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For my final mailing of 2023, I sent out my Top Essays of 2023 and revisited my Predictions for 2023.
[Author's Note: Happy New Year! I am going to send out two mailings this week. Today's predictions for 2024 and then tomorrow a short essay on how the movie "Maestro" unintentionally exposes a weakness for Netflix as it pivots into advertising.
Two things to put on your radars for 2024:
I will start adding shorter essays to the mix of mailings—readers asked for explainers of "corporate speak" quotes from earnings calls (basically, the logic of what executives are both saying and also implying), so look for those when earnings season starts later this month.
If you are a paying subscriber in LA or NYC, please respond to this email with your interest in participating in small events. We are planning a 20 person exclusive, off-the-record event in late March with a guest speaker. Please respond if are you are interested!]
Netflix’s “Grand Theft Auto” bet succeeds & accelerates its gaming strategy
Netflix will tell investors on its Q4 2023 earnings call on January 23rd that its "Grand Theft Auto" bundle helped to drive subscriptions past initial projections. The success will convince gaming publishers to release more IP marquee titles on the platform as it builds towards releasing its own, major-publisher-type console game. With the games marketplace in a downcycle—2023 saw a glut of games releases to make up for pandemic-related delays and therefore 2024 will see fewer releases— Netflix will have more gaming publishers willing to take risks with valuable IP on a new platform.
Streaming and gaming will increasingly overlap
Also, it is worth noting two things that are true about gaming and streaming in 2024: An overlap is logical and inevitable. It is logical because both Netflix and legacy media increasingly see value in games and gaming IP (“Media Executives Covet Games, but Are Ill-Suited to Run Them”). It is inevitable because Netflix is setting a new precedent by evolving its direct-to-consumer model into a cable bundle-type offering with gaming for 250 million subscribers worldwide. Also, gaming companies like EA increasingly need to capture the “watch” behavior of their 700 million consumers who play EA games online (“Imagining An EA Sports-ESPN Partnership”). In 2024, streaming and gaming will increasingly need each other to protect and grow customer lifetime value, especially with Generation Z—people ages 13 to 27—and Generation Alpha—people younger than 13—consumers.
But, Netflix will struggle to tell the story of its success
With advertising, gaming and livestreaming Netflix's business model story is more complicated for investors accustomed to a simpler story built around subscription growth. Investors will struggle to buy into those initiatives because that story requires a more sophisticated explanation of how the moving pieces drive growth. They also don't have the data. The stock gains from 2023 (158% since April 2022) and 2024 will begin disappearing in Q4 2024 or Q1 2025, if not sooner.
Adding to Netflix's challenges, the supply of English language content will be more expensive because of the agreements ending the actors’ and writers’ strikes in Hollywood. Netflix will license more valuable library content from arms-dealing legacy media companies, while its pipeline struggles to deliver newer English language content for audiences due to these new costs and complexities.
Additional Predictions
A wave of legacy media mergers *won't* happen after April 8, 2024
Instead, Paramount starts selling parts
This means, all this talk of bundling is empty talk
Disney’s ad-supported streaming efforts echo The Washington Post's failed programmatic ads business
The biggest impact of AI in media will be in ad sales and marketing, but not content
A bummer of a year in sports media business
Roku find wins in connected TV advertising
Total words: 1,600
Total time reading: 6 minutes
A wave of legacy media mergers *won't* happen after April 8, 2024
To repeat what I wrote in November:
[I]t is hard to imagine how mergers across any legacy media companies will result in a more agile consumer-savvy model like Universal’s with gaming IP, or a more agile tech-savvy model like EA’s or DraftKings or even Netflix where “the heart and soul of the organization is product and technology.” Fundamental change towards more consumer-savvy, tech-savvy models seems to be only possible with changes to management teams.
Those changes are not likely to happen. The more likely outcome is that the legacy media companies realize there is no marginal value in having separate databases. They have no management expertise about how to build out multiple business models to monetize the same customer within one ecosystem. They are unable to build out positive cash-flow-generating models. Instead, these companies will lay the groundwork for a joint venture along the lines of what former WarnerMedia CEO Jason Kilar outlined in Variety last October.
Instead, Paramount starts selling parts
Last November, all eyes turned to the future of Paramount Global after Liberty Media Chairman John Malone suggested in a CNBC interview that the company is facing “very serious distress” because it “didn’t leverage prudently”. It owes $2 billion to the NFL for 2024 under its broadcast rights deal, but it only has $1.8 billion of cash on its balance sheet as of Q3 2023 and $15 billion in debt obligations. The overall television advertising market declined by 12.5% in 2023 and is projected to decline another 9% in 2024. “Distress” for Paramount seems inevitable in 2024.
The bigger question I presented in “Imagining Paramount Global's Future Post-Skydance Acquisition” is: What is Shari Redstone—the President of Paramount’s controlling shareholder National Amusements—thinking right now? There seems to be no way to avoid “distress”. The Skydance acquisition scenario presents the opportunity for a singular way out, as does a rumored merger with Warner Bros. Discovery. But, I think she remains (too) bullish on Paramount’s future, and therefore funds her NFL deal and debt obligations with the sale of smaller cable channels like BET and VH1 to private investors.
This means, all this talk of bundling is empty talk
In the wholesale media business model, bundling involves multiple offerings from multiple vendors delivered to a single consumer account (e.g., cable bundle). In the media retail model, bundling of streaming services involves multiple offerings across multiple services to a single consumer with multiple accounts across those offerings. There is no marginal value to these media companies in having separate databases from each other. They have no management expertise about how to build out multiple business models to monetize the same customer within one ecosystem.
This is why I write about both The New York Times and Crunchyroll: Both business models start with the premise that their databases consist of particularly valuable customers and have iteratively built out various businesses to monetize those customers in multiple ways within their respective ecosystems.
Disney’s ad-supported streaming efforts echo The Washington Post's failed programmatic ads business
Disney has been on a public relations push about its programmatic advertising back-end for ad-supported streaming across Hulu and Disney+. It recently shared that in 2023, over 4,500 advertisers and 1,000 agencies transacted on Disney Campaign Manager. The problem with its story is the scale of subscribers does not always translate into engagement at scale and that is a challenge for every streamer with an ad-supported tier. Part of that is reflected in Nielsen’s weekly Top 10s for Disney+ and Hulu which reflect a “power law”: A handful of titles are watched for more than 100 million minutes, and the rest have lower consumption.
Something about their PR story reminds me of the Washington Post’s attempt to build out Zeus, a real-time, programmatic ad buying network across premium publishers. According to The Wall Street Journal, Zeus “thrived for a time” but became “less relevant as it changed its technology approach and publishers adopted other systems.” It could not compete with the scale of Google.
Disney certainly has a leg up with Hulu’s platform—advertisers already like buying from Hulu—but engagement matters more than scale, and advertisers can find more engagement at scale on YouTube, Amazon Prime Video, Netflix and Roku. Disney will quickly learn programmatic advertising platforms are difficult businesses for legacy media companies to manage and evolve because the needs of the customers and the publishers evolve so quickly.
The biggest impact of AI in media will be in ad sales and marketing, but not content
The Information reported just before the holiday that Google plans to reorganize a big part of its 30,000-person ad sales unit in part because of the success and profitability of its AI tools for customers. The tools have eliminated “the need for employees who specialized in selling ads for a particular Google service, like search, working together to design ad campaigns for big customers”. That is an obvious, tangible change driven by AI with actual economics attached to it, and at scale.
Also, as I argued in my Q4 trends essay, these tools are invaluable and easy to grasp for small-to-medium sized business owners to seize “advantages typically reserved for big companies (making sense of data, security, marketing at scale, personalized experiences, etc…)”, as Adobe's Chief Product Officer Scott Belsky, tweeted.
But, I’m still not sold that demand exists at scale for content generated by AI. I have seen compelling evidence that AI can help make the pre-production process for movies and TV shows both more robust and cost-effective. But, consumer demand will still be for movies or TV shows—and human-created content on TikTok and YouTube—and not AI-generated content.
A bummer of a year in sports media business
It will be revealed the NFL has an insurance plan in place in case Paramount is truly in distress. The NBA will get a decent return on its rights deal for 2025, but nothing close to the amount it was seeking (3x its current deal). Amazon moves into the regional sports network business by acquiring Diamond Sports Group, but nothing moves the needle.
Beyond Amazon, there will be uncertainty around the tech companies’ ability to deliver audiences at scale for live sports. Netflix will not buy any rights, but will announce a deal for event-adjacent programming. Mark Cuban will be seen as the canary in the coal mine for the future of sports TV rights as regional sports network revenues decline. MLB, NHL and NBA teams will struggle with payrolls. Apple's deal with the MLS shows signs of as the impact of the Leo Messi signing wanes.
Roku find wins in connected TV advertising
The easiest story to follow in advertising is that spending is shifting from linear into programmatic and connected TV inventory is benefitting. eMarketer projects connected TV spend will grow by 17% in 2024 to $29 billion, up from $25 billion in 2023. But, analyst Brian Wieser projects available TV inventory in the United States including linear and connected TV will decline 24% between 2023 and 2027, or at a -6.6% compound annual growth rate.
So, there will be only a few good stories to emerge from the connected TV marketplace, one of which will be competition. It is a fragmented market and with the entrance of the Charter-Comcast Xumo joint venture, even moreso. There is a low risk of duopoly.
Roku seems to have the simplest story to tell investors in this marketplace because it is the only walled garden with scale and with an ad business that is focused almost entirely on Connected TV inventory. Its competitors sit within a large organization (Google, Amazon, Samsung, LG). Roku will find wins with Wall Street by offering the simplest and best story to advertisers and investors about capturing growing Connected TV advertiser spend.