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?”
I returned from Munich on Saturday. At DLD I had the privilege to present to trainees at Hubert Burda Media on PARQOR’s key trends for Q1 2023 (and the theme of this essay): “Media companies have millions of consumer credit cards on file. What happens next?”
A question emerged in preparation for that presentation: if the flywheel model is the obvious solution with millions of consumer credit cards on file, then why don’t we see more media CEOs announcing plans for flywheels built around their streaming services?
Ryan Faughnder of The Los Angeles Times asked two years ago why media companies *were* pursuing the flywheel model back in 2021. He interviewed business consultant and researcher Jim Collins, who coined the term in his 2001 book “Good to Great”. Collins argued “the idea, in essence, is to set up a virtuous cycle” that has the logic of momentum, and “fanbases grow as a result”. But, now they seem less likely to be.
Key Takeaway
In an ideal world, every media company with a streaming service is now building out flywheels. But that’s not happening, as Paramount Global and Taylor Sheridan’s "Yellowstone" universe reflect.
Total words: 1,300
Total time reading: 5 minutes
Former WarnerMedia CEO Jason Kilar recently said in a conversation with me on Twitter that “One of the biggest opportunities in entertainment is to delight the biggest fans in ways a one-size-fits-all model is not designed to do” and that YouTube and TikTok creators are the ones figuring this out, now: "The emerging roster of modern creators clearly gets this and has leaned into it from the start. Walt Disney would be proud of them."
So, in an ideal, hypothetical world, every media company with a streaming service shamelessly borrows from the creator economy, and reveals flywheel initiatives that drive growth, reduce churn and grow the ecosystem of direct-to-consumer (DTC) subscribers.
But that’s not happening, and Paramount Global offers a helpful example of why with Taylor Sheridan’s Yellowstone universe.
“Oh My God, How Did That Happen?”
IAC Chair Barry Diller told Kara Swisher in a 2019 interview that Amazon’s model “to people in the entertainment business, is like, ‘Oh my god, how did that happen?’”
I love this quote because it succinctly and amusing captures how no one in entertainment imagined they would be competing with a website that sells both house cleaning supplies and books (among millions of things) also could outspend them on TV. But Amazon will spend over $2B on “Lord of the Rings: The Rings of Power”, and it has been succeeding both in Nielsen ratings and in driving subscriptions to Prime. The Rings of Power delivered momentum to its flywheel.
Now that they are competing, the question is whether they need a flywheel model, too. Creators have proven that the basics of a flywheel can be plug-and-play with a Shopify account or a Patreon and some hyperlinks to merchandise and memberships under a YouTube video. Minus internal corporate politics (often a make-or-break constraint within media companies), there are few if any market obstacles in the way of media companies pursuing their flywheels.
Notably, Paramount Global’s approach to the Yellowstone universe of Taylor Sheridan is not a flywheel. Rather, it is building this universe out in “this tougher market” with “a familiar Hollywood strategy: prequels, sequels and spinoffs that tap into existing fanbases.”
From a management perspective, “familiar” is not only safe, it does not require an entirely new skillset nor does it require an entirely new team. The risk is manageable.
Notably, Paramount is opting not to be building a flywheel model like the one Chip and Joanna Gaines have built around their Magnolia brand in Waco, Texas, which I wrote about last March: “the value of Magnolia IP to the Gaineses is many-headed: it drives streaming and linear viewership, e-commerce, tourists to Waco, TX, and magazine sales. Discovery's only role is as distributor, which helps the Gaineses grow and monetize their audiences from their Magnolia flywheel.”
“The Taylor Sheridan universe”
By opting to be only a distributor of the Taylor Sheridan universe, Paramount has opted for a one-size-fits-all approach. In one sense it’s working for them: the premieres of Yellowstone prequel “1923” brought in 7.4 million viewers across linear telecasts and streaming, “marking Paramount+’s biggest debut ever”. Yellowstone’s season 4 premiere in November drew 14.7MM viewers, and the show is now averaging 13MM viewers per episode, according to Nielsen data. There’s obviously enormous and growing demand for the universe.
The challenge for a business like Paramount is whether fans of the show *need* more like they do from the Gaineses, or from YouTube creators. In his 2017 book “Streampunks” former YouTube Chief Business Officer Robert Kyncl wrote about creator Jenny Doan and her business the Missouri Star Quilt Company in the small town of Hamilton, Missouri. After the 2008 financial crisis, Jenny both opened a quilt ship and started quilting tutorials. The tutorials gained traction over the next three years.
Kyncl writes that by 2011:
Jenny’s videos hadn’t become a viral sensation, exactly, connected with an incredibly passionate audience, scattered across countries and generations. They would watch her tutorials on YouTube, order fabric from the online store, and in many cases make a pilgrimage to Hamilton. By the end of the third year, Missouri Star Quilt Company had grossed more than $1 million in revenue.
Both the Magnolia and Missouri Star Quilt Company reflect how a new generation of fans have demonstrated that they want to engage with a TV and/or streaming brand beyond those mediums. And Paramount seems to be saying to shareholders that they see greater returns in producing more shows than in building a flywheel. But at the same time, they are also talking up 66MM global streaming subscribers.
Flywheels help to solve for churn, and according to Antenna, Paramount+ churn recently shot up from 4.9% in 2020 to 6.4% in Q3 2022. Antenna explained the reason was that like Netflix and Hulu, Paramount+ “were so differentiated in that less competitive market that they had significantly lower Churn than they face today. As the market became more competitive, however, the differentiation was more difficult for consumers to identify.”
Paramount is increasingly relying heavily on Taylor Sheridan to differentiate Paramount+. Its “one-size-fits-all” approach to the Taylor Sheridan universe has not “set up a virtuous cycle” that has the logic of momentum. And if Paramount+ doesn’t have the logic of momentum, then an obvious question for Paramount investors becomes, what’s the long-term value of investing $22MM per episode in “1923” if it doesn’t help to reduce churn or help to monetize its millions of fans better?
Keep Disney on the radar
Disney’s current strategic and operational uncertainty presents the question of whether Paramount management may be correct in not pursuing a flywheel in 2023. In one sense Disney’s scale and business model reflects Paramount’s challenge of simply not being large enough to survive on its own. In other words, if and/or until Paramount has more scale and more resources, a flywheel is a nice-to-have but not a must-have for survival.
But, as last Friday’s essay highlighted: “A conglomerate like Disney generally may not be able entrepreneurially reinvent itself in order to continue to delight users and therefore drive shareholder value, and especially if it rejects the premise of data as a solution to creative questions.”
In other words, a flywheel model within a media conglomerate may be too complex, too cumbersome, and too unwieldy to manage and/or to compete with the creator economy. And, if the flywheel model has become risky for Disney, and contributed to $1.5B in streaming losses in FYQ4 2022, alone, then why should any other media company try to pursue one, too?