In Q1 2023, PARQOR will be focusing on four trends. This essay focuses on two trends, "Media companies have millions of consumer credit cards on file. What happens next?" and "The definition of scarcity is continuously evolving away from linear. What happens next?”
Bloomberg reported on Friday that Disney is “exploring more licensing of its films and television series to rival media outlets as pressure grows to curb the losses in its streaming TV business”. Disney's entire streaming bet was based on keeping its entire library behind a walled garden and pivoting to Netflix’s distribution model.
Disney now joins its more risk-averse legacy media competition like Warner Bros. Discovery and Paramount that have given up on the value proposition of exclusive walled gardens in streaming. The market has regarded Disney as Netflix’s direct competitor, to date, because both were focused on growing their subscription models, and both treated licensing revenues as either an experiment (Netflix) or necessary for dealmaking (Disney). Disney was so deep into its bet on subscriptions that as of last Fall it was selling investors and D23 fan conference attendees on a “Disney Prime” offering of perks associated with Disney+ that would mirror Amazon Prime membership.
All of that seems either off the table or less of a priority, or perhaps even both.
The significance of this decision may be best understood via something said by Amazon founder Jeff Bezos which popped into my Twitter feed this week. In the video he describes how he built Amazon around the answers to the most important question no one asks, "What’s not going to change in the next 10 years?"
Disney has just told the marketplace that, contrary to what Disney CEO Robert Iger wrote in his autobiography “The Ride of A Lifetime”, its future does *not* lie in owning direct-to-consumer (DTC) relationships over the next 10 years and beyond. We have much more certainty that legacy media will not solve for owning the DTC relationship over the next 10 years, and two of PARQOR’s four key trends for Q1 2023 offers some insights into Disney's challenges, in particular.
Key Takeaway
Disney's pivot into licensing distribution suggests its future is similar to its smaller competitors, and with real challenges from Smart TV.
Total words: 1,000
Total time reading: 4 minutes
1. Media companies have millions of consumer credit cards on file. What happens next?
Disney’s rationale for pivoting into licensing is that it generates cash flow and that is what investors want to see. The implication is that streaming generates insufficient cash flow, something we already knew from Disney losing $1.5B in Q4 2022, alone, and from every legacy media business struggling to make a profit in streaming. It also implies that, looking ahead, streaming will not offset cord-cutting losses (something AMC Networks Chairman Jim Dolan recently acknowledged).
Perhaps the biggest implication from this pivot is something I had not considered before: having millions of credit cards on file may be more of an existential crisis than a competitive advantage for a legacy media business. At a conglomerate like Disney, the impressive scale of the business may belie either dysfunction and/or a lack of cooperation across divisions to optimize the value of that database. It is too large and therefore too paralyzed to solve the types of complex problem for which Netflix has delivered a singularly focused corporate mission.
For example, as I wrote two weeks ago, ESPN's 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. It raises a reasonable question of, but for the bundle, how many Disney+ subscribers would there be? The cynical answer is that, of 46.2MM Disney+ subscribers in the U.S. — and discounting for Canada (~10%) — there may be only 21.7MM subscribers who need Disney+ without the bundle (just there may be 3.5MM who need ESPN+ without the bundle).
Disney’s biggest advantage — its conglomerate status — seems resistant to digital evolution as Iger envisioned it. And that would suggest its future distribution models will be no different from smaller legacy media businesses like AMC Networks for the next 10 years.
2. The definition of scarcity is continuously evolving away from linear. What happens next?
Scarcity is the linear distribution model’s historical moat — the linear model enabled multichannel video programming distributors (MVPDs) to aggregate millions of households locally, regionally and later nationally. It is still the best business model for Disney, particularly for driving operating income ($8.5B in 2022, compensating for $4.3B in losses) and, really, for every other legacy media business.
So, if scarcity is evolving away from linear over the next 10 years, and it is not evolving towards streaming, then where is it headed?
I think the implication of Disney’s reversing course is that no legacy media company can own scarcity unless they have another solution for aggregating scarcity. In the connected TV world that is effectively owning a smart TV platform, like Roku or Amazon. And, in legacy media, that’s Comcast which now has X1 and Flex (now Xumo) customers across Comcast, Charter and Cox for 68MM potential residential customer relationships. As I wrote last month, Comcast is solving for fragmentation by reinventing the wheel of its linear model: aggregating scarcity across multiple broadband and linear distribution households.
When compared to Comcast, it becomes clear that Disney or any company that does not own a smart TV solution does not have scarcity. And, once Disney decides to license its library to Comcast for its ad-supported and perhaps even streaming offerings, it will be relying on the likes of Comcast, Roku, Samsung, and Amazon (with which it already has a licensing deal for FAST-distributed content) for monetization.
That point of friction and competition is not going to change over the next 10 years with ad spend trending towards $43B in 2026 for Connected TV, and the majority of $65B in TV ad spend in 2026. The onus will be on Disney in 2023 and beyond to change those dynamics of friction between smart TVs and its subscribers.
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Author's Correction: I originally wrote "Disney’s 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 was referring to ESPN+'s subscriber numbers. It has been updated, above.