Happy New Year!
A reminder I wrote three essays before the holidays:
I also offered five predictions for 2023 in this month’s opinion essay for The Information “2023 Will Be Another Difficult Year for Traditional Media”.
Some housekeeping for the next two weeks:
I will publish PARQOR's three to four trends for Q1 2023 either Friday or next Monday.
I will be traveling the latter half of the week of January 9th, and plan on mailing on Monday and Wednesday. If something notable happens in the news cycle on Thursday/Friday, I will publish a short essay then.
One of the odder developments over the past few years has been the emergence of maritime metaphors to describe the future of the streaming marketplace.
The first time I heard it was in May 2021, when IAC Chairman Barry Diller told CNBC’s Andrew Ross Sorkin that he was bullish on Comcast’s strategy in streaming because they “have a route to the sea”. He added:
"Brian Roberts and $CMCSA have a route to all markets. They are the perfect hedge of all [media companies] because they are the only ones with both feet on both sides” of the streaming marketplace with its Xfinity Flex streaming platform and its streaming service Peacock."
I read a similar metaphor this year in the HBO history “Tinderbox”, where Warner Bros. Discovery CEO David Zaslav described his February 2021 discussions with AT&T CEO John Stankey to author James Andrew Miller:
“When I was a kid, I went to camp, and the girl’s side of the camp was on the other side of the lake. Here’s the analogy: Netflix had been so successful, they’ve already gotten to the other side of the lake and built a cabin. Disney’s a formidable company, and none of us expected they would be impactful so fast, and they’re on the other side too. I said to John, ‘Each of us are in the middle of the lake right now, looking over our shoulder at a bunch of others and wondering if we’re going to make it to the other side. If we’re together, not only do we make it to the other side, but we become the best.’”
They both refer to this “complex industry transformation” that the media marketplace is undergoing, as returning Disney CEO Robert Iger recently described it. Both are also two different takes on traditional media’s best business models for scarcity in 2023, which I wrote about in Monday’s essay.
Key Takeaway
The technological, operational and financial structures required to be a gatekeeper to scarcity no longer seem to have an obvious business logic to them. It's no longer clear what the role of a gatekeeper is in media outside of Amazon's and YouTube's business models.
Total words: 1,700
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. In turn, that enabled cable networks to capture millions of households at scale, and sell access to those audiences to “media retail cartel” advertisers (the 200 or so brick-and-mortar retail advertisers who accounted for 88% of U.S. network television revenue). The ultimate moat for scarcity was that, until Google and Facebook emerged, there was no market alternative to reaching millions of households on a nightly basis.
That has changed, as I wrote in May: “The networks are no longer gatekeepers to scarcity—if audiences aren’t watching TV, they can be found while they’re doing something else like gaming or scrolling social media. Inventory pricing now occurs both annually and in real time.” Meaning, Google, Facebook, Roku, Roblox, Epic Games (Fortnite) and Electronic Arts are all examples of companies that aggregate scarcity on a nightly, weekly and monthly basis. Moreover, the base of advertisers has expanded to 10MM e-commerce advertisers who emerged via Facebook’s advertising model.
Diller’s sea metaphor implies Comcast’s model is “smarter” because it offers Comcast a way out (“a path to the sea”) of not being landlocked within the streaming model, only: scarcity can be protected and/or recaptured with a portfolio of controlled access to broadband, linear and streaming. More importantly, it’s profitable and it preserves Comcast's role as a gatekeeper, as Diller told Ross Sorkin, “what [Comcast have] done is say, no, no, no, no, no, we are not going to unplug all the profitable routes we've had. We are going to have a streaming service. It's going to be ad-supported which we know something about. And our investment will be relatively moderate”.
Zaslav's lake metaphor, on the other hand, is narrowly focused on scarcity as defined by scale in streaming.
The “Seismic” NFL-YouTube deal
The YouTube-NFL deal highlights how Comcast may not be a gatekeeper for the “right” model of scarcity in the long run versus Google or Amazon. As I wrote on Monday. YouTube can aggregate:
A subscale “scarcity” of linear subscribers with its virtual MVPD YouTube TV and monetize them both at $65.99 per month and also with connected TV inventory it owns on the service;
YouTube viewers of NFL content at scale (some percentage of 2.5B monthly active users) and sell them to advertisers; and,
YouTube creator audiences and monetize them both with advertising and also Partner Program monetization tools, which they split with the creators 45/55.
In the background of the YouTube-NFL deal, Google is also imitating both Comcast’s Xfinity licensing strategy and Amazon’s Fire TV device strategy. It has grown its share of Android TV device users from 80MM to 110MM since May 2021, but still trails both Roku and Fire TV device penetration in the U.S. Fire devices have 85% of the reach of Roku in the U.S., suggesting there are ~42.5MM active Amazon Fire TV accounts in the U.S.
Also, the NFL’s Thursday Night Football (TNF) on Amazon Prime Video has landed four of the top 100 telecasts of 2022 (according to Nielsen data through December 4th, 2022). Amazon TNF audiences ranged between 10.4MM in October to 13.1M in September. Amazon is estimated to have as many as 172MM Prime members as of Q4 2021.
Amazon offers alternative streams for TNF: “TNF with Dude Perfect,” “TNF with Storm & Kremer,” “TNF en Español,” and “Prime Vision with Next Gen Stats.” It recently signed a deal with executive producers LeBron James and Maverick Carter to bring a live version of “The Shop”, a show recently on HBO, during broadcasts.
Google’s and Amazon’s ecosystems are redefining the role of gatekeepers of scarcity into more sophisticated and multi-faceted offerings that Comcast is not yet positioned to deliver for consumers.
Warner Bros. Discovery = Disney = Netflix
The common implication of Diller’s and Zaslav’s maritime metaphors is, if Comcast’s model isn’t enough to compete in 2023 and beyond, then it won’t matter if Warner Bros. Discovery makes it to “the other side of the lake” alongside Disney and Netflix.
Warner Bros. Discovery reaches 95MM streaming subscribers globally, and 53.5MM in the U.S. and Canada, across HBO Max, discovery+ and other streaming apps. It is aiming for 130MM globally by 2025. As of December 2021, Discovery-owned networks like Food Network and HGTV reached as many as 82MM linear subscribers. That number will be lower in 2023, but is yet clear by how much given the historical strength of Warner Bros. Discovery’s relationships with MVPDs.
By comparison, Netflix has an estimated 68MM U.S. subscribers and Disney has an estimated 40MM streaming subscribers. Like Warner Bros. Discovery, Disney also has scarcity in linear: ESPN reached 76MM households as of December 2021. If we believe Zaslav’s maritime metaphor, post-merger Warner Bros. Discovery will make it across the lake and achieve scarcity.
But, the problem for Netflix, Disney and Warner Bros. Discovery is that the YouTube-NFL deal has diminished the market value of their scale by redefining the role of a gatekeeper to scarcity.
Notably, this is not an issue limited to streaming: a gaming executive last year told me his team was trying to solve for how to keep users who would leave the company's ecosystem and go to YouTube to consume short videos of the game. They have no way of monetizing or tracking a consumer once they have left the game and gone to YouTube. So, their value proposition as a gatekeeper to the scarcity of their millions of monthly active users (MAUs) is being undermined by YouTube’s competitive value proposition for a different content format.
It is worth noting that the problem cuts both ways. For example, with the NFL deal, both YouTube and the NFL will be able to monetize consumers watching video, but will be unable to further monetize a YouTube viewer who leaves to play Madden NFL 23 (an EA title) on their Xbox or Playstation.
What is a "gatekeeper" in 2023?
After the YouTube-NFL deal and the success of Amazon’s TNF broadcasts, these maritime metaphors now reflect a moment in time that’s now gone. Scale, on its own, matters little as a defensible value proposition. Rather, it’s the aggregation of various consumer behaviors at scale that matters more to the future of a media business.
That said, Diller’s point was ultimately that profit matters most, and Comcast’s broadband model is a great business model: it reported $6.1B in revenues in Q3 2022, alone, and 45% EBITDA margins. Comcast reported $3.4B in free cash flow in Q3 and $11.3B year-to-date. Peacock lost $614MM in Q3 2022, even though its distribution model relies heavily on Xfinity. As Diller effectively implied, it’s a “moderate” loss but not an existential challenge to Comcast’s future.
Google breaks out YouTube revenues individually ($28B in 2021 and $7B in Q3 2022) but does not break out the segment's operating income individually. So we have little insight into how YouTube contributes to Google’s operating income and cash flow, if at all.
Amazon accounts for Prime subscriptions similarly, which includes Prime Video users: it breaks Prime revenues out separately under Supplemental Financial Information and Business Metrics but does not break out their operating income or contribution to operating income (which relies largely on its AWS segment ($5.4B in operating income in Q3 2022)).
Both Disney ($1.5B in streaming losses in Q3 2022), and Warner Bros. Discovery ($634MM in streaming losses in Q3 2022) break out their streaming revenues. By comparison they seem vulnerable to the opaque optics of Amazon and Google. Netflix is also vulnerable but seems to have a solution, reporting $5B to $6B in annual operating income and $1.4B in profits year to date.
The trio's comparative vulnerability reflects the problem with scarcity as a value proposition to investors and advertisers in 2023: the technological, operational and financial structures required to create scarcity no longer seem to have an obvious business logic to them. And therefore, it's no longer clear what the role of a gatekeeper is in media outside of Amazon's and YouTube's business models.
In 2023, it’s getting harder to understand how exactly the media ecosystem will evolve from here, but it is getting easier to understand that the adage “less is more” no longer will win over advertisers or investors.