Good afternoon,
The Medium identifies a few key trends each fiscal quarter that reveal the most important tensions and seismic shifts in the 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 "Legacy media companies are throwing in the towel on their bets to own the consumer relationship in streaming and beyond."
On Tuesday my podcast interview with The Rebooting’s Brian Morrissey went live. Brian has long been one of my favorite interviewers in digital media, and I’ve had the pleasure of getting to know him over the past two years. We discussed “The Doom Loop of the Mogul”, and why I’m on “Team Chapek”.
On that note, my monthly Medium Shift opinion column —“Disney’s New Boss Sounds a Lot Like the Old Boss” — went live yesterday. It dove into CEO Robert Iger’s post-linear vision for Disney and how it is structurally similar to that of his predecessor and successor Bob Chapek. But, it is limited by Iger being bearish where Chapek was bullish on data-drive, consumer-first models.
The past two essays — “The Doom Loop of the Mogul” and “It’s Complicated” — have highlighted how the media marketplace finds itself at a crossroads. To summarize:
Maybe no legacy media companies have thrown in the towel on owning the consumer relationship. Instead, we are seeing that no one understands the media business they manage anymore.
The strikes have revealed that the media business model in the streaming era is not simply inefficient, as the Curse of the Mogul suggests, but that it is a bad business model on its own.
A reader, Jason Barkham, responded:
“In the spirit of ‘yes and’ there's also the question that you raise of whether the owners are being properly represented here. Are the boards doing their job of ensuring that they have a leadership team that can play the best hand for shareholders?”
His point reflects how there is now a weird dance between media companies and Wall Street. Partly this is because Wall Street’s expectations for media companies have become weird. Somewhere between management, the board of directors and Wall Street, the basics of the story have gotten lost and there is no single party to blame. There is another loop dynamic at play, though not necessarily a “doom loop”:
Shareholders have not actively sought to elect boards of directors with more relevant skillsets (and activists rarely do),
Existing boards of directors have not ensured there are leadership teams in place that can play the best hand for shareholders, and
Leadership teams are not incentivized to pursue business strategies that require their replacement with managers possessing more relevant skills.
From a Wall Street perspective, there is nothing unusual about this loop dynamic in public markets. It happens often. But, for media this is the market moment where the wholesale media model is transitioning to a retail model. New technology is reshaping both the media that people consume and the business model itself. Changes to the strategic, financial and operational constraints of the business are required.
The growing question is where and how a catalyst for change will emerge through this "loop dynamic".
Key Takeaway
Media businesses may be impossible to change until shareholders, board directors and management agree that favoring EBITDA and Enterprise Value over a simplified corporate focus is a mistake in this marketplace.
Total words: 1,800
Total time reading: 7 minutes
...at the management & board levels?
Any board or management team in media, particularly with a streaming business, can point to billions of dollars of spend on both streaming technology and original content and say, “We acted in the best interests of shareholders.” And they may do so in large part because of the “free money” of zero interest rate policies, which allowed them to take on billions of debt to fund this spend. But, as I pointed out in June, both boards and management have learned that “streaming” does not deliver the same returns as previous “free money” business models like DVD and VHS rentals or sales.
Their debt-driven initiatives have not resulted in retail models that deliver Customer Life Time Value (CLV). In a retail model like streaming where this greater churn, customer value is the average monthly fee times the total number of monthly subscriptions over the period. But legacy media initiatives have delivered churn rates that are multiples above Netflix's. Consequently, CEOs like Warner Bros. Discovery’s David Zaslav and Disney’s Iger are now openly discussing the question of “What are the retail models that create CLV when ‘free money’ no longer does, and how does a company build them?’
That reads like a criticism with 20/20 hindsight. But every legacy media management team made the mistake of treating it like a one-to-one replacement for the losses of wholesale TV and (partially wholesale) theatrical distribution. As AMC Networks Chairman James Dolan said back in February — in a concession that his strategy had erred in applying a wholesale operational structure and culture to a retail business model: “where you apply your manpower [in a retail model], you don't -- it is not affiliate relations, not that you're stopping affiliate relations, but affiliate relations is a much smaller task now, compared to understanding the customer and serving them well.” AMC Networks has been in the business of streaming for over a decade, and it took them that long to figure this out.
It is also worth noting a point made by Third Point’s Dan Loeb in the activist campaign against The Walt Disney Company last September: “Disney directors don’t have enough experience in digital advertising, the monetization of consumer data and other areas that could help Disney boost profits as the company becomes more technology-focused.” That remains true, even today. Loeb sought two board seats but was only to capture one, adding former Facebook and Microsoft executive Carolyn Everson. The rest of the board is composed of Iger appointees and Iger himself. It is arguably weaker without former CEO Bob Chapek’s Disney-specific retail and consumer savvy.
...at the shareholder levels?
AMC Networks is now undergoing a cultural and operational transformation as a solution for this challenge. Meanwhile, as Barkham argued in his own recent essay “For Entertainment Companies, This Time Really Is Different”, other management teams across the rest of the industry are “responding with its standard toolkit” of licensing library content to third parties, improving near term profitability, and headcount cuts. He adds:
These moves will improve profitability and buy time for streaming to break even. But if the streaming future is not as bright as they expected, it won’t be enough to sustain long-term cash flows. In the meantime, the whole ecosystem is becoming less consumer friendly and less compelling. Streaming isn’t the ad free, full library subscription experience that would drive high engagement and retention, and there will be less content dispersed across disconnected services. The “next big thing” looks like a mirage.
If one agrees with Barkham’s perspective — and I do — then “The central challenge for legacy media companies is that they need more than a new toolkit; they need a new way of thinking.” And, within the loop dynamic above, the question is where “a new way of thinking” may emerge.
But, there is also the flip side of this story with shareholders. As I discussed in The ARPU of Storytelling, average revenue per user (ARPU) is typically the simplest story to tell shareholders. Lately, ARPU is one of the most complicated stories for media companies to tell as they shift from wholesale to retail business models. So, there ends up being a variety of scenarios where either shareholders do not get the answers they need from management and/or they simply do not understand the nuances of direct-to-consumer business models. There are too many risks in attempting to explain the basics of the new business model and the "new way of thinking", and Bob Chapek learned the hard way.
Pray for the Activism?
Shareholder activism seems like the obvious path for a "new way of thinking" to emerge. but, if Disney is precedent, that seems unlikely. Recently, former Marvel head Ike Perlmutter was vocal about a lack of fiscal discipline by both management and the board, going so far as supporting an activist campaign by Peltz and his fund Trian Partners. As Perlmutter told The Wall Street Journal in April:
“My experience with any major corporation, when they’re having problems and they don’t have the free cash or whatever it is, usually people like Nelson Peltz know how to put it back on track,” Mr. Perlmutter said. “I learned one thing about creative people my whole life: You cannot give them an open credit card.… They’re doing this for 30 years, why would they change?”
Effectively, he was saying management was stuck in its ways, the board had rubber stamped the excessive spending at the expense of return on investment — and therefore shareholder value — so shareholder activism was necessary. He had pushed for changes and bought $800 million in Disney last November seeking cost discipline. They declared the proxy fight over in February after Iger announced a massive cost-cutting and restructuring plan. Perlmutter was pushed out as part of a mass layoff of 7,000 employees in April.
Third Point’s Dan Loeb also pulled back on his activism after getting Carolyn Everson on the board, agreeing to a customary standstill agreement and other provisions — including that it would not take a stake in Disney that’s larger than 2% and that it wouldn’t solicit proxies or present proposals — through Disney’s 2024 annual shareholder meeting.
There has not been any shareholder activism, otherwise. The only other notable shareholder activity took place at the annual Warner Bros. Discovery shareholders meeting, where Zaslav’s compensation was ratified with just over 50% approval. The votes are advisory only — so they are non-binding — but most public companies get over 90% approval and anything under 70% is considered “dismal” for CEOs. The message was Zaslav is overpaid for the value he is delivering to shareholders.
The question is why. One obvious reason is that boards and management have already acted in response to investor demands over the past decade. So they invested billions in streaming when investors promised the mythical “streaming multiple” and then shifted to a focus on profitability when investors became bearish on streaming. The implication is there is no "new way of thinking" because for better and increasingly for worse, management and shareholders generally are on the same page.
The Conglomerate vs. The Loop Dynamic
But, there is also the sense that activist investors are picking their battles. If they were to push deeper or demand more change, they would find themselves faced with the more complex questions that “a conglomerate built via M&A and is a non-related collection of great assets” presents. The general belief among shareholders, management and boards of directors across the media marketplace has been that media companies will need to get bigger in order to compete with tech companies. Activist investors would need to have a solution for reducing or transforming a conglomerate into something else.
But, which media business model delivers the best creation of value “for users mainly but also shareholders as that flows from users in my book”, as subscriber Andy Weissman posed to me last September? He proposed were four other models in addition to the conglomerate:
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;
A niche media community that offers e-commerce, experiences, and more so that “people can now almost always find something they love”
All are proven and different examples of a "new way of thinking", and none seem to be breaking through. This is true even with media stock prices depressed and leaders like Iger exploring sell-offs of linear networks and perhaps even ESPN. It is almost as if after a decade of imagining the conglomerate as the future of media, the conglomerate is now the obstacle to the marketplace's future and shareholder value. The complexity makes it difficult for shareholders, board directors and management to move in any particular direction.
So, we may not see change emerge until we see fewer conglomerates with a non-related collection of great assets. In other words, the problem is not the conglomerate model per se, but rather the fact that their assets are unrelated. Media businesses may be impossible to change until shareholders, board directors and management agree that favoring EBITDA and Enterprise Value over a simplified corporate focus is a mistake in this marketplace.