In Q2 2023, PARQOR will be focusing on three trends. This essay covers "Media companies have millions of consumer credit cards on file. What are they building for their customers?”
A reminder that this newsletter is now 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 my focus on the moving pieces of media's evolution from wholesale to retail models.
PARQOR will remain the corporate brand, and I will be building out membership services under that brand.
In May, Disney announced the removal of about 30 titles from its direct-to-consumer (DTC) platforms. Last Friday, it also announced a $1.5 billion impairment charge to the value of its library, and that it anticipates another $400 million in charges. The write-down follows similar moves from Warner Bros. Discovery, and appears to augur a wave of additional write-downs by other owners of struggling streaming services.
The Disney write-down focused on content that was produced specifically for its streaming services (e..g, “The World According to Jeff Goldblum”, “The Mighty Ducks”, “Willow”). Warner Bros. Discovery had cut broader, removing titles like“Westworld” that had been distributed both on linear HBO and on its streaming platform HBO Max.
These write-downs are surprising given how heavily both companies sold the market on the value of their libraries of intellectual property (IP). In particular, “The Mighty Ducks” spawned a trilogy of movies and an actual NHL hockey team in Anaheim, California; and, “Westworld” spawned four seasons over six years. Both were objectively smart bets in the streaming era. But now these once-Zeitgeist popular shows are more valuable being licensed to third parties than offered in a proprietary streaming service’s library.
If past is precedent, both shows should have succeeded. They did not, and therefore it is worth considering whether these write-offs are actually the consequences of outdated operational structures and management practices.
Key Takeaway
Both Disney’s and Warner Bros. Discovery’s film and TV-first models may be understanding audience demand too narrowly in large part because operationally they are structured to do so.
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Total time reading: 4 minutes
Lessons from Disney & Peter Rice
When Peter Rice was ousted as head of Disney’s General Entertainment Content division last year, a relevant case study emerged. In The Wall Street Journal article on his surprise firing by then-CEO Bob Chapek, Joe Flint reported: “A senior Disney official cited Mr. Rice’s decision to renew two struggling shows on the Disney+ streaming service—“The Mighty Ducks” and “Big Shot”—as examples of questionable deal-making. Both shows cost more than $50 million and neither had shown the type of success that merited additional seasons.”
The Mighty Ducks and Big Shot were two of the 30 titles included in Disney’s content removals and write-down. The article highlighted a variety of operational issues, including a long list of Disney senior and C-Suite executives with whom Rice clashed. There were also “tensions” within management about how Mr. Rice was allocating resources and his decision-making on programming.” Rice had a reputation for getting “upset if he didn’t get his way” and going to Chapek for sign-off. Despite all this dysfunction and this investment, Disney+ subscribers ended up quickly moving on from both The Mighty Ducks and Big Shot.
Putting aside the specifics of Mr. Rice’s management style, we have some background as to the operational and management dysfunction that led to this outcome. There was clearly demand for this content when the shows were approved. But there appears to have been a misread of audience demand for the IP, insufficient marketing of the shows, and broken communication lines across divisions to ensure the content was marketed optimally.
The structures and decision-making that could get new and original IP produced and distributed made didn’t map to why audiences would invest themselves in that content. The culling of at least 28 other shows reflects how this is not a problem limited to these two shows. Neither the management structures nor the corporate culture in place at Disney seem to be conducive to driving optimal outcomes for content investments.
We have less insight into why Westworld failed at Warner Bros. Discovery, though we do know that HBO does not have the reputation for dysfunction described in the piece on Peter Rice.
The Activision-Time Warner alternate timeline
Activision CEO Bobby Kotick was interviewed by Variety’s Cynthia Littleton last week, and he revealed that “during the first half of 2018, when the fate of the $85.4 billion Time Warner purchase hung in the balance, Activision Blizzard took a cue from its “Call of Duty” commandos: It stockpiled financial ammunition and waited patiently for an opening to pounce.”
If Activision had managed to secure the deal, “We’d take their IP and turn it into games. They’d take our IP and turn it into film and television, and we’d have an extraordinary company.” Kotick is mirroring what former WarnerMedia CEO Jason Kilar told Peter Kafka last March before leaving the role:
…if you’re going to invest a lot of upfront capital in creating beloved characters in worlds, I think it’s only natural if you have the capabilities and if you have the skillset in terms of leadership and talent to be able to lean into telling those stories, both in a linear fashion with narrative storytelling but also an interactive fashion with gaming.
The key similarity is not just the proposed split of IP across games and film and television. It is that both Kotick and Kilar assume that audience demand has evolved past film and TV, and therefore the solution lies in fundamentally different operational cultures than the ones in place at Disney and Warner Bros. Discovery. The core decision in their models is to first determine whether the optimal returns for IP are in gaming or in film and television, and then invest execute accordingly.
The write-offs at both Disney and Warner Bros. Discovery expose the challenges of treating streaming as simply another additional distribution channel. The implication from the worldviews of Kilar and Kotick is that its value is both narrower but also more powerful in terms of engaging fans.
The art of storytelling
There is no magic potion or cure in what Kotick and Kilar are proposing. Also, as I pointed out the other week, having a multi-faceted strategy that involves gaming does not mean investors will understand it.
But, the write-off of proven, popular IP like Westworld and The Mighty Ducks are examples of how that the supply of “core brands and franchise” content is not mapping to the demand, to date. And yet, that is the growth strategy that Disney CEO Robert Iger is promising investors in streaming.
They suggest that Disney’s and Warner Bros. Discovery’s film and TV-first models may be misunderstanding audience demand too narrowly in large part because operationally they are structured to do so. The write-offs in this sense are less a necessity to achieve profitability sooner or a flaw in the streaming model. Rather, they more symptoms of a failure to evolve with changing audience demand — 9 in 10 Gen Alpha and Gen Z are game enthusiasts, according to recent research from NewZoo, but stream movies and series equally as much.
Media businesses run by Kilar or Kotick would still have had to write off underperforming shows. Also, it is hard to imagine either betting on a show like Big Shot, a TV series starring John Stamos as “a temperamental college basketball coach who finds himself demoted — though, in a human sense, promoted — to coaching high school girls.” The point is not that the show was good or bad, but that it was not IP that has multiple paths to revenues for shareholders.
In the model Kotick and Kilar are describing, perhaps Big Shot gets approved and succeeds. But they both prioritize reorienting the corporate mission towards deeper consumer relationships with the IP and leveraging multiple paths to monetizing that relationship.
Disney and Warner Bros. Discovery are currently struggling to tell a growth story relying on only TV and film. That seems unlikely to change under current management at both companies. But we are starting to see more evidence of clear-headed thinking outside of the legacy media business as to what the business model should look like as it shifts from wholesale models to retail.
Must-Read Monday AM Articles
* How Warner Bros. Discovery plans to win over new customers with its HBOMax rebrand to Max
* First Impressions of Max: Content Discovery is Easier, But Where Are the Kids Shows?
* The New York Times profile on new NBCUniversal CEO Mike Cavanagh, a “Hollywood outsider” until now
* Broadcast networks this upfront season have focused on improving the economics behind new and long-running scripted originals
* Nearly 40% of Adults Say They’ll Lose Access to Netflix Thanks to Password Sharing Rules; Youth Hit Hardest
* Studios from Netflix to Amazon put book-adaptation deals on hold amid writers’ strike
* ESPN would make more revenue on each individual subscription they can sell DTC rather than through MVPDs, they’re unlikely to get close to the number of DTC subscribers that they currently have for linear ESPN
* As ESPN eyes standalone streaming service, don't write the obit on cable TV just yet
* “Traditional TV access is well into becoming a niche product,” the Convergence Research Group’s new Battle for the North American Couch Potato report, concludes. Notably, that’s true even if subscriber numbers for online TV services like YouTube TV or Fubo are included.
* Diamond Sports Group, which was set to pay the San Diego Padres $52 million this year for the right to broadcast the team’s games on its Bally’s regional sports networks, declined to make a contractually obligated payment as it moves through Chapter 11 bankruptcy proceedings. ($ - paywalled)
* MLB Commissioner Rob Manfred broke down the league’s fractured relationship with Diamond Sports Group, including what he sarcastically described as a “happy exchange” with Sinclair Broadcast Group Executive Chairman David Smith.
* Vitriol between MLB, Diamond Sports exposed in marathon bankruptcy hearing ($ - paywalled)
* Storytelling platform Wattpad is revamping its creator program and making it more accessible
* The increase in ad-supported streaming plans has created more opportunities for advertisers to reach U.S. consumers, and Antenna data suggests ad-supported options are likely here to stay.
* Based on over 300 buy-side interviews conducted in February 2023, advertisers are becoming more conservative about where they are spending, in the face of mounting pressure to prove return on investment (ROI).
* If Sci-Fi author Ted Chiang had to invent a different term for artificial intelligence, what would it be? “His answer is instant: applied statistics” ($ - paywalled)