Good afternoon!
The Medium delivers in-depth analyses of the media marketplace’s transformation as creators, tech companies and 10 million emerging advertisers revolutionize the business models for “premium content”.
Each fiscal quarter, The Medium identifies three or four new trends that have momentum and seem poised to play out at a larger scale in 2023. These key trends pinpoint dynamic and constantly evolving developments in the media marketplace that are emerging from incremental shifts or fundamental changes. The bi-weekly mailings analyze these trends as developments emerge in real-time.
Read the three key trends The Medium will be focused on in Q4 2023. This essay focuses on "In the shift from wholesale to retail models, there are many business models that delight consumers but no single, dominant one."
The $11.46 billion in cash on Disney’s balance sheet will take a 75% hit at some point within the next four weeks. Disney announced yesterday that it expects to pay Comcast’s NBCUniversal $8.61 billion by December 1st—plus an amount to be determined in 2024—for its 33% stake in Hulu. The looming burden for Disney will be to pay down $44.5 billion in debt with less cash. So, Disney finds itself in a position where its long-term bet on growth has devolved into a hyper-focus on managing its balance sheet for the foreseeable future.
It is not alone. Every other legacy media company that took on billions in debt to fund libraries is stuck in the same short-term game plan. Growth will not come from streaming— Disney has lost $2.1 billion over the past three months, alone, according to a recent filing with the SEC—so the cash for paying down billions in debt will come from cost-cutting measures (e.g., Warner Bros. Discovery) or alternative business models like content licensing.
That short-term financial reality contrasts with the long-term trend of media business models shifting from wholesale to retail. There was no better example of this disconnect than the recent report that deputies of Disney CEO Robert Iger have been pushing for “a bolder transformation of Disney from gaming licensee to gaming giant” by merging with Electronic Arts (EA). Disney’s balance sheet reflects three key challenges with this proposal: First, Disney has limited resources to solve for that path. Second, its focus on solving for its balance sheet means “bold” is neither financially nor operationally a near-term option for a necessary long-term solution.
The third key challenge may be the most important: Iger and his deputies are the architects of Disney’s balance sheet challenges, and they have no background in gaming. They have no background in streaming, either: Both Hulu and BAMTech ($3 billion) were bolt-on acquisitions, and not built in-house. Their balance sheet reflects cash being used to pay down both the debt funding its misguided streaming strategy and to cover the losses of that strategy. There is no reason to believe a bet on gaming would result in a different trajectory.
But, a spin-out of Hulu and a pivot towards gaming increasingly seem to be the bets they need to make. The question is how it—and other legacy media companies—can make that pivot while servicing debt and struggling in streaming.
Key Takeaway
There is an inevitable overlap between gaming and streaming on its way. The mostly necessary focus of both Disney and Warner Bros. Discovery management teams on their balance sheets has resulted in a weird dance between good business instincts, debt service, and bad execution towards this future.
Total words: 1,700
Total time reading: 7 minutes
Plumbing & Poetry
I will have another take on the Disney-EA story in my next Medium Shift column. For our purposes here, I think the biggest issue from both that story and the Hulu acquisition is that Disney continues to take big swings instead of updating the “plumbing”, if you will, of its ecosystem.
So what is “plumbing”? I got the term from New Zealand All-Blacks rugby great Dan Carter, who has been on a book tour describing his interpretation of LinkedIn founder Reid Hoffman’s phrase, “the plumbing that supports the poetry”. Basically, the poetry is “purpose” or “vision”, the “beautiful thing I am aspiring towards.” But, it can’t be achieved without “the plumbing” and the “day-to-day consistency of doing the work”. Hoffman is a bit more technical in his definition:
“There’s plumbing and poetry in investment,” he explained. The plumbing is more logistical: market size, product fit. The poetry, however, is about societal impact. “I prefer [investments] that are like, ‘Who knows if this will work or not? But if it does it’ll be super important,’” said Hoffman.
Hoffman frames the tension for legacy media companies than Carter, who is trying to make Hoffman’s advice more practical for a broader audience. There has been a poetry in Iger’s vision of Disney going into streaming. It’s always been a big vision that investors bought into, enough that Disney’s stock was $100 per share above where it is today two-and-a-half years ago. Despite the loss of Wall Street's confidence, he remains bullish on streaming.
There also may be no better version of a “poet” on Wall Street than Warner Bros. Discovery David Zaslav, who sold Discovery+ to investors with analogies to an SUV, and content spending that would "shock and awe (NOTE: I wrote about this in February 2022). Other leaders like Paramount Global CEO Bob Bakish and previous NBCUniversal CEO Jeff Shell have used similar talking points.
All have bet heavily on library investments and debt as the “plumbing”. There was a certainty that streaming “will work”, all that was required was the investment. That was half true, and this is where Carter’s insight is valuable: There was no day-to-day consistency of building towards a retail first, consumer first business. They all defined the vision as larger libraries, only, and not the harder challenge of building the day-to-day operational architecture of being able to hyper-serve consumers across streaming, gaming and e-commerce.
Plumbing also explains why that consistency was missing: The cash flows that allowed them to take on billions in debt was funded by their wholesale linear businesses. In the case of Disney and NBCUniversal, it also was funded by their theme parks businesses (and in the case of NBCUniversal, also by parent company Comcast’s cable and broadband distribution businesses). As I wrote in “Wall Street’s Expectations for Legacy Media Are Getting Weird”, the direct-to-consumer business requires a more sophisticated understanding of the consumer in the day-to-day operations of the business. The debt funding was never directed towards solving that in large because management did not understand the business
Plumbing vs. Scale
Hoffman’s framing of “poetry” mirrors Iger’s broad strategic worldview that fighting Clayton Christensen’s Innovator’s Dilemma is Disney’s necessary path to the future. An incumbent needs to “spend capital to generate long-term growth or adapt to change”, as Iger told his board in 2017 when pitching building out Disney+. So, Disney chose to spend billions to make its way out of the disruptive forces of streaming, and until March 2021 Iger looked prescient. The same logic seems to be behind the chatter at Disney around EA, which has an Enterprise Value of $34 billion.
But, Dan Carter’s framing of "poetry" highlights how big visions for retail first, consumer first futures simply are not feasible without solving for day to day operations of a retail first, consumer first business. A company simply cannot raise debt and not spend on the basics. I think Carter’s view is synonymous with Hulu employees in 2019, as The Information reported then:
“Hulu employees are worried that Disney will weaken Hulu by making it a subsidiary brand whose main purpose is to support Disney Plus in a bundle. Employees also worry that Disney will lay off Hulu’s marketing and customer acquisitions teams, losing expertise in those areas that Hulu has built up over the years, said current and former employees. And there are concerns internally about what will happen if Hulu’s technology infrastructure is moved to Disney’s BAMTech platform, they said. One Hulu employee said it felt like Disney+ was Disney’s baby, while Hulu felt more like the adopted child.”
That is a long list of important factors that Hulu employees did not believe that Disney could solve. Four years later those disconnects remain, as The Wall Street Journal recently reported:
“an effort to fold Hulu into Disney+ has been slowed by delays, according to people familiar with the matter. Some features designed to attract customers to a planned new Disney+ and Hulu bundle won’t be available when the Hulu tile within Disney+ debuts later this year.”
And yet, Disney continues its bet on poetry more than plumbing by sinking an additional $8.61 billion into Hulu, and considering a gaming business at a $34 billion enterprise value, or 10X the value of the cash it will have remaining (nominally) after buying out Comcast.
The Poetry of Gaming+Streaming
I think Carter’s perspective also captures how gaming companies like EA perceive Disney or Warner Bros. Discovery, which has a $2 billion dollar gaming business in WB Games. That business has had two hit games over the last two years: "Hogwarts Legacy” ($1 billion in revenue in 2023) and the free-to-play crossover fighting game “Multiversus”. The latter was a beta of the game that ended up being the biggest launch for a fighting game on Steam, the most downloaded game on the PlayStation store, and the most popular title on the Steam Deck. It would go on to amass 10 million players by August and 20 million by September 2022. But, it was not adding enough content at a consistent basis for players to stay interested, and the free-to-play monetization model was not strong enough to monetize those players. In other words, under Warner Bros. Discovery was not doing sufficient day-to-day "plumbing".
The company's plan is for a full release of the game in 2024 across PC, PS4, PS5, Xbox One and Xbox Series X|S. But, the purpose of “Multiversus” was much broader, as originally explained by former WarnerMedia CEO Jason Kilar told Recode’s Peter Kafka in 2021: “if you’re going to invest a lot of upfront capital in creating beloved characters in worlds, I think it’s only natural if you have the capabilities and if you have the skillset in terms of leadership and talent to be able to lean into telling those stories, both in a linear fashion with narrative storytelling but also an interactive fashion with gaming.”
The vision here is an entire ecosystem built around storytelling, so that consumers may stream their favorite content and then play games seamlessly across then-HBO Max and Multiversus or Hogwarts Legacy platforms. The plumbing of that ecosystem indeed needs the types of content libraries that can be consistently updated to attract fans. But the plumbing also needs to keep them engaged across platforms, and that requires one user login for all services. Warner Bros. Discovery still has yet to announce that.
My sense from both research and conversations is that gaming companies perceive Disney and Warner Bros. Discovery as both stuck in debt servicing. Neither management seems invested in solving for the plumbing of engagement. Nobody in gaming seems to believe these things need to mutually exclusive, but they appear to be when senior management have wholesale backgrounds and are not digital natives.
The oddity in all this is both Disney and Warner Bros. Discovery management teams are directionally right in their bullishness for the inevitable overlap between gaming and streaming. But, their execution, or "plumbing", has been a weird dance between good business instincts, debt service, and bad execution. More debt-fueled big swings won't help their businesses reach this next chapter. Smarter, more retail-savvy management willing to build the boring plumbing are necessary. They need the old guys to exit, first.