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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."
The recent news cycle reminds me of something Disney CEO Robert Iger shared in his interview with Andreessen Horowitz’s a16z podcast. After being asked by co-host Sonal Chokshi about whether he ever had “concerns or doubts or fears about being able to shore up on the technology side” before building Disney Plus in 2017, he responded:
“Reed Hastings from Netflix tried to convince me that there was no way we could do it. ‘You won't have the platform. You don’t know how to manage things like busted credit cards, all the issues with geotargeting and so many different factors.’ We had no ability to do any of that.”
In January’s “Be Like Peacock to Solve for Scarcity”, I argued it was Hastings asking:
“If Disney cannot figure out the software then why will people subscribe? How will Disney grow and maintain the scale that advertisers want to buy and investors want to own?”
Today, I would add two bits of context. First, replace Disney with the name of any other legacy media company with a streaming service — AMC Networks works particularly well — and my interpretation of the questions still holds true. Second, the back-drop of accelerating cord-cutting suggests Hastings’ was also pointing out Disney would be solving for streaming churn as a wholesale business that never previously needed to solve for churn because its linear distribution partners had been:
Solving churn as a go-between with linear customers and
In doing so, keeping churn at or below around 1%.
Netflix has long envisioned a new era of streaming entertainment. Hastings’ prescient warning to Iger was, effectively, that it is hard to solve for cord-cutting churn as a wholesale business, and it is also hard to solve for churn in a retail streaming business. It is the hardest to solve for both. The success of a corporate strategy in this new era was ultimately going to be defined by the version of churn that management would focus on solving.
Key Takeaway
Media's growing problem of churn may in part reflect a "gerontocracy", and in part may reflect the loss of debt as a solution, but it especially may reflect a monopoly of a narrow skillset over an entire industry at a pivotal moment.
Total words: 1,400
Total time reading: 6 minutes
Debt is the solution
Iger has offered various counterpoints to this, arguing that Disney needed to move into streaming because there was audience demand for it, and licensing valuable shows and movies to Netflix was like "selling nuclear weapons technology to a Third World country". He also wrote in his (now-outdated) autobiography “The Ride of a Lifetime” that the logic of Clayton Christensen’s innovator’s dilemma —a framework that argues an incumbent business in a marketplace must “spend capital to generate long-term growth or adapt to change” when faced with disruption — was at the core of Disney’s pivot to streaming.
But the churn in linear we are witnessing in 2023 is a different beast than the change Disney and other management teams saw in 2017. Cord-cutting is now accelerating and doing actual damage to linear business models. CNBC’s Alex Sherman reported last month that for market leader ESPN, “Accelerating cancellations have now overwhelmed fee increases, and linear TV revenue outside of advertising has begun to decline.” Total cable TV households are estimated to be at around 72 million and are expected to fall to 67 million by the end of the year. Sherman wrote in a separate article that ESPN can no longer “generate revenue growth by increasing programming fees for pay TV distributors, such as Comcast, Charter and DirecTV.”
The other different beast is the public debt market. In 2017, zero interest rate policy (ZIRP) or near zero interest rates were in place, so Disney and everyone else could borrow cheaply to both disrupt themselves and build solutions that could solve for both forms of churn. The U.S. Federal Reserve had benchmark interest rates at 1.25% in June 2017 when Disney took on $1.6 billion to acquire a controlling 75% share of BAMTech.
With ZIRP conditions gone after the pandemic, the benchmark fed rate is now somewhere between 5 percent and 5.25 percent, or over 4x more than it was when Disney opted to buy a majority stake in BAMTech (it bought out the remainder for $900 million in November 2022).
Legacy media companies find themselves unable to raise cheap capital to solve for either cord-cutting or growing streaming churn, which is now likely higher than the 6% market average one year ago. For any business, the inability to raise capital to solve for customer churn is a death sentence. Through the lens of Hastings' decision tree, the availability of cheap capital came too soon.
Solutions With & Without Debt
So, one way of looking at this moment is whether TV executives like Iger and Dolan misread the organization's overall ability to pivot to streaming, as Dolan conceded in February. This argument implies that debt was inefficiently allocated across both wholesale and retail. The other way is to ask what a retail-savvy executive like Chapek would now be able to accomplish with limited access to “free money” if they were in charge of these media companies, instead. In other words, how much is the retail skillset still a solution for growing churn when there is limited access to “free money”?
This question hits at the core tension of “Team Chapek” argument I’ve been framing for Disney’s challenges, and also emphasizing AMC Networks Chairman James Dolan conceding the need to evolve from a wholesale operational culture to a retail one. Both suggest that legacy media leaders with broadcast and linear backgrounds like Iger (Capital Cities/ABC) and Dolan (AMC Networks) lack the requisite skillset to build retail-first streaming models.
We got one answer from Lucas Shaw of Bloomberg who reported last night:
…there is a growing consensus among Wall Street analysts and former Disney employees that the 72-year-old CEO should take all the company’s linear TV networks, such as ABC, Freeform and FX, and spin them off into a separate company.
This would solve a lot of his problems. He can offload debt and get rid of legacy businesses that suppress his share price. He can then create a new company with theme parks, the studios and Disney+ that is better positioned for future growth. Former Disney executive Kevin Mayer — now an adviser to Iger -- has been proposing a version of this strategy for months.
In other words, Disney splits into a wholesale company and a retail company, a more ambitious version of Chapek’s original vision. The business logic also mirrors the implicit warning of Hastings: Disney can solve for streaming churn or it can solve for cord-cutting churn, but it cannot solve for both.
But the retail Disney would still need an executive with a Parks and direct-to-consumer skillset, which ironically is still Bob Chapek.
Blame the TV executive
For all the talk of gerontocracy in Hollywood, the brief reign of Chapek also highlighted how no executives except for those with a cable background (Comcast’s Brian Roberts, James Dolan) had career experience with retail business models. If the challenge is to solve for churn in streaming alone, and there is no “free money” to solve for it, the next best solution may be a relevant retail skillset in senior management. I told Brian Morrissey of The Rebooting on a recent podcast interview:
“The thing that I experienced [at Viacom] was how do you evolve when everybody in the building is looking at operating income and looking at cash flow and saying, if we disrupt this, we are the stupidest people that's ever inhabited these positions? Senior management are counter-incentivized to innovate. People are paid money not to innovate.”
In other words, the problem of churn may in part reflect a gerontocracy, and in part may reflect the loss of debt as a solution, but it especially may reflect a monopoly of a narrow skillset over an entire industry at a pivotal moment. The questions Wall Street should be asking in light of flattening streaming growth and growing churn are:
What would a retail executive do differently at the helm of a media business without “free money” available? and
How much different would those decisions be from the track record of decisions traditional TV or Hollywood executives have been making, to date?
I argued earlier this month in “It’s Complicated” that media ecosystems — both within companies and more broadly — may be too complex to navigate disruption due to the misalignment of shareholders. But Reed Hastings’ original insight was that they are too complicated because there is only one battle to be fought against churn. The implication is ultimately *which* churn a company chooses to fight may be the path out of today’s messes.
Must-Read Monday AM Articles
* It is worth revisiting Doug Shapiro's To Everything, Churn, Churn, Churn: How Churn Became Streaming TV’s Biggest Surprise and Biggest Problem
The demand for “premium content” is being redefined by creators, tech companies and 10 million emerging advertisers.
* Warner Bros. Discovery plans to simulcast games from the MLB, National Basketball Association, National Hockey League and National Collegiate Athletics Association, including college basketball’s March Madness, on Max. It also intends to add content from its sports media outlet Bleacher Report, such as highlights and interviews.
* Disney offered a case study on how Pixar's Elemental didn’t "evaporate at the box office" after a slow start.
* If an buyer were to conclude that the best path forward is to orchestrate individual direct buys solely with their desired top CTV publishers, "they'd be wrong". There is "a middle ground between the complex ad tech web that governs digital video and the bare-bones direct buying model that some are taking within the CTV space."
* Yale SOM’s Zoe Chance, a former Mattel brand manager, discussed the marketing and message of "Barbie"
* Amazon is building its Sell Side Platform (SSP) "as the lines between adtech that services advertisers and adtech that services publishers has become especially blurry over the past year." Building adtech for publishers is a new opportunity for Amazon. ($ - paywalled)
* It’s hard to imagine the Mumbai film industry reinventing itself in a modern form but the lesson for India is clear. What its economy needs is more cricket, less Bollywood. ($ - paywalled)
AI & cloud computing applications and services are increasingly dictating content consumption
YouTube is getting ready to release generative AI tools for creators. But unlike rivals such as Facebook-parent Meta Platforms, it’s less interested in chatbots—the conversational software that can take on a persona such as Tony Soprano. Instead, it’s focusing on tools that will power video editing or help creators generate ideas
https://www.theinformation.com/articles/youtubes-walpert-levy-on-the-ai-tsunami?
Legacy media companies are throwing in the towel on their bets to own the consumer relationship in streaming and beyond.
* No one should be surprised that Lionsgate announced the purchase of eOne’s film and TV business for $500 million — we all knew that was coming — but it is totally reasonable to be confused.
* Movie theaters and streamers may end up friends, after all
* A basket of the top US streaming services will cost $87 this autumn, compared with $73 a year ago, as Disney, Paramount, Warner Bros Discovery and others have raised their prices in response to pressure from Wall Street to end the profligacy of the streaming boom. The average cable TV package costs $83 a month. ($ - paywalled)
Other
* New York City's MTA is looking at ways to expand the city’s subway system into the virtual world — and onto gaming platforms, agency records reveal.
* The company formerly known as Twitter is betting that a new ad-tech partnership and enhanced safety tools for brands will lure back advertisers who departed in the months since Elon Musk purchased the company.
* Google removed “in-stream” classification from the name of one of its video formats. The change comes at a time when buyers are questioning whether they can trust the inventory the video giant sells.