In Q2 2023, PARQOR will be focusing on three trends. This essay focuses on "Media companies have millions of consumer credit cards on file. What are they building for their customers?"
To remind you, PARQOR identifies a few key trends each fiscal quarter that reveal the most important tensions and seismic shifts in the media marketplace. Must-read stories or market developments are not always obvious from press reports or research analysis, and often require a deeper dive. PARQOR’s analysis questions established ideas and common wisdom, reassesses the moving pieces, and reveals the potential in the media marketplace in 2023.
In Monday's essay, I concluded that “media companies face an existential need to refine and evolve their value propositions around narrow affinities. But to do that, consumer behavior and economics requires the companies to split off the consumption of ‘general entertainment’ from linear and subscription models, and sacrifice scale.”
Meaning, audiences can get Hollywood movies and TV series across a wide variety of paid and ad-supported services, and they are increasingly turning to Free ad-supported TV services (FASTs) for the same value proposition that subscription services offer.
Lately, Disney CEO Robert Iger and WWE CEO Nick Khan have been making the case that the best value proposition for consumers is relevancy: libraries built to complement core franchises and brands like Marvel or Star Wars on Disney+, or WWE and English Premier League content on NBCUniversal’s Peacock. Parrot Analytics calls this “affinity”, or overlap that exists between the audiences of different series.
In other words, if one agrees with these predictions, the streaming services most likely to succeed in the future will understand their subscribers and hyper-serve those audiences with relevant content and advertising. In that model, a streaming executive’s role is less about building out big libraries, and more about identifying third-party content to license or produce that pairs with core franchises and brands (and Khan (unashamedly) suggested the secret sauce is starting with content 52 weeks per year like WWE, which produces live events and seven hours of original weekly programming).
But “bigger is better” was the sales pitch that Warner Bros. Discovery executives delivered yesterday with the renaming and relaunching of an app combining HBO Max and Discovery+ libraries. They have called it “Max”. Warner Bros. Discovery CEO David Zaslav told event attendees, "Max is the one to watch because we have the largest TV library in the world.” They are betting that “Dr. Pimple Popper” and “Fixer Upper” will be relevant to audiences who watch recent HBO hits “Last of Us” and “Succession”.
So Warner Bros. Discovery is openly embracing “bigger is better” at a time when both consumers and advertisers seem to be telling media companies “relevancy is better”. That move raises a fair question: does relevancy translate into a successful business model in 2023?
There is also a deeper, underlying question that needs to be answered first: what is “relevancy” as a business model in 2023?
Key Takeaway
It makes sense why relevancy-driven streaming models are appealing to the likes of Disney and NBCUniversal. But it also makes sense why companies like Warner Bros. Discovery are hesitant to make that pivot.
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FASTs & Relevancy
I believe the growth of FASTs — Tubi and Pluto TV are now showing up in Nielsen’s The Gauge of total TV and streaming consumption — is the key development that explains why relevancy is more important in streaming. It is bringing both good news and bad news to the streaming market.
The good news is that media companies no longer are required to license third-party content for streaming, which is often an expensive and variable cost reflecting residuals. Effectively, FASTs have assumed the risk of a variable cost — third-party licensing, normally billed based on a rate card — and made it more cost-effective through ad revenue sharing. Warner Bros. Discovery recently embraced that model, licensing 2,000 hours of content to Roku — including titles like “Westworld”, “The Nevers” and “Legendary” — on 14 Warner Bros.-branded FAST channels. But, it also seems to be rejecting that model in selling “the largest TV library in the world.”
With “bigger is better” no longer the best objective, streaming services must do more than simply have enough titles. They need to have the “right” complementary titles, robust first-party data, management skilled with data-driven decision-making and a platform built around algorithmically-driven content delivery.
And that’s where the bad news comes in: all legacy media streamers operationally and financially oriented themselves around the business objective of larger libraries than the objectives of competitive software or competitive first-party data. Robert Iger has been quoted in The Wall Street Journal going so far as rejecting personalization: “I think if people are clicking on Mickey Mouse, they mostly want Mickey Mouse.” Only HBO Max under WarnerMedia management was openly iterating towards greater personalization before, and Warner Bros. Discovery rejected that strategy soon after taking over.
At yesterday’s event, JB Perrette, Warner Bros. Discovery’s global streaming and games head, announced a new interface for Max that will include personalized recommendations and a new content navigation system. But, Warner Bros. Discovery also will keep the Discovery+ app as a stand-alone streaming service, “part of an effort to avoid risking losing a significant chunk of the app’s 20 million subscribers who might not want to pay the higher price to access that content”. That means Warner Bros. Discovery is solving for growth churn across multiple apps and multiple target customers. That seems complicated.
Relevancy as a business model
Relevance is not a new concept to the media business — programming schedules from Thursday night "Must-See TV" to the Super Bowl have long been curated to ensure fans of a particular show stick around to watch another show.
But, the software-first (now Artificial Intelligence-first) algorithm-driven models of Hulu, Netflix and YouTube have fundamentally changed the math of that model, fragmenting programming decisions from half-hour blocks of a particular moment into real-time programming recommendations. As I wrote last 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.” The model is sophisticated from a software perspective and Hulu, Netflix and YouTube have been built by the most elite engineers in the marketplace.
They also have been built off of 15 to 25 years of robust data on consumers engaging directly with these services, an outcome legacy media companies have actively avoided in order not to upset their cable network distribution partners (who own those relationships in TV households). These are fundamentally different businesses requiring fundamentally different economics and different management skills from legacy media.
That said, the business models of relevancy that Iger and Khan are describing are similar and much narrower in scope: those are less about building larger libraries and more about curating more hits that are relevant to subscribers (a.k.a., being more like linear programming schedules). It is easier written than done, but the model is less complicated from a technological perspective: the curatorial savvy of management (e.g., NBCUniversal investing in “Yellowstone” and WWE) trumps what an algorithm may dictate as optimal for a subscriber.
A relevancy model will still have to rely on algorithms — meaning, Peacock should be better at distinguishing which consumers should be marketed the English Premier League after WWE and which consumers should be marketed “Yellowstone”. But the robust sophistication of a Hulu, Netflix or YouTube seems unnecessary in a relevancy model.
Management Age & Relevancy
On this point, a recent Ankler piece, “Everyone Who Ran Hollywood Used to be Young. What Happened?” raised an important question: “Has the quality and pool of younger executives deteriorated and shrunk or is this a singular moment when a generation — mostly baby boomers — simply refuse to hand over the keys?”
I would rephrase that question: Is the model of relevancy the best objective for these streaming services? Or is it the only model that linear executives with little to no career experience in digital can deliver in 2023?
The Ankler piece has a good answer to this question from Stephen Galloway, the Dean of Chapman University's Film School:
“the size and complexity of these companies today… makes it incomparably harder to navigate than the studios and network system of old when people could do it with far less experience… These companies not only have so many tentacles but they’re dealing with lobbyists, the sensibilities of foreign countries like China and Saudi Arabia, the culture war, and things like exchange rates which are all immensely important. It takes massive experience to learn about all of that and a rare skill to be able to handle it. When you’re looking for people at the pinnacle there are very few who actually have the skills to do these jobs. And the money at stake today is so great that the boards (of these companies) want to play it safe.”
The fact that media conglomerates are complex businesses that require multiple skillsets beyond digital is a fair point. Former WarnerMedia CEO Jason Kilar seemed to have learned this the hard way. But, the previous model of scale is disappearing and there is general agreement that streaming is here to stay. That would suggest relevancy as a business objective is A solution, and an important solution, but is not yet THE solution.
Relevancy & Debt
This brings us back to Warner Bros. Discovery, which is zigging where everyone else is zagging and emphasizing scale over relevance is its $48 billion in debt. There is a simple explanation for this: all this complexity has led to a burdensome debt load for which it needs cash to pay down.
Streaming has been a loss-leader ($2.3 billion in EBITDA losses from streaming in 2022) and streaming revenues are not replacing lost linear revenues on a one-to-one basis. Warner Bros. Discovery is in a place where it needs to maintain both debtholder and investor confidence in the business: A shift towards an unproven model of relevancy and the smaller scale it should deliver will do more harm than good to that confidence.
Investors and debtholders are demanding more profitability and cash flow. The objective of delivering relevancy over scale may ultimately deliver that cash flow, but the needle to thread in that story is scale. At 20 million subscribers, Peacock does not help to tell that story even if it may be the new standard-bearer for a relevancy-driven model.
There is no precedent for Warner Bros. Discovery to point to say “we are better off pivoting to relevancy”. To keep its investors happy (and the stock has dropped 6% since the presentation), it is better off selling investors and debtholders on scale even if the best model lies elsewhere.
Delivering Relevancy
The ultimate question is, why would pivoting to delivering relevancy be a financially savvy decision?
It is a smaller business model because it relies on fewer titles. There is no clear path to return on investment and if WWE CEO Nick Khan has his way, the cost savings from no longer licensing larger libraries will be eaten up by the WWE and other licensed content providers who understand their unusual worth to a relevancy-driven ecosystem. That rationale underpinned the recent WWE merger with Endeavor and UFC.
So, it makes sense why relevancy-driven streaming models are appealing to the likes of Disney and NBCUniversal. But it also makes sense why companies like Warner Bros. Discovery are hesitant to make that pivot. This may be why we are currently *hearing* more about relevancy as a solution than being presented with the details of actual successful models beyond Hulu, Netflix and YouTube.