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Read the three key trends The Medium will be focused on in Q4 2023. This essay focuses on "In the shift from wholesale to retail models, there are many business models that delight consumers but no single, dominant one."
Author's Note: I was unable to publish on Thursday due to a tight travel and meetings schedule. There are no Must-Read Articles this morning for this reason, too. I am rethinking how to deliver those in a way that is more time efficient and valuable to readers. That may be as a separate mailing.
A new Medium Shift column is scheduled to be published on The Information early this week. As this is a holiday week, there will be no Member Mailing this Thursday. I will publish something for the holiday on Wednesday based on conversations I had with research analysts over the weekend.
Good morning from a windy Las Vegas! I have been here for a weekend of meetings, primarily. I was also invited to watch the Las Vegas Formula One Grand Prix.
Disney’s ESPN and Netflix were ubiquitous and front of mind for everyone here because both have been driving forces behind the average American Formula One viewership per race more than doubling from 554,000 in 2018 to 1.21 million viewers per race in 2022. Netflix’s docuseries “Drive to Survive” has contributed to that popularity.
Over the weekend Netflix launched “The Netflix Cup” on November 14th, a livestreamed golf tournament with the casts of “Drive to Survive” and “Full Swing” (PGA Tour). It was their fourth livestreaming event, to date, and received mixed reviews from critics and audiences. It also had production crews filming for the next season of “Drive to Survive”, capturing “the drama of sport” which Netflix Co-CEO Ted Sarandos told investors is “the part of the sports business that we bring the most value to.” As he explained at last year’s UBS TMT Conference, “the economics of live sports are built around pay TV and don’t make sense for streaming.”
The drama that played out on the Las Vegas strip ended up favoring Sarandos’ vision more than it did ESPN’s $85 million per year bet on live broadcasts of the races. A loose drain cover damaged driver Carlos Sainz’s Ferrari eight minutes into the first practice session, forcing its abandonment. The second session after a delay of 2.5 hours for track repairs, and all spectators were removed from viewing areas ahead of the 90-minute session that ended at 4 a.m. local time. Worse for ESPN, the broadcasts of the practice and qualifying runs started near midnight in Las Vegas or 3am on the East Coast. The final race was broadcast on ABC, ESPN, and ESPN+ at 10pm in Las Vegas or 1am on the East Coast.
In 2024 those spectators, every potential U.S. viewer who was asleep for all races, and more than 240 million current and future Netflix subscribers worldwide will have access to the behind-the-scenes drama of the Las Vegas Grand Prix in the next season of "Drive to Survive". So, Netflix will be able to achieve multiples of the viewership of an average audience for an ESPN F1 broadcast with the same content and for a fraction of the cost.
F1’s 2023 season will be the second-most viewed season of F1 since it was reacquired by ESPN. But now the economics of the distribution model are in question at a time when ESPN’s future is in question. With F1 distribution rights up for renewal in 2025, what rationale will justify Disney paying more than an $85 million per year price tag? As Netflix moves iteratively into livestreaming with F1's fan base as existing subscribers, how will Disney compete in 2025?
Key Takeaway
There are the early broad brushstrokes of a global economics model for sports distribution and marketing emerging from the Las Vegas Grand Prix. Netflix has the opportunity build a global, digital platform-exclusive flywheel for F1 fans that Disney simply cannot deliver for ESPN, despite all of its talents in building flywheels.
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Total time reading: 5 minutes
ESPN Loses in Vegas
Nothing about the Las Vegas Grand Prix broadcasts favored ESPN’s business model of live broadcasting American television audiences. Las Vegas Grand Prix CEO Renee Wilhem told Sporting News this reflected “a compromise to make sure we are broadcasting at a time when our European fans can get up with a cup of coffee and watch the race six, seven in the morning, very similar to how we [in the US] watch the European races.” So, instead of being broadcast on primetime U.S. television, the event played to race attendees, live audiences in Europe, and U.S. viewers who were willing and able to stay up late.
This story could not have come at a worse time for Disney, which is writing the for ESPN’s new status as a standalone sports division in real-time. Disney CEO Robert Iger is now pushing a vision of building ESPN into “the pre-eminent digital sports platform” as one of four pillars of his long-term strategy for Disney. ESPN reached 72.5 households in June 2023, 5% fewer than Disney reported in December 2022. Before the Las Vegas Grand Prix, average viewership million across the ESPN, ESPN2, and ABC channels had fallen one percent to 1.2 million.
The final race started at 1am ET on Sunday, so it is safe to assume its ratings will be lower. That may not matter much across 23 F1 races. But, the provocative question posed by Sarandos’ “the drama of sport” sales pitch is whether Netflix has a better model for all broadcasts of F1.
Uncomfortable Truths
This past weekend presented some uncomfortable truths for Formula One's future in Iger's digital ambitions, which is anticipated to get competition from other network bidders anyway.
This past weekend presented some uncomfortable truths for Iger's digital ambitions for ESPN. First, Netflix is emerging better positioned than ESPN to be “the pre-eminent digital sports platform” as Iger defines it. All ESPN streaming viewing, including ESPN+ was 0.06% of all streaming viewing in July 2023, according to supplemental data from Nielsen’s The Gauge. Netflix had 14x the viewership at 8.5% of all streaming viewing.
Disney reported 26 million ESPN+ subscribers in FY Q4 2023, up 3% since July but at a lower average revenue per user ($5.34, down from $5.45). This is the flip side of linear distribution, where ESPN distributes six different channels and the top two reach 72.5 million households. ESPN, alone, has an average estimated carriage fee of $9.42 per sub per month or almost 2x per subscriber at nearly 3x the scale of ESPN+.
Second, Netflix reaches an estimated 70 million subscribers in the U.S. at an average revenue per member of $16.16, or 3x that of ESPN+ and 1.7x ESPN’s affiliate fee. This captures the meat of Sarandos’ argument that with livestreaming Netflix could build an F1 “flywheel” within its platform, and then shuttle subscribers between docuseries, live events and races over a year. Meanwhile, a digital ESPN platform would be stuck with the challenge of marketing races, only, to an exponentially smaller scale audience.
Last, the global distribution of "The Netflix Cup” event and predominantly global audience for the Las Vegas races imply the economics for sports rights deals in streaming must evolve towards pricing that reflects the economics of global streaming distribution. There is also the implication that advertising deals must go global, too.
Sarandos’ Global Vision vs. Malone & Iger's Local Vision
That poses two challenges to Iger’s digital vision for ESPN. The first is that after Disney’s recent deal with Charter, cable and streaming “are kind of tied to the hip”, as Liberty Media Chairman John Malone recently explained to CNBC. The logic of that deal was to prevent linear consumers from buying access to ESPN content like Formula One races twice (once for streaming and once for linear). So Charter provides ESPN+, and then later the ESPN DTC service, to subscribers in the Spectrum TV Select Plus tier at no additional fee. If Malone’s vision wins out, Netflix will be an exclusively digital platform delivering sports content but ESPN DTC will not.
Second, unlike Malone, Sarandos is both thinking and executing with a global logic for distribution and marketing economics for sports distribution. Sarandos' sales pitch is unusually clear about his desire not to pursue U.S. sports rights. That contrasts with Iger’s Disney being stuck in the routine of needing to acquire expensive sports rights to protect the future of the ESPN business. This contrast is best reflected in the quote from Las Vegas Grand Prix CEO Renee Wilhem, above.
After the Las Vegas Grand Prix, the broad brushstrokes of a long-term sales pitch for Netflix to F1 have emerged. In an ideal world, Netflix can capture audiences globally via both livestreaming and subscription streaming that ESPN simply cannot either locally or globally. F1 will not need to split up the rights to aggregate and monetize the most passionate audiences.
This argument is equal parts logic and speculation. But, having witnessed fans get priced out of tickets—a three-day grandstand ticket cost up to $2,500—and hotel rooms—a couple told me they had paid $26,500 for a suite overlooking the straightaway of the Las Vegas Strip—it is obvious Netflix will enable those fans and millions of others to have an intimate experience with the race via livestreaming and via behind-the-scenes content.
If Netflix can obtain global streaming rights that includes the U.S.—a concededly thorny big "if" given the patchwork of agreements F1 has around the world—it has the opportunity build a global, digital platform-exclusive flywheel for F1 fans that Disney simply cannot deliver for ESPN, despite all of its historical strengths in building flywheels.