PARQOR is the handbook every media and technology executive needs to navigate the seismic shifts underway in the media business. Through in-depth analysis from a network of senior media and tech leaders, Andrew Rosen cuts through what's happening, highlights what it means and suggests where you should go next.
In Q4 2022, PARQOR will be focusing on four trends: this essay is on the theme, "Linear channels seem doomed. What happens next?"
The Twitter story has played out as a funhouse mirror on the media industry, perhaps in part because it is a media company in certain ways. Meaning, applying Twitter as a mirror on happenings at other companies may unfairly amplify or downplay what is going on within those companies, but the exercise also may reveal some hard truths.
This thought was inspired by this line in Twitter founder Jack Dorsey’s apology tweet to Twitter staffers: “I own the responsibility for why everyone is in this situation: I grew the company size too quickly.” It’s a concession of “bloat” at Twitter — the excessive number of employees and inefficient corporate bureaucracy (“2500 coders doing at least 100 lines per month” that emerged in discovery for the Twitter v. Musk case) that companies take on for reasons both intentional and unintentional over the years. It’s a point reinforced by new owner Elon Musk tearing apart Twitter’s corporate structure and software code in order to build a new product, laying off 50% of workers.
The thought also was inspired by the comical back-and-forth between Musk and the advertising community, who are seeking the types of guarantees for brand safety that legacy media companies have long guaranteed, even in the face of digital disruption.
Both suggest that Twitter “needed” its bloat to keep investors happy (7,500 employees and $5B in annual expenses supporting $5B in annual revenues), and it “needed” a brand safety story to keep large advertisers happy (who spent very little of their budgets on Twitter, but made up 85% of Twitter’s advertising revenue as of 2020). However, neither drove growth, and the business was unable to evolve because it was constrained by this bloat (NOTE: Dorsey also was constrained by his decision to be CEO of two public companies).
Applying the Twitter funhouse mirror to Q3 2022 media earnings, a provocative question emerges: Is any publicly-owned legacy media company positioned to evolve?
Key Takeaway
The Twitter funhouse mirror tells us that public markets implicitly believe legacy media businesses may be better off going private or becoming subsidiaries of much larger companies
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Every public legacy media company is saying they are positioned to evolve, and they point to both streaming subscriber growth and unquantified growing advertiser demand for ad-supported streaming inventory. But they also are not taking drastic steps to evolve, anything akin to Netflix launching an ad-supported tier seven months after Co-CEO Reed Hastings’ “unscripted move” to announce the service on the Q1 2022 earnings call.
They also face Wall Street skepticism about the value of subscriber growth. Wall Street investors now demand Average Revenue Per User (ARPU) growth and profitability. They are also asking legacy media companies to be more aggressive in their post-linear vision and figure out how to charge millions of credit cards multiple times. But, as I wrote on Monday, “Legacy media management understands DTC business models better now (and certainly does not dismiss them). But there is still both management and investor resistance to an objective opportunity to increase consumer ARPU with credit cards on file.”
So what should they do?
Applying the Twitter funhouse mirror to Warner Bros. Discovery and Disney reveals some hard truths.
Warner Bros. Discovery
Warner Bros. Discovery CEO David Zaslav is tearing down the corporate structure of WarnerMedia he inherited, and rebuilding it with aggressive promises to investors of greater savings and more efficiency. He told investors last week: “We are fundamentally rethinking and reimagining how this organization is structured and we are empowering our business unit leadership to transform their organizations with Warner's mindset and a view on quality and accountability. And you see this reflected in our numbers and some of the strategic decisions we are making.”
But 100% of WBD operating income relies on its linear Networks business — the forté of Zaslav and his management team — and that faces declining revenues from affiliates due to cord-cutting and a slowdown in advertising. Streaming, which lost $634MM in the last quarter alone and Studios (its theatrical and licensing business) almost netted each other out ($762MM in operating income).
So Zaslav is saying there is bloat for its linear business, but he’s also arguing that the management team that specializes in linear businesses is also the team to build out WBD’s next chapter. I’ve long questioned this argument, most recently in “The Subscriber Is and Isn't "A Hollow KPI":
Warner Bros. Discovery management simply does not buy into the DTC model. They don’t believe they need to always own the consumer relationship.
Wall Street's demands for ARPU suggest that it will indeed need to always own the consumer relationship. WBD betting on distribution on third-party platforms like Netflix or YouTube Primetime Channels – which don't offer syndication models or guaranteed recurring revenues– is betting on the commoditization of its library, which offers few if any long-term returns.
The question is what a reimagined Warner Bros. Discovery will look like. There’s no question it will need to be different and streaming will be a core component of its business model. But, as I noted back in May, “WarnerMedia management envisioned HBO Max and Multiversus, a free-to-play platform fighter game that now reaches more than 20 million players, as complementary forms of narrative storytelling that fans of Warner Bros. and DC will readily spend more to access.”
And Zaslav and his team have openly rejected that vision. So, Zaslav and his team are in a similar position to Elon Musk and the Space X engineers who have joined him to re-engineer Twitter. But they are also unlike Musk and his team because Zaslav and his team are not software engineers, and they have rejected the previous vision of WarnerMedia software engineers (former CEO Jason Kilar, former HBO Max Head Andy Forssell and former CTO Rich Tom).
So, it’s hard to imagine that Warner Bros. Discovery will come out of this process substantially changed, both given how heavily the business relies upon linear for its operating income, and how Zaslav and his team are not software engineers (including streaming and games head JB Perrette).
The Twitter funhouse mirror suggests that this management team has the wrong strengths and wrong skillsets to pull a directionally “right” vision.
Disney
CEO Bob Chapek is doing the opposite of tearing down: he is maintaining the current structure of Disney while pushing to unite personal data behind its parks and streaming services. It’s a vision premised on his experience in Parks as a direct-to-consumer business, as I wrote back in September:
“The implication from recent Disney’s recent “Disney Prime” push is that there are opportunities for more revenues to be extracted from Parks visitors. Also, as CEO Bob Chapek told Ryan Faughnder of The Los Angeles Times, “Disney Prime” Virtual Reality and Augmented reality can open the door to the ninety percent of Disney consumers around the world who will never have a chance to experience Disney parks in person.”
He is also promising investors that their streaming bet — which lost $1.5B in last quarter alone — to turn a corner soon: “Building a streaming powerhouse has required significant investment. And now with its scale, incredible content pipeline and global reach, Disney+ is well situated to leverage our position for long-term profitability and success” by fiscal 2024.
But, like WBD, its relies heavily on linear networks for positive operating income ($1.74B), and its losses in streaming are weighing on the business. Perhaps “Disney Prime” changes that equation, driving up ARPU. There’s a live experiment on Disney+ with shopping as we speak. That’s certainly the intent. But like WBD’s promised revamp of HBO Max and FAST offering for early 2023, it’s in its early stages.
So the logical answer to whether it is positioned to evolve is “Not yet.” Investors aren’t yet sold (the stock is down 13% today). Chapek logically makes sense as a CEO to push Disney towards a bigger, more ambitious vision of Disney “as a service”.
Applying the Twitter funhouse mirror to the aggressiveness of Chapek’s vision and the incrementalism of its execution, his vision fairly and/or unfairly seems too safe.
Lessons from the Twitter funhouse mirror
The obvious question that the Twitter funhouse mirror raises is whether Disney or Warner Bros. Discovery should be acquired or even taken private. The rumor mill for Disney’s acquisition has already begun with Apple as the rumored potential acquiror. Its current market cap is $158B so a merger is more likely.
But the issue is not whether Bob Chapek’s vision is feasible — all signs suggest that the best business models in digital media business models rely less on streaming and more on monetizing the same user in multiple ways. So Chapek's vision seems true, and we are very much in the early stages of that model emerging outside of Apple and Amazon.
Rather, the real question for Disney is whether Chapek’s vision can capture the confidence of investors in the face of recessionary headwinds. Today, the answer appears to be “No.” If it can’t, and nothing else can, that puts Disney management in a difficult position while holding a strong portfolio of assets.
As for WBD, Zaslav and Musk seem to find themselves in very similar situations: they are both trying to reduce debt and reconfigure the fundamentals of their businesses. Except, Musk told advertisers on a call today that he and his team are rewriting the tech stack entirely, and moving towards a payments-first model – Zaslav’s update to investors offered much less aggressiveness in vision (it is more aggressive in cost-cutting) and also much less clarity.
Meaning, the Twitter funhouse mirror suggests that Zaslav and his team may be cutting bloat, but they aren't building. In some ways, it suggests that their roadmap may be too safe. It seems counterintuitive the market believes that these media businesses need to be reoriented towards the consumer beyond streaming, and Zaslav’s efforts are well-intentioned but misaligned with where investors foresee the models delivering ARPU and profitability.
Overall, the Twitter funhouse mirror tells us that public markets implicitly believe legacy media businesses may be better off going private or becoming subsidiaries of much larger companies. That it’s not just “bloat” that’s the problem but rather the growth that public markets want to see is not the type of growth that these companies can deliver.
WBD’s market cap is $23B and Disney’s is $88B at a time when interest rates are near 6%. It’s hard to imagine a debt-funded acquisition of either of these businesses (as David Zaslav recently told a WBD town hall ““We are not for sale”).
Wall Street seems to be telling us it shouldn't be out of the question.