear distribution. It would be better off with a more niche strategy of focusing more on Disney’s core brands and franchises for content.
James Dolan was throwing up a cautionary red flag about niche content, too: Even if there is passionate demand for niche content like horror (Shudder), the economics of streaming alone do not support a business model for serving this demand. On this point Iger said something notable on the earnings call:
“Nielsen came out with something a few weeks ago that was stunning to us, and that was that 10 of the top 15 movies streamed in the United States in 2022 were ours. On that list was Moana and Zootopia and Frozen, but also Turning Red and Encanto. That suggests to us that our brands and franchises work extremely well in streaming.”
This data confirms Iger’s take that Disney+ has captured extraordinarily passionate demand for its core brands and franchises. But four out of those five titles he mentioned were released before 2022: meaning, streaming seems to be serving demand that was previously served by the DVD and VHS, and not demand for new TV content. Also, two of the three Disney+ properties that showed up in Nielsen’s top 15 most streamed for 2022 were acquisitions: "Bluey" and "The Simpsons".
None of the Disney+ original series showed up in the top 15 most streamed original programs. This suggests that the passionate demand for Disney franchises and brands like Marvel and Star Wars — for which Disney produced multiple original series in 2022 — it does exist at a greater scale than Disney+ today (161MM subscribers with Disney+ Hotstar, and 104.3MM without).
WBD & Bad Assumption #1
David Zaslav’s perspective has been that “general entertainment” is the end-all, be-all objective of streaming. One streaming application with two powerful content libraries, and for one price, is what consumers of both libraries want and need, and will be more likely to scale. That logic was the driving force for the merger of WarnerMedia and Discovery.
But as James Dolan implied, consumers are not always looking for a value proposition of “general entertainment” across a bundle of offerings. The Wall Street Journal report, above, suggests discovery+ has reached a passionate niche audience who are happy with the application and the limited library at a lower price point. Those consumers do not need another library and therefore HBO Max’s price point at $16 is too expensive. Like Disney, the demand that Warner Bros. had assumed for an HBO Max with a broader library is actually fragmented, it does not exist at scale, and cannot be aggregated with bundling.
Bad Assumption #2
The surprising survival of discovery+ also reflects Dolan’s implicit point about the economics of streaming. The Internet enables multiple consumption models. Audiences are willing to pay for content they are passionate about, but not all of them the same willingness to pay for that content. That is "bad assumption #2" of both Iger and Zaslav.
The price efficiencies of bundles have always been perceived as the solution for capturing demand beyond passionate consumption. Disney has long understood this, having launched the Disney+ bundle in the U.S. in 2019 and then the Disney+ Star bundle in 2021. But Iger now implicitly seems to be conceding that the emergence of FASTs as well as linear’s continued presence and even free-to-air in other countries offer general entertainment that competes with both Hulu and Star.
Disney is realizing that the demand for "general entertainment" is now solved by competitive platforms. That puts a premium on Disney+ for its passionate users, and pushes Disney to evolve its service towards those consumers. That seems to be what Iger is telling investors they are planning on doing. But he does not yet seem to have an answer as to what the economics should be — he implied on the call that they had not been expecting last quarter's price bump for Disney+ to $7.99/month to result in “de minimis” churn.
Zaslav and his management team find themselves on the flip side of that pricing dilemma. They have bet on Internet distribution as an opportunity for extraordinary scale and aimed to monetize it with premium pricing. They have unintentionally learned that the beauty of Internet distribution is that it can capture passion better than it can than scale. The permutations of what consumers will pay for are not solved by one-size-fits-all. In this light, discovery+ may be underpriced and HBO Max may be too expensive.
The right lesson at the wrong time
Ultimately, both CEOs begin 2023 digesting a difficult lesson at the same time: the futures of their businesses rely more on feeding consumer passion than they do aggregating scale, and bundling is not the solution for feeding that passion. Consumers need more of what they want, and will pay more for that.
With billions in debt looming for both companies ($45B for Disney and $50B for Warner Bros. Discovery) — the consequence of the pursuit of subscribers at scale — a big question now is whether that may be a lesson learned too late. Because it is not entirely clear how they will solve this problem.