Good morning!
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".
I asked at the end of last week’s “Fare Thee Well, Media Conglomerate (...After April 2024)”: “Will [ESPN] be able to survive within Disney by April 2024? If not, how will it be better off outside of Disney?”
I cited one data point that raises cause for concern: All ESPN streaming viewing, including ESPN+, was 0.06% of all streaming viewing in July 2023, according to supplemental data from Nielsen’s The Gauge. I have trouble letting go of that data point because it basically says that ESPN+, which launched over five years ago in April 2018, still has not figured out direct-to-consumer marketing. But now, ESPN Chairman Jimmy Pitaro is promising investors ESPN “inevitably” will be a 100% direct-to-consumer business.
I don’t believe that will ever happen as long as Disney is a public company and/or as long as ESPN is within Disney. I have a simple reason for this from my own experiences as an ESPN+ subscriber: I never received any email marketing for the Wimbledon final last month, which was streamed live on ESPN+. Nor did I see any in my feeds.
And it’s not sour grapes on my part that I didn’t get notified: I was able to catch the closing moments of the match. But my X (néé Twitter) feed was filled with the text versions of journalists and friends wowed by the match, and I assumed I was missing it all because I had cut the cord years ago. A quick Google search out of curiosity during the final set of the match changed all that.
I’m also a Barcelona FC fan and ESPN.com knows that about me. ESPN+ broadcasts their matches as part of a $175 million per year deal with Spain’s La Liga. But, I almost never get notifications about when their matches are being played, or which ones are must-watch. And I can go on with other examples, but there are three key takeaways here:
There are basics of DTC marketing at which ESPN is objectively failing;
Disney and ESPN seem to be stuck in operational inertia for solving that key pain point, and
That is impacting the value proposition of ESPN+ with over 25.2 million subscribers.
I think Disney’s best solution is to simply borrow from Yahoo’s playbook and sell ESPN to a private equity firm.
Key Takeaway
ESPN management does not seem to be taking on the responsibility of taking care of the streaming customer, despite being over five years into the streaming marketplace. Both Yahoo and The New York Times offer valuable precedent for a better path forward for ESPN.
Total words: 1,600
Total time reading: 7 minutes
The update on Yahoo
I last wrote about Yahoo in last November’s “It’s Not Just Disney”. Its pivot to digital media as a public company failed and ended in a $5 billion acquisition by private equity juggernaut Apollo Global Management in September 2021. I wrote:
Apollo’s strategy with Yahoo has been to focus on a few promising properties like Sports and Finance, break their dependence on advertising and instead use subscription models to generate additional revenue per user.
Underlying that strategy is a new way of thinking about what Yahoo fundamentally is. Rather than thinking of itself as a media company, Yahoo is “a product company,” CEO Jim Lanzone told Yahoo Finance’s 2022 All Markets Summit in October.
Fast forward nine months and CEO Jim Lanzone has revealed to The Financial Times last month that Yahoo is betting on returning to public markets. There was one notable paragraph outlining the rationale:
Yahoo was “ready financially, the company has a great balance sheet, we’re very profitable,” he said. But Lanzone added that being private allowed the company to make necessary structural changes, creating business units similar to the model used when he was head of CBS Interactive. Yahoo “still ranks in the top five globally in total traffic, and “has more than 30 titles or business units, the biggest of which are branded as Yahoo such as finance, sports, news and mail, alongside other sites such as start-up news site TechCrunch.”
It is not exactly a one-to-one comparison to ESPN’s portfolio of linear channels (six total), website and ESPN+ membership and streaming service. Rather, the most important takeaway is Lanzone’s summary of all the work they did to take apart what Verizon had done with Yahoo under a media brand called “Oath”: “It was deployed for their business plan, not for what ours would be on the standalone base.”
Going private allowed Yahoo to rebuild a foundation for new corporate objectives and a new, more product and digital-focused corporate culture.
The Yahoo & NYT Precedents
The answer for what Disney needs to do with ESPN lies within two of Lanzone’s quotes, above: First, Yahoo could only pivot away from its parent company’s attempt at a media company while private. Second, Yahoo sees itself not as a media company but as a “product company” that could have only found its footing while private.
These two points reflect two arguments I have made recently.
1. “Strategic Inflection Point”
As I argued in last Monday’s Media Conglomerates & Strategic Inflection Points, the rationale for whether Disney needs to continue as a media conglomerate seems weaker. A quote from Bank of America analyst Jessica Reif Ehrlich to Yahoo Finance was particularly notable:
“Disney's assets feed off one another to power the business, with the studio IP driving the parks while linear networks provide the cash for Disney to funnel further investments into growth areas like streaming.” Meaning, the revenues and cash flow from ESPN’s six channels are crucial to Disney’s ability to invest in growth, and removing it from the Disney business model may do more harm than good.
Cord-cutting accelerating has meant both the loss of these revenues and ESPN’s newfound inability to generate revenue growth by increasing programming fees for pay TV distributors, as CNBC’s Alex Sherman recently reported. ESPN has found a financial cushion in a recent 10-year, $2 billion marketing agreement with Penn Entertainment to rebrand Penn’s sportsbook app.
But, beyond helping Disney’s business, it is becoming less and less clear why ESPN benefits from being within the Disney ecosystem. Returning to the data point that ESPN+ 0.06% of all streaming viewing in July 2023, and its failure to market tentpole content for the service, there is strong evidence that ESPN’s future is basically dead within the confines of a conglomerate structure.
2. The Daisy
In “The Daisy or The Flywheel?”, I dove into a diagram of a daisy that David Perpich — the publisher of The Athletic, now a subsidiary of The New York Times — drew for a journalist for The Wall Street Journal. The diagram starts with a core value proposition — news— and "then builds complementary services for which subscribers will pay a marginal subscription fee, or may subscribe to only one of those services."
ESPN has some overlap with The New York Times: sports news is one of its core value propositions. The daisy model suggests that for ESPN to succeed as a 100% DTC business, it needs to transform from a media company to a bundle of products. Basically, the daisy would be a sports version of The New York Times’ core value proposition of News, and the services around it — ESPN+, sports betting, fantasy sports — would be the products.
The New York Times is seeing both subscriber and revenue growth from the approach. Subscribers grew by 370,000 to 3.64 million, up 215% since Q2 2022, and up 11% from Q1 2023. Revenue also grew, up almost 9% from the previous quarter and up 55% year-over-year. They also reduced operating losses by one-third from $11.6 million in Q1 to $7.8 million in losses in Q2, and down 40% year-over-year from $12.6 million in losses in Q2 2022. Moreover, Yahoo has found revenue growth and profitability with the approach.
ESPN management is not going to be able to deliver any of these digitally as is. The daisy diagram may not be *the* solution but, directionally, it seems more sound than what ESPN management is currently executing as a DTC strategy.
Something has to give
Disney generated $14 billion in revenue and $3 billion in profit in the first half of its fiscal year 2023. Assuming those hold for the second half, too, Disney could be able to sell ESPN for at least $30 billion (5x $6 billion in profits) — though, assuming that the linear channels are struggling and eating into ESPN profits, ESPN could be worth as much as $40 billion to a buyer.
Disney badly needs the cash — it has $11.46 billion on its balance sheet as of its fiscal Q3. With a payment of at least $9 billion due in four months to Comcast for Hulu, that is not much. A lot of other things would have to fall into place. If Yahoo's past is precedent, some of those key details would be: (1) DTC-savvy investor like Apollo and (2) a digitally-savvy, digital native Jim Lanzone-like leader taking over ESPN from Jimmy Pitaro.
This is all easy to write. But I think the most important hire will be someone who will be able to navigate the institutional inertia in Bristol, CT. As I have written before, there is little institutional incentive to change without the economics of the wholesale model disappearing. I know from both professional and personal experience that ESPN’s failures to properly market tentpole sports events ESPN+ are no accident. ESPN remains stuck in a wholesale culture which AMC Networks Chairman described earlier this year as “somebody else takes care of the customer, somebody else watches the customer and somebody else actually ends-up pricing to the customer.”
Dolan also said, “When you go to DTC all those things become your responsibility and for an organization to move from wholesaler to retailer is to really significantly change its focus.”ESPN now faces decline despite its promises to investors that it is pivoting to DTC. Management does not seem to be taking on the responsibility of taking care of the customer, despite being five years into the streaming marketplace.
Something has to give, and both Yahoo and The New York Times offer valuable precedent for a better path forward for ESPN.
Must-Read Monday AM Articles
* The Information reported Amazon has had early talks with Disney about working on the streaming version of ESPN it is developing. [NOTE: I don’t think this will do anything to solve the problems I described above] ($ - paywalled)
The demand for “premium content” is being redefined by creators, tech companies and 10 million emerging advertisers.
* Starting August 31, YouTube will no longer allow clickable links in Shorts descriptions, comment sections, and vertical live feeds.
* YouTube is teaming with Jimmy Donaldson aka MrBeast, the platform’s biggest creator, to push NFL Sunday Ticket out-of-market games package for the 2023 season.
* Among Tinuiti’s clients, YouTube CTV spending jumped 31% while streaming services like Max and Netflix had growth of just 6%.
* Amazon's 'Thursday Night Football' is winning over advertisers after a bumpy launch year, and a top exec says it will be 'aggressive' in pursuing more live sports
* The owner of OnlyFans was paid $338 million in 2022 as the subscription site continued to gain traction with both creators and users.
* Social media, led by TikTok, now drives more new packaged goods product purchases for Gen Z than TV, according to a study by performance marketing agency Tinuiti. ($ - paywalled)
* Owlchemy Labs CEO Andrew Eiche has been experimenting with hand tracking, and he believes that Apple has figured out how to bring VR and spatial computing to the masses.
https://www.fastcompany.com/90941236/apple-vision-pro-hand-tracking-future-gaming
* Author Colleen Hoover’s popularity illustrates a growing number of genre-bending titles that have taken off in the BookTok age. According to Hoover and her publishers, her novels “fall into the New Adult and Young Adult contemporary romance categories, as well as psychological thriller.”
* The global games market is expected to generate nearly $188 billion in revenue in 2023 — up 2.6% from last year, according to a report from Amsterdam-based industry tracker Newzoo.
* Apple TV+ has amassed a rich library of original content in less than four years—with the awards season nominations to prove it. Can its dedication to curation help it overtake the top streamers, or will Apple lose its appetite for spending on prestige?
* Influencer Kai Cenat is a perfect example of the new type of celebrity. How did he summon a crowd of thousands to Manhattan’s Union Square?
AI & cloud computing applications and services are increasingly dictating content consumption
* TikTok is building a data-sharing solution called 'PrivacyGo' as it looks to grab ad dollars. PrivacyGo will function similarly to a data clean room, where two parties with separate data sets like email addresses and sales information can match data in a privacy-safe way to find overlaps in their audiences.
* Amazon has been teaching its machine learning systems to understand how football works so it can help viewers understand it, too. But we’re still not getting 4K.
* Journalist Janko Roettgers has a good breakdown on what’s next for Meta’s Ray-Ban Stories smart glasses
* YouTube has announced it will move away from third-party measurement for co-viewing on connected TVs (CTV), and instead trade based on its own measurements and surveys—triggering pushback from agencies around transparency concerns.
* Google is alleged to have violated not only its own YouTube Kids ad/data restrictions but also knowingly violated the data use restrictions of major advertisers across YouTube Kids channels.
* YouTube may still be tracking people who visit its iOS app, raising questions about whether the company is complying with industry privacy-focused efforts to give people more control over their data.
* The Trade Desk will start undercutting the fees publisher adtech firms tack on to digital ads in part because the adtech used by publishers often inaccurately prices their inventory.
* Still lacking an industry standard definition for made-for-advertising sites (MFAs), one of the largest media agencies, GroupM, has taken matters into its own hands to more thoroughly vet sites as potential MFAs within its programmatic business.
* Dave Morgan, CEO of Simulmedia, argued “A more pronounced threat to writers’ and actors’ livelihood today and tomorrow is from ad-tech platforms that destroy billions of dollars of value in TV and streaming video by shifting high-value ad dollars away from their products and into fake media inventory: “made-for-advertising” sites linked to search pages, or sites with unviewable video or sound off.”
Legacy media companies are throwing in the towel on their bets to own the consumer relationship in streaming and beyond.
* Amazon’s Fire TV Channels adds a sidebar and more free streaming content
* While the MCU has been able to create a fairly unified fan base (though not without its own share of sycophants and antagonists) nobody really has a strong idea of what DC fans want, or who the fans really are.
Other
* With better margins on advertising-supported offerings, Disney, Netflix, Paramount, NBCUniversal and Warner Bros. Discovery find themselves incentivized to usher consumers to those plans.
* When subscribers receive their last red envelopes from DVD.com — the rental-by-mail arm of Netflix still dedicated to the physical discs which is shutting next month — they can add those movies to their permanent collection.
* There are many ways to describe artist and film director Harmony Korine’s EDGLRD, it turns out, none of them simple. This is the first time Korine or his partners have talked about it publicly. It’s a design collective; it’s a creative factory; it makes movies that are not really movies, movies that are closer to video games, that sometimes are actually playable as video games. It also makes video-game video games.
* Microsoft is restructuring its proposed Activision Blizzard deal to transfer cloud gaming rights for current and new Activision Blizzard games to Ubisoft. The transfer of rights is designed to appease regulators in the UK that are concerned about the impact Microsoft’s proposed $68.7 billion deal will have on cloud gaming competition
* An explosion of data use has led to massive infrastructure costs. Is the era of cheap all-you-can-watch content about to end?
* Netflix has inked a “first-of-its-kind” deal with Jio Platforms, India’s largest telecom operator, to bundle the streaming service with the carrier’s two pay-as-you-go plans as the American giant pushes to expand its subscriber base in the key Asian market
* Independently produced “Sound of Freedom” is the surprise box-office hit of the summer. Produced a reported $14.5 million, it’s topped $160 million at the box office since its July 4 release, fueled by word-of-mouth endorsements, pay-it-forward ticket purchases and the efforts of conservative influencers and pundits who've positioned the film as an answer to "godless" Hollywood's domination of American entertainment.