In Q1 2023, PARQOR will be focusing on four trends. This essay focuses on the trend, "The definition of scarcity is continuously evolving away from linear. What happens next?”
There is another reason to listen to Disney CEO Robert Iger’s interview on Andreessen Horowitz’s a16z podcast (I offered one last week). After being asked by co-host Sonal Chokshi about whether he ever had “concerns or doubts or fears about being able to shore up on the technology side” before building Disney Plus in 2017, Iger responded:
“Reed Hastings from Netflix tried to convince me that there was no way we could do it. ‘You won't have the platform. You don’t know how to manage things like busted credit cards, all the issues with geotargeting and so many different factors.’ We had no ability to do any of that.”
This story adds some history that neither Iger nor Hastings appears to have shared before — it was not in Iger’s autobiography, “Ride of a Lifetime” nor in Hastings’ “No Rules Rules”. I think it is significant because Hastings was ultimately asking questions about scarcity: If Disney cannot figure out the software then why will people subscribe? How will Disney grow and maintain the scale that advertisers want to buy and investors want to own?
Key Takeaway
Digital media, and now streaming, continue to find new and innovative ways of fragmenting the scarcity of audiences. Does Disney, Netflix or NBCUniversal's Peacock have the best solution for aggregating these audiences?
Total words: 1,800
Total time reading: 7 minutes
Scarcity is the linear distribution model’s historical moat — the linear model enabled multichannel video programming distributors (MVPDs) to aggregate millions of households locally, regionally and later nationally. It has similar business logic to the circulation model of the print business.
Disney’s model assumes the demand for its extraordinary library of IP is inelastic, and therefore it will achieve scarcity in streaming. But, with ~44MM U.S. households, it has reached only 67% of Netflix’s U.S. market penetration (57% of U.S. broadband homes), which is the standard for scarcity in streaming. It is obvious why Hastings was trying to seduce Iger by seeding reasonable doubts back in 2017: Disney will not be able to achieve scarcity on its own, so it should join Netflix. Netflix would be better off with Disney's library.
Until recently, Iger and Disney had been proving him wrong. Digital media, and now streaming, continue to find new and innovative ways of blowing the definition of scarcity apart. As I wrote the other week, YouTube’s deal with the NFL has already redefined scarcity across linear and the creator economy. Recent news that YouTube is pursuing its own free ad-supported service (FAST) — which will look and operate like an electronic programming guide (EPG) — will once again redefine YouTube’s value proposition of scarcity to consumers and advertisers, alike.
But, comparing Disney's bundles to both Netflix's and Peacock's models highlights why its bet on bundles unintentionally may be proving Reed Hastings right in the long run.
"Evolve or die" logic
Disney has been solving for fragmentation of demand since the launch of Disney+ in 2019 with a strategy of bundling different services: Hulu and ESPN+ are bundled with Disney+ in the U.S., a Disney+ Star bundle in Europe, and a Disney+ Hotstar bundle in Asia. It also offers Star+ for sports alongside Disney+ in Latin America.
Disney+ Basic with Ads launched last month, and it is Disney’s attempt to capture the fragmentation of audience demand away from the bundle. The move mirrors something Co-CEO Ted Sarandos told the UBS TMT Conference in December about Netflix’s future models: “it's likely we'll have multiple ad tiers over time, but nothing to talk about yet. And the product itself will evolve, I suspect, pretty dramatically, but slowly, gradually."
His point was that scarcity is evolving away from the simple definition of previously aggregated audiences at scale, and towards a more real-time aggregation of audiences based on their various preferences. Audiences may be price sensitive, or maybe they simply prefer ads. Streaming services need to evolve their offerings to meet these various behaviors in order to reduce churn and drive growth in order to aggregate these audiences in real time.
If more than four offerings are required — Netflix currently offers that many — then Netflix will adapt: it is evolve or die business logic. Evolution requires technological abilities to offer multiple conversion funnels, pricing structures, and business models for a single value proposition.
In this light, Disney still seems to be solving for the basics while Sarandos is laying out Netflix's advertising vision for the near future.
ESPN+ or NBCU's Peacock?
It is worth focusing on ESPN+, which seems to benefit unusually from the Disney+ bundle: Its subscriber numbers have grown from 3.5MM to 24.5MM since November 2019, almost in lockstep with Hulu (26.8MM SVOD Only subscribers in November 2019 to 42.8MM in November 2022) after the launch of the Disney+ bundle.
In other words, but for the Disney+ bundle ESPN+ would struggle to scale. It likely would be serving only fans of UFC and sports bettors who rely on ESPN+ to watch more niche sports leagues and games in the U.S. (e.g., Dutch Eredivisie football league and lesser-known college sports teams).
That audience can be estimated to be anywhere around 3.5MM or as much as 5MM (the latter equals the difference between Hulu’s net three-year growth of 16MM and ESPN+’s growth of 21MM).
In comparison, NBCUniversal’s Peacock does not rely on a bundle to achieve scale and scarcity, but rather offers sports alongside movies, original TV series, popular NBCU channels like Bravo, and WWE. Peacock is recently coming off the success of its World Cup broadcast: 2.96 million streamed the World Cup Final on Peacock and Telemundo's digital services, which made it the most-streamed World Cup match in U.S. history, regardless of language. It also saw Peacock subscribers grow from 15MM to 18MM in Q4 2022.
Sunday’s Premiership broadcast of Tottenham v. Arsenal on Peacock delivered an average-minute audience of 808,000 viewers, its “best streaming viewership ever.” [1] The implication is that Peacock has solved for an optimal sports streaming experience — and that has been my experience both during the World Cup on my smartphone and watching Premier League on my TV — in ways that other streamers have yet to, including ESPN+, Paramount+ and HBO Max. In having done so, they are both achieving greater scale and are on a path toward scarcity. [3]
Peacock seems to be on a path where its streaming business model will rely more on scarcity driven by a portfolio of mostly sports and movies (“Halloween Kills”, “Halloween Ends”, “Marry Me”), but less so original TV series. Notably “Halloween Ends” put Peacock on the Nielsen weekly top 10 charts for the first time with 717 million viewing minutes in its opening weekend. [2]
Whereas ESPN+ relies heavily on the scale driven by a portfolio of original TV series and movies hosted by Disney+ and Hulu. It has yet to share any viewership or average minute audience data. The streaming bundle is not accomplishing for Disney anything similar to what Peacock is accomplishing for NBCU with its sports-heavy portfolio, despite Disney streaming innovations like serving ESPN+ with Hulu (which I wrote about last April).
Peacock's (really, Comcast's) solutions
An important detail to add is that Peacock’s scarcity relies upon distribution via its parent Comcast’s Xfinity platform. It has been bundled for X1 and Flex (now Xumo) customers across Comcast, Charter and Cox as a free service for 68MM potential residential customer relationships, to date. Some percentage of Peacock's 30MM monthly active users are those Xfinity customers who have activated complimentary access, and therefore viewership of its World Cup, Premiership viewership and broader sports offerings are padded by Comcast’s reach.
Comcast is solving for fragmentation by reinventing the wheel of its linear model: aggregating scarcity across multiple broadband and linear distribution households. But for Comcast’s scarcity and evolution of that value proposition in broadband via Xumo, Peacock might look more like a bundle-less ESPN+ at best.
Comcast’s Xfinity as a back-end basically eliminates the need for Peacock to solve for Hastings' sample issues of geo-targeting and “busted credit cards” — Comcast has the pre-existing infrastructure to solve for both. If Ted Sarandos’ prediction of “multiple ad tiers” in the future is precedent for Peacock, then Comcast's FreeWheel will be an engine behind any Peacock should decide to launch, too (alongside NBCU One).
By comparison, when both Netflix and Disney opt to launch multiple tiers, they will have to build, distribute and monetize those tiers on their own. As of now, that strategy does not look promising for Netflix. According to Reuters, today Netflix is expected to report its slowest quarterly revenue “as its ad-supported plan struggles to attract customers in the saturating U.S. market.”
Disney+’s ad tier has only been in the market for one month, having launched in early December 2022. But its launch reflects Disney’s streaming growth *needing* to pivot away from the assumption of inelastic demand, which is also not promising. The launch is an ominous signal for its ability to mirror the agility with which Netflix launched its ad-supported tier within eight months, and which Sarandos envisions Netflix further evolving.
"Girls5Eva" & Scarcity
There is a fun anecdote from New Yorker writer Rachel Syme in her recent interview with Puck’s Matthew Belloni on “The Town” podcast. She shared that she had interviewed Tina Fey for her recent, much-discussed piece on Netflix’s Global Head of Television Bela Bajaria. Fey had given her a heads up that Bajaria would be “potentially saving” her from NBCUniversal, a wink and nod to her show “Girls5Eva” on Peacock, where it had failed to break through to larger audiences. Syme believes “Girls5Eva” will be "huge" after it moves to Netflix.
If we looked at Peacock through the lens of that story, alone, the immediate takeaway would be that Peacock is in trouble, and A-List Hollywood talent like Tina Fey are eager to leave it. But Peacock is not in trouble in sports or movies, it is still figuring original TV on streaming. It may not have set out to embrace fragmenting audience behaviors with sports alone, but all evidence suggests Peacock is successfully solving for and capturing scarcity in U.S. sports viewing, and sometimes with movies.
The other takeaway from the “Girls5Eva” anecdote is that Netflix does not needs sports because it *has* solved for scarcity in TV viewing (the latter of which Nielsen data continues to reflect weekly), enabling shows that struggled to scale on networks like “You” (Lifetime) and “Manifest” (NBC) to become hits on the platform.
Both takeaways suggest that audiences generally do not require sports viewing packaged with original TV series viewing. ESPN+'s track record, to date, implies this and also that a bundle may not be the solution for this fragmentation. This poses a difficult question for Disney: if a bundle does not solve for scarcity the way that Peacock’s offering or Comcast’s back-end or Netflix does, then what other solutions are available? Does Disney have the right management in place to evolve the business and figure out scarcity in streaming?
Those questions are the activist investor Nelson Peltz, who is seeking a seat on Disney's board with similar questions, has been asking. Disney's over-reliance on the bundle and recent management challenges may prove both him and Reed Hastings right in the long run.
Footnotes
[1] Nielsen defines the average minute audience as the average number of individuals (or homes or target group viewing a channel, which is calculated per minute during a specified period of time over the program duration.
[2] That seems set to change in 2023 with a “course correction” under Susan Rovner, Chairman, Entertainment Content, NBCUniversal Television and Streaming. It may even change next week after "Poker Face", a new TV serires from "Glass Onion" director Rian Johnson, debuts on Peacock next Thursday.
[3] Peacock relies on a long list of sports to achieve its goal of scarcity, as Rick Cordella, President, Sports Programming, NBC Sports and Peacock, recently tweeted.
