Yesterday Netflix released a trailer for “Netflix Stories: Selling Sunset Mobile Game”. It is based on the drama-filled Netflix reality show of the same name.
Netflix wrote in a blog post:
You’ll create your agent, pick an outfit, name, pronouns, and then start selling your way across the City of Angels. Gameplay primarily has you making choices as to when to talk with affluent clients and co-workers, the prime negotiating tactic you’ll use in this text-based, pocket-sized drama simulator.
The games are free for members. So, any Netflix member wanting to play may find this game on the Netflix mobile app, download the Netflix Stories app from the App Store or Google Play, and then log in with their Netflix account.
Co-CEO Ted Sarandos told investors on its recent earnings call that the objective is to give “the superfan a place to be in between seasons [of a show], and to be able to use the game platform to introduce new characters and new storylines or new plot twist events”. It has launched over 100 games, to date, and it told investors last month that it has another 80 in development.
Netflix’s mobile games initiative plays in the same Venn diagram overlap between gaming and television that interactive storytelling fueled by generative artificial intelligence—like Fable Simulation’s Showrunner—play in. But, whereas Netflix is taking a “crawl, walk, run” approach to building mobile games—a favorite phrase of co-CEO Greg Peters—Fable Simulation has eagerly gone down the rabbit hole with its product.
If we add to the mix the David's Choice / The Davids' Choice I wrote on Monday, three different models emerge:
Go down a rabbit hole with a startup where games, TV, streaming and decentralized media all intersect (e.g., Showrunner)
Focus on earnings before interest, depreciation and amortization (EBITDA) and games but build the “wrong” product (Warner Bros. Discovery, “New Paramount”)
Focus on EBITDA and “crawl, walk, run” to games and the right product (Netflix)
Key Takeaway
AI, streaming and gaming suggests the existential challenge for media conglomerates is as much “portfolio reconstruction” as it is the need for “a generational shift in management teams and philosophies”.
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Total time reading: 6 minutes
Revisiting David's Choice / The Davids' Choice
Tuesday’s essay asked the question: “Can either Warner Bros. Discovery CEO David Zaslav and new Paramount owner David Ellison build the “right” product and deliver EBITDA to shareholders?”
I wrote:
“For Zaslav and his team, without streaming or gaming the remaining business is a private equity type of enterprise with cash flows from theatrical, cable networks and licensing. For [incoming Paramount owner David] Ellison, the remaining business without streaming is similar to Warner Bros. Discovery but adds back gaming (from Skydance, only). Neither offers investors a growth story or sufficient EBITDA to justify current market valuations.”
In the media conglomerate model, management must generate growth and cash flow from core businesses that are often unrelated assets. EBITDA is often generated via cost efficiency and financial engineering. That is a fundamentally different corporate mission than engineering growth via software and e-commerce.
The C-suites of these conglomerates are dominated by executives without any background in product development, direct-to-consumer or e-commerce. C-suite executives with that background—former Disney CEO Bob Chapek and former Warnermedia CEO Jason Kilar—have been unceremoniously ousted. Both shareholders and organizations had an immune-system-like rejection of these skill sets.
EBITDA, Games & The “Wrong” Product
Warner Bros. Discovery’s Max is a proven “wrong” product. It combines the Discovery and WarnerMedia content libraries with the assumption that more content would lead to more growth and lower churn. Instead, domestic subscribers have been steadily declining both annually and quarterly.
It is also pursuing growth through games. Yesterday CFO Gunnar Wiedenfels told Bank of America’s 2024 Media, Communications & Entertainment Conference that “there is certainly a significant growth contribution” from games in its “long-term strategic outlook.”
According to research firm Antenna, Max has the highest ratio of Curious Customers to Committed Customers (customers with a tenure longer than six months). The Max product cannot drive growth as is, nor can its gaming business. The Warner Bros. Discovery management team does not have the skill sets to build the right product, as I argued in The Information last December. It can only deliver EBITDA via cost efficiency and financial engineering.
EBITDA, Games & The Right Product
Netflix is the market paradigm of the “right” product for streaming. Its entire corporate mission is focused on its product and technology stack and its subscription model, which drives the majority of its revenues.
It has scale (over 280 million subscribers) and growth. It also generates cash flow for its investors, promising $6 billion by the end of 2024 (down from $7.3 billion in 2023).
Now, it is moving into gaming. Netflix’s technological back-end integrates games seamlessly into the app’s user interface and the consumer’s subscription. The growth of games is intimately tied to the product and membership. It is otherwise largely insulated from the laws of supply and demand because games are offered free of charge.
Whereas within Skydance and Paramount, gaming is a separate division that produces content for third-party platforms. Growth is dependent on factors both within their control—owned intellectual property and game production specifically—and also the broader market forces of the video game industry.
The Rabbit Hole
Last month I wrote that “the logical extreme” of Sarandos' sales pitch (above) is that “valuable IP needs only cheap games and streaming video to grow as time and cost efficiency begin to outweigh the blockbuster model of the past.” That is the bet being made by Showrunner and other generative AI startups.
Showrunner will pass on a portion of its subscription fees based on how many shows a creator makes and how many people watch. People will pay to use elements of TV shows or movies to create and tell their own stories. Like Inkitt’s Galatea app, which allows readers to generate fan fiction from other authors’ self-published books, users will be able to create content based on shows created by other users.
Its founder Edward Saatchi envisions superfans creating more than 1,000 shows with their favorite characters and furiously competing over which shows are most popular. The vision is that both content creation and viewing can exponentially grow within a platform that includes the interactive and competitive dynamics of gaming, too.
There are no publishers or game creators or need for channels like Fox or HBO. There is only the IP. The media conglomerate has no purpose within the Showrunner product except to receive checks from “makes” and “views” of its licensed IP.
Technology Disruption
These three models map to the investment hypothesis of The Chernin Group founder Peter Chernin: "Content will aggregate at two extremes: the big blockbuster hits and niche products”. The rest of the models—which Chernin calls the “bland middle”—will be “gone, and gone forever.” Netflix is the blockbuster here and Showrunner is the niche product.
Showrunner also maps to something Adobe's Chief Product Officer Scott Belsky, tweeted last fall:
“Often lost in the narrative: AI will help small companies leverage advantages typically reserved for big companies (making sense of data, security, marketing at scale, personalized experiences, etc…), and this could redefine how we think about [small-to-medium-sized businesses].”
In other words, startups like Showrunner will benefit from being a startup both from the perspective of the Chernin hypothesis (it offers a niche interactive storytelling product for animated IP). Also, according to Belsky, AI will enable Showrunner to compete with Netflix and streaming services.
Portfolio Reconstruction
The remaining question is where this leaves the media conglomerate model. Chernin’s hypothesis implies that they will be “gone, and gone forever.”
The implication from Belsky’s perspective is less dire. The centralized operational and financial efficiencies of a conglomerate will lose their importance in a world with AI. Conglomerates will exist, but they will have more competitors who can replicate much of their operational models at a smaller scale.
That means the existential challenge for conglomerates is as much “portfolio reconstruction” as it is the need for “a generational shift in management teams and philosophies".
“Portfolio reconstruction” was explained to me yesterday by Anand Shah, the COO of EffinFunny, a production company. The premise is that if management cannot optimize shareholder value across unrelated assets, then they should either discard those assets or find managers who do understand how to connect them in ways that audiences want.
The linear model justified aggregating unrelated cable channels because bundles created more negotiating leverage. But, all available data suggests that on the internet, media consumers value personalized user experiences (Netflix, YouTube, Tubi) and/or “sub-scale, dynamic and product-oriented models” (Crunchyroll) more than they do access to large libraries of content.
That not only requires executives with a product-first mindset, but also a conglomerate to own a portfolio of assets that enable it to navigate technological change with a decentralized structure.