Member Mailing: Amazon, MGM, and How Lina Khan's FTC Misunderstands the Value of IP in Streaming
Key Takeaways
The FTC is contemplating a lawsuit over Amazon's acquisition of MGM
The argument assumes that the withholding of content from other competitors is a competitive advantage
But, we have seen with Netflix's recent moves in gaming, the value of IP to streamers is evolving past streaming
We have seem similar evolutions in sports streaming and at discovery+
Market competition in streaming increasingly sees more value in IP beyond the streaming business model
One of the default assumptions of the streaming era has been that "Content is King" and therefore IP is a competitive advantage. One of the fascinating questions to emerge in 2022 is what that competitive advantage actually may be.
There is no longer a single answer to that question, which is playing out in the background deliberations of the Federal Trade Commission over whether MGM’s library of movies "would give Amazon too much power in streaming, especially if Amazon were to make MGM films exclusive to its Prime Video streaming service". The assumption is that the movies, and not the TV series, would be a competitive advantage.
But what would the advantages be to Amazon of movie franchises like "James Bond", "Rocky" and "Creed" in streaming?
In other words, what exactly is the FTC trying to regulate here? The probability or the possibility of Amazon Prime Video's success in movies with this IP?
Because, as I wrote in Why Disney+, Paramount+ and Legacy Media Streamers Can’t Escape the Past:
The problem lies in the general market reliance on the Sumner Redstone adage, “Content is king.” That was true when the wholesale model reigned, and Viacom and CBS needed to figure out which content to produce to pump into the pipes of cable distributors and movie theaters. If the content attracted valuable demographics at scale, everyone won because the economics were great.
But Netflix has solved for the retail model: that is, how to distribute the right content to the right audiences at scale across multiple platforms.
The FTC is arguing that Amazon owning a movie library is a competitive advantage. But, with a handful of momentary exceptions (including Coming 2 America, Wheel of Time), ownership of IP as a competitive advantage simply has not been proven to be true for Amazon.
That reflects one question about the evolving value of IP. Meaning, the withholding of content from other competitors does not necessarily mean better results on-platform (as Peacock has learned with The Office, which is no longer in the Nielsen top 10).
Three additional questions about ownership of IP in streaming have emerged recently:
Netflix's growing investment in mobile gaming invites questions about the value of IP in streaming, only;
Older library content has proven out to have varying value to discovery+ as it faces increasing competition from the creator economy, and
Big bets on sports streaming rights have been made in recent years, but the value has not been in tune-in, at scale.
At a time when the FTC is evaluating MGM movies as a competitive advantage that may give Amazon "too much power" in streaming, the value of IP to other streaming services is evolving in other, more innovative directions.
[Author's Note: The rest of this essay will be exclusive to members, only.]
Amazon Prime Video & MGM
In Monday's Which Streamers Will Survive in 2022?, I contrasted streaming services with a "less is more" approach, "more is more" and those that fall into neither bucket. Amazon fell into the last group because its ROI on streaming is not fundamental to any one of those businesses, and especially not its P-E ratio.
In fact, it does not break out Prime streaming numbers: its most recent shared statistic was that 175MM of 200MM Prime Video subscribers streamed shows and movies in 2020.
But, other than the movie "Coming 2 America", or TV series "Wheel of Time" or "The Boys", Amazon's original IP rarely breaks through to the Nielsen top 10. Presumably, they will have another with their "Lord of the Rings" Trilogy. Not even Judy Justice on IMDb TV has broken through, and its predecessor Judge Judy was a ratings winner in syndication.
Owned IP is sometimes, but not always, a competitive advantage for Amazon Prime Video. So, then, what is the advantage of Amazon owning MGM?
I wrote last June in Jeff Bezos & David Zaslav learn "It's Good to Be The King".
...it is not clear how Amazon is going to monetize the MGM library beyond theatrical distribution, attracting and/or retaining Prime subscribers, and serving ads to high-quality programming [on IMDb TV]. Those are clear revenue drivers, but again, the PARQOR Hypothesis tells us that those, alone, are insufficient for a media business in 2021.
MGM's IP offers Amazon a multi-variable, multi-faceted advantage: it can drive more Prime Video consumption, which in turn may or may not lead to more engagement and transactions across the Amazon Prime ecosystem. But there is no single answer to what the competitive advantage of owning that original IP is.
Netflix & Gaming
Netflix has been increasingly moving into gaming. COO Greg Peters discussed its gaming ambitions in its Q4 2021 earnings call:
I mean it was exciting to see the activity in the space. And I think to some degree, it's an endorsement of the core thesis that we have around subscription being a great model to connect consumers around the world with games and game experiences. And we're open to licensing, accessing large game IP that people will recognize. And I think you'll see some of that happen over the year to come.
But we also see -- back to Ted's like building out a whole cloth and the ability to sort of take the franchises or the big titles, let's call it, that we are excited about and actually develop interactive experiences that are connected to those. We see a huge, long-term multiyear opportunity in that, too. So we'll -- we're very open. We're going to be experimental and try a bunch of things.
The "huge, long-term multiyear" vision is to "take the franchises or the big titles... that we are excited about and actually develop interactive experiences that are connected to those." That vision implies streaming will be a necessary condition of its longer vision, but will not be the core business. [1]
This new strategic reality for Netflix - a desire to find additional growth through gaming versions of owned IP - sheds a different light on the evolving nature of IP.
A recent, intriguing example was its announced partnership with Take-Two Interactive for a film adaptation of the game "BioShock". The partnership aims to develop a potential cinematic universe, which is "on lists of best video games ever created".
First, it is a partnership around gaming IP. Second, a mention of a "universe" implies "BioShock" may end up in the form of a game on Netflix .
But what does a "universe" mean? One answer is Netflix's recent acquisition of the Dahl library:
This acquisition builds on the partnership we started three years ago to create a slate of animated TV series. For example, Academy Award winning filmmaker Taika Waititi and Academy Award nominee Phil Johnston are now hard at work on a series based on the world of Charlie and the Chocolate Factory. In addition, we’re working with Sony and Working Title on an adaptation of Matilda The Musical.
These projects opened our eyes to a much more ambitious venture - the creation of a unique universe across animated and live action films and TV, publishing, games, immersive experiences, live theatre, consumer products and more. Roald Dahl's books have been translated into 63 languages and sold more than 300 million copies worldwide, with characters like Matilda, The BFG, Fantastic Mr. Fox, Willy Wonka and The Twits delighting generations of children and adults. These stories and their messages of the power and possibility of young people have never felt more pertinent.
The suggestion is that the advantage for Netflix to invest in IP with titles like "BioShock" and from the Dahl library is no longer about video, only. I wrote about the Dahl library acquisition and Netflix's acquisition of another gaming studio - Night School Studio - previously in Netflix, Wonka, Gaming, Facebook & Kids & Family:
Netflix’s bet on Night School Studio, and on offering in-app gaming more generally, is the opposite of what Disney has done in gaming (it closed its in-house studio in 2016 and pivoted to a licensing model). That is interesting on its own.
What makes it more interesting is that bringing gaming in-house is an un-Disney-like move to become more like Disney, and at a time when Disney’s streaming business has become a global competitor for kids and family content.
In other words, Netflix has a broader objective of leveraging its IP to become like Disney, and to do so it is betting heavily on gaming. That would imply the competitive advantage of IP to Netflix will become progressively less valuable to streaming, and progressively more valuable to evolving its business model around creative universes.
Discovery vs. Creator Economy
Discovery is pursuing a "More is more" strategy in its merger with WarnerMedia. I think discovery+ faces an enormous challenge from YouTube and its creator economy model. Meaning, there are 2 million creators producing unscripted content worldwide, and assuming 0.1% of them are the cream of the crop, that is 2,000 creators producing content, daily and worldwide, versus discovery+'s 4,300 of titles.
YouTube also has a global audience of over 2B monthly unique visitors. The question for a brand like Discovery is, what is the value of Discovery's library of IP in a streaming world increasingly dominated by YouTube?
I asked and answered a version of this question in discovery+ vs. Creator Economy back in July:
...the launch of the Magnolia Network’s launch neglects both discovery+’s need to grow, and direct-to-consumer (DTC) relationships with fans of the Gaineses who are increasingly accustomed to creator economy-type DTC relationships.
The Gaineses have built out Magnolia as a creator economy, DTC-type brand, but that is not reflected in how Discovery has built out the Magnolia Network online or offline (linear). Discovery sees more value in B2B distribution relationships and the linear distribution model than it does in DTC relationships with multiple sources of revenue.
That is a contrast to the YouTube model, which increasingly seeks to empower creators with the YouTube Partner program and more tools for monetization. YouTube still controls the distribution of the content and relationships with advertisers, but otherwise acts to minimize any friction it may create between creators and their fans.
This would imply that the value of Magnolia IP to Discovery is a much narrower value proposition, both in linear and streaming. But the value of Magnolia IP to the Gaineses is many-headed: it drives streaming and linear viewership, e-commerce, tourists to Waco, TX, and magazine sales. Discovery's only role is as distributor, which helps the Gaineses grow and monetize their audiences from their Magnolia flywheel. [2]
Another challenge for Discovery is that its portfolio of content is thousands of older library titles. As I argued in Why Disney+, Paramount+ and Legacy Media Streamers Can’t Escape the Past:
It may be that retail-first Netflix has figured out something wholesale-first legacy media companies are still trying to solve: that the purpose of spending on new content is to feed the distribution and marketing engine. And if the distribution and marketing engine isn’t strong enough, the present ends up losing to the past.
Meaning, if the value of IP to Discovery is more narrowly defined around the consumption of older content, then the value of unscripted IP in streaming for Discovery and HBO Max will only get narrower (reducing churn), and not broader (reducing churn and driving growth). Moreover, audiences can get a deeper relationship with new unscripted content on more interactive platforms like YouTube (and TikTok and Snapchat),
That will limit its impact on growth, especially, and may narrow the value of older library to churn reduction. Paramount Global CEO Bob Bakish highlighted this point in in its Q4 earnings call:
But what is tremendously valuable in streaming is library and specifically series that are deep in number of seasons. So you look at the NCIS, the FBIs, the SEAL Teams, the SpongeBob, et cetera. Those are tremendously valuable for in some cases bringing people in, but for the most part in terms of engagement, and engagement, is what you use to manage churn.
Notably, Discovery Chairman Zaslav described Discovery's churn as "still not certainly even on par with some of the best in market yet", suggesting older library has not been a solution for discovery+ in this regard. Instead, he framed unscripted content as a driver of engagement on a future HBO Max under Warner Bros. Discovery:
And so, when you put Euphoria on and then that audience could then watch 90 Day Fiancé and they could watch Fixer Upper, that there's a real balance of content here that we can go to. And there's a lot of nourishment in our library together with a lot of shock and awe in the Warner library. And the shock and awe together with the nourishment and the great personalities, we think is a really compelling menu. And it's a great recipe that we think we can lean into.
There is no data to tell us whether that prediction will come true - it's salesmanship. Rather, the point is that older IP is solving for churn on Paramount+ but not on discovery+. It has different competitive value to each service.
In the case of discovery+, specifically, that competitive value stands in a David vs. Goliath competition with YouTube's growing library of creator economy unscripted content.
Sports IP & Streaming
The other interesting question is what the value of sports IP is to streaming. For businesses like Discovery, Paramount Global, Disney and WarnerMedia's Turner Networks, sports distribution is a business model into which various sports rights deals are plugged. Long-term deals effectively license ownership of a broadcast - the NFL deal is a 10-year deal - so it is an expensive competitive advantage around which broadcasters streamers must problem-solve.
Sports IP is not owned like MGM's library will be owned by Amazon, so it's not an antitrust concern.
Sports IP streaming, to date, has been relatively weak in terms of the scale of tune-in: this year's Super Bowl broadcast on Peacock saw 6MM viewers (up from 5.7MM across CBS platforms in 202o), and an average minute audience of 11.2 million AMA viewers, which takes into account co-viewing from connected devices.
That was about 6 to 11% of the average audience on NBC (99.2MM viewers).
I wrote about the broader challenge of scaling sports viewership in streaming in Subscribers vs. Viewers in Sports Streaming, where I compared the value of sports IP to Amazon and Disney, respectively:
Amazon can consistently drive Prime subscriptions at scale, but it cannot yet consistently drive Prime sports viewership at scale. Even its Thursday Night Football figure of digital average-minute-audience if 4.8MM is less than one-third the NFL’s average audience of 15.4MM viewers (live + same day).
The same is true for Hulu, which has grown by over 50% since its merger with Disney. But, the stakes are different for Hulu: ESPN+ has only been integrated into Hulu for less than 90 days. So if Amazon is still in the early days of figuring out its sports streaming strategy for driving viewership, Disney has only just begun to test what will drive sports streaming viewership.
However, for Hulu, it has a fraction of the challenge for NHL viewership: during the regular season, NHL games averaged 391,000 viewers across NBC and NBCSN; and, the 15-game Wednesday Night Hockey package averaged 508,000. Basically, Hulu only needs 1% of its subscriber base and 3.6% of ESPN+’s subscriber base (13.8MM) to recreate NBCU’s audiences digitally.
In terms of pure math, sports IP sits at an interesting crossroads. It does not (yet) drive viewership at a scale that competes with linear. That certainly was the case with the Beijing Winter Olympics, which averaged 11.4 million viewers in prime time across NBC, the USA cable network and Peacock streaming service (a 42% decrease from the 2018 Winter Games in Pyeongchang). For NBC alone, prime time telecasts reached an average of 9.3 million viewers, suggesting that the rest were across USA and Peacock, and as a cable channel USA has broader reach than Peacock.
But, NBCUniversal has been spinning The Olympics as a net positive for Peacock:
Overall, viewers streamed 4.3 billion minutes of Winter Games content, which includes social media platforms, up 78% from the 2018 Pyeongchang Olympics.
[NBC Sports Group Chairman Pete] Bevacqua said that usage levels and increase in paid subscriptions to Peacock exceeded projections, although the company did not release numbers for the service
This elegantly captures one important uncertainty around sports IP: it currently may be more valuable for driving paid subscriptions than viewership at scale. Paramount CEO Bob Bakish offered an interesting perspective on this on the Q4 earnings call:
Look, it’s early days, but we’ve seen real benefit of sports as part of Paramount+ in the United States. The NFL, as you saw in one of the charts, was the number one source of subscriber additions for the product in 2021 and we have found that we can cross consumer, bring them in on sports and get them to consume entertainment product, sports fans, as an example, in the fourth quarter were also big consumers of shows like SEAL Team and Mayor of Kingstown and 1883, and that’s key to our overall plan and economics and ROI.
Another important uncertainty lies in a favorite quote of mine from NBA owner Mark Cuban given in an interview with SportsTechie in April 2020:
One of things that’s changed dramatically in terms of making our games available is that we’ve gone from a bandwidth-constrained environment on paid TV to a non-bandwidth-constrained environment. … With the Mavericks, we’re having conversations: Can we have three, four, five streams of the same game that’s going on traditional TV? You might have one where you have Twitch-like announcers; you might have two of your favorite YouTubers that are doing another stream; you might have your traditional broadcasters doing another stream; you might have a players-only doing another stream. We don’t care if there’s four, five, six streams—we care about the aggregate audience. By setting the priority of being an aggregate audience, then we can do things to experiment and try a lot of different things.
Then there’s the element of gambling. You can have a gamblers feed where it’s geared toward the prop bets going on right now. That might be an element for paid TV that’s kind of a salvation. One of the problems with streaming is that you don’t know what’s going to buffer or when, and you don’t know if everybody is getting the feed at the same time. There’s a delta between a satellite feed and a cable feed and even a good stream—and that’s an issue for gambling on some level, maybe 5G changes that with low latency. But there’s a unique opportunity to juice up paid-TV subscriptions and get gamblers in particular say, ‘There’s this unique paid-TV feed that’s geared toward prop bets, gambling, so I know what’s happening.’
Notably, versions of this multi-stream scenario have played out at ESPN with the success of the ManningCast on ESPN2 (1.9MM viewers per game during the regular season, 13% of the Monday Night Football audience), across Turner Networks for this year's NBA All-Star Game (5.4MM for traditional, 852K on alternate TBS broadcast), and the SpongeBob-focused NFL playoff game on Nickelodeon (an average of 2.06 million viewers).
As for Cuban's prediction for sports betting, I recently wrote in Chapek's "Three Pillars" for Disney's Future Faces Tough Trade-Offs In Sports Betting that this model presents Disney with an uncomfortable dilemma:
solving for sports betting in DTC terms is Disney solving for both the conversion and retention stages of a conversion funnel but without owning the consumer within the Disney BEADS ecosystem
For Disney in particular, the value of sports IP in streaming is increasingly becoming a double-edged sword:
unlike the ESPN+ subscriber, the sports betting consumer has both one foot in and one foot out of Disney's ecosystem, which is an un-Disney-like outcome.
Live sports deals as IP have been proven to attract new subscribers to Disney. But, Disney's strategic dilemma is whether it needs to evolve its delivery of that IP to better monetize audiences.
Other legacy media companies have made more iterative, conservative bets on linear. Even Amazon's bet on live streaming - a recent $1B per year deal with the NFL for Thursday Night Football - seems to be a conservative bet on bringing a traditional linear broadcast to streaming (though it added X-Ray functionality - real-time access to live stats, key insights, enhanced replays -to the broadcast last November)
Disney's dilemma with sports betting reflects a deeper question around whether sports IP should be narrowly considered to be valuable to streaming as a lean-back experience, or whether the rapid emergence of sports betting and alternative broadcast models suggest the value will need to be unlocked through innovation.
Conclusion
As I was writing this essay, Netflix announced it bought Next Games "to build a portfolio of world class games - with no ads and no in-app purchases - that will delight our members around the world." Next Games built a story-driven puzzle RPG (role-playing game) called Stranger Things: Puzzle Tales for Netflix's popular franchise.
The penultimate season of Stranger Things will arrive on May 27th, 2022. After that it, it will have one more season. Prior to Netflix pursuing mobile gaming, Stranger Things would have lived on only as a show in Netflix's library, available to both the familiar and the uninitiated.
With gaming, Stranger Things IP becomes something more. Netflix wants to call this a "universe", and that is the long-term ambition. The vision - as we have seen with the Dahl rights and also its recent hit "Bridgerton" (a new agreement with producer Shonda Rhimes includes film, games, VR, branding and merchandising, live events and experiences) - is that Netflix now realizes there is more of a future in expanding the media by which subscribers can engage with IP on and off its platform.
Notably, we are something similar in sports streaming and also legacy media streamers like discovery+: the traditional linear broadcast via a streaming platform is insufficient to capture audiences at scale. Those audiences need more from their viewing experiences, and are finding better experiences elsewhere like Netflix, YouTube and now even broadcast TV.
Returning to Amazon, in this light it seems silly that the FTC may sue Amazon over its purchase of MGM. Because of all the companies I discussed above, Amazon is notably the exception: it is not currently pursuing gaming opportunities for the "James Bond" or "Rocky" IP. That does not mean they will not - Amazon is considered to be first-in-line for buying the gaming rights to Lord of the Rings and The Hobbit. But, there has been little to no press on the gaming rights of the "Rocky", "Creed" or "James Bond" franchises at Amazon.
The nature of IP is evolving so rapidly and in so many surprising ways that the FTC's exploration of a lawsuit is missing how market competition now sees the value of IP beyond the streaming business model. In essence, the FTC is focusing on the wrong market signal. The distribution of MGM's movies, alone, is not a competitive advantage for Amazon in streaming because its competitors' increasingly need to monetize their own IP outside of streaming (Netflix, sports streamers) or face limited value in that IP (Discovery, Paramount+).
[1] There is an interesting question here of whether this will impact how Netflix will report its earnings. Here is how Zynga describes its operating metrics:
We manage our business by tracking several operating metrics: “Mobile DAUs,” which measure daily active users of our mobile games, “Mobile MAUs,” which measure monthly active users of our mobile games, and “Mobile ABPU,” which measures our average daily mobile bookings per average Mobile DAU, each of which is recorded and estimated by our internal analytics systems. We determine these operating metrics by using internal company data based on tracking of user account activity. We also use information provided by third parties, including third party network logins provided by platform providers, to help us track whether a player logged in under two or more different user accounts is the same individual.
Netflix only reports subscribers using its first-party data. Will that change as it adopts more games? And how will that impact the simplicity of its subscribers-only story to investors?
Bigger questions loom as the evolution of IP drives the evolution of Netflix's business.
[2] I argued in discovery+ vs. Creator Economy that they may be better off on YouTube instead of with Discovery. I also argued in A Dotdash Future for Chip & Joanna Gaines?:
...after the Warner Bros. Discovery merger closes, the Dotdash model may win out for Magnolia at both IAC and at Warner Bros. Discovery.
The Gaineses could end up with better DTC models than pre-merger because Dotdash’s model will be both driving their Magnolia Journal model, and underlying the growth of their Magnolia Network model.