Amazon CEO Andy Jassy recently wrote to shareholders that "Lord of The Rings: The Rings of Power is one of a number of “unique benefits” to “make Prime even better for members”. In other words, the measure of success for The Rings of Power will be in sales of Prime memberships and retail sales.
Or, presumably, that is the case. We do not know because Amazon does not share with us the internal metrics that reflect how it defines “better”.
The same question applies to Apple - which is happy to publicize growing Services revenues but does not share subscriber numbers for subscribers to iCloud, Apple TV+, or from any other of its services. Apple's and Amazon's precedents suggest that membership is a driver of marginal revenues that doesn't require transparency with investors.
Disney’s move into a broader Amazon Prime-like membership is a response to Wall Street's new demands for higher average revenue per user (ARPU): streaming subscriber growth is now flat and now investors want to see growth in the form of more revenue per subscriber.
I have my monthly opinion piece coming out on Friday in The Information that focuses on the absurdity of this ask after decades of Wall Street and legacy media discounting direct to consumer relationships (DTC). The lens of transparency highlights an additional absurdity to this ask: basically, it’s Wall Street saying “we didn’t appreciate of your lack of transparency before, we’ve punished your stock for that, and now we just need better ARPU, but we don’t need to know the details of how you do it.”
Meaning, even Disney won't share metrics about the performance of hit Hulu shows. But investors don't care, they just want to see higher ARPU, and Disney's answer to that ask is "membership".
Comparing Disney’s plans for “Disney Prime” to Apple’s and Amazon’s membership models helps to tease out the problem with Wall Street's ask for higher ARPU: despite investors' evolving demands, higher ARPU is not a story public companies are positioned to tell well.
Disney+ = Apple? Or Amazon?
An Apple or Amazon-esque "Disney Prime" would be a great story for Disney, which is seeing less mileage in its streaming story with investors. With the pandemic seemingly in the rearview mirror, the growth story from streaming is gone and a growth story for Parks is re-emerging: Q3 revenues were up 70% year-over-year and 92% over the last nine months.
The Parks line item drove 40% of operating income in Q1 2022 and is now at 61% in Q3 2022. The implication from recent Disney’s recent “Disney Prime” push is that there are opportunities for more revenues to be extracted from Parks visitors. Also, as CEO Bob Chapek told Ryan Faughnder of The Los Angeles Times, “Disney Prime” Virtual Reality and Augmented reality can open the door to the ninety percent of Disney consumers around the world who will never have a chance to experience Disney parks in person.
That vision wades into the business logic of Amazon’s and Apple’s membership stories to investors. Amazon and Apple are not entertainment businesses and streaming isn’t their entry point. Rather, streaming is an add-on designed to make those companies’ enormous existing user bases marginally happier at zero (Amazon) or minimal (Apple) additional cost to consumers.
By contrast, streaming and Parks are separate entry points into Disney's ecosystem. The common denominator for both under "Disney Prime" will be a membership, which as a Disney+ subscription they would measure via their Direct to Consumer business (where those subscriptions are accounted for in the organization). Chapek laid out a vision to investors on the Q3 2022 earnings call:
As you know, Disney+ is still a young business and we are learning more every day about the service's ability to attract new fans to our powerhouse franchises. For example, in addition to driving engagement among tens of millions of existing Marvel fans, we have seen each new Disney+ original Marvel series attract incremental viewership and new subscribers that hadn't previously engaged with Marvel content on the service, thanks to the episodic format that enables us to explore new characters and genres. The value of expanding the fan base is tremendous, and this new audience can then experience Marvel across our other offerings from consumer products to games to theme parks.
This quote helps to tease out three important questions:
Which model is best for Disney Prime?
Which Disney division will own the customer relationship - Parks, Experiences and Products or Media and Entertainment Distribution? And,
How will Disney account for it in their public disclosures to investors?
A black box problem
Apple and Amazon offer helpful but imperfect answers to these questions.
Apple
For Apple, Services are marginal revenues extracted from Apple device owners for a variety of applications. That business has generated $40B in sales over the last two quarters of 2022, alone. But with the exception of its Apple One all-in-one bundle, these services are not built for a cohesive user experience across the Apple ecosystem.
An Apple-wide ARPU isn’t a story Apple seems to want to tell because it’s complicated. Apple's relationship with consumers is driven primarily by device ownership, and sometimes via Services (e.g., Apple TV+ subscriber who does not own an Apple device). Meaning, a device owner is more valuable to Apple than a Services subscriber in pure ARPU terms, and Services revenues may marginally boost that ARPU. But Apple seems agnostic as to the choices consumers make within its portfolio of Services.
Disney+ = Apple Services?
Disney’s membership story doesn’t map neatly to Apple’s: it’s not a device company, and it doesn’t define its relationship with consumers as Parks-first. Chapek's Marvel example, above, suggests that it’s focused on being IP-first: meaning the relationship with the consumer is primarily driven by the IP, but the monetization of the IP is spread across divisions.
Disney+ memberships currently fall under the DTC division within Media and Entertainment Distribution, and subscriber numbers are Disney+, Hulu and ESPN+ subscriptions. So, no division owns the IP and therefore no division will own the consumer relationship in "Disney Prime". If Disney uses Apple's model, it will create a Services division within Disney+ and disclose it as such. The only challenge is any upside to Parks for Disney Prime would be to Parks, and not Disney+ membership. Parks will want that revenue recognized on its P&L.
Amazon Prime
Amazon breaks out Subscription Services as a line item but it is not considered an accurate proxy for total Prime memberships. A footnote in the earnings report says the line item “includes annual and monthly fees associated with Amazon Prime memberships, as well as digital video, audiobook, digital music, e-book, and other non-AWS subscription services." Amazon relies primarily on its AWS business for operating income, and this footnote makes it clear that Prime subscriptions are not tied to that business.
Also, Amazon consumers can purchase from Amazon divisions without a Prime Membership - like walking into a Whole Foods store or simply purchasing items from Amazon.com (it has 300MM active customer accounts). But there are more perks for them - free delivery, music, photo hosting - with a Prime membership than without it.
Disney+ = Amazon Prime?
"Disney Prime" business logic is similar: visitors have never needed a Disney+ subscription to enter Disney Theme Park and they won’t now. But, after this month's D23 fan conference, it is clear Disney+ members will be happier at Parks and Cruises with exclusive perks that non-members will not have access to.
However, Amazon does not tie Prime subscribers to operating income - which is driven primarily by AWS and its advertising business. Whereas, under "Disney Prime" Disney+ will help to drive more Parks revenues, and Parks revenues drive the majority operating income.
That raises an important question: as Disney+ becomes more oriented towards driving marginal revenues from Parks and broader Disney experiences like AR and VR, the less it will make sense to have Disney+ under Media and Entertainment Distribution. Why would Parks allow for the Media and Entertainment P&L to benefit from Parks revenue growth driven by Disney+?
So, in trying to imitate Amazon Prime, Disney would need to operationally transform itself again for the second time in three years. Also, Disney will need to be less transparent with investors after a recent shift towards increased transparency with subscriber numbers. That would be a reversal that would lose the confidence of investors.
Amazon Prime's business logic may have appeal as an inspiration for Disney, but it presents some tough challenges for Disney's business.
Transparency & CDP business logic
It's also worth considering these challenges within the context of “CDP business logic” in the broader media marketplace. With CDP software, data is ingested to tell the CDP owner important details about its customers, and the data is then applied throughout the ecosystem to market and/or deliver services and goods to the customers. It also may be used to improve how a broader consumer ecosystem runs.
The Amazon, Apple and Disney examples, above, highlight a problem with CDP business logic: simply having one database for all consumers doesn’t necessarily translate into revenue growth or operational clarity.
The other problem is CDPs and similar solutions are black boxes into which consumer data goes, and CDP business logic concludes that higher ARPU will come out the other end of those black boxes. If it’s not obvious to investors how Amazon, Apple or Disney will generate higher ARPU from a single, centralized relationship with the consumer, then any other company pursuing the greater ARPU via CDP business logic is unlikely to have a better answer.
That is, unless the media company and membership model is niche.
For instance, 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).
If CDP business logic is *the* necessary organizing principle for media companies to grow ARPU, the companies most likely to solve it will rely on stronger management and operational models than they will on CDP software vendors. That management and those models may be more likely to be found at niche businesses.
So, the example of Crunchyroll suggests that the outcome Wall Street wants most - higher gross revenues, higher profits and higher ARPU - will have the easiest story and metrics to follow within businesses that it values least - subscale niche content businesses. And the businesses that best map to this story - AMC Networks and Lionsgate’s Starz - have no available means of building a flywheel now or tomorrow.
That's an absurd market reality for public media companies.
Conclusion
Wall Street isn’t wrong for demanding more ARPU now that streaming growth has flatted - as I will argue on Friday, it's an absurd ask given how Wall Street has demanded media companies not to cannibalize their linear models in the past.
But, Wall Street does not understand what the best businesses should look like if ARPU is the best metric for the future of public media companies. If CDP business logic is the future of the media business - and I believe it is - maybe legacy media companies will be better off going private with investors who understand this.