PARQOR is the handbook every media and technology executive needs to navigate the seismic shifts underway in the media business. Through in-depth analysis from a network of senior media and tech leaders, Andrew Rosen cuts through what's happening, highlights what it means and suggests where you should go next.
In Q4 2022, PARQOR will be focusing on four trends. This essay focuses on the themes, "Linear channels seem doomed. What happens next?"
Some housekeeping before the holidays
I returned to the Hollywood Breaks podcast on Friday in “TikTok BOOOOM!!!”. It was a fun conversation, as you can see in the first few minutes (you can find the audio version here). We started on the Taylor Swift Ticketmaster fiasco and what that reveals about what we don’t understand about consumer demand. We then moved into a really good discussion about how fragmentation of distribution models is impacting Hollywood content creators, marketers, executives and audiences.
Barring any last minute news drop, there will be no mailing on Wednesday or Friday. We’ll return to a normal schedule on Monday.
My next monthly opinion piece is scheduled to be posted on The Information on Tuesday.
Chapek Out, Iger Back
First, wow. I shouted “Wow!” audibly when the news of Robert Iger’s return as Disney CEO popped up in my Twitter feed last night.
Second, if you guessed that I was about halfway through writing a different essay before the news broke, you’d be right.
So, let’s start here. Iger stepped down before the pandemic. Iger is now returning with recessionary headwinds looming and his linear business facing cord-cutting and softening advertiser demand.
Key Takeaway
Iger thought streaming would solve for the disruption of legacy media distribution. Not only has fragmentation not played out the way it was intended to, his vision been proven wrong.
Total words: 1,300
Total time reading: 5 minutes
Iger is also returning after cord-cutting accelerated in Q3 2022 and Procter & Gamble announced it is cutting brand spend, which in turn will threaten Disney’s upfronts and therefore its linear business in 2023.
And within that context, Iger is returning at a time when Disney+ growth has plateaued, it is losing $1.5B in a quarter, and according to Nielsen, YouTube has 4.25x the TV usage to Disney+ in the U.S.
Streaming was intended to dampen the losses of the inevitable decline of the linear business. Instead, it is a worse business.
And then Iger writes this in an email to staff last night: “I know this company has asked so much of you during the past three years, and these times certainly remain quite challenging, but as you have heard me say before, I am an optimist, and if I learned one thing from my years at Disney, it is that even in the face of uncertainty -perhaps especially in the face of uncertainty - our employees and Cast Members achieve the impossible.”
Piece it all together and my takeaway is that Iger’s vision of streaming solving for the fragmentation of legacy media distribution not only hasn’t played out the way it was intended to. His vision has been proven wrong.
Problem #1: Fragmentation & The Creator Economy
I think a key problem with Iger’s vision is reflected in the point I made about fragmentation in the Hollywood Breaks podcast interview.
Meaning, I think Iger’s streaming bet defined the threat of disruption of fragmentation too narrowly. Iger’s streaming pivot was intended to prevent Disney’s linear and theatrical from being disrupted by Netflix and third parties in the streaming revolution. He perceived it through the lens of what had happened to music and newspapers and concluded that Disney wasn’t going to let third parties kill the economics of its distribution business. The optics of that bet succeeded initially.
But, in defining fragmentation as related to distribution, only, he failed to anticipate the fragmentation of the economics of consumers paying for more than just content.
By the fragmentation of the consumer relationship, I’m referring to this quote from the Hollywood Breaks interview:
“really what the creator economy is doing and really what the internet enables is that it fragments spend and distribution into a variety of things. YouTube’s answer to fragmentation is ‘Yes, we are a distribution channel but we are also a way tip your favorite creators, also a way to put stickers and make the chat experience that much better for you, for them, make it that much easier for you to buy merchandise.’”
Iger originally envisioned consumers with inelastic demand for Disney content across smartphones, tablets and TVs. But he failed to anticipate that the creator economy of YouTube and TikTok would enable more exciting user experiences than lean-back streaming, and that those ad-supported platforms would figure out additional ways to get consumers to pay beyond streaming (e.g., Chat, merchandise)
Problem #2: Fragmentation & Advertising
Iger predicted “linear and satellite TV is marching toward a great precipice, and it will be pushed off. … I can’t tell you when, but it goes away”, but I think he failed to anticipate how this would play out in the advertising marketplace.
Now, part of that is failing to anticipate Apple’s Anti-Tracking Transparency initiative, for which he can be excused. And, also, there’s reason to believe that it contributed to Procter & Gamble’s seismic move away from brand spend and towards digital spend because it killed the problem of bots. That problem had led to P&G pulling back up to $1B in digital spend back in 2019 and 2020.
So he can be excused for that, too. But he also failed to anticipate that Disney+ would require an ad-supported tier, or that Free Ad Supported TV services like Pluto TV would end up capturing nearly 50% of U.S. TV audiences of Disney+. He’s not alone — Netflix management made the same mistake, only to correct it this year — but growing audience demand for ad-supported models changed the optics of his vision for Disney+ from visionary to short-sighted.
An Outro for Chapek
I wrote back in March: “Bob Chapek seems to be a fiduciary both rejecting the constraints of Bob Iger's more conservative vision for Disney and making his own attempt to be visionary - despite little proven track record of being one. Despite some real wins, to date - including FY Q1 2021 subscriber numbers outperforming investor expectations - that seems messy in both concept and execution.”
I thought Chapek’s “Disney Prime” vision, which saw Disney+ as a gateway for monetizing users with e-commerce and Parks perks, was directionally right. As I wrote back in September: “An Apple or Amazon-esque "Disney Prime" would be a great story for Disney, which is seeing less mileage in its streaming story with investors. With the pandemic seemingly in the rearview mirror, the growth story from streaming is gone and a growth story for Parks is re-emerging: Q3 revenues were up 70% year-over-year and 92% over the last nine months.”
But I also thought the model came with risks. “in trying to imitate Amazon Prime, Disney would need to operationally transform itself again for the second time in three years. Also, Disney will need to be less transparent with investors after a recent shift towards increased transparency with subscriber numbers. That would be a reversal that would lose the confidence of investors.”
I never imagined Chapek would be fired, largely because Disney would need to figure out direct-to-consumer for its next phase. But, after writing the above, I now realize I didn't correctly read the 13% stock drop after the FY Q4 2022 earnings call.
It is now abundantly clear Wall Street is freaked out by the threats to the linear business, and it is treating all media stocks equally on that point. It’s one thing for affiliate revenues to disappear and not come back. It’s another when over $5B in annual U.S. linear spend from P&G is going to be permanently shifted towards programmatic, and other advertisers are likely to follow suit.
A CEO from Theme Parks can’t allay those fears, not just at Disney but at any company. He doesn’t have the experience and he doesn’t have the relationships with advertisers or with content. Chapek was asking investors to bet on his ability to execute a pivot at a time when their worries were caught up in linear.
It’s going to take a CEO with TV DNA to figure out how to manage Disney’s TV decline. That's Iger, who cut his teeth as a TV executive under ABC Sports legend Roone Arledge. As for streaming, I’m less sold that Iger is the right guy: the model has evolved so rapidly and so significantly away from his original vision of global, inelastic demand for a low-priced subscription-only offering.
And just to throw it out there: could Disney merge with another company? If you’re as bearish about the immediate future of its linear business as I am, it may be a necessary outcome.
Must-Read Monday AM Articles
* The Wall Street Journal article we referenced about advertising holding companies including WPP, IPG, Omnicom and Publicis having transformed to provide data and e-commerce services after facing numerous challenges ($ - paywalled)
* The must-read article of the week is James Stewart’s “Was This $100 Billion Deal the Worst Merger Ever?” about AT&T’s acquisition of Time Warner ($ - paywalled)
The Vibe Shift
* Bloomberg’s Lucas Shaw has a less cynical take on Warner Bros. Discovery CEO David Zaslav’s “We don’t need the NBA” interview than I had last Friday
* Condé Nast CEO Roger Lynch is on a PR blitz to end the year, and gave an exclusive interview to The Hollywood REporter about about its effort to mine archives for film and TV projects, weathering an advertising downturn and a commitment to high quality digital video.
* Sharon Tal Yguado, who developed shows like The Walking Dead, The Lord of the Rings: The Rings of Power, The Boys, and The Wheel of Time — launched Astrid Entertainment for video games. It is currently working on its first, currently unannounced game designed to bring players together in worlds where they can define their own stories
* The Verge’s Nilay Patel interviewed Phil Spencer, CEO of Microsoft Gaming, about the present and future of the business
* Blizzard Entertainment is suspending most of its gaming services in China after failing to renew a licensing deal with NetEase, a Chinese gaming partner.
The 200 vs. The 10 Million
* Advertising holding companies including WPP, IPG, Omnicom and Publicis have transformed to provide data and e-commerce services after facing numerous challenges ($ - paywalled)
* The Federal Trade Commission should scrap its “misguided” effort to issue online privacy rules, the industry group Interactive Advertising Bureau says.
Aggregator 2.0 & Bundles
* MobileDevMemo’s Eric Seufert mapped out he post-ATT future of mobile free-to-play gaming
Sports & Streaming
* With Telemundo as the official Spanish-language broadcaster in the United States, Peacock will simulcast the games and have them available on-demand and other ancillary programming.
* Apple announced pricing for its MLS package, with a full "Season Pass" available for $79 for subscribers to its Apple TV Plus service or $99 for those who do not subscribe to Apple TV Plus.
* My favorite article on the World Cup by Simon Kuper, writing about the middle aged players ($ - paywalled)
* Qatar’s last-minute decision to ban alcohol sales immediately outside stadiums came directly from the emirate’s royal family. ($ - paywalled)
Creator Economy, Platforms & Transparency
* The unconventional moves TikTok has made to ramp up its ad business ($ - paywalled)
* MrBeast overtakes PewDiePie as most-subscribed YouTuber
* Cashnet USA used SocialBlade’s database of YouTube channel data to isolate the top-earning channel in every country and estimate of the channel’s lifetime earnings to figure out the 2022 YouTube Rich List
* A big week for Candle Media: Netflix will launch the first spin-off show set in the world of Blippi starring Meekah, and PUMA is teaming up with Moonbug Entertainment to launch a collection inspired by CoComelon characters that will be available exclusively at Kids Foot Locker next spring
Original Content & “Genre Wars”
* The Los Angeles Times’ Wendy Lee went behind the scenes of Netflix’s “Bridgerton” Balls. “Netflix and its partners have sponsored more than 800 “balls” since March in such cities as Atlanta, Montreal, Los Angeles and San Francisco, which — by the way — have resulted in 38 marriage proposals and at least four groups arriving by horse and carriage” ($ - paywalled)
* Deadline summarized Disney CEO Bob Chapek’s appearance at a Q&A at the Paley Center for Media’s International Council Summit in New York called “The Walt Disney Company: The Next 100 Years”
* Toy giant MGA Entertainment — home to popular retail brands such as L.O.L. Surprise!, Rainbow High, Bratz and Little Tikes — has launched MGA Studios, a content division backed with $500 million in capital and assets to drive acquisitions and new production.
AVOD & Connected TV Marketplace
* The Information’s Wayne Ma dove into the weeds of Apple’s “cautious” relationship with its growing and evolving ad business
* The critical use cases the TV industry must solve across linear and CTV.
Other
* Why PARQOR favorite source of quotes IAC Chairman Barry Diller’s investing record through conglomerate IAC rivaled Berkshire Hathaway until this year’s tech meltdown. His "catch-and-release style" could pay off again. ($ - paywalled)