Author's Note: The 2024 election results invite the opportunity to tie together essays and themes from both The Medium and my Medium Shift columns from the past year. For this reason, today's essay is longer than usual.
Donald Trump’s incoming Administration will have less intrusive antitrust regulation than Lina Khan's Federal Trade Commission under President Joe Biden. Now, media and Wall Street coverage has instantly shifted to speculation of the first megamergers since Disney acquired much of Fox’s entertainment empire in 2019 for $71 billion.
If one believes Sony Pictures Entertainment CEO Tony Vinciquerra, we will see “mergers and bankruptcies and sales and all kinds of fun things happening over the next couple of years.” He also predicted at an investor conference in September that “big companies will be the ones that survive unless they make some massive mistake or miscalculation.”
The other part of this quote has been summarized by Hollywood trades, and its missing parts are worth adding:
“So, scale will be important. And people say we're under scale at Sony Pictures. But we have PlayStation music, all the electronics background of Sony. I don't think -- we're not under scale if you look at the company in total”.
In other words, a “big” media company that emerges from megamergers will not need to look like Disney's enormous library of intellectual property (“IP”) or“flywheel” of business divisions built upon that IP. Instead, it will need the scale of its owner to compete like a Sony Corporation or Comcast with a studio integrated into a broader ecosystem.
That presents a difficult question for a media marketplace in secular decline:
Will any merger solve for the suboptimal monetization of IP libraries in the streaming era?
Key Takeaway
A merger or acquisition likely will not create more opportunities for IP to be monetized. Instead, the logical solutions are either to aim for free marketplaces for IP or to let third-party technologies rethink walled gardens.
Total words: 1,700
Total time reading: 7 minutes
Suboptimal Monetization Of IP Libraries
Consumers increasingly seem more sentimental for the IP of media companies than they are for the TV series and movie formats. Therefore, there are three business problems a mega-merger will need to solve for IP libraries:
Linear is declining; or, as Vinciquerra described it, cable networks have become an “albatross” around the necks of media companies that still own them;
Theatrical revenues are declining; and,
Streaming is not a growth business that compensates for either.
A megamerger that puts a studio in a Sony-like ecosystem solves for the second, only. Comcast recently proposed a version of that outcome where it will spin out its cable networks into a separate company. That would leave the Universal Studios division within Comcast. Disney CEO Robert Iger floated the same idea in Sun Valley in July 2023 to CNBC’s David Faber, but never got any traction.
A spin-off of cable channels may create a better outcome for cable channels to be more efficient and generate more cash in decline. But, it complicates the content supply for streaming service libraries.
For example, if Comcast spins out both Bravo and USA networks, Peacock will still need to exclusively license content from those two companies. However, Bravo and USA networks will deliver more shareholder value by letting free markets dictate the value of their IP. Peacock is worse off in this outcome.
To date, selling IP to owned-and-operated streamers—which I described in step 2 of “The Doom Loop of The Mogul”—has resulted in “no real marketplace in Hollywood right now”. Given that Hollywood increasingly needs free marketplace dynamics to maximize the value of its IP, neither a spin-off nor a licensing deal will result in that outcome.
That raises the question: How can a merger or acquisition create more opportunities for IP to be monetized than within the closed marketplaces of walled gardens?
The logical solutions are either to aim for free marketplaces or to let third-party technologies rethink walled gardens.
Alternative Solution #1: Cloud-Usage Model
One solution for a free marketplace is a cloud-usage model that I proposed in September and speculated that Oracle will pursue with David Ellison’s acquisition of Paramount (Oracle Chairman Larry Ellison personally funded the acquisition). In this model, Apple, Amazon or Paramount would tear down their walled gardens, toss out their subscription models and become marketplaces like Amazon Web Services (AWS).
However, I noted that licensing is still an issue:
“No licensing agreements are structured to reflect cloud usage. The contracts with Hollywood unions are structured to reflect benchmarks in the streaming business model. This will neither be an instantaneous nor seamless pivot.”
As for expanding walled gardens, Comcast President Mike Cavanagh suggested to the market that the outcome is appealing but complicated: “[W]e would consider partnerships in streaming despite their complexities.” That is an implicit concession that it has learned the same lesson as Disney: Expanding Peacock’s library will not change consumer demand enough to mitigate losses of $436 million in Adjusted EBITDA in one quarter.
I also argued last week that:
Cavanagh’s concession of “complexities” reflects an understanding that Peacock may be part of a flywheel without needing to be a “walled garden” anymore. He is referring specifically to the complexities around ad delivery and consumer data. Both are optimal in a single, centralized solution. So, the fate of a valuable IP library is intertwined with advertising (more on this below).
It is clear that executives at Comcast and other media companies understand there a merger or acquisition can accomplish only so much for a valuable library of IP.
Alternative Solution #2: Spotify for IP
That said, a merger or acquisition delivers a concrete outcome and return for shareholders, whereas technology-focused models promise exciting but more speculative outcomes.
The core argument of my essays on four broad buckets of “back to the people” business models—where studios are likely to license IP to professional amateur content creators— is that technology can deliver a solution for unlocking hidden value.
The most concrete proposal was made by Gavin Purcell—a producer and host of the podcast “AI for Humans”—who imagined a Spotify-type platform emerging to enable these “back to the people” models. IP rights holders would receive a share of royalties per use, much as artists receive a payment per stream on Spotify. IP rights holders likely “will be paid less than they have in the past”. But, like music labels, they will get paid.
Showrunner founder Edward Saatchi imagines his generative AI, interactive storytelling platform “passing on a portion of its subscription fees based on how many shows a creator makes and how many people watch.” He also envisions that “people will pay to use elements of TV shows or movies to create and tell their own stories.
Showrunner is currently in its Alpha stage and does not envision a studio licensing its most valuable IP for another two years. Inkitt—“a startup that lets writers self-publish books and uses artificial intelligence to edit, distribute and sell the most promising works on its Galatea app”—is live with a similar model in the fan fiction space. Inkitt readers can select their favorite Galatea story for inspiration, and customize elements like character names and the story’s setting.
Inkitt pays authors a royalty when a reader generates fan fiction, and it is the same royalty that they earn from the sale of an original title. It appears to be one market precedent for a Spotify for IP-type solution.
Alternative Solutions
A “Spotify for licensing” may not be a competitive investment opportunity given that Spotify, Netflix, Meta and YouTube already have licensing solutions in place. One could expand that list to platforms like Epic Games’ Fortnite or Roblox, where users pay licensed third-party character “skins” to play as their favorite characters in virtual worlds.
A key problem faced by sophisticated third-party platforms licensing valuable IP face lies in game theory (or, the study of mathematical models of strategic interactions with rational consumers). Technology is fragmenting the books, movies and TV shows of famous IP into value propositions where the “beloved characters and worlds” are front and center.
Warner Bros. Discovery may know which users like DC Comics’ intellectual property from its Max streaming platform or “Multiversus”, its free-to-play crossover fighting game. But, Netflix, Amazon, Meta or YouTube have built multidimensional lenses on what those DC fans also like across shopping and other affinities. All are built upon the assumption that IP is one variable among many to understand the consumer. Their key to success is targeting the right advertisement to the right consumer.
In this light, the only competitive solution to ensure libraries of valuable IP do not become beholden to technology companies is for a white knight to come in with a competitive solution. Two immediate solutions come to mind.
Alternative Solution #3(a): Data Warehouses
One feasible white knight solution would be a data warehouse service offering itself to media companies as the default platform for managing their IP licensing and advertising. As I wrote in May, data “warehouse-native” marketing technology (which allows marketers to create, run, and manage online marketing campaigns and conduct onsite marketing) is “creeping” into marketer data stacks.
First-party apps that now run within the data warehouses can assume the roles of third-party ad servers, demand-side platforms (DSPs), and attribution/measurement partners. Snowflake and Oracle are leading providers. Adding licensed IP libraries to these solutions would make them more robust on the open market, especially as walled gardens.
Alternative Solution #3(b): Curation
Another solution borrows from curation from the ad tech space, or the process of advertisers using “audience, contextual and supply chain signals from publishers to curate collections of auctions across various sellers.” A handful of first-party data signals from both the publisher and the advertiser are combined to help to streamline open auctions in programmatic bidding toward the inventory that is most valuable to both parties.
In this model, a curation partner would capture first-party data signals specific to its IP from both the publisher and the advertiser. (e.g., on which platforms consumers most consume Superman IP). It could then “curate” the optimal signals specific to “beloved characters and worlds” and help publishers optimally monetize IP with creators, gaming publishers, generative AI platforms and (perhaps) meme coins out in the “wild” of the open internet.
Such a solution at scale across multiple media formats beyond video could create leverage over video-focused platforms like Amazon, Apple, Meta, YouTube or TikTok that media companies have failed to build. The catch is that data warehouse providers Oracle (Paramount) and Amazon (MGM Studios, Prime Video) have head starts in this space.
Presumably, this outcome would work based on data partnerships in the short term. If this solution is viable in the long term, a wave of mergers toward the aggregation of IP libraries could make sense to improve studios’ bargaining leverage over the data warehouses.
For now, the need for mergers in this instance and in the other scenarios, above, is more speculative than necessary.