In Q2 2023, PARQOR will be focusing on three trends. This essay focuses on "The definition of scarcity is continuously evolving away from linear and towards walled gardens."
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.
The question I keep finding myself coming back to after last Monday's essay is, what if WWE CEO Nick Khan is right?
What if WWE content is a better "glue" for tying together NBCU's most expensive investments in streaming ($22.5 billion in content spend overall, $3 billion on Peacock) than NBCU’s broader content strategy for broadcast, linear and Peacock? Because, as I wrote last Thursday, Khan seems to be reinforcing Disney CEO Robert Iger’s concerns about the future of “general entertainment”: media companies are better off investing in content that matches the affinities of the most passionate and engaged consumers.
Khan has delivered a message that is both helpful and unhelpful for NBCUniversal. It is helpful in the sense that he has highlighted how intelligent NBCUniversal management was in investing $1B to host the WWE Network on Peacock. The WWE Network on Peacock delivers all premium live events, including WrestleMania, scheduled programming and a video-on-demand library. So WWE fans — which Khan has said are “a significant number of Peacock’s paid subscribers” — have content options 52 weeks per year.
It is unhelpful because it implies that Peacock has few other offerings that engage its subscribers 52 weeks per year across other expensive investments like “Yellowstone”, and the English Premier League ($2.7 billion estimated over six years). Now, we don’t know whether that is true or not given NBCUniversal's opaqueness with Peacock data, but it would not be an unreasonable implication given Peacock’s struggles to scale its paid subscriber base until 2022.
Key Takeaway
The oddity of Upfronts in the streaming era is that bigger is not better, and that doesn’t make much intuitive sense in a media business whose entire foundation is scarcity.
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That’s not the story a streamer like Peacock wants to tell heading into upfronts. Peacock has a success story, but to advertisers it may be a narrow success story: Upfronts are about scarcity or linear distribution model’s historical moat — the linear model enabled cable networks to aggregate millions of households locally, regionally and later nationally. This scarcity — which is shaped by whether a media company can connect the dots across consumer affinities — is narrower.
For example, let’s say that Khan’s meaning of a “significant number” of subscribers is 25% of Peacock’s 20 million subscribers or 5 million. What is the scarcity that advertisers are buying from NBCUniversal at Upfronts?
The short answer is, we don’t know. NBCUniversal recently said that Wrestlemania delivered Peacock’s “highest weekend usage ever and generated the most hours watched of any live event on Peacock with the exception of the Super Bowl.” That Super Bowl data point was an average streaming audience of 11.2 million viewers across 6.0 million devices on Peacock and the various other NBC and NFL digital platforms.
The reasonable assumption is that if Peacock was 50% of those 11.2 million viewers, that was 5.5 million viewers and so it would not be unreasonable to assume that NBCU is saying 5 million viewers tuned into Wrestlemania 39.
The challenge for NBCUniversal at upfronts with this story is, what exactly is the story? The traditional story is that 5 million should reflect scarcity. But the 2022 Super Bowl reached over 112 million total viewers, including the 11.2 million digital viewers, above. Peacock reaches 20 million subscribers monthly. 5 million viewers is niche, competitively speaking.
What is the deal with Upfronts?
Khan is implying — albeit unintentionally — that the best bet for an advertiser is to programmatically buy connected TV inventory that targets WWE viewers, Yellowstone viewers, and English Premier League viewers. But that’s a small audience according to Nielsen’s most recent The Gauge, its measure of total TV and streaming consumption in the U.S. per month. Assuming YouTube has nearly 100% reach (135MM Connected TV device users per month) and it had 7.9% of all consumption in February, Peacock had 17 million Connected TV viewers because it had 1% of all consumption.
In part that is not a story about reach. But NBCUniversal still has networks like NBC, USA Networks and Bravo which are all in the top 30 most-watched TV networks. NBCUniversal can still do well at upfronts by packaging video-based ad inventory across multiple channels and platforms, which is increasingly the tactic pursued by networks to retain advertisers.
But streaming presents a real challenge to scarcity, as Brian Wieser, former Global President of Business Intelligence for GroupM, succinctly summed up in a recent Madison and Wall newsletter: “Most streaming services will be primarily ad-free, and as those who sell advertising will mostly be constrained in terms of their ad loads by the nature of watching on-demand programming, [and therefore] it will be harder and harder for advertisers who rely on television to satisfy their reach-based goals.”
Simulmedia founder and CEO Dave Morgan agreed with the substance of Wieser’s concerns and warned NBCUniversal and others in the TV industry that being able to connect the dots across big properties like WWE and "Yellowstone" is not enough. If companies like NBCUniversal only invest in prime-time shows and sports, they will lose both their ability to uniquely drive massive daily reach *and* their ability to price up the entire package of programming and viewing time, not just their hit shows. In other words, the value of the WWE to NBCUniversal may be as fatal to its future as it is valuable.
Bigger is not better
That is why I can’t let go of Khan’s sales pitch. It succinctly captures the oddity of Upfronts in the streaming era: Relevancy is better, but bigger is not better, and that doesn’t make much intuitive sense in a media business whose entire foundation is scarcity.
If Khan is right —and even with reasonable doubt I believe he is — something is fundamentally wrong with the Upfronts model in 2023: the WWE, the English Premier League and “Yellowstone” are the best properties that a media company can have in 2023. Their business model may rely less on the scale of their viewership and more on the extent to which NBCUniversal can identify the most valuable constituencies within its ecosystem, and maximize revenue from optimally targeting relevant ads to these constituencies. It is doable, but also requires a sophisticated advertising business that looks more like Amazon's or Meta's than NBCUniversal.
But if Khan is wrong or even lying for the sake of a long-term negotiation tactic (WWE’s merger with Endeavor was announced a few days after the interview with Khan), something is also fundamentally wrong with Upfronts in 2023. Because as Robert Iger has argued about the broader “general entertainment” category of content, it is no longer a competitive advantage to have a broader library of content to monetize consumers.
Consumer demand is fragmented across (1) linear — 60 million homes in the U.S. being served by cable networks, and more than 80 million if we include satellite and virtual cable networks — (2) subscription services — both subscription-only and ad-supported — and, (3) now on free ad-supported tv services (FASTs) like Pluto TV and Tubi, both of which have recently surfaced on Nielsen’s The Gauge. From a profits perspective, the best business model for "general entertainment" increasingly lies in FASTs and less and less in the expensive models of content licensing and syndication rights.
That’s the twist: Khan is right even if he is wrong. There is no “scarcity” in the traditional sense for NBCUniversal in streaming, even with a success like Wrestlemania or the Super Bowl. 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.
Historically, “bigger” happens when a media company understands which content its subscribers wants, and makes the investments that keep the most active subscribers engaged. But, in the precedent of Upfronts' past, that still may not be big enough for advertisers.
Must-Read Monday AM Articles
* Mediapost's Joe Mandese argued "Maybe it's time to scrap ratings altogether, and just use the number of people who watched a TV show?"
* Nick Khan spoke to OutKick to discuss the merger with Endeavor: what it means, how it came about, what to expect, and more:
* How The Masters Became A $150 Million Annual Business
* The Hollywood economy is reeling as streaming can’t turn a profit and residuals disappear for writers and actors.
* New research from Aluma Insights finds adult SVOD viewers spend half their streaming TV time watching apps on smart TVs, up from 31% in 2015.
* Analysts seem to agree Netflix will evolve its live-streaming business beyond comedy.
* Amazon Studios is a "a confusing and frustrating place to do business"
* Diamond Sports missed rights fees payments to the Cleveland Guardians and the Minnesota Twins and entered a 15-day cure period to make the payment without penalty.
* Recently fired Marvel Chairman Ike Perlmutter gave a rare interview to the Wall Street Journal with his honest take on the current state of Disney ($ - paywalled)
* Cinema admissions haven’t recovered sufficiently to cure the hangover of financial distress left in the wake of Covid-19 ($ - paywalled)
* A Digiday interview with Epic Games boss Tim Sweeney reveals how he "would rather marketers show up in his games in ways that enrich those experiences"
* Christopher Grimes of The Financial Times asked, "Can Warner Bros Discovery win back Hollywood?" ($ - paywalled)
* A Netflix Basic with Ads user wrote on Slate about being happy with the service. Related: MobileDevMemo's Eric Seufert wrote about "Netflix, Disney+, and the ad-supported streaming calculus"
* It looks like US consumers are about to enter a massive refresh cycle on the TVs in their homes.