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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 is focused on in Q4 2023. This essay covers "the less-discussed lens on how the demand for “premium content” is being redefined by creators, tech companies and 10 million emerging advertisers" and "In the shift from wholesale to retail models, there are many business models that delight consumers but no single, dominant one."
On December 6th, Disney launched the beta version of its integration of Hulu into Disney+. It is exclusive to subscribers to its Disney+ bundle, and the full integration for all Disney+ subscribers will launch in 2024. The service now sits as a sixth tile in the Disney+ app in the U.S., much like its Star service in a subset of countries where it operates.
The move is a bet on BAMTech as the primary back-end of Disney+ and not Hulu. That is surprising given that former Hulu and WarnerMedia CEO Jason Kilar argued in October the platform could be the back-end of “a digital everything product” for Hollywood.
It is also surprising given Disney paid $3 billion for BAMTech, but owes at least $8.61 billion for Comcast’s minority stake in the service—which it was contractually required to pay on December 1st—after Comcast exercised its option to sell. There is now a negotiation with Comcast for the final value of Hulu, and Disney may be on the hook for an additional $4 billion and “$5 billion or so”.
A third reason this bet on BAMTech is surprising is that in 2023, the Hulu standalone app gained subscribers in the U.S. in Q2 and Q3 while Disney+ lost subscribers. So, Hulu should be the better bet as a growth engine in the U.S. or internationally because its technology offers better “plumbing” for Disney’s streaming business model. It seems to be the safer, more dynamic bet for delivering shareholder value. Instead, Disney is integrating the Hulu library into Disney+ and some of its technology, but not as the standalone platform for its retail-first, consumer-first future.
This strategy now seems especially questionable in light of Netflix’s recent release of viewership data “What We Watched”. As I argued last week, the move was a statement to post-strikes Hollywood that it has set the standard for a successful streaming business model and is now evolving past it. That roadmap raises the question why Disney assumes consumers will pay for access to libraries (Disney+) instead of user experiences that delights them with relevant and interesting content recommendations from a library (Hulu).
Key Takeaway
If we believe Netflix’s report was a signal from the market leader that streaming’s value to consumers is about to flatten, then BAMTech is the wrong platform for its retail-first, consumer-first digital media future.
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Total time reading: 5 minutes
What is any media company selling access to?
I argued in October’s “Reconsidering Streaming's Subscription Models”:
“...when media CEOs like Disney’s Robert Iger and Paramount Global’s Bob Bakish beat their drums that ‘Streaming is the future’, they may be correct in their bullishness that consumers will continue to stream movies and TV shows over the internet in the long run. But, the growing challenges they face with churn suggest that a subscription is the wrong pricing model.”
I offered an updated version of that quote in AdAge last week: “The challenge in streaming is not that people don’t need streaming services, but they don’t have a need for one 12 months out of the year. That’s the thing that [media companies] are learning.”
Churn is the metric that has traditionally captured the dynamics of this problem. But, my quote reflects how Disney and its fellow legacy media companies have built models that incorrectly defined customer lifetime value (LTV)—the estimate of the average revenue that a customer will generate throughout their lifespan as a customer—because they assumed content libraries are valuable to consumers all 12 months in a year. Rather, Nielsen’s weekly Top 10s for Disney+ and Hulu reflect a “power law”: a handful of titles are watched for more than 100 million minutes, and the rest have lower consumption. Whereas, all ten of Netflix’s titles for the same week (ending November 19, 2023) had over 250 million minutes of viewing. The demand for Disney content is there but it is niche relative to Netflix.
The Nielsen data makes the case for Disney to integrate Hulu’s library instead of betting on its tech: In a world where the two apps are integrated, seven out of the 20 titles had over 100 million minutes of consumption. However, only one title—”Loki” on Disney+—had more than 250 million minutes of viewing.
The data raises an important question: Streaming over the Internet indeed may be the future of content distribution. However, a key lesson of 2023 is consumers do not always value this content enough to pay a recurring monthly subscription fee without churning out. As I highlighted in “Reconsidering Streaming's Subscription Models”, models like premium video-on-demand (PVOD) capture this reality. In PVOD, Disney may charge as much as $25 to rent a film for 48 hours and $30 to buy a movie as little as 17 days after theatrical release. The model delivers outcomes not much different than a user churning out after two to three weeks, or in terms of LTV, a consumer who will not stick around for 12 months and may not be worth more than one month per year. But, the pricing of the model delivers 5x to 6x the return.
After “What We Watched”
Netflix’s recent release of viewership data “What We Watched”—a statement to post-strikes Hollywood that it has set the standard for a successful streaming business model—presents two challenges to Disney’s bet on Hulu’s library on Disney+ as its future instead of Hulu’s platform. As I argued in “Can Netflix Evolve After ‘What We Watched’?”, the most important takeaway is arguably that, to date, Netflix has made it seem audiences will pay for access to large libraries of content. But, really they will pay for access to technology that curates and makes it easy to consume personalized recommendations from a large library of content.
In other words, the LTV in the subscription model is more the product of access to a consumer experience around a library than just the library. In this light, BAMTech is a library-first solution at a time when Netflix’s data and legacy media’s struggles in streaming both have proven that consumer demand for libraries is only part of the equation.
I also argued last Thursday that “What We Watched” may be a distraction from Netflix’s growing need to adapt to rapidly changing consumer behaviors. Storytelling is being reshaped by the internet—gaming in particular—and therefore what audiences will want 18-24 months from now will be substantially and sometimes radically different. Netflix’s recent iterative moves into gaming (“The Grand Theft Auto Trilogy”) and livestreaming sports reflect how its platform is unusually adept at evolving into these new models. However, “The Innovator’s Dilemma”—the strategic dilemma where an incumbent needs to “spend capital to generate long-term growth or adapt to change”—suggests success is not guaranteed.
The irony of Disney’s bet on BAMTech over Hulu is that it reflects Iger’s belief back in 2019 that BAMTech was Disney’s best bet to survive The Innovator’s Dilemma (as I wrote in July’s “It’s Complicated”). But, if Netflix’s read of the future of streaming is indeed skeptical, Hulu is the better bet for Disney to survive The Innovator’s Dilemma because more consumers pay for access to a mix of customer experience and library.
Iger & The Innovator’s Dilemma
Readers of The Medium should be familiar with my long-running questions about Disney’s shift to retail under Iger’s leadership. My first essay of 2023—“When The C-Suite Are Not Digital Natives”—questioned whether Iger is the right manager to navigate radical paradigm shifts in media business models. That is certainly the argument that Nelson Peltz and Trian Fund Management have been pursuing in their activist campaign for board seats (which last week nominated both Peltz and former CFO Jay Rasulo to the board).
The timing of Netflix’s “What’s We Watched” points to a deeper question about these shifts: It Netflix’s business model is threatened by these radical paradigm shifts in the media business, for how much longer can Disney’s streaming strategy survive when it is betting on a platform that delivers lower LTV than Hulu?
If we believe Netflix’s report was a signal from the market leader that streaming’s value to consumers is about to flatten, the answer is not for long.