In Q1 2023, PARQOR will be focusing on four trends. This essay focuses on the trend, "Media companies have millions of consumer credit cards on file. What happens next?”
If I were to self-critique my newest “Medium Shift” opinion essay from last Friday, it feels like there’s a logical step missing in my argument: because media companies have millions of credit cards on file, they should be able to figure out additional direct to consumer models. So why is that not happening?
I have asked before why there aren’t more companies imitating Sony, which has put together the pieces of an anime “flywheel” around streaming service Crunchyroll through mergers and acquisitions and turned it into a growth machine.
We have very little public information about the business since its $1B acquisition by Sony last year. However, private conversations I’ve had suggest that it’s doing quite well, and now its corporate description reads as:
Crunchyroll connects anime and manga fans across 200+ countries and territories with the content and experiences they love. In addition to free ad-supported and subscription premium content, Crunchyroll serves the anime community across events, theatrical, games, consumer products, collectibles, and manga publishing.
At Viacom and other traditional media companies, I have witnessed digital media executives tasked with innovation opt for risk averse decisions at the expense of solving for market trends. So, I understand too well from experience why innovation suffers or is held back within traditional media companies (that’s the key reason behind PARQOR’s fiduciary vs. visionary framework)..
Key Takeaway
When there is precedent at Sony Pictures Entertainment for flywheel business models, the question is why is that not happening elsewhere? AMC Networks and NBCUniversal’s Peacock have recently offered some helpful answers.
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But Sony didn’t innovate from within. Instead, they both acquired and built businesses (Funimation in 2017, Crunchyroll in 2020) around two databases of fans of anime who paid for subscriptions.
M&A is a more familiar strategy than in-house innovation to most of these companies — even Disney ultimately solved for streaming by buying BAMTech after failing to build something that could scale in-house. There is plenty of literature out there debating whether M&A results in value creation for shareholders, and I would prefer not to go down that rabbit hole in this essay. Rather, the point is a quick look at executive biographies across public media companies tells us more legacy media C-suite managers are familiar with M&A as a strategy than they are with software coding: As I pointed out on Friday, new Netflix Co-CEO Greg Peters is the only CEO of a publicly owned media company who has actual, hands-on experience designing, building and managing streaming-media software.
So when an obvious solution of M&A to build flywheels similar to Sony has not played out in the broader media market, even when there is solid precedent at Sony and in the creator economy, the question is why is that not happening? AMC Networks and NBCUniversal’s Peacock have recently offered some helpful answers.
AMC Networks
In December I wrote about a letter to shareholders form AMC Networks Chairman James Dolan which conceded:
It was our belief that cord cutting losses would be offset by gains in streaming. This has not been the case. We are primarily a content company and the mechanisms for the monetization of content are in disarray.
In that essay I compared AMC Networks to Sony: the latter “sees the Internet as a means of delivering multiple business models that can be tied together under one roof and to one user credit card”, but the former has stuck to streaming.
That missing logical step from Friday’s essay pops up here: why isn’t AMC Networks figuring it out like Sony has? I have been bullish on their bundle strategy to date: it captures passionate fans of horror (Shudder), independent film (IFC, Sundance Now) and British TV (BBC America)and other genres, and offers them access to multiple apps with one subscription fee. So, to me, sitting where I sit, it’s hard to argue that AMC Networks has done anything wrong in streaming other than betting on streaming revenues to replace cable revenues, alone.
Would they be better off liberally borrowing from Sony’s strategy and building out a flywheel built around M&A? Arguably, yes. It’s absolutely worth exploring the argument and the fact that model can grow average revenue per user better than relying on streaming, alone.
But, the open question raised by both Dolan’s letter and CEO Christina Spade stepping down in November after being on the job for less than three months is whether James Dolan is the right owner for that business, and/or whether he has hired the right management to execute it (and yes, this Knicks fan is well familiar with the question “whether James Dolan is the right owner for that business”).
NBCUniversal’s Peacock
A similar question emerged for NBCUniversal’s Peacock after Comcast’s earnings call on Thursday. The continued negative story around Peacock seems based on two key things: it incurred $2.5B in losses in 2022 and $978MM in Q4 2022 alone, the latter reflecting “the cost of new content” such as Peacock’s exclusive next-day broadcast and Bravo content, its lineup of Pay-One titles, its day-and-date releases (e.g., Halloween Ends), NFL, Premier League and the World Cup. It also faces continued Wall Street skepticism about the streaming model and whether it can ever be cash flow positive with expensive content costs like its sports deals.
The thing is, Peacock subscribers grew 33% (by 5MM) in Q4 2022 and by 122% year-over-year in Q4 (up from 9MM at the end of 2021). Replace 2022 with any year before the pandemic and this growth story is extraordinary. Wall Street would have loved it then. Moreover it has pulled off growth with live sports, something that ESPN+ seems to be less capable of — as I wrote two weeks ago, its subscriber numbers have grown from 3.5MM to 24.5MM since November 2019, almost in lockstep with Hulu (26.8MM SVOD Only subscribers in November 2019 to 42.8MM in November 2022) after the launch of the Disney+ bundle.
I also wrote “Peacock seems to be on a path where its streaming business model will rely more on scarcity driven by a portfolio of mostly sports and movies (“Halloween Kills”, “Halloween Ends”, “Marry Me”), but less so original TV series.” Compared to Crunchyroll — which, again, serves the anime community across events, theatrical, games, consumer products, collectibles, and manga publishing — Peacock seems self-defeatingly limited as a value proposition for a business losing $2B per year.
That missing logical step from Friday’s essay pops up again here: why isn’t NBCUniversal figuring it out like Sony has? Would they be better off liberally borrowing from Sony’s strategy and building out a flywheel built around M&A?
NBCUniversal Jeff Shell told investors on the call, “we're always looking for bolt-on acquisitions that bolster our business”, and that “don't necessarily involve big industry consolidation questions.” He gave examples of Dreamworks and Puss in Boots, and its investment in Blumhouse.
Same as we saw with AMC Networks, does this imply Comcast CEO Brian Roberts and/or Jeff Shell should rethink Peacock as a flywheel? They both have track records M&A, and openly want to pursue it, but would M&A lead to meet their promise of growth to investors actually position the business to grow given how the streaming paradigm is evolving towards flywheels?
And to rephrase the question another way, Comcast and NBCUniversal now have millions of credit cards on file — both with Peacock and Comcast’s broadband and cable customers — they should be able to figure out additional direct to consumer models. So why is that not happening?
NBCUniversal and Comcast would say they are — Peacock is baked into its Xfinity, X1, Flex and Xumo platforms, and Comcast is now beginning to charge for it after offering it for free to Comcast customers. They are still figuring out whether customers are willing to pay for Peacock and why.
Information & Generation Gaps
The danger here is that the best explanation for the missing logical step in my essay is an information gap. It is easier to pinpoint that a company is not doing something than it is to understand why they are not. Being a public or private company is an information game, and media companies especially prefer to be black boxes.
So the implication of celebrating a Greg Peters or someone with software coding experience risks implying that older management is failing and a generation shift is necessary in media. And it may be true that the skillset for understanding flywheels may be generational and/or related to more technical backgrounds (like Greg Peters’), and the older, generation of media executives is more comfortable with sticking with the linear model because it is reliable for cash flow, and it is safer to explain to investors.
But none of Sony Picture Entertainment’s executives are software coders, so celebrating Sony isn't pushing for generation change. I think as we start to learn more about the Crunchyroll success story in 2023, we will learn both about why it succeeded and what all these other C-Suite executives are missing. Maybe they don’t need to be replaced, but they do require a shift in perspective.
Must-Read Monday AM Articles
[AUTHOR’S NOTE: I have decided to tweak how I write this section. It is no longer going to be the long list of curated articles under themes and trends. I will limit this section to four must-read articles from the past week.
I will still curate a long list of curated articles under themes and trends, but I am going to set up a private Slack channel for subscribers where I will share those in real-time.
I imagine the value add will be two fold:
It will be more dynamic than a list in a mailing
In an ideal world it creates discussion around the articles - because they’re organized around trends and themes - and therefore creates some basics of a community around PARQOR.
I plan to launch the channel this week, and subscribers will have automatic access to it.]
Articles
* Sinclair’s Sports Channels Prepare Bankruptcy, Putting Team Payments at Risk - I have long been writing about the uncertain future of Sinclair’s Regional Sports Networks in a cord-cutting universe (I wrote about this in May), and now it seems a certain future looms. Bloomberg does a terrific job outlining the moving pieces at play, including how MLB is becoming a stumbling block for the businesses.
* How The Trade Desk went from media agency BFF to frenemy - Several media agencies complained to Digiday that The Trade Desk “has become less transparent, more expensive to use — and perhaps so big that they have begun to fear it.” I haven’t totally bought into The Trade Desk CEO Jeff Green’s vision for streaming, but the company seems to be forcing agencies to do so.
* TikTok undercuts social media rivals with cheap ads in battle for growth - A good overview of how TikTok is trying capture more of the video advertising marketplace as social media evolves to becoming more “premium”. ($ - paywalled)
* Sport-averse Netflix finds itself between Chris Rock and a hard place - A good read about the market dynamics at play for Netflix in sports and live events as we near Netflix’s first livestream ever (Chris Rock).