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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".
[Author's Note: Because of the holiday and a couple of much-needed personal days last week, there will be no Must-Read Articles today. They will return next Monday morning.]
Last night, The Wall Street Journal reported that TikTok users “are posting episodes of TV shows and full-length films in bite-sized clips that users can watch in a long continuous string.” So, before the “Barbie” movie makes it onto streaming, anonymous TikTok users who are savvy with TikTok’s algorithms may “hack” a release of the entire movie in segments that can be as long as 10 minutes.
On its own, it’s a notable story given the scale of TikTok: 843 million monthly active users globally, according to one recent estimate by eMarketer. The article mostly discusses the challenges of copyright law and piracy on a platform of this scale: Accounts posting the content “rack up hundreds of thousands of followers, comments, likes and views”, but do not monetize the content. Piracy is nothing new to Hollywood or the media business: It is estimated to be a $71 billion problem globally. But this is a different type of piracy, one where the medium of TikTok is shaping a new consumption of Hollywood movies.
But this article hints at a deeper shift in content consumption: TikTok as a medium is beginning to shape and change how Hollywood content in legacy formats is being consumed. It is proving that the medium is the message, and traditional long-form content of TV and movies are now faring well in bite-sized pieces.
YouTube has already identified and adapted to this trend with Shorts. As The Financial Times reported this month, senior staff at YouTube “have expressed concern that Shorts… risks cannibalising its core business.” The growth of the format has created the risk that long-form videos, which produce more revenue for the company, are “dying out”.
But after a week where Disney cut back its growth estimates for streaming, and Netflix CFO Spencer Neumann discussed how Netflix is solving for growth at the Bank of America Securities Media, Communications and Entertainment Conference, the question both are facing is whether consumer demand for Hollywood content has changed.
Key Takeaway
The rapid emergence and scale of TikTok and YouTube Shorts (2 billion logged in monthly users) seem to be disrupting and redefining both the value of "right title" to consumers of legacy media content and the units of output in which they are consumed.
Total words: 1,500
Total time reading: 6 minutes
The [Insert name] Paradox
I wrote about a version of this problem last summer in"The Office" Is Succeeding On YouTube, Less So on Peacock. In an interview with Recode’s Peter Kafka, actor B.J. Novak—who starred as Ryan Howard in “The Office—discussed how an entire new generation of viewers consume “The Office” by either the YouTube or TikTok algorithms. For that reason, clips and memes generate more word of mouth and engagement for the show outside of Peacock than the full episodes or the “super fan” episodes of The Office on Peacock.
His shared experiences pointed to a problem I 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”.
The [Insert name] Paradox highlighted a big question for media companies, including Netflix: “Why is any media company with a streaming service trying to extract value from IP from streaming, alone?”
The problem in the WSJ article above highlights a more difficult question: Why is any media company still betting on long-form content as a growth model in streaming?
Disney
The more wholesale than retail deal struck between Charter Communications and Disney last Monday seemed to agree with the premise of the first question. The deal bundles the Disney+ Basic ad-supported offering for the 9.5 million customers Spectrum TV Select package, all of whom pay $60 per month. Presumably, prices will soon go up.
The deal effectively sacrifices Disney vision for streaming in exchange for guaranteed, wholesale revenues per Disney+ subscriber (LightShed Partners shared the rate is $3/sub/month-plus, growing annually, a 63% discount on the $7.99 price) from Charter. Disney leadership sent staff a memo about the deal that acknowledged the sacrifice:
Our customer-first strategy has served The Walt Disney Company well for a century, and as we look to our work ahead, we must be open to a blend of business models as our industry evolves. We encourage everyone to continue to embrace innovation and new ideas because it is precisely that creative thinking that opened an avenue to this agreement with Charter and will continue to fuel our future business.
But, Disney is still losing streaming subscribers, according to a report from Bloomberg News. Disney will not hit its goal of 215 million to 245 million subscribers. It expects to fall tens of millions of subscribers short of its last publicly stated 2024 target for the Disney+ streaming service. Disney+ has been losing customers to price increases and experiencing declining demand in India after the company failed to win cricket streaming rights.
As Bill Gorman (TV Grim Reaper on Substack and Twitter) tweeted last week about recent Nielsen Top 10 data for the week ending August 20, 2023: “If Disney+ doesn't drop a new episode of a Star Wars or Marvel show, their viewership is sadder than AppleTV+'s, which is saying something.” In other words, there is weak demand for Disney+ beyond long-form episodes of powerful but niche intellectual property.
A centralized approach to streaming content simply is being proven not to be a profitable or growing business model for Disney. Decentralization, reflected in the Charter deal, seems like familiar (analogous to linear cable bundles) but also uncharted territory ahead.
Netflix
Last week at the Bank of America Conference, Jessica Reif Ehrlich—senior media and entertainment analyst at BofA Securities, Inc. Global Research— asked Netflix CFO Spencer Neumann about “the longer term growth opportunity for Netflix." Neumann responded that to grow both domestically and globally:
”[W]e have to improve every aspect of our service. So that's why we're so focused on improving content, improving the product, improving marketing and better monetizing all of that engagement. And it starts with content, right? Because that's what our members care about most.”
He also told Ehrlich and the audience that what makes Netflix best-positioned for this growth is “ a consumer proposition of a great kind of set of entertainment across film and TV and ultimately games titles at an accessible price point for consumers. So that's also great as well.”
Basically, Neumann is saying that its price point requires a specific value proposition and core to that value proposition is the original IP and third-party IP they offer. He is also implying that—given need to add gaming to grow, and an ad-supported tier—their value proposition is still not strong enough despite the affordable price point.
The Problem With Short Form
That raises an important question: What if Netflix is actually facing the same competitive dilemma as YouTube, Disney and Peacock?
Meaning, what if the evolution of Internet streaming is steadily pushing consumers away from Netflix’s bread-and-butter of licensed IP and original IP? And instead, its pushing them more towards other forms of visual storytelling like the pirated clips on TikTok?
Neumann offered one hint that Netflix is indeed confronting this problem: “the nature of folks that are converting, tend to be, at least initially, those that are more engaged with Netflix to begin with. And then sometimes, it's not totally in our control because even as we're enforcing well, if someone isn’t really interested in Netflix that particular time, we have to have that right title.”
Neumann did not concede Netflix faces a similar challenge with demand, but that does not mean that challenge does not exist. We do not have any evidence of TikTok users hacking Netflix content, and the WSJ article does not mention Netflix wrestling with piracy. The question is more about Netflix's bet on streaming being a bet on disrupting traditional Hollywood distribution business models while relying on the same units of output from Hollywood production models.
The rapid emergence and scale of TikTok and YouTube Shorts (2 billion logged in monthly users) seem to be disrupting and redefining both the value of "right title" to consumers of legacy media content and the units of output in which they are consumed. Both domestically and now across international markets the emerging question from data is, which business models will survive this trend?
This is what makes YouTube Shorts story and TikTok "Barbie" story so scary for both legacy media and Netflix. As the FT reported: "YouTube staff have expressed concern over internal company figures that suggest content creators are making fewer long-form videos — driven by a lack of consumer appetite and commissions from brands that favour short-form content for product placement."
If dominant market leader YouTube is struggling to navigate these changes in consumer behavior from the rapid emergence of short-form viewer—its advertising revenue remains flat to negative year-over-year—why would any of the weaker legacy media streamers survive those, too?