Reminder #1: as you can see above, I have rebranded this newsletter to The Medium. It's the same newsletter focused on three to four key trends per quarter, but it is now oriented a bit more narrowly.
And, as you may have figured out, the new branding is a nod to Marshall McLuhan's "The medium is the message", and a reflection of my focus on the moving pieces of media's evolution from wholesale to retail models.
PARQOR will remain the primary brand, and I will be building out membership services under that brand. Watch this space!
Reminder #2: This mailing is going out on a Tuesday because of the holiday weekend.
There was a good piece in The Wall Street Journal before the holiday weekend that exposed some of the ugly seams of Disney’s and Comcast’s relationship around the upcoming January 2024 Put/Call option for Hulu. To remind you, as per a May 2019 agreement around Disney’s acquisition of Fox assets, Disney has a 67% ownership interest and full operational control of Hulu. Under the agreement:
Comcast has the option to require Disney to purchase Comcast’s interest in Hulu, and
Disney has the option to require NBCU to sell its interest in Hulu to Disney.
The article revealed a previously undisclosed arbitration case, and the companies “tens of billions of dollars apart” in terms of valuation for Hulu. It also revealed that Comcast has stopped funding Hulu as a tactic in the fight, forcing Disney to provide the equivalent of a bridge loan, so that Hulu has necessary cash on hand.
All signals from Disney CEO Robert Iger point to a sale of Comcast’s stake. But, Disney will need to take on additional debt to buy out Comcast at a time when it is trying to pay down long term debt of under $45 billion and has $10.4 billion of cash on hand. Disney may buy Comcast’s remaining 33% stake in Hulu for a guaranteed floor value of $27.5 billion, or $9.1 billion, which is 87% of its available cash.
This is one reason there has been speculation that there will be “creative dealmaking”. Both companies have assets to play and levers to pull to make a deal happen. The loudest speculation is that ESPN will be a part of the deal, whether something as minimal as lower transmission fees or Comcast effectively “trading” ESPN for Hulu.
But, three recent themes playing out in the marketplace highlight why this speculation misunderstands both Comcast and Disney in 2023.
Key Takeaway
Disney must figure out how to get a big, white, puffy Mickey Mouse foot into Comcast’s broadband distribution business.
Total words: 1,600
Total time reading: 6 minutes
The power law on Max
Warner Bros. Discovery CEO David Zaslav recently told investors at SVB MoffettNathanson's Inaugural Technology, Media and Telecom Conference that on HBO Max, management could see that “five shows or 90% of what people are watching” on the now-renamed streaming service. He added “And if we put it to 20 shows, it's 98% of what people are watching. And when we see what are people -- when they buy the service, where do they go quickly, they go to like 3 or 4 of our series.”
A streaming executive recently shared with me that a similar dynamic was at play at the streaming service they work for, and suggested this “power law” of content consumption was true at others. So, the reasonable assumption is this will be true at both Hulu and Peacock. Both streamers share the value proposition of the next-day streaming of broadcast shows, and this may be what is driving their respective growth lately. They both offer broader libraries of content but if Zaslav’s admission is industry-wide, those libraries matter less than the hits.
ESPN is a much more robust value proposition. To quote its Fact Sheet, it has SportsCenter, NFL’s Monday Night Football; MLB; NBA (The Finals on ABC); NHL (Stanley Cup Finals on ABC); college football including the College Football Playoff; men’s and women’s college basketball, including the women’s NCAA Tournament; tennis’ Australian Open, Wimbledon and US Open, all start to finish; The Masters; WNBA; Little League World Series; and more. It also offers daily and weekly sport-specific studio shows for NFL, MLB, NBA and college football and basketball; and, critically acclaimed and award-winning documentaries and original programming including the “30 for 30” films.
That objectively does not read like ESPN for Hulu will be a fair or reasonable one-for-one trade in 2023. So I think we can rule out a trade, but we cannot rule out ESPN being involved in the deal (e.g., Comcast needs lower licensing fees for ESPN, one of the most expensive channels in).
Linear & streaming churn growing
All available data for churn rates in both streaming and linear households in Q1 2023 appears to have been brutal.
The domestic pay TV industry just experienced its worst quarterly cord-cutting ever in Q1, losing 2.3 million customers, 300,000 more than the same period a year ago, according to equity research company MoffettNathanson. Research firm Antenna has reported that churn went up across the board for streaming services in the U.S. in Q3 2022, and churn rates for premium SVOD services went up to over 6%.
But churn for Hulu is very different from churn in linear, as reflected in “serial churners”. Antenna defines them as “ individuals frequently moving in and out of Services—often to chase hit shows they want to watch at that moment. Antenna measures them as individuals who have at least three Cancels in the past two years among the ten Premium SVOD Services we include in the category.”
Linear churn is a binary decision for consumers — it is very difficult and time-consuming to churn out of a cable service and sign onto a new one. There are multiple barriers (devices, home installation) that make this so. This was reflected in the linear marketplace's 1% churn rate at the height of its penetration in the early 00s. Whereas with Hulu and other streaming services, it is a few thumb clicks within any month a consumer so chooses to end or pause a subscription.
Meaning, even if both are seeing similar churn, and ESPN loses penetration so that it reaches around 50 million households, ESPN’s churn will produce more reliable cash flow than Hulu because linear households cannot “pause” a subscription.
In turn that raises a question about the relative value of ARPU. Hulu in 48 million households at $11.73 average revenue per user is 24.5% greater than the ARPU of $9.42 ESPN gets from linear households. Also, Hulu’s variable churn rate means the lifetime value of its customers is lower than ESPN’s. In ARPU terms, Hulu is a less valuable business than ESPN.
"Free money"
Earlier this month I wrote "It's about the free money... and it's about the free money". The essay highlighted how traditional sources of free money for Hollywood and sports media businesses — DVD sales, DVD rentals, affiliate revenues, near-zero interest rates — are drying up and there seems to be no immediate replacement for them.
It raises a provocative question: which of Hulu or ESPN will be impacted more by the loss of “free money”? For ESPN all cord-cutters are lost “free money”. Disney can make up for those losses by raising its subscription fees on the remaining subscribers, and hoping for some percentage of cord-cutters to become vMVPD customers. But otherwise, that recurring revenue stream is inevitably declining.
For Hulu, the answer is now complicated by Disney CEO Robert Iger’s recent announcement on the FY Q2 2023 earnings call that Hulu will be available as a tile within Disney+ (and that general entertainment content now has a purpose within Disney+, whereas in February it seemed not to). But Disney is cutting back on spending and, as I noted above, has a large debt load on its balance sheet. There seems to be no new source of “free money” to replace that lower content spend.
As for Comcast, it is best positioned to capture new sources of free money. As IAC Chairman Barry Diller told CNBC’s Andrew Ross Sorkin in a May 2021 interview, Comcast are “the only ones with both feet on both sides” of the streaming marketplace. His point was Comcast has one foot in the streaming world with Peacock, and another foot in the broadband distribution world with its Xfinity platform, for which its has 29.8 million residential subscribers. With Peacock, it monetizes with both subscriptions and advertising (22 million subscribers and $704 million in losses in Q1). On Xfinity, it monetizes streaming by charging access to its hybrid fiber-optic and coaxial (“HFC”) cable network, fees for proprietary modems, and commission revenue from the sale of certain third-party DTC streaming services.
At $24 billion, broadband made up the majority of Comcast’s $66 billion in revenue in its Cable Communications segment (where Broadband sits) in 2022. The EBITDA margins for that segment were 44.3% in 2022. But, there is a key difference between this “free money” and the “free money” from its cable segment: Comcast licenses programming for its linear business from cable and broadcast networks, as well as from local broadcast television stations. But it does not license apps for streaming. So, cable networks get both distribution and share in the success of Comcast’s cable business through licensing fees, but streaming apps only get distribution.
It is also worth noting that Comcast’s NBCUniversal business generates revenues by being on the receiving end of licensing fees. It had $10.9 billion in revenues in 2022, $2.1 billion of which was Peacock.
Not a battle of equals
If there is a battle looming between Comcast and Disney, it is not a battle of equals. The assumption that there is a one-to-one exchangeability between ESPN and Hulu has little evidence to support it. All the talk of the 2024 Put/Call has focused on Disney’s future. But I think Diller’s take is the best in this situation: Disney is stuck on one side of the streaming marketplace with its direct-to-consumer business. That leaves it more vulnerable than Comcast as the “free money” dries up in cable, because Comcast is replacing it with broadband revenues of which it distributes little.
In this light, the best outcome for Disney is to figure out how to leverage the Hulu deal to get a big, white, puffy Mickey Mouse foot into the broadband distribution business. Because otherwise, it must continue to scavenge and dig for new sources of “free money”.
Must-Read Monday AM Articles
* The biggest names in media leadership all have different opinions on the future of sports in streaming — from total acceptance to outright denial.
* As Amazon eyes innovative ways to expand its offerings through the movie theaters and collect data and insights from movie-goers, it has the potential to further expand its brand with stronger phygital and in-person experiences.
* As more and more FAST options pile up, will the sheer profusion undercut potential financial benefits for any specific provider? Or are we just setting up a repeat of the Streaming Wars (Ad-Supported Version)?
*Four challenges FAST tech provider Amagi sees confronting FAST viewers, content providers, services, and advertisers.
* With the continued shift toward streaming, the top streamers have made low ad loads a key selling point in the battle for advertisers and subscribers. But almost all the major ones have increased their number of ads per hour in the past year.