Good afternoon!
The Medium delivers in-depth analyses of the media marketplace’s transformation as creators, tech companies and 10 million emerging advertisers revolutionize the business models for “premium content”.
[Author’s Note: There was no long-form essay last Thursday, and today's mailing offers two essays totaling 3,200 words. As you will see below, establishing the guidelines became a necessary step before writing a "handbook". These guidelines distill past essays from The Medium into some basic guidelines for analyzing media businesses in this magic (and weird) market moment.
At the end I include a sample analysis where I apply the three guidelthe joint sports streaming service that ESPN, Fox and Warner Bros. Discovery plan to launch (NOTE: 800 words).
This is an opportunity to make The Medium more interactive. So, please email or contact me via X/Twitter or Linkedin to let me which stories you would like me to analyze with the three guidelines, below. I will publish the best questions with a mentioning your name and linking back to your X/Twitter or LinkedIn account.]
Over the past three years, I have often used a quote from venture capitalist Marc Andreessen: “A good test for how seriously an incumbent is taking software is the percent of the top 100 executives and managers with computer science degrees.”
I first used the quote in November 2021 in “Is Growth in Streaming Driven More By Content or Software?”, just after The Medium (then “PARQOR”) moved onto The Information’s platform. It was part of his longer take on how competition between an incumbent and a software-driven startup is “a race, where the startup is trying to get distribution before the incumbent gets innovation”. Andreessen had concluded: “It is proving easier in many cases to just start a new company than try to retrofit an incumbent.”
These observations are a good starting point for structuring a “handbook” for this “weird” market moment in the media marketplace. They offer the familiar framing of incumbents competing with disruptive startups from Clayton Christensen's "The Innovator's Dilemma". But, Andreessen adds the cynical, 21st century caveat that most incumbents cannot adapt because “great software people tend to not want to work at an incumbent where the culture is not optimized to them, where they are not in charge.”
One key takeaway is that it is a bullish signal if “great software people” are in charge—like Netflix Co-CEO Greg Peters—and a bearish signal if they are not. A second takeaway is that it forces one to look past popular paradigms like The Innovator's Dilemma and ask the simple question of whether the management team of an incumbent is up to the task of adapting. A third, more implied takeaway is that incumbents may still survive because they still have an existing customer base and existing brand, even if they fail to accomplish a culture shift towards a software-driven, retail-first and consumer-first model.
These three takeaways are helpful guidelines of a “ handbook” from The Medium. I realized that it is important to understand the core guidelines underlying a handbook, first, before attempting to explain various market scenarios with a handbook.
So, this mailing will have an explanation of each of three guidelines. At the end, there is an analysis of the joint sports streaming service to be offered by ESPN, Fox and Warner Bros. Discovery that uses these principles. If you want to skip past the explanation to the analysis of "Spulu", at the end, you are more than welcome to.
Key Takeaway
These three guidelines will be a framework going forward for cutting to the core of major stories in the media marketplace. They offer the best paths to insights in this weird market moment.
Total words: 3,200 (2,400 + 800)
Total time reading: 13 minutes
The Other Side of the Lake
The “lake” was Warner Bros. Discovery CEO David Zaslav’s metaphor for the strategic need to pivot his linear business into a scalable streaming business. In “Tinderbox”—James Andrew Miller’s oral history of HBO—Zaslav recalls his February 2021 discussions with AT&T CEO John Stankey about Discovery’s strategic need to make it across a lake to catch up with Netflix and Disney. Zaslav said Netflix had been “so successful, they’ve already gotten to the other side of the lake and built a cabin.”
In 2024, the foundations of the “cabins” built by Netflix and Disney seem less reliable. Netflix is now aggressively pivoting away from its streaming subscription model towards both gaming and an ad-supported model. The long-term vision growth model is less clear than it was under its Executive Chairman, former Co-CEO and co-founder Reed Hastings. I argued in “Reed Hastings Steps Down (and Up)” that Hastings stepped down and up from the co-CEO role in large part because “Netflix’s moves into gaming and advertising both fall outside of his skillset (and the latter notoriously falls well outside of his vision).”
Disney management is currently fighting off activist shareholder campaigns after expensive failures in its creative and streaming efforts. If the winners have not built upon stable foundations, then the question is how do we identify which other companies also sit upon unstable foundations? And not just in streaming but in the broader push of news and media organizations into digital subscriptions.
1. Are “great software people” in charge?
Skift CEO/Founder Rafat Ali tweeted recently that reasons for traditional publishers’ push into subscriptions were flawed to begin with. He argued: “Time magazine/site is not even worth free, it hasn’t been for decades, why.. would anyone pay for it?”
The context of the tweet was the recent “great subscription reversal” reported by Axios: “News companies are reversing course on hard subscriptions — once seen as a safer alternative to the volatile ad market — in favor of flexible paywalls, membership programs and more ads.” Part of the problem is many publishers have learned that “simply throwing a paywall up over your previously free content doesn't work either. It throttles ad revenue without capturing enough new subscribers.”
That is a simple description of a balancing act executives must now navigate between subscription and advertising business models. But, returning to Andreessen’s framing, it is incumbent executives who are trying and failing to solve two software-related problems.
First, paywalls are a messy mishmash of third-party software solutions—payment processing (e.g., Stripe), customer relationship management tools, cloud-based hosting— built on top of websites, which are themselves an amalgam of computer code and different software solutions (e.g., video players). Second, website advertising is a messy mishmash of third-party data solutions ranging across data warehouses, demand-side ad-serving platforms, supply-side platforms and real-time bidding. “Simply throwing up a paywall” does not align with the customer’s journey towards a purchase decision.
At a micro level, solving these two problems individually and collectively is the purview of “software people” beneath the C-suite. At a macro level, the pivot of a business towards a retail-first, consumer-first fundamentally requires those two solutions to align with management’s roadmap for growth. If management has no background in computer science and therefore does not understand the solutions, growth will not be possible.
Marketplace Examples
This takeaway is the gist of the quote from AMC Networks Executive Chairman James Dolan that I frequently refer to: The direct-to-consumer business model requires a “culture change” away from the longstanding wholesale model—which isolates the producer from the consumer—and toward “understanding the customer and serving them well.”
Andreessen’s test has been a particularly easy test to apply in the streaming marketplace: There is Netflix Co-CEO Greg Peters—who previously served as their Chief Product Officer and Chief Operating Officer—who competes with legacy media management teams with legacy television expertise. Also, technology companies (e.g, Apple, Amazon, Roku) whose models rely primarily on hardware sales, software subscriptions and advertising sales are capturing market share without media being their core business.
The test is not as helpful when applied to newspaper and magazine publishers. Amazon founder Jeff Bezos bought The Washington Post, and it is now struggling within “the great subscription reversal” (it has lost over 500,000 subscribers since 2020).
IAC’s Dotdash-Meredith started as a technology-first company—it oriented its business around search engine optimization and solved for page load time—and then purchased Meredith Corporation’s magazine business. The New York Times continues to be an example of a print business model that successfully pivoted into digital. But, none are run by executives with a computer science background.
There is also the exception of digital-native publishers that had been “big winners” in the previous decade like Buzzfeed, Vice, Complex Media and Pitchfork which “all had huge audiences, did good journalism, excelled at video, launched franchises, had millions of social followers, and success in live activations.” They are “all on life support now”.
So, it is an imperfect guideline, but it quickly identifies the companies successfully figuring out the pivot to retail.
2. Are the management team of an incumbent up to the task of adapting?
There is an argument to be made that this first question ignores how media content is commoditized by Internet business models like Google Search, Apple News and a long tail of other solutions. In streaming, Netflix and YouTube have fundamentally redefined the economics of legacy media business models. What was once paywalled as “a bundle of information” in a newspaper or magazine is now freely available, or paywalled and only consumed if an algorithm recommends it (e.g., Netflix, Apple News).
So, whether or not someone in management has a computer science degree, the reality of the past two decades has been that “information wants to be free” and on the internet information is a commodity. Last week I also quoted Rameez Tase—Co-Founder and President of research firm Antenna— who recently tweeted that all media CEOs pursuing a subscription model failed to ask the question “Is my content commodity or scarcity?" And when they did, they answered it “naively / dishonestly”.
The tweet frames why asking this second question—”Are the management team of an incumbent up to the task of pivoting?”—in this “weird” market moment is important in the media business. Because, whether or not one agrees with the premise that management requires a background in computer science, media companies have a fiduciary duty to shareholders—if not an existential need—to understand the value of their content on the internet.
Jacob Donnelly of A Media Operator recently wrote a good analysis of this problem for publishers: “I would suspect for many publications, no one would care if they disappeared. And if that’s the case, why would anyone willingly hand their money over?” Rafat Ali was saying the same thing about Time, specifically, and offered a hypothetical of “because of some catastrophe, the media company you know suddenly shuts down, tomorrow.” It presents the question for management, “What would happen day two and beyond, if you suddenly go away tomorrow?”
So, a management team is “up to the task of adapting” if it understands the media that it creates has the quality of scarcity. Meaning, that after day two and beyond, its subscribers would not be able to find its offering anywhere else. A team that is not “up to the task of adapting” naively or dishonestly believes that its content is not a commodity, despite all evidence to the contrary.
Marketplace Examples
This takeaway is clearer in the example of “the great subscription reversal” in publishing than in the streaming marketplace. Consider NBCUniversal’s “Suits”, which was all but unwatched on Peacock. After Netflix licensed the title in June, it became the most-streamed series in the U.S. for 2023. So, “Suits” had the quality of scarcity on both Peacock and Netflix, but its value was only realized on Netflix.
Disney+ reflects a different aspect of scarcity. Earlier this month in “Lessons on Market-Making from Nielsen's Video Top 10s for 2023”, I wrote: “Older movies in Disney's library can compete with Netflix—’Moana’, released in 2016, is in first place and ‘Encanto’, released in 2021, is in second place—but new series with large budgets cannot generate the scale of audiences that Netflix can at lower budgets.” In other words, Disney understands that its library of intellectual property has the quality of scarcity.
But, streaming has proven that there is a disconnect between how Disney perceives the value of its scarcity—a library of valuable intellectual property across Disney, Marvel, Pixar, Star Wars and Fox assets—and how audiences value its intellectual property. As I have highlighted in recent essays, Nielsen’s weekly Top 10s for Disney+—and Hulu, which it acquired from Fox—have consistently reflected a power law: a handful of titles are watched for more than 100 million minutes, and the rest have lower consumption.
3. Can the company survive a failed pivot with the existing customer base and existing brand?
One of the biggest challenges of media’s shift from wholesale to retail business models is the question of brand loyalty—"a long-term commitment to make repeat purchases of a particular brand"— and what it means in a digital distribution environment versus a wholesale distribution environment. In the wholesale model, brand loyalty is (basically) measured by reach and backed by internal customer research. In the digital retail environment, it is measured more by engagement metrics like churn and customer lifetime value. These may be a better measure of the existing customer base for media with the quality of scarcity because they measure people paying for media or a service they cannot find anywhere else.
Social media metrics like total followers and likes have become measures of engagement, too. Those may be a better measure of the existing customer base for commoditized content that is distributed via third-party platforms with business models that assume content is commoditized (e.g., Google Search, Netflix, Apple News).
The implication is that a media company may survive the pivot to a retail-first, consumer-first model if it can figure out which of its offerings have the quality of scarcity or are not vulnerable to the commoditization of media. Or, a media company may survive if it is destined to fail in its pivot to retail but has other business models that enable it to survive.
Marketplace Examples
In last September’s Medium Shift column “A Hopeful Sign for Big Media?”, I wrote about how The New York Times and Yahoo had identified which of their offerings have the quality of scarcity and therefore are succeeding. New York Times executive David Perpich had described the idea that led to them creating individual subscriptions for Cooking, Games, sports (The Athletic) and shopping (Wirecutter): “I started to get really interested in this idea that the Times was a newspaper, and newspapers were more than about news. They were a bundle of information.” Meaning, in a retail-first, consumer-first world, certain offerings within the bundle were more valuable to the consumer than the “bundle” of the newspaper itself.
Yahoo executives reached a similar conclusion after its sale to Apollo Global Management in 2021. Yahoo’s strategy is to be a “product company” by focusing on subscriptions to digital products and services for its most engaged users, and less so on content.
The streaming marketplace is rife with examples of companies that seem destined to fail in their pivot to retail but have other business models that enable them to otherwise survive. Most legacy media companies making the pivot from linear to streaming were relying heavily on their linear businesses until a recent slowdown in linear advertising spend. Executives from across the marketplace have been telling investors they are not sure if or when the advertising spend will return.
But, in the meantime, the near-guaranteed monthly revenue from cable channels still “subsidizes” the business despite accelerating trends of cord-cutting and streaming consumption. In this shift from wholesale to retail models, most legacy media companies are still recognized as cable channels, first.
Disney is the most interesting example because its Experiences (Parks) and Sports division (ESPN linear channels) produce around 60% of its operating income. CEO Robert Iger’s insistence that streaming is the future of the company’s distribution business has led to enormous losses: $2.5 billion in 2023, alone.
Applying The Guidelines
As I wrote last Thursday, on “the other side of the lake” are questions like: “What did executives get wrong? Who is getting it right? And, which sexy new ideas—like the sports joint venture between Warner Bros. Discovery, Disney’s ESPN and Fox? Or Comcast’s Xumo—are directionally right?”
These three guidelines offer better paths to insights than I have found elsewhere. I will give one example below, and will offer more both in an upcoming “handbook” and on social media going forward.
The Sports Joint Venture (or “Spulu”)
ESPN, Fox and Warner Bros. Discovery plan to launch a joint sports streaming service this fall. It will carry 14 networks, including Disney’s ESPN channels and its ABC network, Warner’s TNT and TBS, and Fox’s broadcast network and sports cable channel. The service will feature sports including the NFL, NBA, Major League Baseball, college football and basketball, golf and Nascar. Analysts expect the new service to encompass about 55% of U.S. sports rights.
The platform will be owned by a newly formed company with its own leadership team, and in which Disney, Fox and Warner Bros. Discovery will each own a one-third stake.
1. Are “great software people” in charge?
None of the leaders of the ownership group are “great software people”. Disney CEO Robert Iger, ESPN Chairman Jimmy Pitaro, Warner Bros. Discovery CEO David Zaslav and Fox CEO Lachlan Murdoch all have primarily linear backgrounds. Iger, Pitaro and Zaslav all face growing investor concerns about their investment decisions into streaming and whether their streaming services can survive, as is.
The Wall Street Journal reported, “ESPN, Fox and Warner are looking for an executive seasoned in marketing subscription services and managing the challenges that arise in those businesses, such as customer turnover.” A leading candidate is reported to be Pete Distad, formerly a top executive at Apple in charge of its video and sports businesses and earlier a marketing and distribution executive for the streaming service Hulu. Distad’s pointed involvement has led to the venture being coined “Spulu”, which is short for “sports Hulu”.
Because this is ultimately a virtual cable distributor for a select group of channels, it is effectively repurposing its cable distribution model in a retail-first business model. So, the venture falls into a grey area of being a purely retail-first, consumer-first model.
2. Are the management team of an incumbent up to the task of adapting?
I wrote above that media companies have a fiduciary duty to shareholders—if not an existential need—to understand the value of their content on the internet. It is still not clear what the value of sports content over the internet is. ESPN (including ESPN+) streaming via smart TVs & TV connected devices for January 2024 was 0.14% of total viewing, according to Nielsen. That was 5% of Hulu and Amazon Prime Video (which has sports) and 7% of all Disney+ viewing.
Fubo TV, a sports-focused virtual cable network, is the closest comparison. It had 0.31% of total viewing in January 2024, according to Nielsen. On Tuesday it filed an antitrust lawsuit against the venture.
I wrote recently that NBCUniversal may have learned from the success of its Peacock-exclusive NFL Wild Card playoff game between the Miami Dolphins and Kansas City Chiefs—which averaged 23 million total viewers across its linear and streaming platforms, and reached 27.6 million viewers overall (Nielsen)—that the bulk of its customers’ “passions” are event-driven, but neither monthly or daily. Paramount shared that its Paramount+ streaming viewing set “a record for the most-streamed Super Bowl so far”, but did not break out streaming audiences from its average viewership of the telecast.
The companies are reportedly discussing a price that could approach $50 a month, Given that all available data contradicts the assumption that there is a need for a monthly subscription service focused on sports, it is evident that the management teams may not understand the value of their content on the internet. As I argued in “Peacock's NFL Wild Card DTC Lessons for CNN & ESPN”, there may be more value in pursuing a premium video on-demand model.
3. Can the company survive a failed pivot with the existing customer base and existing brand?
This question only applies to ESPN and Warner Bros. Discovery. Fox previously pivoted away from streaming when it went all-in on linear networks by selling its film and TV assets to Disney in 2019.
ESPN will be fine, for no, as its six branded channels reach anywhere between 46 million and 71 million subscribers and are priced as high as ~$9 per month. It is still profitable, generating $2.7 billion in operating income in 2023. But, it is losing viewers as viewing behaviors shift to streaming: viewership was down 9% year-over-year in 2023. For this reason Disney and ESPN plan on launching a full direct-to-consumer (DTC) streaming version of ESPN by 2025 that will deliver "all of ESPN’s programming and feature new personalization and integration with ESPN’s fantasy platforms and ESPN Bet."
As for Warner Bros. Discovery, it is still figuring out sports streaming. It recently announced a Bleacher Report tier on its streaming service Max. The tier costs $9.99 per month. There has been little discussion of the tier since the announcement. Its cable channels TNT and TBS reach the same total households as ESPN: viewership at TNT was down 3% year-over-year and down 10% at TBS.
The implication of this viewership data that is the real challenge they face is advertiser dollars becoming less reliable and disappearing to competitive platforms. Traditional TV ad revenue decreased by $235 million for Warner Bros. Discovery in Q3 2023, alone, and declined 12% year-over-year. Disney saw a year-over-year decline of 7% in its linear networks revenues.