No research analyst on Thursday’s Q2 2022 earnings call asked Warner Bros. Discovery (WBD)management about whether YouTube and TikTok compete with them on premium content. Nor did anyone from WBD management mention YouTube and TikTok as competitive threats.
In a world where YouTube (135MM connected TV (CTV) viewers per month in the U.S.) and TikTok (~80MM monthly active users in the U.S.), increasingly are capturing consumer attention - and advertisers are shifting spend accordingly - the traditional linear TV definition of “premium content” matters less and less.
I wrote about one version of YouTube as competition in last week’s "The Office" Is Succeeding On YouTube, Less So on Peacock: “an entire new generation of viewers consume “The Office” by the algorithm, and clips and memes generate more word of mouth and engagement for the show outside of Peacock than the full episodes or the “super fan” episodes of “The Office” on Peacock.”
On Friday I wrote about another version: former WarnerMedia CEO Jason Kilar’s “for the fans” Medium post, which talked up the “opportunity to do something firmly focused on the fans, which is to provide choice.”
Both reflect an important tension between consumer choice and “premium content” that is worth fleshing out a little more, as it has been a theme in recent mailings. Ultimately, WBD and legacy media companies are promising these investors and analysts streaming growth, and neither side seems to understand they won’t be able to grow without engaging the “fans” across platforms.
The Paradox
I wrote last week that “The Netflix Paradox”, “'The Office' Paradox” or “The YouTube Paradox” is:
Streaming services have invested billions into exclusive IP libraries at a time where the value of IP is fragmenting across platforms;
The best business models for monetizing this IP should be PARQOR Hypothesis businesses because they centralize the value of IP and monetize it in multiple ways; but,
Without a centralized model for the IP, the YouTube ecosystem and algorithm may be more valuable to building fan bases for IP than the exclusivity of a “walled garden”.
We can frame this paradox in terms of growth: premium content has less value to the future growth of a media company than data on where, when and how consumers engage with “premium content.”
Kilar’s “for the fans” memo framed the choice for the consumer as: “to enjoy a great new movie out at the cinema, to open up HBO Max, or to do both”. Getting them onto HBO Max was key, as he later explained to Puck’s Matt Belloni, because it taught WarnerMedia two things:
A metric called “first views” - or the first thing someone who subscribed to HBO Max you substantively spent time with - which was “a good indication that this was probably what compelled” them to subscribe; and,
The metrics of how many watched the movie, because it was “an indication that you’re delighting customers each month.” (and if they didn’t watch anything, it was “a pretty good indication” they would churn out the next month).
Understanding how consumers choose between theatrical and streaming - and understanding which consumers did not see it as an either/or choice - was more valuable to WarnerMedia than delaying theatrical distribution until the end of a pandemic that did not have a predictable end date.
Kilar was laying out the parameters of a longer-term test: what could WarnerMedia learn over the pandemic about how consumers make choices to consume via streaming? What were the economics of those decisions?
It was also an acknowledgment that “fan” demand is inelastic across platforms and devices now, and aggregating data on this inelastic demand in a direct-to-consumer (DTC) business is more integral to building a growth strategy than premium content, alone.
Peacock & Long-Term Growth
B.J. Novak - who played Ryan Howard on “The Office” - outlined a much more complex world of choices for “fans” to Recode’s Peter Kafka: highlight clips on YouTube, memes on the Internet, or watching full episodes on Peacock. He reported fans told him they were opting primarily for the first two, which are free.
In other words, two years ago WarnerMedia was testing in the market what it could understand better about “fan” choice between watching a movie at home versus watching in a theater. Two years later, WBD, NBCUniversal and other legacy media companies must understand fan choice across theatrical, streaming, YouTube and TikTok.
New generations of “fans” may prefer the highlight clips to full episodes of the original content or full movies; and, perhaps more importantly, discover them more easily.
The challenge for these legacy media companies is platforms like YouTube and TikTok have exponentially more consumption of legacy media “premium” original IP across exponentially more formats. Therefore they have exponentially more data on what consumers want from “premium” original IP that the legacy media companies own.
How will legacy media companies grow when third-party platforms have a better understanding of what consumers want than they do? How will they compete for advertiser dollars on the power of “quality”, “premium” content when younger consumers increasingly turn to YouTube and TikTok for the same content in shorter form?
The North Star?
I think Kilar and WarnerMedia management were in the early stages of developing a roadmap towards solving this problem. My sense is the logic of the end goal looked and sounded like something Electronic Arts (EA) CEO Andrew Wilson told investors in its earnings call last week:
I think we're growing across platforms, we're growing across business models, and we're growing across geographies. And in a world where gaming is becoming more important to the lives of Gen Z and Gen Alpha, who will be the leading generation in terms of consumption, entertainment for the future, I don't think we could be in a stronger position as a stand-alone company.
When it describes “growth across platforms” it is describing growth for interactive games across Personal Computers (PCs) and tablets, mobile, and consoles (Playstation, Xbox). Streaming is also across PCs and tablets devices, mobile, and consoles, but it also includes CTV devices and Smart TVs. However, the growth engine is passive content consumption.
Like EA, any legacy media company would love to be able to tell investors and advertisers that they are growing across platforms, growing across business models, and growing across geographies. But they simply do not regard the DTC relationship as existentially as important as EA does because linear and theatrical generate more operating income, and DTC has yet to.
Conclusion
In February 2020, Jason Kilar and his team were about three months into the market launch of “Project Popcorn” when AT&T CEO John Stankey and then-Discovery CEO David Zaslav began discussing a merger of WarnerMedia and Discovery. In May 2020, they were about six months into “Project Popcorn”.
There was no guarantee that they could have ended up in the long-run with the growth story EA is telling investors, now. But, in broad brushstrokes, EA’s “growing across platforms, growing across business models, and growing across geographies” seems to have been the North Star towards which they were oriented (and, as Kilar told Peter Kafka last December, gaming was a big part of their long-term vision for growth, too).
Perhaps WBD management is right to be skeptical of a consumer-first strategy given the growing power of YouTube and TikTok with Gen Z and Gen Alpha. There simply may be few wins.
But if they believe they can still win and deliver growth to shareholders, they will need to aggregate data about the inelastic demand spread across platforms more than they will need to rely on “premium content”. The signals are telling us Gen Z and Gen Alpha prefer the algorithm to the app, and selling them a destination for "premium content" doesn't answer that need.
Must-Read Monday AM Articles
[Author's Note: I have hyperlinked certain themes to specific past mailings where I first defined and discussed them]
* WBD disclosed in a regulatory filing Friday that it has taken a $825 million writedown on content following the merger, including a $496 million impairment on content, as well as content development writeoffs of $329 million.
* Research finds the names HBO and Discovery “do mean different things to different people,” and that might create a challenge.
* A good piece on this question from Cynthia Littleton in “‘Batgirl,’ David Zaslav and the End of Streaming Evangelism in Hollywood“
* There seems to be “a great deal of misinformation and conjecture floating around” about the future of WBD’s animation division
* The Entertainment Strategy Guy also wrote about growth “It's Still All About the (Much Lower) “G”
The Vibe Shift
* Disney’s bungled response to a controversial Florida bill has raised difficult questions for its LGBT+ fans
* The Wall Street Journal reported new details on Netflix’s pivot to advertising ($ - paywalled). Netflix insiders described to Insider a culture shift to 'fear-based' decision making ($ - paywalled)
* Are Sony and Fox proof “streaming is a business to avoid”? And an excellent post from former WarnerMedia executive Doug Turner arguing that for most of the media companies, 20% the margins of streaming “are out of reach”
* Sonny Bunch argues “Streaming Is a Black Hole of Financial Loss”
* Why these shifts towards algorithmic feeds over friend feeds make sense.
The 200 vs. The 10 Million
* A new LG ads survey found 76% of surveyed consumers found ad breaks on FAST channels shorter than those on cable or satellite TV. Not only are ads shorter, 69% of respondents felt FAST ads were of higher quality and more relevant to their interests.
Aggregator 2.0 & Bundles
* Samsung announced that it’s bringing more than 250 games to the Samsung Gaming Hub through the Amazon Luna streaming-based gaming service, and will make these titles available on its 2022 Samsung smart TVs and M-series smart monitors.
* Apptopia estimates an average of 1.7 million people are engaging with Netflix games daily, less than 1% of Netflix’s 221 million subscribers
Sports & Streaming
* England’s victory over Germany in the UEFA Women’s Euro 2022 final attracted a peak audience of 17.4 million on the BBC and 5.9 million streams on digital platforms. The previous record-holder, England’s 2019 World Cup semi-final defeat, was 11.7 million.
* Electronic Arts is already preparing for its post-FIFA future, and announced a new deal with Spain’s LaLiga
* DirecTV will carry Amazon’s broadcast of “Thursday Night Football” to commercial establishments, including bars and restaurants, this NFL season. Amazon is planning to offer different, simultaneous feeds in Thursday Night Football in an effort to reach Prime Video viewers who might not be typical NFL fans. ($ - paywalled)
Creator Economy, Platforms & Transparency
* ESPN is adding a Peloton fan favorite instructor, Jess Sims, to its “College GameDay” roster.
* Triller, a TikTok rival, promised millions to Black creators. Now some are deep in debt. ($ - paywalled)
* Facebook is shutting down its live shopping program and shifting its focus to Reels ($ - paywalled)
Original Content & “Genre Wars”
* The showrunner for the cancelled lesbian teen vampire drama “First Kill” complained about Netflix’s marketing of the show.
* Roku is set to release a live capture of the West End stage show “Heathers: The Musical” as a Roku Original special on the Roku Channel
* Why Did Netflix Sue the ‘Bridgerton’ TikTok Musical—but Not MrBeast’s YouTube ‘Squid Game’?
* Prime Video unveiled two Nigerian originals, the first creative results of a series of recent deals as part of an aggressive push into Nigeria.
AVOD & Connected TV Marketplace
* Wall Street seems worried about the near-term prospects for Roku. CrossScreenMedia’s Michael Beach dove into the data in “Can Roku Change The Channel After Q2 Earnings?”
* Mike Shields argues that, when Roku and YouTube struggle amidst a supposed gold rush for CTV inventory, that should tell you something
* Warner Bros Discovery has a new ad sales executive team
* Roku’s best ROI may be its buttons on its remotes, and lower platform sales hurt this ROI.
* Roku’s What to Watch recommendation engine can’t compete with Fire TV and Google TV
* Roku will launch Paramount+ as a premium subscription within the Roku Channel later this month, including a dedicated TV guide for all Paramount+ live content — its first for a premium partner.
* Apple is building a demand-side platform
Other
* UK’s data watchdog assesses a complaint on ways online gambling firms profile and target problem players ($ - paywalled)
* A good post on Marshall McLuhan’s “The Medium is the Message” in 2022:, I Didn’t Want It to Be True, but the Medium Really Is the Message