Good morning.
To remind you, The Medium identifies a few key trends each fiscal quarter that reveal the most important tensions and seismic shifts in the 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 Curse of the Mogul’ argues that the poor performance of the media industry is the responsibility of media management’s stubborn refusal to accept the economics of basic business strategy.”
The quote, above, was written in 2011 as a postscript to the 2009 book of the same name. To date, I have used “The Curse of the Mogul” to highlight when legacy media CEOs may be pursuing creative businesses that they believe are not subject to traditional strategic, financial or management appraisals. As a consequence, media companies may reward content creators at the expense of shareholder value.
Back in May’s “Writers, Franchise Fatigue & YouTube's NewFronts”, I highlighted how the complaints of the Writers Guild of America (WGA) — just prior to their strike — reflected the Curse of the Mogul. Showrunners like Taylor Sheridan (“Yellowstone”), Shonda Rhimes and Ryan Murphy had benefited unusually from the “Peak TV” era with nine-figure deals. But it was not universally true: “many of the people who wrote the series that created TV’s latest Golden Age were seeing their remunerative gold turn into silver”, as Mary McNamara of The Los Angeles Times observed. I argued this was a noteworthy disconnect.
There is a long, complicated set of disconnects between the two sides of Hollywood's strikes — on one side, the Alliance of Motion Picture and Television Producers (AMPTP), and on the other, its striking counterparts The Screen Actors Guild - American Federation of Television and Radio Artists (SAG-AFTRA) and the WGA. These disconnects are more significant than many may realize: They reveal how two core assumptions of the Curse of the Mogul are now blown up.
First, the strikes have revealed that the media business model in the streaming era is not simply inefficient, as the Curse of the Mogul suggest, but that it is a bad business model. Neither creative talent nor media shareholders are reaping value despite growing spend (total media industry content spend of $134.6 billion in 2022, and a 25% jump from $89.9 billion in 2020 to $118.4 billion in 2021) and growing distribution.
Second, the Curse of the Mogul argued that creators benefit from media’s inefficiencies, but the strikes are highlighting how streaming economics are inefficient for both creators and media companies.
Key Takeaway
The Hollywood strikes have revealed how the economics of legacy media streaming efforts have left media "moguls" and shareholders stuck in a “doom loop”.
Total words: 1,600
Total time reading: 6 minutes
1. The streaming era media business model is bad
One key factor that has made legacy media business models "bad" in the streaming era is "organizational inertia" that has disrupted agility or innovation. That should be a familiar argument to readers of The Medium, and most recently in an essay back in March:
“the politics of owning a lot of IP in the streaming era is a core strategic disadvantage. It results in organizational inertia at a time when fans increasingly want to be served with flywheels, and when agility is necessary for survival in a rapidly changing marketplace. And both technological progress and compelling economics are not enough to conquer inertia at a time when legacy media companies face decreasing odds of survival. Any attempts to challenge that inertia by a sitting CEO have led to their sudden ousters.”
Netflix is proving that streaming can be a profitable business model — it told investors last week that it expects at least $5B in free cash flow for 2023, up from a prior estimate of at least $3.5B — but its business model is built off of different business fundamentals than legacy media businesses. As Netflix management wrote in its most recent letter to shareholders:
“Long term success takes strength in both entertainment and technology, a combination that’s not been required of large media or tech companies in the past. It’s about one’s ability to work with the best creators; to produce and license movies, TV shows and ultimately games across multiple genres and languages globally; to create a stellar discovery engine; to build great partnerships and payments systems; and to continually pierce the zeitgeist with consumer passion and fandom.”
This long list of unique advantages implies that Netflix management are not faced with the same choices as linear executives faced with the innovator's dilemma of cannibalizing linear and theatrical businesses. The linear revenues generate as much as 100% of operating income for legacy media businesses, and help to cushion the billions in losses from streaming. Moreover, Netflix is defining streaming as one “arrow in the quiver” of a long list of factors that they have mastered and/or pioneered to succeed in the streaming era. The billions of dollars of losses, the lack of profitability, and the flattening growth curves in some of the most competitive legacy media streaming models to date — Disney’s $4B in losses last year in particular (which I discussed last week) — imply that "organizational inertia" is a key obstacle for legacy media businesses needing to evolve.
If Netflix has listed what is necessary to achieve success in streaming, today, then legacy media management teams inevitably will be unable to deliver shareholder value in streaming within the constraints of their existing strategic, financial and/or management structures. This is more than inefficiency — as is and as managed, these businesses simply are not built to deliver value for shareholders or creators.
On that point, legacy media shareholders have seen stock prices decline by 50% or more — even Disney has seen share prices decline by 13% after a 10% stock bump following CEO Robert Iger's surprise return.
2. Creators no longer benefit from media’s inefficiencies
Both SAG-AFTRA and the WGA are seeking higher base pay and a bigger cut of streaming companies' revenue in the form of residual or licensing fees (NOTE: The Entertainment Strategy Guy recently had a good breakdown of how residuals work). But the key point for our purposes is that SAG-AFTRA wants to shift the definition of residuals from collecting a flat-rate per show to a percentage of profits.
Residuals in streaming generally have been delivered in three ways:
The most obvious is Netflix's precedent of paying for original TV shows or movies with an enormous upfront payment to producers based on its estimate of how the show or movie will perform on its platform. In other words, the talent gets an enormous payday and Netflix bears all the risk of execution.
Another obvious precedent is rate cards, a variable fee per stream for licensed shows or movies that declines over time.
Last, there is the percentage of the sale price, which can be most easily explained by Netflix’s recent $500 million licensing deal for “Seinfeld”. Jerry Seinfeld, Larry David and other owners of the IP receive a fixed percentage of the $500 million.
The streaming model is a demand-driven business. Residuals are better for talent in the linear syndication model because it pays based on how many times an episode or movie airs, and that is a supply-side decision. The problem with subscription streaming models is that any residuals are ultimately determined by a consumer’s decision to stream a particular piece of content, if they do at all. And, as Nielsen’s The Gauge has been showing, most consumers increasingly opt for YouTube.
But, for our purposes, a deeper challenge is that the streaming services are vertically integrated. Meaning, studios negotiate internally with owned-and-operated streaming services when they negotiate the residuals for content. Generally, though not always, there is no bidding process with the broader marketplace for Warner Bros. or HBO content created for Max, Disney content for Disney+, or FX content for Hulu. Cost-conscious media conglomerates can therefore drive down costs by ensuring any residuals are cost-efficient (ergo, the writers’ and actors’ union strikes). [1]
The Doom Loop of the Mogul
When combined with the first disconnect, an obvious “doom loop” emerges against the backdrop of these strikes:
Legacy media management is unable to deliver shareholder value in streaming within the constraints of their strategic, financial and/or management structures; and
Therefore they engage in self-dealing to keep costs low, and
Therefore writing and acting talent protest with strikes, and with less content produced for their streaming services…
Legacy media management is unable to deliver shareholder value in streaming within the constraints of their strategic, financial and/or management structures… [repeat cycle]
This is effectively the “devastating effects” that IAC Chairman Barry Diller was warning as an outcome of the strikes in his recent CBS interview:
“What will happen is, if in fact, it doesn't get settled until Christmas or so, then next year, there's not going to be many programs for anybody to watch. So, you're gonna see subscriptions get pulled, which is going to reduce the revenue of all these movie companies, television companies, the result of which is that there will be no programs. And at just the time, strike is settled that you want to get back up, there won't be enough money.”
Transparency
Last, it is worth considering the demand of SAG-AFTRA for both revenue sharing and data transparency as part of any negotiated solution. Both the doom loop and Diller’s prediction, above, highlight the obvious challenges with that demand.
But, a a lack of transparency in the streaming era has helped management create a narrative for investors and talent, alike, that leadership is *not* in fact constrained by their strategic, financial and/or management structures. Streaming losses have been sold to shareholders as short-term pain for long-term gain than as any misallocation or even mismanagement of shareholder value.
In other words, the ultimate risk of transparency is that it may force the hand of Wall Street to push for new strategic, financial and/or management structures that that hold management responsible for the outcomes of streaming losses, a lack of profitable business models and even the writers’ and actors’ strikes.
Will that happen? Well, that outcome would spell true doom for the moguls. But as recent, lucrative compensation structures for Warner Bros. Discovery CEO David Zaslav and Disney CEO Robert Iger imply, that is an outcome that the moguls and their respective boards are now incentivized to prevent, even at the further expense of shareholder value.
Footnotes
[1] Matt Stoller offers a helpful antitrust lens on this problem, and my criticism is it creates a bit of a funhouse mirror on the market dynamics at play.
Must-Read Monday AM Articles
* SAG-AFTRA President Fran Drescher on why the union is striking
* Why Netflix “has more runway” than legacy media during the strike.
* Voice actors speak out on how the SAG-AFTRA strike affects video games [NOTE: I want to write more about this topic]
The demand for “premium content” is being redefined by creators, tech companies and 10 million emerging advertisers.
* Anjali Sud is taking over as CEO of Tubi — Fox Corp.’s free, ad-supported streaming TV service — after she stepped down as CEO of video-hosting platform Vimeo.
* TikTok has become the first-ever app to exceed $1 billion in consumer spending within a single quarter. That’s according to new data from mobile app experts data.ai.
* Why May 23, 2023 was “the day streaming died”
* A handful of seasoned negotiators — including federal mediators Javier Ramirez and Jimmy Valentine and power agents Ari Emanuel and Bryan Lourd — are working in the shadows to find a way forward.
* Manufacturing challenges for the Apple Vision Pro ($ - paywalled)
* Interviews with 54,000 internet users across 28 countries conducted by Ampere Analysis estimates that 45% no longer watch linear TV of any kind. (free - subscription required)
* Publishers must adapt to a short video-driven model or be crushed, argues Bustle CEO Bryan Goldberg
* The lesson from the strikes is simple: the old models of TV production and advertising are changing fast, and the brands that leverage the “shows” where the engagement is happening will be the ones left standing.
AI & cloud computing applications and services are increasingly dictating content consumption
* “The advertising industry is in a love-hate relationship with artificial intelligence.”
* Artificial intelligence is poised to transform entertainment as we know it, from blockbusters to pornography. But the power is still in the hands of humans.
Legacy media companies are throwing in the towel on their bets to own the consumer relationship in streaming and beyond.
* Just days after conceding the end of its association with the Phoenix Suns, Diamond Sports Group is officially walking away from its rights deal with the Arizona Diamondbacks.
* Streaming penetration of US households rose to 84% in Q2, the highest sequential change versus a Q1 since that data has been tracked by a HarrisX survey.
* Why Comcast buying a stake in ESPN "makes a lot of sense"
* ESPN held talks with NBA, NFL and MLB in search for strategic partner, sources say
Other
* The story behind Netflix’s unusual earnings calls
* Nearly 35% of streaming "pods" can last more than three minutes -- the same range as traditional TV advertising breaks, according to a Comcast Advertising survey.
* The current state of CTV measurement, the pressing need for direct connections, the role of CTV within the omnichannel equation, and the innovative partnerships paving the way for a brighter future.
* A good Twitter thread on the implications of the Barbenheimer weekend
* Streaming veteran Reid Tandy outlined a few key trends shaping the future of media: (1) Large media companies → niche media led by individuals and small teams; (2) Renting audiences → ownership of audience and (3) Ads-based internet → subscription-based ecosystems.