[Author's Note: A reminder that my latest Medium Shift column for The Information went live last Monday. In “Giving Fans AI to Riff on Popular Shows”, I wrote about Showrunner from Fable Simulation, a platform that can write, voice and animate episodes of shows. The simple way to understand it: Imagine a fan of “The Simpsons” making episodes about characters such as the bartender Mo or the convenience store owner Apu.]
To date, the fundamental question has been whether streaming could replace the linear model as “the financial backbone” of Hollywood. The answer increasingly seems to be no and churn seems to be the key reason why.
In its heyday, the linear model had almost 0% monthly churn rates whereas streaming services now see as high as triple-digit multiples of that. Higher churn means both consumer engagement and recurring revenues are less predictable, which translates into less predictable production funding.
The growing success of free services like YouTube and Tubi on connected TVs at the expense of Netflix and their legacy media competition—as per Nielsen’s The Gauge—suggests consumers increasingly prefer not to pay for content. If streaming cannot scale and produce near-guaranteed recurring revenues to fund Hollywood productions, another source at an extraordinary scale will need to deliver those.
Generative AI text-to-video appears to offer one answer: Exponential permutations of consumer-driven, text-to-video storytelling with licensed third-party IP can scale and compensate rights holders. Moreover, consumers are assumed to have a near inelastic demand for this service. In turn, it will generate sufficient licensing revenues in a way that could mirror the music industry’s success with music streaming, which in the U.S. went from $233 million in 2005 to $10.1 billion in 2024.
But, Hollywood does not have 20 years. Domestic television and film productions are down 40% since before the pandemic. Job losses at struggling media conglomerates are accelerating.
Now, the future of the cable bundle is up in the air after a federal district court judge granted a preliminary injunction for Fubo TV against aspiring sports streaming app Venu. Judge Margaret Garnett noted that “it is difficult to avoid the conclusion that, on balance, [programmers’ bundling practices], are bad for consumers.” The implication is that a future lawsuit could undermine that model, too.
That leaves three questions on the table:
What will replace these recurring revenues?
When will the solution emerge?
Who will lead the charge with a new solution?
Key Takeaway
Heading into Q4 2024, the coincidence of both Venu's likely failure and generative AI's emergence is interesting: The likely solution to lost recurring cable revenues will need to be a business model we have not seen yet.
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The Everything Product
Last October, former WarnerMedia CEO Jason Kilar took a stab at answering these questions. He argued that the linear bundle had been “Hollywood’s everything product” that offered access to “all television series, movies, news and live sporting events for one price in one seamless interface.” There were three history lessons from the success of that product:
“(1) large number of customers really liked Hollywood’s everything product; (2) because it was everything product, over time more and more of the dollars flowed to those contributing to it (the studios, the sports leagues and the talent); and (3) the everything product allowed for large and small companies alike to earn attractive profits for decades.”
Kilar argued that “many if not all” of legacy media companies “should be architecting a modern everything product that consumers will adore.” That product: “starts with a singular, delightful, intuitive user experience offered for one attractive price.” But, it is neither “a hard bundle (e.g., when a cellular service provides its customers access to a streamer)” nor “a synthetic bundle (e.g., when access to two distinct streaming apps are sold for one price).”
The best available in-market solution was Hulu. But, Kilar also conceded that there were structural disincentives in the marketplace that made the emergence of a “digital everything product” unlikely.
The Problem with Venu
Venu was a smaller version of this idea, bundling virtually all of the U.S. national sports broadcast rights controlled by Disney, Fox and Warner Bros. Discovery in a single subscription, with limited entertainment and news content. The venture’s public projections were at least 5 million subscribers in five years, though evidence revealed in the Fubo TV trial suggested that these projections were conservative. The objective was to replace lost recurring revenues with a bundle of recurring revenues from sports broadcasts, only.
After the recent ruling, not only will this bundle likely not emerge (Venu is appealing the decision) but now the bundle model no longer seems long for this world.
A Venu is a bundle designed and orchestrated by three longtime TV executives: Disney CEO Robert Iger, Fox CEO Lachlan Murdoch, and Warner Bros. Discovery CEO David Zaslav. All three saw an existential need to replicate the cable bundle in streaming and only for sports.
There is a good reason for this need: Sports rights deals are expensive and only getting more expensive. To pay for those rights, all three companies need recurring revenues from a bundle that is a sports-only “everything product”, even if the product will not have every sport (after Warner Bros. Discovery lost its NBA rights) or every cable channel (neither Paramount or Comcast’s NBCUniversal were invited to join the venture).
But, as imagined, Venu seems to be a desperate bid to preserve and grow recurring revenues at a low churn rate—assuming sports viewing has inelastic demand—by any means necessary. Effectively, a group of TV executives narrowly defined the solution to their expensive rights deals as network television distribution over the Internet. But, as their failures in streaming have proven, the Internet is a different medium that favors other media formats and pricing models.
No Answers To What/When/Who
Heading into Q4 2024, there are no obvious solutions to disappearing recurring revenues. Neither Venu nor Kilar’s “digital everything product” have emerged as viable solutions to declining recurring revenues. Kilar predicted a few Hollywood companies may reach streaming scale on their own, but that seems increasingly unlikely: Disney’s growth story is now being driven by “zombie” Charter Spectrum accounts..
Outside of virtual cable distribution and streaming, generative AI tools like Fable Simulation’s Showrunner and Sora are limited to animation and/or “not direct-able”. Also, AI models will compensate the licensing divisions of these companies and not the distribution arms (and those licensing deals are a work in progress, according to Variety). Something like Venu works better as a solution than AI because it directly solves the problem for a distribution business.
Whereas, flipping the business to rely on licensing is an internal accounting maneuver game. There is nothing unusual about that: In 2023, $2.47 billion in operating income from Disney’s Sports division seemed to subsidize $2.45 billion in operating losses from its Direct-to-Consumer division. But, it is also a fundamentally different business model.
2034?
Without obvious solutions to recurring revenues, it is worth asking whether there are any promising solutions and/or whether there are any visionaries with a “digital everything product” or something similar.
Right now, the answer seems to be no.
Meaning, there are probably plenty of promising ventures being funded with an eye to the same problem (and if you know of any, please introduce me to them!). But, Kilar’s piece suggested that there are no viable replacements for an “everything product” except for a “digital everything product”.
Generative AI may be a potential financial solution. But, it also will mean that consumers will not be paying for either live sports or human-driven storytelling.
Instead, the best question to ask is when we can predict a solution could emerge. Back in May, I wrote about reverse-engineering the future of media conglomerates from 2034, when the first version of Superman will enter the public domain. After 2034, a wave of major comic book intellectual property that includes Batman and Wonder Woman will be released into the public domain. The implication is that real shocks to traditional Hollywood storytelling will emerge then.
Or 2028-29?
But, from a sports rights perspective, 2028-2029 looms larger. In 2028, the MLB's deal with Fox, Turner, ESPN and Apple TV expires. Also, in 2028, The Premier League's deal with NBC expires.
In 2029, the NFL can terminate any or all of its $100 billion worth of deals with Amazon, ABC/ESPN, CBS, FOX and NBC via an opt-out clause. Also, the WWE's deal for "Smackdown" with NBCUniversal's USA Networks expires then, too.
All of these sports deals will need scale to pay for these rights. By 2029, there are expected to be less than 50 million cable households. Whether streaming will be able to deliver that lost scale remains TBD. There are good reasons to be cynical.
This is what makes the coincidence of both Venu's likely failure and generative AI's emergence so interesting: The likely solution will need to be a new model we have not seen yet, and which will need to inevitably provide recurring revenues. As of 2024, that seems far-fetched.