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The Medium delivers in-depth analyses of the media marketplace’s transformation as creators, tech companies and 10 million emerging advertisers revolutionize the business models for “premium content”.
Each fiscal quarter, The Medium identifies three or four new trends that have momentum and seem poised to play out at a larger scale in 2023. These key trends pinpoint dynamic and constantly evolving developments in the media marketplace that are emerging from incremental shifts or fundamental changes.
Read the three key trends The Medium will be focused on in Q4 2023. This essay focuses on "In the shift from wholesale to retail models, there are many business models that delight consumers but no single, dominant one."
Last week, Bloomberg reported that 2023 earnings for Candle Media will fall almost 50% short of forecasts in 2023. Candle is the media and entertainment acquisition vehicle backed with $1 billion from private equity giant Blackstone, and run by ex-Disney executives Tom Staggs and Kevin Mayer. Candle projects Reese Witherspoon’s production company Hello Sunshine to deliver just 10% of projected earnings, and “Cocomelon” and “Blippi” owner Moonbug Entertainment will fall short by some 30%.
Candle has been most notable for its talent and its investments. I wrote in my last Medium Shift column for The Information that, like investment firm The Chernin Group, sees "the potential for Disney-like 'flywheel' business models within the creator economy." Candle bet big that content was generally undervalued by a market that didn’t understand flywheels or the creator economy.
As Lucas Shaw wrote in his newsletter “Screentime” last night, “Mayer and Staggs blamed the shortfall on an unprecedented series of events, including sales declines at YouTube, labor strikes and a pullback in spending across Hollywood.” One of those unprecedented events was Will Smith’s infamous "the slap" of Chris Rock at 2022’s Oscars. Two months earlier, Candle had acquired a minority stake in Will Smith and Jada Pinkett Smith’s entertainment company, Westbrook, and was estimated to have paid "about $60 million for more than 10% of the company". The market demand for both Will Smith and his wife Jada Pinkett Smith has fallen since, including Facebook ending its popular “Red Table Talk” original series with the family back in April 2023.
The Entertainment Strategy Guy recently argued Hasbro’s discounted sale of eOne Studios to Lionsgate for $500 million—a fraction of the $3.8 billion Hasbro paid for the entire Entertainment One business only four years ago— was a warning signal that deals like the ones Candle made "sure look like bad investments”. Candle's investment in Hello Sunshine was one of them. Shaw added to fuel to the fire last night, highlighting how financial firms investing in celebrity-led production companies like Hello Sunshine were betting those companies "would grow into something they weren’t yet."
I have written about Candle a few times over the past two years. I think the coverage of their investment hypothesis, above and elsewhere in the media, has been a bit too cynical. Candle has always bet on streaming demand evolving. But, it seems neither Mayer or Staggs anticipated “The Doom Loop of the Mogul”, and that may be their biggest challenge.
Key Takeaway
Even if Candle Media's prediction of four or five streamers remaining seems to be playing out, it seems they did not imagine executives at their buyers caught in a repeating cycle of delivering cost-savings over growth.
Total words: 1,300
Total time reading: 5 minutes
The Candle Media Hypothesis
Candle Media has two angles to its investment hypothesis:
Content, community, and commerce: “We feel that high-quality content with high-quality creators at the right brands create great connections in social media with large audiences.”
As Candle Media Co-CEO Kevin Mayer told SXSW last year, "The value is rising for independent content creators as streaming platforms hunt for more content.
Moonbug and Hello Sunshine reflect both angle. From the content side, the bet is that there is “must-have” content, and both Hello Sunshine and Moonbug are production companies in high demand. It is a bet that more production companies receiving more budget to produce more content will find growth from an increasingly inelastic demand for new content from streaming services.
The second angle is that the trio of “content, community and commerce” have the potential for Disney-like “flywheel” business models within the creator economy. Moonbug generates revenues from YouTube ads, licensing to Netflix and other platforms, and merchandise. Reese Witherspoon's Draper James clothing brand and her popular book club also form a “flywheel” for the Hello Sunshine brand and its productions.
The acquisition of Hello Sunshine cost $900 million or 3x its projected 2022 revenues—and notably *not* earnings—of $310MM in August 2021), and Moonbug was bought for $3 billion in November 2021. Moonbug’s revenue grew 148% in 2021 to $149.2 million, and it would have posted a profit if it had not incurred costs related to the Candle acquisition. The implication is that independent of Candle, Moonbug would have been okay in this market but Hello Sunshine would have faced declining confidence from its previous team of investors. Candle still believes strongly in both.
I wrote in February 2022, “Candle Media's business logic, in broad brushstrokes, reflects an interplay of betting on guaranteed growing production company revenues while assuming growth can be found in riskier creator economy business models.” Today, despite the difficult economic circumstances in Hollywood, Candle is still profitable and growing.
Revisiting Four Scenarios for Candle’s Future
Also in that February 2022 essay, I argued that Candle Media's hypothesis implied four potential outcomes across its portfolio in 2022 and beyond:
Production revenues stay within projections, and creator economy revenues stay flat
Production revenues stay within projections, and creator economy revenues increase
Production revenues increase, and creator economy revenues stay flat
Production revenues increase, and creator economy revenues increase
Obviously, none of those predicted paths envisioned writers’ and actors’ strikes and a five-month-long work stoppage, or I would have two others for "Production revenues decrease, and..."
The point of those predictions was to further flesh out the prediction of inelastic demand for productions from its portfolio of investments. Mayer has publicly arged a nuanced, skeptical take that this demand will narrow into “four or five big global services”, at most, emerging at the end of the “streaming wars”. He also envisions smaller niche programming services “doing very well, continuing to be profitable, but smaller”.
The best insurance policy against that declining demand is to invest in content for which the demand would be inelastic. Their assumption was never “the amount of money being spent on programming would continue to soar”, as Lucas Shaw wrote last night. Only some of that spend would grow.
The Doom Loop of the Mogul
Candle does not seem to have anticipated The Doom Loop of the Mogul dynamic that emerged with the 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 doom loop captures the changing incentives of buyers in post-strike Hollywood. Production budgets will be inevitably higher because the agreement ending the writer’s strike has resulted in higher compensation structures for writers. Any future resolution to the ongoing actor’s strike drive budgets higher, too, as actors demand better compensation from streaming. So, studios and streamers buying series and movies will be forced to make fewer bets with a focus on efficiency. Until there are four to five streamers left, the best business model for studios and streamers will not be active buying but rather to get as many at bats with limited internal production budgets and growing costs.
In other words, demand will be inelastic from streaming but it also be more selective and cost-conscious. Budgets will be higher and also structured to be more risk-averse. The assumption of inelastic demand assumes the free market will price a production optimally, but The Doom Loop of The Mogul reflects the streaming business model will not deliver optimal pricing for Candle. Distribution terms will reflect internal accounting machinations, first, and the value of the production on the free market, last.
Candle seems not to have assumed that a more cost-conscious streaming model will mean studios with owned-and-operated streaming services will not be partners in the truest sense of the term, or that streaming services will not be able to deliver better economics over time.
Even if Candle’s prediction of four or five streamers remaining seems to be playing out, it seems they did not imagine executives at their buyers caught in a repeating cycle of delivering cost-savings over growth. Candle will always be navigating cycles of discounting baked into the inelastic demand from studios, at least until four or five streamers figure out how to deliver shareholder value from streaming. So, their revenues growth will always be lower than projections. That may be the real challenge that Candle faces.
Must-Read Monday AM Articles
* Today, pricing a show is far more difficult -- in part because there's no standardized Nielsen-esque middleman and streaming platforms are reluctant to share metrics with anyone.
* Studios are aiming for a much more efficient allocation of programming resources with the goal of generating more consistent returns on content investments. In other words, building a library of movies and TV shows that all contribute to overall platform success is integral. No more mooching!
* Sony’s chairman of global TV studios Ravi Ahuja warned that the end of the peak TV era will likely “be painful for most companies,” as cost-cutting measures across the industry leads to less shows and money spent on marketing.
* Things are bleak, “but this could turn out to be the best year in entertainment for decades”.
* With the actors’ strike ongoing, some new scripted productions may not get to networks and platforms until the spring -- or later. It's in the spring when media agencies are deep into projecting their cost/availability needs in terms of available inventory, and estimated impressions/viewership going into next season.
The demand for “premium content” is being redefined by creators, tech companies and 10 million emerging advertisers.
* Almost a year into owning the social-media platform, Elon Musk’s vision for making X a competitor against the likes of YouTube is coming into greater focus after improving its video capabilities developing revenue sharing with users creating content for the site to make it a more appealing home. ($ - paywalled)
* The former Twitter is incentivizing violent content, which will only become worse to stand out to users.
* Netflix plans to raise the price of its ad-free service a few months after the continuing Hollywood actors strike ends. ($ - paywalled)
* Chef and entrepreneur David Chang has signed on with Amazon’s Prime Video to do food-driven segments for select games in the “Thursday Night Football” package.
* After just more than a year at Netflix booting up the streamer’s ad business, Jeremi Gorman is leaving the company. Amy Reinhard, previously VP of studio operations, will succeed Gorman as president of advertising.
* Spotify plans to offer subscribers up to 15 hours of free audiobooks each month, an attempt to better compete with Amazon.com-owned rival Audible and find a path to profitability.
* YouTube Premium Lite subscribers in Europe will soon be required to upgrade to a full Premium subscription (which includes YouTube Music), or else they’ll start seeing ads once again.
* TikTok is the latest platform offering an ad-free experience to its users. The ByteDance-owned app has confirmed that it is testing a premium subscription tier in regions outside of the U.S.
* The TikTok version of Mean Girls was only up for a single day, but that was long enough for the stunt to generate a wave of reactions across the internet. Some observers noticed that Paramount seemed to adopt the strategy used by content pirates.
In the shift from wholesale to retail models, there are many business models that delight consumers but no single, dominant one.
* Viewers have fled prime-time lineups for streaming outlets, with one notable exception: people over 60.
* The real question we must ask to omnichannel strategies is whether it is good for business. To do it well, you have to expend a huge amount of strategic, political, and technical energy, and often, you need to ask the executive team for millions of dollars to make it happen. What’s the payoff?
* YouTube TV subscribers filed a class action lawsuit accusing Disney of essentially operating the business as a single entity, which has allowed it to drive up prices for live-streaming pay TV services across the board.
* By licensing Dune as a “co-exclusive” to Netflix will generate some cash for a company that needs cash because it has close to $50 billion in debt. And the other is that putting the first Dune on Netflix could help generate more ticket buyers for Dune 2 when it debuts next year.
* The NBA ideally would like no more than three packages with its next media rights deal as it decides among TV carriers and streaming services, say people familiar with the matter.
* A recent change in antitrust law made it easier for Taylor Swift and Beyoncé to bypass big movie studios when seeking distribution for their concert films.
* Sharing series with Netflix isn't only “all about the Benjamins”. It's also about the exposure.
* The Disney-Charter deal “further marginalizing secondary basic cable networks” according to a new report from S&P Global Market Intelligence analyst Scott Robson.”
* With help from Beyond Sports, ESPN and Disney combined Toy Story and the NFL in a fully animated telecast of the Jaguars-Falcons London game.
Why the creator economy helps to explain emerging AI business models
* Jimmy Donaldson aka MrBeast‘s Feastables brand is joining the likes of PayPal, Walt Disney World, Motorola, and Honey as an official NBA jersey patch sponsor.
* Dave Portnoy, the controversial founder of Barstool Sports, is now almost certainly America’s most influential person in pizza.
Other
* Amazon’s Kelly Day and WBD’s JB Perrette spoke about their roadmaps at the APOS conference for the Asia Pacific Media and Telecommunications industries
* Baseball’s Houston Astros and the NBA’s Houston Rockets have acquired AT&T SportsNet Southwest from Warner Bros Discovery and will relaunch the channel Tuesday as the “Space City Home Network.” The move completes the media conglomerate's exit from the regional sports networks (RSN) business,
* Xumo, a joint venture between Comcast and Charter formed to deliver the next generation of video entertainment, announced the launch of Xumo Stream Box to Spectrum households, with plans to bring it to Xfinity homes soon. The Ankler’s Sean McNulty had a good breakdown of the questions raised by the launch.
* The Information reported TikTok parent company ByteDance is planning to buy at least $300 million worth of stock from current and former U.S. employees in a deal that values the privately-held company at $223.5 billion, down 26% from a similar buyback offer a year ago, according to two people with direct knowledge of the situation. ($ - paywalled)
* Activist investor Nelson Peltz is now one of Disney’s largest investors with a stake worth upward of $2.5 billion, and is making a fresh push for multiple seats on the board including one for Peltz.