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?”
To remind you, PARQOR identifies a few key trends each fiscal quarter that reveal the most important tensions and seismic shifts in the media marketplace. Must-read stories or market developments are not always obvious from press reports or research analysis, and often require a deeper dive. PARQOR’s analysis questions established ideas and common wisdom, reassesses the moving pieces, and reveals the potential in the media marketplace in 2023.
Last Thursday’s essay concluded that the PARQOR trend for Q3 2023 about media companies having millions of credit cards on file should be rewritten. Instead of asking “What are they building for their customers?”, perhaps the question should be, “How are they solving for delivering more relevant content and services to their customers?”
Media companies must now compete with a firehouse of content whose volume is expanding daily, and which is expanding in real-time because of advances in artificial intelligence (as Spotify is learning the hard way). It becomes harder to break through, making the return on investment into libraries both harder to accomplish and harder to justify pursuing with billions in spend.
But what does solving for relevance even mean? Why is it a solution?
Key Takeaway
It would seem having a broad portfolio of content may be the problem for media companies, and relevancy as a service cannot be a solution until the portfolio is refined to better reflect a valuable target customer.
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Walled gardens, defined
One answer is that relevance as a service is a business model where the walled garden can serve customers through its proprietary services and channels of distribution. Relevance is guided, if not dictated, by first-party data. YouTube and Netflix leverage personalized algorithms in their walled gardens, and Apple recommends apps to users with its first-party data.
Walled gardens may be defined as “closed ecosystems limited to certain sets of users and partially or largely separated from other, competitive services with controlled provisioning of access to outside services”. YouTube is a walled garden, as is Google’s search engine. So is Roku’s ecosystem of connected TV devices and The Roku Channel, and similarly Amazon’s ecosystem of Fire TV devices, Prime Video, and its free ad-supported service FreeVee. Apple is notoriously a walled garden, as the decision of Epic Games’ lawsuit fleshed out. Netflix is as walled a garden as they come.
Sony-owned Crunchyroll is an example of a walled garden that solves for relevance at a niche scale. It serves the anime community across events, theatrical, games, consumer products, collectibles, and manga publishing. As I wrote last week, Crunchyroll delivers and monetizes content in the distribution or direct-to-consumer channels that match the affinities of the most passionate and engaged consumers, and not by aiming broader by investing in “general entertainment”.
Crunchyroll highlights how the best media business models can monetize the consumer via other distribution and direct-to-consumer channels within the same ecosystem. Larger competitors like Netflix (with multiple partner deals with anime studios) and HBO Max (with an exclusive deal with Studio Ghibli) may have invested in anime. But, whereas those two are streaming modes, only Crunchyroll's model adapts to how, when and where anime and manga fans like to consume their favorite content.
“The Netflix Paradox”, “'The Office' Paradox” or “The YouTube Paradox”
Last month I highlighted recent Nielsen data showing that for media companies with streaming services, “not only do consumers seem to not find a clear value proposition for subscription services, there is no lock-in value from these subscription services or the IP they provide.” The example I offered was Paramount Global’s streaming service Paramount+, which research firm Antenna has reported as having the highest growth rate in the U.S., but also the highest churn rate.
Notably, Paramount has had 10 years to build out a first-party data-driven ecosystem like Crunchyroll, as Paramount Plus launched as CBS All-Access in 2014. But Paramount launched a direct-to-consumer outlet for merchandise only as recently as two months ago.
Paramount has been particularly vulnerable to something I have labeled “The Netflix Paradox”, “'The Office' Paradox” or “The YouTube Paradox”:
Streaming services have invested billions into exclusive IP libraries at a time when the value of IP is fragmenting across platforms;
The best business models for monetizing this IP should be PARQOR Hypothesis businesses because they centralize the value of IP and monetize it in multiple ways; but,
Without a centralized model for the IP, the YouTube ecosystem and algorithm may be more valuable to building fan bases for IP than the exclusivity of a “walled garden”.
Meaning, Paramount’s value proposition of a “mountain of entertainment” of 500+ movies and 400+ shows is not a walled garden. Instead, Paramount IP lives as memes on TikTok, Instagram or YouTube. "South Park", one of its tentpole properties, logged over 700 million minutes of viewing in April 2023, making it the most-watched acquired adult animated series for the month. “Top Gun: Maverick” was its biggest movie hit of 2022, it grossed $1.5 billion, but Paramount is distributing the movie in streaming across both Amazon Prime Video and Paramount+.
Also, its churn data suggests that there is very little keeping audiences within the ecosystem beyond streaming. At 7%, the Paramount+ churn rate is 80% of the way to 8.33%, the monthly churn rate at which it loses a subscriber for each subscriber gained. It does not offer its subscribers relevance as a service, and is nowhere near solving for either personalized algorithms or a Crunchyroll-type ecosystem.
Technological relevance
Both Netflix and YouTube have accomplished extraordinary pivots in the past two years to offer their respective customers more relevant content. YouTube pivoted its business towards a TikTok-like, more mobile-centric Shorts business in 2021, and those now get more than 50 billion views per day. In the past 18 months, Netflix has launched both a gaming business and an ad-supported tier.
These are media platforms that have solved the risk of irrelevance — growing research is showing millennials and Generation Alpha consume games equally with streaming — and built new value propositions for relevance.
The open question for both right now is the business model. Netflix is not charging for gaming nor serving in-game ads — it is included with the subscription fee for all tiers — and YouTube is still in the early stages of figuring out how to both monetize Shorts, as creators seem to be losing money two months in.
In contrast, Crunchyroll has a business model having solved for relevance with traditional distribution channels that have proven business models, like video-on-demand and merchandise. There is very little public data on its success, but all indications from the company suggest that revenues are growing, whereas both YouTube and Netflix are still testing updated, iterative versions of their bread-and-butter business models.
A complicated problem
These particular examples highlight a complicated problem: through the lenses of YouTube and Netflix, relevancy is a technological problem that demands a technical solution where there are no obvious business models or short-term solutions for revenue. It is best to have some form of personalization algorithm as a moat, but that moat requires both enormous scale and consistent usage at that scale.
But Sony has leveraged a strategy of mergers and acquisitions to solve for Crunchyroll's relevancy with a more niche audience, as I argued back in January. A consumer-centric ecosystem may be a better solution as a business model for media companies than a pursuit of an algorithm.
That distinction embodies the problem about relevancy as a service in the streaming marketplace. It is a need for all media streaming services, but the logical solutions of "build a personalization algorithm" or "build an ecosystem of services around the streaming customer" are not plug-and-play solutions. In terms of capital the former is not too expensive, though will require expensive engineering talent. The latter is both complex and capital intensive.
So, there are no immediate or obvious solutions, as badly as media companies may need to offer relevancy to improve their streaming business models in 2023, Crunchyroll's success has come from serving a very specific customer, whereas media companies continue to pursue their customers with broad portfolios of content. It would seem the latter may be the problem for media companies, and relevancy as a service cannot be a solution until the portfolio is refined to better reflect a valuable target customer.
In other words, to solve for relevancy in streaming media companies as we know them must shed and reduce their libraries. That presents an uncomfortable outcome for media executives who have taken on billions in debt to *build* out their libraries, but one that Wall Street in its hunt for profits may happily embrace.
Must-Read Monday AM Articles
* Crunchyroll has a struck a deal with producer Thymos Media for worldwide rights to Korean K-pop supergroup BTS’s animated superhero adventure Bastions, excluding China, Japan, Hong Kong, Taiwan, North Korea and South Korea. It will begin airing the five-part series on Saturdays from this week (May 13).
* Chat bots and AI-generated videos show the possibility of the tech. But more insidious are the black box algorithms that decide what's popular — directly influencing which stories to tell and how. In the nonfiction space, the stakes are dire.
* “TikTok’s viral movie clips are changing how I watch films”
* Amazon MGM Studios Distribution will look to sell streaming originals ranging from “The Marvelous Mrs. Maisel” to “The Tomorrow War” to other outlets.
* In a case of bad timing, disclosures of higher (or lower, but still very healthy) CEO compensation in regulatory filings in March and April have made for a sharp contrast with layoffs and the start of the writers strike.
* Antenna churn data signals "alarm bells" for HBO Max and progress for Peacock
* I liked this blog post from Antenna co-founder Rameez Tase which argued, in part, "given that sports revenue has been driven primarily by the top of the funnel (casual fans monetized via the cable bundle), it’s almost a guarantee that the bottom of the funnel has been underemphasized, and that opportunity exists."
* Linda Yaccarino’s decision to leave NBCUniversal to become CEO of “couldn't have happened at a worse time” for NBCU. ($ - paywalled). NBC says the broadcast network will have more programming hours than in any prior Olympics, with the opening ceremony and key finals to air and stream live.
* Why The NewFronts Are Not In Kansas -- Or Paris -- Anymore?
* While other media companies are still getting ready to launch their extravaganzas, Paramount has held nine different dinners with various media agencies, says new Paramount Ad Sales Chief John Halley
* Because of the writer’s strike, Netflix is backing away from the live-in-New-York showcase it planned to hold for advertisers during the industry’s annual week of “upfront” presentations for advertisers, a move that threatens to put a damper on the company’s first big public attempt to woo advertisers to its service.
* YouTube plans to have content creators post videos from NFL sidelines, locker rooms
* New Warner Media CEO Robert Kyncl is arguing that Spotify should stop paying fixed rates to labels: “It can’t be that an Ed Sheeran stream is worth exactly the same as a stream of rain falling on the roof.”
* Barcelona FC will shut down the television channel Barca TV at the end of the season to free up money to invest in the playing squad, although Barca did not give any official reasons for the closure.
* Altice USA is also looking into ways to outsource its struggling video business, particularly in areas where it's building out new fiber networks.