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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 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: ICYMI, my monthly Medium Shift opinion column —“Why So Many Streaming Services Are Struggling” — went live last Thursday. It is worth checking it out again as had some good exchanges with The Information subscribers in the comments, including a good, lengthy back-and-forth on Disney's "She-Hulk" as a basic case study of the problems I discussed.
A question raised by my recent opinion piece for The Information last week was whether the monthly subscription model in streaming, as is, is a viable business model: “Consumers paid a monthly fee for cable TV, why wouldn’t they pay a monthly fee to stream content?”
Cable TV is a utility like access to electricity, gas, water, telephone or broadband. We each pay a monthly fee for those utilities. We each and all risk uncomfortable, potentially existential consequences the minute we cancel a utility: A nuisance like lack of access to high-speed internet, or a crisis like lack of access to water or gas for heat. So, the example Warner Bros. Discovery CFO Gunnar Wiedenfels shared recently—”too many viewers sign up for a streaming service for a low monthly fee, binge content for two or three weeks and then cancel”—would rarely if ever be seen with a utility customer because utilities are rarely, if ever, needed for only two or three weeks at a time. That outcome is a crisis for Warner Bros. Discovery, and not for the consumer.
Legacy media streamers have gone to market with the assumption that you and other subscribers value your monthly access to their storytelling expertise and libraries the same way you value your monthly access to electricity. That reads absurd. It also explains the consumer behavior Wiedenfels described at the conference: Consumers value streaming, but do not perceive access to a content library as an existential, life-or-death need per month.
So, 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.
Key Takeaway
Premium VOD and TV Everywhere models seem like better solutions to consumer churn in streaming than a doubling down a monthly subscription model.
Total words: 1,300
Total time reading: 5 minutes
A Brief History
Monthly subscriptions in streaming exist primarily because Amazon Prime Video, Netflix and Hulu all launched with that model in 2006 and 2007, and subsequently set the precedent. Amazon’s monthly fee for its Prime subscription service has always included Prime Video, but Prime Video subscriptions have also been offered separately (and there are international countries and territories where Prime Video, but not Prime, is offered). Netflix’s subscription model was an iteration on its existing monthly subscription model for DVD rentals. Hulu followed shortly thereafter. As I wrote on Thursday, they all built “Distribution Moats” in streaming that include the algorithms for personalized recommendations, the dynamic user interfaces and operational back-ends for content distribution over the internet.
In 2010, legacy media companies halfway followed these new streaming competitors into Internet distribution with TV Everywhere. That was a cable distributor-led initiative that allowed cable subscribers to access live and on-demand online content from networks that they subscribed to in their cable bundle. It was not direct-to-consumer because cable distributors owned the consumer relationship. Instead, the entire model was predicated on the cable distributors authenticating subscriber access to the app versions of cable networks. If you were not a cable subscriber, you could not access the app.
There were no additional charges for cable subscribers to access this content, so the fee was included in the existing monthly subscription fee for cable. When legacy media began shifting to direct-to-consumer initiatives as cord-cutting trends began to emerge, TV Everywhere meant the cable distributors needed to be disintermediated. But, the monthly subscription model remained the default with consumers.
So What?
Fast-forward to today, and 150 million-plus subscribers to Disney streaming services, 96 million subscribers to Warner Bros. Discovery streaming apps, and the tens of millions of subscribers across various legacy media streaming services are proof in the pudding that consumers will pay a monthly fee for direct access to “The Storytelling Moat”. The question that Wiedenfels suggested at The Bank of America conference last month is: If the assumption of recurring monthly revenues is not true in practice, so what? Profitable outcomes seem nowhere in sight.
Notably, he did not go as far as saying this assumption has been proven wrong. But he flirted with that conclusion: Subscribers are not committing long-term and that is a problem “the entire industry is aligned in their incentives to work on”.
Had he mentioned subscribers to annual plans, he may have shared a more difficult problem: Consumers benefit from cost-savings on an annual fee, but what they get in exchange is a black box of a value proposition. They do not know which titles will be delivered one, two or three months ahead from a service, or whether they will want to watch them. The “Storytelling Moat” has become more uncertain as streaming services like Max increasingly opt to remove and/or license titles to Netflix and other third parties on an ad-hoc, as-needed basis.
Two Early Answers
If consumers do not need monthly or annual subscriptions—but still value access to content libraries—then what should legacy media streamers do?
That is a big, open-ended question that will not be answered in one essay, alone. There are two initial answers. The first answer is recurring revenues are a core assumption of their streaming models and the “recurring” is not always true. But the TV Everywhere model proved it can be, and the recent carriage deal between Charter and Disney seems to be a step back to the future of the TV Everywhere model (a point I missed when I wrote “A More Wholesale Than Retail Outcome in Disney-Charter Deal”).
To remind you, the Disney+ Basic ad-supported offering will be bundled into the 9.5 million customers of the $60 per month Spectrum TV Select package. It is not clear yet whether Charter will pay Disney a wholesale fee for either each of the 9.5 million subscribers or for those subscribers who sign up for Disney+. LightShed Partners shared the rate is $3/sub/month-plus, growing annually, or a 63% discount on the $7.99 price. So Disney could receive as much as $28.5 million in monthly recurring revenues
The second answer can be found in something Peter Levinsohn, the Universal Filmed Entertainment Group’s chief distribution officer, told The New York Times last June: “We have also taken back control of the decision of when to make our content available in the home, based on the most optimal timing for an individual film.” The context of the quote was an article that revealed last Spring’s hit movie “The Super Mario Bros. Movie”, which generated over $1 billion globally while in theaters, had generated more than $75 million in premium VOD (PVOD) revenue since May.
In the PVOD model, Universal charges 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. It keeps 80% of the revenue. $75 million at $25 per viewer is 3 million viewers. Had Universal waited for the movie to go onto Peacock 90 days later, that would have been 3 million who paid $4.99 per month to watch it. If that data point Gunnar Wiedenfels shared is true, the outcome of PVOD is not much different than a user churning out after two to three weeks. But, it delivers 5x to 6x the return.
Other Universal movies had done well with the PVOD model. “Jurassic World: Dominion,” “The Croods: A New Age” and “Sing 2” each collected more than $50 million. 14 films, including “News of the World,” a period drama starring Tom Hanks, and “M3gan,” each collected more than $25 million. The lesson seems to be that legacy media companies are better off focusing on maximizing revenues within windows than betting on recurring monthly revenues.
Both lessons suggest the best business models will look less like progress and more like big steps backward into the past, especially in light of the streaming techno-optimism spun by legacy media executives like Iger and Bakish, to date, But, from the perspective of an executive’s fiduciary duty to act in the best interests of shareholders, both models are better at maximizing the value of movies and TV shows than streaming subscriptions.
Must-Read Monday AM Articles
The demand for “premium content” is being redefined by creators, tech companies and 10 million emerging advertisers.
* Netflix has “not succeeded” in scaling up its business in India despite the global streaming giant consistently lowering the subscription costs in the country, analysts at AllianceBernstein wrote in a report to clients Thursday
* Disney’s Marvel unit “is undergoing growing pains” after its first creative forays into streaming and seeing the logic of "traditional TV culture."
* Anime is “exploding in western games markets”
* Candle Media reportedly discussed investing into Peyton Manning’s Omaha Productions, as well as Colin Cowherd’s sports production company, The Volume.
* Netflix’s animation unit and the film slate it controls will undergo a restructure, resulting in job cuts and the shutdown of two films currently in pre-production.
In the shift from wholesale to retail models, there are many business models that delight consumers but no single, dominant one.
* Brian Morrissey wrote in The Rebooting, “The media industry has long struggled with product, mostly because it has not been run by product people.”
* Activist investor Nelson Peltz and his firm, Trian Fund Management its stake in Disney to roughly 30 million shares, valued at more than $2.5 billion. The firm plans to push for multiple board seats.
* The Wall Street Journal reported an effort to fold Hulu into Disney+ has been slowed by delays. Some features designed to attract customers to a planned new Disney+ and Hulu bundle won’t be available when the Hulu tile within Disney+ debuts later this year. ($ - paywalled)
* Comcast and Disney have hired investment banks to appraise Hulu prior to a November 1st, when either can trigger their option in the remaining 33% of the business.
* Crunchyroll, the Sony-owned anime service, announced a new 24-hour free, ad-supported channel in the U.S. to promote the Japanese animation format. Anime
* Netflix’s ad-supported tier “has been a tough sell and the scale just isn’t there”, according to an agency executive
* Amazon could add an estimated $3 billion in revenue with ad-supported prime video launch.
* Sports creator group Dude Perfect launched their official Dude Perfect Streaming Service over the weekend—and it debuted at No. 2 in the sports category on Apple’s App Store charts, just one spot behind ESPN
* In hopes of increasing its revenue, YouTube creator RoosterTeeth is turning some of its top draws from YouTube into website exclusives.
AI-meets-the-creator-economy business models are emerging.
* Just five months after its launch, TikTok‘s Effect Creator Rewards Program is getting its first significant upgrade. The revenue stream, which provides payouts to the individuals behind popular video effects, is coming to 14 more countries and getting new, reduced entry requirements.
Other
* ATSC 3.0 hits another speed bump – but its real enemy may be time