Good morning!
The Medium identifies a few key trends each fiscal quarter that reveal the most important tensions and seismic shifts in the rapidly and dramatically changing media marketplace. The key trends help you answer a simple question: "What's next for media, and where's it all going? How are the pieces lining up for business models to evolve, succeed, or fail?"
Read the three key trends The Medium will be focused on in Q3 2023. This essay focuses on "Legacy media companies are throwing in the towel on their bets to own the consumer relationship in streaming and beyond" and "There is a less-discussed lens on how the demand for 'premium content' is being redefined by creators, tech companies and 10 million emerging advertisers."
One of the most fascinating questions is what the purpose of the media conglomerate model is in the streaming era.
Warner Bros. Discovery is famously the outcome of AT&T having walked away from the media conglomerate model after its $85.4 billion acquisition of Time Warner. In last Thursday's member mailing, I closed with an argument made back in January 2022 by The Wall Street Journal’s Holman W. Jenkins, Jr. that AT&T “could not make the necessary investments in both its telecom and its Hollywood properties while continuing to pay the large dividend that a certain class of AT&T shareholder was expecting.” And therefore:
“it’s hard also to escape a suspicion that AT&T management recognized that new investors would want new managers for new opportunities, not a bunch of telecom veterans. In short, AT&T is proceeding with its chaotic unmerger so AT&T can go back to being a company that the market will let AT&T’s current leaders keep running.”
That suspicion applies equally to all media conglomerates with streaming services: Why isn’t any management team following the sage advice of former Intel CEO Andy Grove and considering the question “If we got kicked out and the board brought in a new CEO, what would he do?”
There are many answers to this question, and I plan for the Member Mailing on Thursday to answer them. In this essay, I'm going to answer the question through the lens of Grove's "strategic inflection point" framework, which he wrote about in "Only The Paranoid Survive."
Key Takeaway
Management of media conglomerates in the streaming era may think less ambitiously about the post-wholesale future because the still-solid basics of the TV business model incentivize them to. What's the rush to pave the way for new management to take over and reimagine the future?
Total words: 1,300
Total time reading: 5 minutes
Disney
One reason the future of the media conglomerate is a hot debate topic now is because of a question on Disney’s FY Q3 2023 earnings call. Michael Nathanson from MoffettNathanson asked Disney CEO Robert Iger:
“…given the thinking you've done about the future of Disney, why does it make sense to create two Disney companies: one focused on parks, CP, Disney+ and then the studio IP that drives that flywheel, and then one on everything else? So why not make a clean break?”
A simpler version of the question is “Why does Disney still need to be a media conglomerate?”
Bank of America analyst Jessica Reif Ehrlich provided one answer to Yahoo Finance: “Disney's assets feed off one another to power the business, with the studio IP driving the parks while linear networks provide the cash for Disney to funnel further investments into growth areas like streaming.” Disney may face problems as a media conglomerate, and its business model may be complex, but the business model otherwise is still a good business model.
As I have argued before, the challenge reflected in Erlich’s framing is that the Disney conglomerate is a mix of retail and wholesale business models. Nathanson’s question to Iger implied that the retail-first, consumer-first businesses would be better off separated from the wholesale businesses. But the implication of Erlich’s answer is that the business model simply will not work as well if the conglomerate is split up. For example, streaming is a growth business but it also comes with churn rates that are 5x to as much as 9x the churn rates of the wholesale model (I discussed this problem in last week’s “Reed Hastings' Churn Decision Tree”).
The Strategic Inflection Point
Another way of framing Erlich’s point is that Disney may not actually face the existential choice of splitting off wholesale businesses from retail that Nathanson and Iger imagines that they do. Grove described this choice in his memoir — “Only the Paranoid Survive” — as one reflecting a "strategic inflection point", or “a time in the life of a business when its fundamentals are about to change.”
Grove recalled he and Intel co-founder Gordon Moore decided to get out of the memory chip business because they were losing to Japanese producers of higher quality, lower cost mass-produced and government subsidized parts. It was a story of Intel needing to imagine a business model without memory chips.
Grove recalls asking: "If we got kicked out and the board brought in a new CEO, what would he do?" Grove then writes:
Gordon answered without hesitation, "He would get us out of memories." I stared at him, numb, then said, "Why shouldn't you and I walk out the door, come back and do it ourselves?"
Instead, they would pivot into the microprocessors business. Grove wrote that the rationale was that Intel had been supplying the key microprocessors to IBM-compatible PC computers for five years, and that they were the “largest factor in the market”. A pivot into microprocessors also opened the door to the opportunity to build faster, cheaper, better versions of their next microprocessor — the 386 — to supply that growing market.
The Problem with Conglomerates
The story highlights why no media conglomerate is in a rush to get out of the TV business. With continued recurring revenues from 70 million homes and continued advertiser demand for linear TV inventory (which is valuable for brand awareness marketing), there is no hard stop to the TV business looming. YouTube and Netflix could be considered analogous to Japan as rivals to TV networks. But, even at 50 million homes, the linear TV business will still be a better and more lucrative business model — and have lower, more reliable churn rates — than most streaming services.
Grove also wrote there was no actual “point” but rather “a long, tortuous struggle”. Intel was able to navigate through and survive that struggle because it was “a well-managed company with a strong corporate culture, well-managed employees and a good track record.”
I like the Holman Jenkins take, above, because AT&T management objectively did act to protect its "strong corporate culture, well-managed employees and a good track record" rather than kill its dividend and transform the business. But it also highlights how AT&T management did not see a binary, existential need to pivot to the new model, even if they had all the right assets. There was no "long, torturous struggle ahead" for its telecoms business.
The only reason we are discussing the future of media conglomerates may be because legacy media leaders misunderstood the retail streaming model as a one-to-one replacement for the wholesale cable distribution, as I pointed out last Thursday. A more nebulous set of alternative retail business models are emerging, and they can be centralized around a single customer relationship. That competitive threat has yet to be proven as a binary, existential threat.
That may ultimately be the problem with the media conglomerate in the streaming era: Management thinks less ambitiously about the post-wholesale future because the still-solid basics of the TV business model incentivize them to. Moreover, there is no alternative, yet, that incentivizes them to think otherwise.
So, in the face of the steady, predictable decline of the linear model, what's the rush to pave the way for new management to take over and reimagine the future?
Must-Read Monday AM Articles
The demand for “premium content” is being redefined by creators, tech companies and 10 million emerging advertisers.
* Earlier this week, English comedy creator Max Fosh pointed out on Twitter the striking similarities—and differences—between a video he released in May and an August episode of the UK television show Rob & Romesh Vs.
* Creators including Preston and Linus Tech Tips have recently started experimenting with 24/7 live videos as part of a YouTube/Google beta test. Unlike other 24/7 live streams that play music (such as Lofi Girl), these streams loop videos from a creator’s own catalog.
* Andrew Wallenstein argues in Variety VIP unless the Spotify model prevails, he doesn’t “lasting success for any of streaming’s current bundling experiments”
* As part of this year’s Sony Creators Conference, an entirely new Ghostbusters short film was presented that returned the Ecto-1 to the streets of New York City, thwarting a menacing marshmallow man, all filmed using real-time game engine technology, said to be a proof-of-concept project.
* Front Office Sports imagines Apple as a potential acquirer of ESPN.
* The Amazon Prime Premiere program allows Amazon Prime members to get free tickets to exclusive advance screenings of Amazon Original movies and TV series, as well as access to photo ops, concessions, and special giveaways
* YouTube announced six features NFL Sunday Ticket customers may add to their game plan for the upcoming season
* Roughly one-third of Disney’s streaming advertising portfolio is transacted programmatically.
* Netflix, two years after initially launching a selection of games on mobile devices, is kicking the tires on letting customers play titles on computers and internet-connected TVs.
AI & cloud computing applications and services are increasingly dictating content consumption
* As generative AI companies multiply, celebrities and their estates are starting to see the profit potential in digital twins. ($ - paywalled)
* It’s time to think about how Martech vendors represent the products they sell, and the problematic use of language and concepts to conceal their product’s capabilities, starting with the idea of real-time.
* The scary truth about AI copyright is nobody knows what will happen next
* YouTube is focusing on AI tools that will power video editing or help creators generate ideas, said Tara Walpert Levy, YouTube’s vice president of Americas, in a recent interview with The Information. ($ - paywalled)
* Tiktok recently announced that its users in the European Union will soon be able to switch off its engaging content-selection algorithm
* The Supreme Court ruled that Apple does not have give developers the option to steer payments outside of the App Store. (NOTE: a good summary)
* So here we are, advertisers being told true transparency doesn’t, or can’t, exist. And it is an easy answer to accept because the ecosystem is so complex that everyone feels confused, not even sure what questions to ask. How do you convince the world the devil actually does exist?
Legacy media companies are throwing in the towel on their bets to own the consumer relationship in streaming and beyond.
* Charles Pulliam-Moore argued in The Verge: “the idea that people should always be on the lookout for the next big streaming show or original movie for fear of missing out on the hype cycle is something that many of us who subscribe to multiple streamers have bought into — even though it’s never really been true.”
* The Information’s Sahil Patel reported Verizon has been in touch with Disney about potentially partnering on a new ESPN streaming service. ($ - paywalled)
* Beano Brain surveyed 60,000 kids between the ages of seven and 14 to compile its list of the 100 Coolest Brands for Kids & Teens. The #1 spot went to Netflix, which was dubbed “cool” by 72% of U.K.-based respondents.
Other
* A report on the long-running legal dramas between Dr. Luke and artist Ke$ha is a must-read on how the music industry works today.
* Disney has been hit with a lawsuit in Los Angeles Superior Court by film financier TSG, which claims that the media giant used “nearly every trick in the Hollywood accounting book” to hoard hundreds of millions in profit.
* TikTok began a limited rollout of its own music-streaming app, TikTok Music.