Warner Bros. Discovery CFO Gunnar Wiedenfels recently told the Goldman Sachs Communacopia conference that “we’re not optimizing for subscribers.” He argued that metric reflects “the old world of streaming service evaluation” and is a “hollow” measure of success.
In the macro sense, he is right: his competition is pivoting away from the metric because investors no longer value it (meaning, more growth doesn’t merit the mythical “streaming multiple”, or Netflix’s price-to-earnings ratio). Amazon and Apple offer streaming via memberships, and Disney is now laying the groundwork for Disney+ as a foundation for membership perks within the Disney ecosystem.
But, it also reflects how Warner Bros. Discovery management is rejecting the aggressive pivot to a pure direct-to-consumer (DTC) model under its WarnerMedia predecessors—so aggressive that it rejected distribution via Prime Video Channels and The Roku Channel, which led to the months-long standoffs I wrote about in June. The new management team are rumored to be approaching Amazon and Roku to revive those deals, and has been unapologetically open in their efforts to reverse the previous management team’s direction.
Regardless of my opinions on the fundamentals of WBD’s strategy, I think Wiedenfels is making an important counterargument to Wall Street and at an important time.
No rewards for subscriber growth
Wiedenfels was answering this question from Goldman Sachs’ Brett Feldman:
Really, the biggest part of the revenue growth algorithm for the next few years is not going to be ARPU anyhow. It’s actually going to be subscriber growth. And you’ve established a target of getting to 130 million subscribers in your DTC business by 2025. That obviously implies over 40 million subscribers when you adjust for some of the overlap. And we get questions about, is that too ambitious?
Wiedenfels responded, in part:
…the subscriber target, we really didn’t give that as subscriber guidance because I think that’s one of the issues with sort of the old world of streaming service evaluation. It’s a proxy. We have given guidance to breakeven in the U.S. for the D2C business in 2024, and we’re targeting $1 billion of profit for the D2C business globally in 2025 despite the fact that we’re going to be rolling out additional markets with associated start-up losses. So that’s what we’re working towards. We’ve given the 130 million subscriber number as one of the defining parameters to get to that financial outcome. But we’ve also been very clear that we’re not optimizing for subscribers. We’re optimizing for a long-term sustainable business for one additional distribution platform that’s going to drive a better monetization of our content and as such, better shareholder value. And one specific trade-off is going to be maybe, we’re going to come to the conclusion that in a certain market, the licensing model might be better from a shareholder value perspective than launching our own service might mean that we’re happy with a handful of subscribers less but better profitability or the other way around. We will figure that out over time. All of this is obviously, right now, very much assumption-driven, but we’re optimizing for value, not for a hollow KPI such as subscribers.
I think he’s saying “I have long suspected you would not reward me for growing streaming subscribers, now you haven’t and you likely won’t (ever), so can we please change the conversation to what a long-term sustainable media business will look like?”
It’s a bold point, and it’s not wrong. Subscriber growth as a metric never told the full story of a streaming business, and led investors to look past mistakes by streamers that have since come back to haunt their stock prices (Netflix especially).
Long-term sustainable media business
But, at the same time, Wiedenfels isn’t the best messenger for this argument because he is openly rejecting the strategy he inherited from one-time WarnerMedia CEO Jason Kilar and his team.
That strategy envisioned HBO Max and Multiversus, a free-to-play platform fighter game that now reaches more than 20 million players, as complementary forms of narrative storytelling that fans of Warner Bros. and DC will readily spend more to access. It’s not a membership like Disney or Amazon, but it does monetize fans of WB and DC content across both HBO Max and Metaversus (via in-app purchases). So it has the basic cornerstones of a membership business, but says little.
Also, as we learned in the Epic v. Apple ruling, monetizing gamers is a great business when done right. Less than half a percent of all Apple accounts represented more than half of total App Store billings in a quarter, paying in excess of $450 each. 7.4% of Apple accounts spent an additional $15-$450/quarter. So, there may be a share of at least $5 to $150 per month of additional ARPU to which Warner Bros. Discovery would have access if they opted to bundle HBO Max and Metaversus.
So why is Wiedenfels not selling this opportunity?
My guess is, as I’ve long argued, that Warner Bros. Discovery management simply does not buy into the DTC model. They don’t believe they need to always own the consumer relationship. As Wiedenfels says above, “in a certain market, the licensing model might be better from a shareholder value perspective than launching our own service might mean that we’re happy with a handful of subscribers less but better profitability or the other way around.”
If they can figure it out, they'll sell it to Wall Street.
On the other hand...
But, I also think Wiedenfels is making an important point: he doesn’t think media businesses should destroy shareholder value on business models they are unlikely to execute as well as a software businesses could.
He never says this, but it’s implicit from the above and from CEO David Zaslav’s "'We're big believers in the linear business" in the Q2 earnings call.
It also reflects the point about consumer data platforms I argued last week: If CDP business logic as *the* organizing principle ix what is necessary for media companies to grow ARPU, the companies most likely to solve it will rely on stronger management and operational models than CDP software vendors.
Wiedenfels and Zaslav are admitting that they are not that management team and do not have that operational model. But they were also saying that Wall Street shouldn't be asking them to. If investors want a different strategy then they can seek different management.
But Wiedenfels “charmed” the crowd that day and the crowd knew that the management team shareholder and Liberty Media CEO John Malone wants is the management team they’re going to get.
Must-Read Monday AM Articles
* Loyalty initiatives “might just be the ticket” for streaming services.
* A good overview of Spotify’s audiobooks strategy
* All premium SVOD suppliers in Australia, Asia-Pacific’s most mature market, are focusing on profitability rather than simple growth
The Vibe Shift
* Fabian Steltzer is using AI to make a movie (image, audio and text generation) — and you can help decide what happens next in the movie.
* TikTok may be disrupting Google as a default search engine ($ - paywalled)
The 200 vs. The 10 Million
* GroupM released its “The State of Retail” report, where they estimate global retail media is likely to reach $101 billion in 2022 (15% higher than a year ago) and will hit $160 billion in annual revenue in five years’ time
* MobileDevMemo’s Eric Seufert is beginning a series to explore how much macroeconomic factors are at play in the ad marketplace, and how much the impact of Apple’s Anti-Tracking Transparency is a factor
Aggregator 2.0 & Bundles
* The CEO of SkyShowtime, the European streaming joint venture of Comcast and Paramount Global, shared their strategy
Sports & Streaming
* Why you won’t see beer commercials on Amazon’s Thursday Night Football broadcasts
* Some interesting data on The 2022 International Volleyball Federation (FIVB) Volleyball Men’s World Championship final broadcast in 90 territories
Creator Economy, Platforms & Transparency
* Spotter offers direct payments to creators who let Spotter claim new ad revenue from their old videos, and has delivered $600MM in funding, to date.
* A good profile of British creative collective The Sidemen
* There’s a delicate balance between platform culture and viral arbitrage — and “most social networks are on the wrong side of it”
Original Content & “Genre Wars”
* How “data-mongers… wield far more influence at Netflix than at legacy Hollywood studios.”
* Twelve years after making their big-screen debut in a supporting role, the Minions of “Despicable Me” have emerged as one of the best-known franchises in recent Hollywood history, thanks to a strategy, and a willing fanbase. ($ - paywalled)
* Roku’s hiring of Charlie Collier from Fox “signals that Roku plans to spend more on original content.”
* Can “Emancipation”, even if it succeeds artistically, overcome the baggage that now accompanies star Will Smith? And can producer and distributor Apple find a win-win solution?
AVOD & Connected TV Marketplace
* Plum Research found “a noticeable shift” in the U.S. after Squid Game’s Netflix premiere — “the share of Korean productions grows much faster and at the expense of the Japanese ones.”
* The Information’s Kaya Yurieff profiled Jeremi Gorman, Netflix’s new advertising chief ($ - paywalled)
* Walmart data can now power ads on TikTok, Roku, and Snap. Advertisers can use that data to target ads on those social platforms, and measure the sales that come from those ads. ($ - paywalled)
* Amazon Studios is looking for new senior executives, including a head of first-party and exclusive FAST channels to join the AVOD original programming team.
Other
* CAA’s Bryan Lourd “isn’t a household name, but he wields a stunning amount of influence in Hollywood”, writes CNBC’s Alex Sherman
* A good read on the emerging tensions of telecommunications companies trying to evolve for business customers but relying increasingly more on the cloud computing oligopoly (Amazon, Google, Microsoft)
* A tech-savvy artist unearthed video footage of people working hard to capture the perfect shot for Instagram. It is a lesson in the artifice of social media and the ubiquity of surveillance. ($ - paywalled)