Member Mailing: The Best Future Media Business Model For Consumers & Investors Is... Snap?

One wouldn’t think there is much in common between three stories that emerged over the past week:

1. The Chernin Group (TCG) invested $100MM in a new firm, Night Capital, co-founded by Reed Duchscher, the manager of the YouTube megastar Jimmy Donaldson (aka MrBeast), 

2. Disney CEO Bob Chapek talked up virtual worlds as “next-generation storytelling”, and 

3. Snap CEO Evan Spiegel told the Code Conference he is making it a priority for the company to look for opportunities to make money in areas like Augmented Reality.

But, they each and all are different bets on post-‘streaming wars’ media convergence”, or how direct-to-consumer (DTC) streaming business models enable companies to monetize the same consumer via additional DTC models beyond streaming:

1. Night Capital and TCG are betting on creator economy models to deliver the best value for consumers and investors;

2. Disney is betting that it can evolve into an ecosystem that delivers the “delight” of Disney consumers both physically and virtually; and,

3. Snap is investing in augmented reality (AR) technology and creator tools to become both an ecosystem that delivers “delight” and the means for creator economy models to thrive.  

These are completely different objectives that share key building blocks, making their respective visions of creating user “delight” and shareholder value more similar than different. By looking closer at these building blocks, a new optimal business model for post-‘streaming wars’ media convergence” emerges.

It looks a lot like Snap.

Five models for the best creation of value

Last week I wrote about an exchange I had with Andy Weissman, a Managing Partner of Union Square Ventures in which he posed the question of which model delivers the best creation of value “for users mainly but also shareholders as that flows from users in my book”?

Our exchange surfaced five answers:

1. An integrated ecosystem of delight à la Amazon or Apple (“maybe FB/Meta”);

2. A service you check 20 times a day, every day, for delight (e.g., YouTube, TikTok, Spotify);

3. A branded content service that serves primarily in one medium;

4. A conglomerate built via M&A and is a non-related collection of great assets; or,

5. A niche media community that offers e-commerce, experiences, and more so that “people can now almost always find something they love”?

Each of these stories maps to one or more of these outcomes. For example, I argued in last week’s essay that Chapek, Disney management and Disney's board seem to believe they can evolve from #4 - a conglomerate created by M&A - to #1 - an integrated ecosystem of delight via an Amazon Prime-like membership program. “Disney Prime” would offer discounts or special perks to encourage customers to spend more on its streaming services, theme parks, resorts and merchandise

Snap seems to be #1 or #2, more likely some combination thereof. Night Capital’s model is #5 because it reflects The Chernin Group’s founder Peter Chernin’s hypothesis about how technology disrupts media.

The three stories, above, shed valuable light on how Night Capital’s, Snap’s and Disney’s models share one or more of three traits:

1. Community (Night Capital, Snap)

2. AR (Disney, Snap), and

3. E-commerce (Disney, Night Capital, Snap)

Community (Night Capital, Snap)

Snap defines “community” in the broadest sense of the term as “a large and growing community of nearly 350 million daily active users”. It projects 450MM daily active users by the end of 2023. Effectively, the platform is a community of communities.

Night Capital and TCG will focus on creators with passion projects and passionate communities “who can harness established platforms to sell products and market themselves”.  Ben Mullin of The New York Times writes their investment hypothesis “was informed by TCG’s investments in firms that pair content with e-commerce, such as Barstool Sports, the sports-media company; Food52, which focuses on cooking; and MeatEater, which caters to carnivores.” Hello Sunshine, the Candle Media investment I wrote about last August that combines a production business with a book club, podcasts, e-commerce on social media, and founder Reese Witherspoon’s Draper James fashion line.

So, Night Capital and Snap are completely different in terms of scale and business models for community. But, it is worth noting that they are interdependent: meaning, Night Capital must depend on Snap for audiences to help build out its larger community across social media platforms; and, Snap must depend on Night Capital to help prove the business case to creators that they can build a community and monetize that community via advertising on Snap (more, below). 

Which model delivers the best creation of value?

This interdependence makes it complicated to answer the question of which model will deliver the best creation of value for users and shareholders. 

For users, the answer really depends on whether they prefer a platform or a community. That’s a case-by-case basis across 350MM existing Snapchat daily active users.

For investors, the simplest question is whether they prefer betting on a model at a global scale over a model that monetizes audiences with more products and services and across more platforms than Snap, but at a fraction of the scale. 

The answer becomes more complicated in light of Snap’s recent struggles with the impact of Apple’s Anti-Tracking Transparency (ATT) on its business, which emerged because it can no longer collect user-specific data. Those struggles have resulted in a stock decline from over $83 last September to just below $12 this September, cuts to about 20% Snap's workforce (and some departments by as much as 40%), and shutting down a number of products and projects.

Night Capital’s model seems hedged against these challenges, and across platforms, even if at a smaller scale. 

Augmented Reality (Snap, Disney)

Both Snap and Disney are pursuing proprietary AR experiences for consumers and both have highly ambitious objectives. 

Spiegel laid out Snap’s ambitions in his memo to employees. Normally I would distill the vision into a summary, but Spiegel’s vision helps to explain why both Snap and Disney are betting heavily on AR:

We believe that augmented reality will profoundly transform the way that we experience the world. Augmented reality represents the next major evolution in computing, and it brings the power of computing into the real world, offering shared experiences and interaction paradigms that mimic the way we engage with our physical surroundings. Augmented reality has already transformed self-expression and shopping through the Snapchat camera, and it is in the early stages of supercharging education by making learning experiential on Spectacles. Our CameraKit partners are using augmented reality to grow their businesses, from video creation to virtual try-on. Leadership in augmented reality is important to Snap because it helps us build a durable competitive advantage that comes from investing over the long term, building things that are technically difficult, and growing a platform that is increasingly hard to replicate. It also positions us to benefit from the next major platform shift: mobile to wearables. Leading this shift will be one of our most meaningful contributions to human progress; empowering people to express themselves, live in the moment. learn about the world, and have fun together.

Spiegel’s point here is that, despite struggles in the post-ATT marketplace, AR is a moat that Snap can protect with both software (Snapchat app and camera) and hardware (e.g., Snap Spectacles), and around which it can build communities of creators and advertisers.

Disney’s Bob Chapek also envisions AR as a moat, as he told Ryan Faughnder of The Los Angeles Times: “Ninety percent of our consumers around the world will never have a chance to experience our Disney parks.” So, Disney's objective with AR and also virtual reality (VR) is “to give people the ability to experience digitally, something that’s akin to a physical experience that they necessarily can’t be at that place in that time”, as Chapek told Deadline.

Its AR ambitions also see Disney’s storytelling expertise as a moat, as he told Los Angeles Times’ Ryan Faughnder: “how do we unbridle our storytelling to unleash a new dimension? It’s a third dimension of the canvas, so that you can start understanding what tools are available from a technology standpoint. How you can use those as an arsenal, like a different paintbrush, right? Telling stories in that third dimension brings everything together.”

One example is a new AR experience in a new app it is offering Disney+ subscribers in conjunction with the short film “Remembering,” starring and produced by “Captain Marvel” Brie Larson and directed and written by filmmaker Elijah Allan-Blitz. 

It should be noted that creators funded by Night Capital may be investing in AR, too, but there seem to be no publicly available materials on that, yet.

Which model will deliver the best creation of value?

If one agrees with both Chapek and Spiegel that AR is the future, Snap is much further along with AR business models and has exponentially more means of monetizing AR than Disney. As Chapek told Deadline, it is in the “very embryonic beginnings” of AR and virtual worlds: “I would say it’s akin to lab experiments that do proof of concept.”

So users have the best AR experience from Snap but may soon see more from Disney.

For investors, Snap is betting its long-term growth on AR-driven advertising and commerce because it envisions AR as “the next major platform shift”. In some ways, the crucial question is whether investors agree with Speigel's vision. 

Because if they do agree with it, Snap’s model is more proven than Disney’s and is still growing even at nearly 350MM daily active users (up from 319MM in its FY 2021 release). Also, Disney seems to have lower expectations for AR, seeing it as marginally valuable in driving more subscription revenues for virtual Theme Parks experiences and perhaps even e-commerce. That will boost average revenue per user (ARPU) for its Disney+ service, and perhaps in the longer term drive up Parks visits (e.g., consumers wanting to experience Parks physically and not digitally). 

E-commerce

E-commerce is the most complicated trait to analyze because each business is building out completely different e-commerce models. 

The simplest e-commerce model is Night Capital’s: creators effectively become catalysts for DTC brands by cultivating communities around the merchandise and marketing the merchandise across channels like Snap. So the only complicated aspect of Night Capital’s model is that it will rely on Snap for growth.

Snap has relied 100% on advertising revenues, to date, but it is now beginning to grow DTC revenue with Snapchat+, a new subscription plan intended for users “who spend most of their time communicating with their closest friends on Snap.” Spiegel wrote in his memo that “We are working to improve optimization against lower funnel objectives to drive more conversions by delivering high intent clicks and evolving our webview performance and features.” [1]

Snap also aims to monetize its creators by enabling in-app gifting (or, tipping) and connecting AR developers and influencers with brands via its Creator Marketplace. It paid creators $250MM last year through its TikTok-like short-video feed called Spotlight.  

E-commerce is most complicated within Disney’s ecosystem, which is constructed to be a flywheel for consumers across various media. It has generated $81B in revenue over the past twelve months, up 27.5% year-over-year. However, on DTC alone, Disney lost $1.7B in operating income in 2021 and over $630MM in its FY Q3 2022.

Disney is aiming to improve operating income by increasing the price of Disney+ to $10.99 and driving up ARPU via both an ad-supported Disney+ and “Disney+ Prime”. But again, it is still in the “lab experiments that do proof of concept” stage of building out its e-commerce efforts.

Which model offers the best creation of value?

For users, Night Capital’s and TCG’s e-commerce model seems most attractive because it is focused on delighting pre-existing passionate audiences across platforms. One key risk seems to be whether it is actually can the right bets on the right brands with its creators, and whether those brands will resonate with niche audiences. 

But Snap is monetizing passionate audiences, too, with Snapchat+ converting subscribers from a pre-existing base of 350MM daily active users, and is projecting $350MM in revenues for Snapchat+ in 2023 (basically an average of ~7MM subscribers per month in 2023). 

Disney is currently solving how to leverage DTC to monetize the 90% of consumers around the world who “will never have a chance to experience our Disney parks”. That’s an enormous opportunity, but Chapek is openly conceding they are in the very early stages of solving it.

So, all are focused on bringing “delight” to passionate audiences, but Disney’s is the most speculative bet of the three. 

Piecing together the ideal model

If we take the best versions of each of these three shared traits, above, and build out an ideal model based on the three, alone, we get a really interesting answer to the question: Which model delivers the best creation of value for users mainly but also shareholders?

Community

Snap and Night Capital seem to be taking two very different cuts at a community with the same assumption: passionate audiences can and should be monetized. So the best model for both users and investors involves monetizing passionate, niche communities via e-commerce, experiences, and more. But, investors should note that as a platform, Snap simply has exponentially more communities than Night Capital.

AR

Of the three, Snap has the best AR technology and the most established relationships with both consumers and advertisers around the technology. It seems to be inarguably the best model for both users and investors.

E-commerce

The “best” model ultimately depends on the consumer - for example, a passionate fan of a creator may not always use Snap and so Night Capital’s model is best-constructed to hyper-serving and monetizing their passion across platforms. But, a passionate user of Snap may discover a creator and their community, and therefore become a customer of a Snap advertiser more easily. 

From the investor’s perspective, there is an argument to be made for Snap’s model, as it takes a share of all advertising and transactions within those communities at scale. But there is an argument to be made that Night Capital’s model is safer and perhaps better, as it is able to monetize passionate audiences with elite creators across Snap and other platforms.

The Ideal Model?

Through the lens of these three traits, Snap adds up to being the ideal model, and a new, hybrid model of #1 and #5 of Andy Weissman's five proposed business models. I might describe it as an integrated ecosystem of delight (#1) that offers e-commerce, experiences, and more for both passionate fans of creators (#5) and passionate fans of AR.

That’s a fascinating new answer to what post-‘streaming wars’ media convergence” will look like, though concededly skewed because both Disney and Snap are pursuing AR. Whether this model emerges depends on whether AR and “mobile to wearables” will indeed be “the next major platform shift”.

Footnotes

[1] “Lower funnel” means the part of the conversion funnel that drives conversions to sales and retention for these types of DTC brands (brand awareness campaigns are the top part of the funnel, and most often are not intended to drive an immediate sale).