The Medium identifies a few key trends each fiscal quarter that reveal the most important tensions and seismic shifts in the rapidly and dramatically changing media marketplace. The key trends help you answer a simple question: "What's next for media, and where's it all going? How are the pieces lining up for business models to evolve, succeed, or fail?"
Read the three key trends The Medium will be focused on in Q3 2023. This essay focuses on "There is a less-discussed lens on how the demand for 'premium content' is being redefined by creators, tech companies and 10 million emerging advertisers."
On Monday I asked what the purpose of the media conglomerate model is in the streaming era, and I answered it with former Intel CEO Andy Grove’s “strategic inflection point”. There is the assumption in the marketplace that Disney and other legacy media conglomerates are at Grove's binary, pivot-or-die strategic inflection point because of streaming. And that is because leaders like Disney CEO Robert Iger have defined it as a new distribution channel.
However, the TV business is still a better model than streaming and with lower and more predictable churn rates. So, it is hard to argue that the TV business will be a worse business model than the streaming business model for these conglomerates anytime soon. We are not witnessing a “strategic inflection point”, and there is no urgency for anyone to pivot to a different business model.
Then what exactly are we witnessing?
One subscriber responded to Monday’s essay that we are witnessing a holding pattern until early April 2024. That is when the tax statute that prevents WBD CEO David Zaslav from offloading Warner Bros. Discovery assets will be lifted. The reader argued: “That will be the starter pistol for this next wave of consolidation and contraction”, and others will follow after the unwinding of the WBD merger’s complicated tax structure (a Reverse Morris Trust).
Even if that is the case, the question remains: Will media conglomerates still exist on the other side of that market shift? Because in this dynamic market shift from wholesale to retail, it is not clear what competitive advantages the conglomerate offers its individual business segments. Nor is it clear whether those business segments will be able to compete outside of the conglomerate
Key Takeaway
If the legacy cable media conglomerate cannot figure out how to allocate resources to delight consumers across its own ecosystem, and therefore create shareholder value, why should any of their individual subsidiaries/pieces of the business exist within or without the conglomerate?
That is the ultimate question looming for April 2024.
Total words: 1,800
Total time reading: 7 minutes
Five Delightful Models
Last September, I explored a question posed by a subscriber about which media business model delivers “delight”, or the best creation of value “for users mainly but also shareholders as that flows from users in my book.” We had come up with five answers:
An integrated ecosystem of delight à la Amazon or Apple (“maybe FB/Meta”);
A service you check 20 times a day, every day, for delight (e.g., YouTube, TikTok, Spotify);
A branded content service that serves primarily in one medium (e.g., Netflix);
A conglomerate built via M&A and is a non-related collection of great assets (e.g., Disney); or,
A niche media community that offers e-commerce, experiences, and more so that “people can now almost always find something they love” (e.g., Crunchyroll)
I argued, then, that Disney CEO Bob Chapek’s “Disney Prime” initiative reflected a belief that Disney could evolve from #4 to #1. Two months later, both Chapek and that belief were proven wrong when Chapek was fired. Under Iger, Disney remains a conglomerate and as I wrote on Monday, it is now struggling to find answers to how and/or why it should not be one.
The bet AT&T management had made in its Time Warner acquisition was that a conglomerate could compete by leveraging entertainment content to lock in customers and reduce churn. AT&T’s spin on the Time Warner deal was “A reduction of 1 basis point of wireless churn across the base is worth about $100 million to us annually.”
Existing wireless consumers were already locked into the ecosystem of AT&T-WarnerMedia conglomerate or acquired customers would be locked into the ecosystem. AT&T’s business logic was that the better it was able to reduce churn, the more cash it would have on hand to distribute to shareholders as a dividend and also to invest in growth opportunities in the streaming era.
But also because, as Holman Jenkins wrote in The Wall Street Journal back in January 2022, “it’s hard also to escape a suspicion that AT&T management recognized that new investors would want new managers for new opportunities, not a bunch of telecom veterans. In short, AT&T is proceeding with its chaotic unmerger so AT&T can go back to being a company that the market will let AT&T’s current leaders keep running.”
So, one lesson from the AT&T-Time Warner merger is that a conglomerate cannot solve for delight unless a management team and board of directors are willing to fire themselves. And, as I recently discussed in "Reed Hastings' Churn Decision Tree", there is a "gerontocracy" aspect to these media conglomerate management teams and boards that prevents that outcome.
Versus Streaming Competition
Another lesson of AT&T’s failed Time Warner acquisition is that a media conglomerate needs to compete outside of its strengths to survive. To do so, it needs to change its management team. But, the wholesale linear business model is still the best business model for these conglomerates, in large part because it produces “free money” from affiliate fees paid by cable distributors. So, ultimately the conglomerate’s purpose ends up being primarily financial: to tell a story of improved EBITDA and profitability to shareholders in order to boost enterprise value, which in turn boosts stock price multiples.
That self-reinforcing loop — not quite the “doom loop of the mogul”, but also not a positive one — leaves conglomerates unlikely to solve for evolving or pivoting into any of the other four models for delight. This is especially true for its competition in paid streaming.
Apple and Amazon are trillion dollar-plus market cap companies that offer many-headed “ecosystems of delight”. Competing with them may find tactical wins — Apple TV+ only had 0.32% of TV viewing time in July, according to Nielsen’s The Gauge. But strategically, it’s impossible to compete with businesses with similar amounts of content spend, and who treat the results of that spend as an afterthought within their own ecosystems.
Netflix is evolving into a many-headed ecosystem of delight with a single subscription fee as the ticket to multiple services. Media conglomerates seem to face increasingly fewer competitive advantages as Netflix has rapidly added gaming and advertising to its platform within the past two years. In subtle ways, Netflix is leveraging legacy media libraries and IP to redefine what a media conglomerate will be in the streaming era.
For a media conglomerate to compete with either after April 2024, it would have to solve for the complex problems of redefining the primacy of content production within its business model, and to figure out new technologies. Neither of those seem remotely likely as objective problems, but especially under "gerontocracy" leadership.
Losing to the Creator Economy or Crunchyroll
A media conglomerate is also burdened in trying to compete with YouTube or TikTok — a service you check 20 times a day, every day, for delight — or Crunchyroll — a niche media community that offers e-commerce, experiences, and more so that “people can now almost always find something they love”.
That competitive challenge is even more complicated than streaming competition because all three are subsidiaries of larger companies — YouTube within Google, TikTok within privately-owned Chinese conglomerate ByteDance, and Crunchyroll within Japanese conglomerate Sony’s subsidiary Sony Pictures Entertainment. How can a conglomerate compete with subsidiaries of companies who are larger in scale and equal in revenue (YouTube’s $28.8 billion in annual revenues in 2022 is almost equal to Paramount Global’s $30.2 billion)?
We know from public filings that YouTube’s annual revenues tend to be around 10% of $257.6 billion in annual revenues. Crunchyroll is one revenue driver of a $9.5 billion subsidiary. Both Google and Sony discuss YouTube and Crunchyroll in their results, and both marginally contribute to shareholder value. One analyst estimate has Crunchyroll accounting for 36% of all profit at Sony Pictures Entertainment in five years, up from just 1% in the year ended in March. Bytedance’s revenues surged 30% in 2022 to $80 billion because of TikTok’s success.
The existential reason for a conglomerate strategy — a content-driven media business model that can compete at a global scale — is an afterthought within the Google, Sony and Bytedance business models. Moreover, these are subsidiaries that have exponentially more scale: YouTube has over 2 billion monthly active users of both its main platform and its Shorts platform and TikTok has over 1 billion monthly active users. Crunchyroll is smaller but is reported to have over 100 million registered members, including 11 million paid users.
These businesses pose an existential threat to the core value proposition of a media conglomerate: its content libraries. YouTube’s and TikTok’s business models require no original investment into content. They rely instead on millions of creators and legacy media companies to post content in exchange for a revenue share on advertising and/or other monetization tools (500+ hours of content uploaded every minute). As for Crunchyroll, anime is simply cheaper to produce: It generally costs around $2 million to produce a 12 episode anime series, or 10% of the per episode budget of $22 million for Taylor Sheridan’s “Yellowstone” prequel “1923” on Paramount+.
But perhaps the biggest threat these businesses pose is demographic. Crunchyroll’s internal research has found anime is “exploding in the 13-17 and 18-25 age segments” and Sony believes the market demand for anime will nearly triple from 300 million fans globally to 800 million by 2025. 95% of teens use YouTube and 67% use TikTok in the U.S., according to Pew’s Teens, Social Media and Technology 2022. Recent research from Antenna in the U.S. found that around 80% of subscribers to streaming services are older than 30.
Those trends will be accelerating eight months from now.
Fare Thee Well, Media Conglomerate
If the legacy cable media conglomerate cannot figure out how to allocate resources to delight consumers across its own ecosystem, and therefore create shareholder value, why should any of their individual subsidiaries/pieces of the business exist within or without the conglomerate?
That is the ultimate question looming for April 2024.
The challenges of this question may be best explained by Disney’s decision tree for ESPN’s future. It relies heavily on the high affiliate fees ESPN's six channels generate (nearly $10 per subscribers) for operating income in its linear business. It is marginally better off after a recent $1.5 billion deal with Penn Entertainment, but that only solves its challenges with its sports betting. All ESPN streaming viewing, including ESPN+ was 0.06% of all streaming viewing in July 2023, according to supplemental data from Nielsen’s The Gauge.
There’s no demand for the brand beyond TV. It isn’t competing and it seems yet to prove that to will be able to compete outside of linear. And yet, it is arguably the best asset owned by any media conglomerate of the wholesale TV era. Will it be able to survive within Disney by April 2024? If not, how will it be better off outside of Disney?
The answer to those questions arguably rely whether it will be able to produce consumer delight outside of linear. And right now, it isn't, despite being within a $151 billion ecosystem and the best business of the wholesale bunch.