A reminder that this week’s schedule will be:
Today: A summary of lessons from the Four Trends of Q4 2022, and
Friday: Key trends I’m considering for Q1 2023.
My predictions for 2023 are scheduled to be published in The Information next week.
At the beginning of October, I outlined the four trends and market signals that identify the seismic market shifts in media that are poised to play out in 2023.
There have been 27 mailings (and two opinion pieces for The Information) since then. The breakdown of total mailings by theme (and double-counting for multiple themes) is:
Media companies have consumer credit cards on file. What happens next? (Total: 9)
Linear channels seem doomed. What happens next? (Total: 12)
There is no such thing as a CTV household, what happens next? (Total: 8)
Hollywood’s future lies in the creator economy, what happens next? (Total: 10)
It is a pretty even distribution of essays across themes, perhaps helped most by essays covering multiple topics.
My original, pre-breakdown calculation guess was that I had written too little about theme #2. But, it turns out actually had written too little about theme #3. Those essays focused on answering the question, “How do we think about the future of TV advertising when the TV is no longer the center of the living room, but eMarketer and Nielsen are telling us it is?”
Total words: 2,600
Total time reading: 11 minutes
That trend emerged from conversations at the IAB Video Leadership Summit in June. I thought that story would be dynamic, and it was in one important way after Procter & Gamble’s earnings call (“P&G's Quiet But Seismic Shift in Spend”): P&G’s new focus on reach seemed to be the strongest signal that “brand advertising spend seems to have bought a one-way ticket from linear to digital.” But, there were other angles I was hoping to see — like advertising spend shifting from Connected TV to smart audio — and I never saw any evidence of those happening. That doesn’t mean they won’t will not, but the economically efficient outcome I was told ad buyers were seeking neither happened nor seemed closer to happening
That played out in other trends, and it made for a fun quarter of writing.
The most dominant theme across all four trends was Wall Street’s message to public companies and investors alike: it perceives modern media as a game of attention, and Wall Street doesn’t believe any legacy media business or media platforms like Netflix or Spotify will capture sufficient attention to grow anytime soon (“Bo Knows Media”).
1. Media companies have consumer credit cards on file. What happens next?
What I hoped to learn
I saw “Consumer Data Platform” business logic emerging in media: CDP software is arguably the best software and operating model available for media companies to monetize consumers as they pivot towards direct-to-consumer (DTC) business models.
“Disney Prime” was a perfect example of this trend: then-CEO Bob Chapek was promising investors that Disney+ would become more than just an app — it would be an “experiential lifestyle platform” for over 150MM Disney streaming subscribers and hundreds of millions more Parks visitors.
My hypothesis was that more of these models would emerge because media companies now had millions of credit cards on file, and rudimentary flywheel models could help to drive higher average revenue per user (ARPU).
What we learned
Investors didn’t buy the vision, nor did the Disney board (or, we may learn that they did but they didn’t trust Chapek in the role). “Disney Prime” was Chapek’s answer to investor demands for higher ARPU. It was also a skeptical take on streaming: if you want higher ARPU from streaming consumers, the best strategy is to imitate Amazon and Apple and to look for business models beyond streaming.
Perhaps the most valuable insight was gleaned in “Where Are The Profits To Drive The Flywheels (And Vice Versa)?”. Flywheels seem not only inevitable, but with a consumer credit card on file, they're that much easier to build. So why aren’t we seeing more of them?
Blockbuster Video’s business model was a helpful reference point for answering this question: the additional revenue it created for producers catalyzed the supply of productions, and Blockbuster’s model catalyzed the demand for those productions.
It highlighted a weird dynamic that exists for legacy media companies trying to grow ARPU: there are no profits in streaming to act as a supply-side catalyst for growing ARPU. As for demand-side catalysts, there's nothing in place to engage legacy media streaming subscribers beyond streaming.
But, we are seeing these “flywheel” business models emerge in the creator economy. As former CEO Jason Kilar and I discussed over Twitter, "One of the biggest opportunities in entertainment is to delight the biggest fans in ways a one-size-fits-all model is not designed to do” and "The emerging roster of modern creators clearly gets this and has leaned into it from the start. Walt Disney would be proud of them."
The implication is that the best answers for this trend are emerging at the micro level of YouTube creators — "A constellation of small flywheels" in the tradition of Walt Disney, as The Recount COO Markham Nolan elegantly phrased it — and at private companies like Sony’s anime streaming business Crunchyroll.
Both YouTube and Sony offer little transparency. I am hoping and betting that will change in 2023.
2. Linear channels seem doomed. What happens next?
What I hoped to learn
This trend was focused on cord-cutting: specifically, what happens in the marketplace when Peak TV production spend hits a wall because of cord-cutting?
I had heard various versions of this simple question in conversation, and therefore it captured a few dynamics. First, it captured the question of what happens in the post-production marketplace when an AMC Networks or a Paramount network disappears due to lack of demand. It also captured the visual effects production marketplace: as gaming production ramps up for larger audiences, those resources will compete for legacy production visual effects editors schooled in Unreal Engine. It captured generative artificial intelligence (“AI”), which is beginning to disrupt what we understand to be a produced video. It also captured sports: The NFL and sports betting will keep linear alive.
These dynamics had emerged in conversations with readers and my network. The result is a trend that feels “too" dynamic: meaning, now that AMC Networks seems more likely to disappear altogether, it reads like the tip of the iceberg of what’s to come for other linear networks.
Where to begin? There should be lots more rabbit holes to go down with this trend in 2023 (more on that on Friday).
What we learned
AMC Networks hit a wall in Q4 2022 (“Is AMC Networks A Canary In Cord-Cutting Coalmine?”), as Chairman James Dolan wrote to investors: “We are primarily a content company and the mechanisms for the monetization of content are in disarray.”
Beyond recent layoffs and the upcoming restructuring at AMC Networks, it is not clear what happens next to AMC Networks productions or its intellectual property library. In recent days we are seeing a broader trend of productions being cancelled at Starz — “Step Up” and “Dangerous Liaisons” — and at HBO Max — “Love Life”.
I predicted in “How Linear's Decline May Fuel Gaming's Next Decade”: “the obvious story is that the decline of AMC Networks and other linear channels is about to set off a messy set of market dynamics that we won’t have much insight into, nor will we be able to track their impact.” That’s because the post-production marketplace may be best described as an “eight-by-eight grid” of different companies in different roles, and most are private companies, some mom-and-pop artisanal shops.
That marketplace remains quite opaque. As Variety’s Jennifer Maas wrote on Monday, “The removal of shows from HBO Max means WB Discovery is able to save money in residuals paid to cast and crews of productions, on top of the money saved by not continuing with the shows at all.” Meaning, the post-production marketplace is going to be hit hard by these moves, but how it will play out remains anyone's guess.
One big question is how gaming disrupts legacy media’s future given two key trends:
Over the next decade Gen Z and Gen Alpha are an enormous and growing audience increasingly going to be engaging primarily with online multiplayer games and popular IP; and,
In order to capture that audience, major gaming companies like EA and Sony Playstation are going to be producing more original titles.
It’s not clear what percentage of legacy media productions are built on Unity and Unreal Engine platforms, both of which are used in gaming, too. But, the implicit market dynamic is obvious: the more the supply of legacy media productions is reduced by the changing economics of the linear business and disappointing economics of streaming, the better-positioned gaming companies will be to capture more of the post-production marketplace for their 2030 objectives of producing more original titles.
I wrote about AI in “What Will Happen When Artificial Intelligence Recasts "The Office"?” It’s early days as to whether AI is disrupting video production (ChatGPT certainly is disrupting college essay writing). I concluded there is a creator economy marketplace dynamic at play: “The only clear answer we have right now is whenever they do figure this out, the businesses best positioned to host all that content, to target different content to fans of those celebrities with an algorithm, and to monetize it are Netflix, YouTube or TikTok. Because all that content will need algorithms to map different celebrities and different clips to the audiences who are most likely to watch them.”
In sports, the only market signal I wrote about was Warner Bros. Discovery management telling shareholders “we don’t need the NBA”. But otherwise, sports has largely been a black box. There’s a good, must-read essay on how Amazon’s NFL broadcasts were the moment when sports broadcasting “crossed the Rubicon” in the second half of 2022. It was written by PARQOR subscriber and former ESPN and NBA executive John Kosner, and I think it does a better job of capturing this dynamic in Q4.
3. There is no such thing as a CTV household, what happens next?
What I hoped to learn
I attended a couple of ad industry events, and the question that emerged was “How do we think about the future of TV advertising when the TV is no longer the center of the living room, but eMarketer and Nielsen are telling us it is?” Because there is an emerging tension between the narrative around CTV solving for the "attribution gap", CTV not always solving for that, and the problems emerging from Anti-Tracking Transparency make that problem harder to solve.
What we learned
One of the key takeaways is in the introduction, above: P&G seems poised to force different behaviors in the linear and CTV ad-buying markets.
Two other dynamics worth highlighting showed up in “YouTube's Earnings & Little Green Shoots Among The Ad Market's Bear Signals”. First, MobileDevMemo’s Eric Seufert argued: Apple’s Anti-Tracking Transparency (ATT) initiative, which eliminates the use of tracking consumers via third-party cookies, “is a larger and more pernicious obstacle than many advertising-dependent companies appreciate or care to admit”. His example was Alphabet’s Q3 2022 earnings, which saw YouTube and Search revenue growth diverge from each other in Q3 2022 after both segments grew at around the same rate in Q3 2021. The implication is that ATT is an obstacle to direct-response advertising models. That’s an additional obstacle for legacy media streamers trying to attract smaller, DTC advertisers.
The second was an excellent essay from Simulmedia’s Dave Morgan, which summarized three smaller disconnects between supply and demand playing out behind the scenes in TV and streaming ad sales. He focused on three dynamics — fragmentation, fit and fluency. Morgan’s point is that cord-cutting may be a reality but linear isn’t going away anytime soon. Package deals of linear and digital will be a market reality going forward, and the market is still in the early days of figuring out the most efficient and effective ad buys.
Overall, it’s remains important trend but for which it is hard to pinpoint signals. The clearest signal was a pullback in ad spend as recessionary trends emerge. But, there were also conflicting signals from Apple’s Anti-Tracking Transparency initiative and a growth in CTV ad spend.
4. Hollywood’s future lies in the creator economy, what happens next?
What I hoped to learn
The original assumption of this trend was that the YouTube ecosystem and algorithm may be more valuable to building fan bases for legacy media intellectual property than the exclusivity of a “walled garden”. For example, "The Office" has performed better outside of Peacock than within it.
But, I also noted that creators like Jimmy Donaldson aka MrBeast and 2MM others in YouTube’s Partner Program are actively flipping and evolving the definition of “premium” content for users and advertisers, as are TikTok creators.
YouTube is a black box, despite its blog and Twitter accounts of senior leadership. So the lessons were largely gleaned from YouTube's publicity efforts, which were compelling. But they are also optics around and for a black box.
What we learned
This was a pretty significant, if not seismic quarter for YouTube. I highlighted our trends in More Than Catalysts That Will Drive YouTube's Inevitable Win in CTV.
I concluded, “If YouTube continues to capture more ad dollars and more eyeballs as legacy media streaming services face plateauing growth in the U.S., the logical question is where the breaking points for legacy media efforts in streaming lie. All data suggests CTV is generally where they seem most vulnerable.”
Mark Bergen’s book on YouTube "Like Comment Subscribe" highlighted a key data point YouTube CEO Susan Wojcicki revealed to YouTuber Hank Green in a 2020 interview: “in terms of viewership of YouTube users, there’s creators, music companies and traditional media, and creators are about half of it.” This is another way of saying that creator content is going to be anywhere between 2x (if traditional media is 25% of consumption) and 5x (if it’s 10%) more likely to be consumed than legacy media content on YouTube.
According to Nielsen’s The Gauge, YouTube had 8.5% of consumption in October 2022 on U.S. TVs, 4.25x more consumption than Disney+. It had spent much of the year below Netflix and then neck-and-neck with Netflix until August.
The head-to-head between YouTube and Netflix’s Basic with Ads tier was another important dynamic. I argued in “Netflix ($NFLX) May Not Have Any Answers For YouTube Shorts” that “anything to distract Wall Street from the growth of the creator economy will be necessary” for Netflix to sell the success of its ad tier. The core problem is that “YouTube is capturing more legacy media ad dollars, which it is sharing with creators, and those creators outperform legacy media content with faster, cheaper and sometimes better content. Instead of catalysts, these dynamics help to reveal how YouTube is changing the economics of streaming to its advantage.”
Netflix now finds itself in an arms race with YouTube where YouTube seems to have an infinite supply of arms for which it pays a performance-based fee, while Netflix spends $17B per year for content. The real question is growth: 95% of teens use YouTube (and 67% use TikTok), according to Pew’s Teens, Social Media and Technology 2022.
There are some fascinating tensions in the marketplace as a new generation of video consumers consume content for free, and define “premium” content very differently than their parents did.
[Reminder: On Friday, I will outline key trends I’m considering for Q1 2023.]