PARQOR’s Three Key Trends for Q3 2023
1. Legacy media companies are throwing in the towel on their bets to own the consumer relationship in streaming and beyond.
This trends offers one answer to the question I posed last quarter: “Media companies have millions of consumer credit cards on file. What are they building for their customers?”
In Q2 2023, Warner Bros. Discovery, Paramount and Disney removed titles from their respective streaming libraries. Notably, Warner Bros. Discovery removed prestige HBO titles like “Insecure”, “Band of Brothers”, “The Pacific”, and “Six Feet Under” and licensed them to Netflix. From a licensing business perspective, this makes sense: If Netflix or another platform values these titles more than Max subscribers value these titles, then Warner Bros. Discovery is properly maximizing the value of its library through licensing.
Licensing revenue that comes with less risk and less cost than marketing spend. Why bet on that content to drive subscriptions and/or reduce churn on Max when Netflix has more subscribers and better technology to do so?
But from the perspective of a retail, direct-to-consumer model, the move is a head-scratcher: if those titles have value to existing and target subscribers of Max, and the relaunch of the app includes personalized recommendations, then why are these prestige titles *not* on Max?
In other words, why did Warner Bros. Discovery management bother with betting shareholder value on the relaunch of the Max app if they cannot figure out from tens of millions of credit cards and consumer profiles which consumers highly value that same library content?
I discussed the deeper implications of legacy media’s collective failures to pivot to retail in May’s “The ARPU of Storytelling”: average revenue per user (ARPU) offers the best story to be told in retail business models for media companies. As I wrote in May, media executives and Wall Street investors alike are coming to realize that the new ARPU from streaming alone will not replace the lost ARPU from cord cutting, and that extra revenue will have to come from somewhere.
In other words, the optimal ARPU for business models at the intersection of media, direct-to-consumer and technology reflects the average across multiple sources of revenue.
One example is The New York Times, whose story to investors is that, even as its wholesale (print) distribution model declines, consumers are spending more money within its ecosystem and for more digital subscriptions beyond news. The other is anime streaming service Crunchyroll, which Sony has evolved beyond its streaming DNA into a “flywheel” model: theatrical releases of new anime content, sales of home entertainment products (e.g., DVD box sets), merchandise licensing and secondary distribution.
So, even when investors applaud the licensing of libraries as positive for Disney, Warner Bros. Discovery and others, they ignore that those businesses have thrown in the towel on figuring out how to diversify ARPU. In Q3 2023, we will see more outcomes that reflect legacy media collectively (*with exceptions) throwing in the towel on their bets on retail models.
2. Artificial intelligence (AI) and cloud computing applications and services are increasingly dictating content consumption.
My basic take on AI reflects something computer scientist Jaron Lanier recently argued in The New Yorker, AI systems have “a flexibility and unpredictability that we don’t usually associate with computer technology. But this flexibility arises from simple mathematics.”
I read this to mean that AI exponentially changes the probabilities of outcomes because it can correlate billions of data entries. For example, as I wrote in May’s “Consumer Data May Be Too Complex for Media’s DTC Models”, AI is becoming increasingly important to dictating which marketing content we will see and/or consume depending on the data a media company has on us. The view of any individual or cohort of consumers by a singular AI program is “now truly holistic, and the decisions that are made about serving us content from data within a warehouse may be made without human insight or guidance.”
An essay from data entrepreneur Jonathan Mendez added a notable prediction on this point:
“The brand’s cloud is going to handle everything data and the data warehouse or lakehouse is the platform. Owned and paid, merchandising and product, finance and forecasts. Applications and services will operate inside databases filled with rich AI ready data. That is what is actually rising.”
That observation, and any imagined logical outcomes from out, are technical and wonky. They also suffer from a required understanding of how the AI works, what is in the database, and what is or is not “AI ready data”. None of those questions have straightforward or immediately available answers.
But, if AI is truly going to leverage more data and a more holistic approach to us as media consumers, then it is necessary to understand which companies are driving towards that outcome and what they are building. It may be ambitious to assume that the AI marketplace is evolving so quickly that we are guaranteed more answers in Q3 2023, alone.
Or, maybe it isn’t ambitious.
3. There is a less-discussed lens on how the demand for “premium content” is being redefined by creators, tech companies and 10 million emerging advertisers.
The supply of premium content is changing. A big reason why is because Meta’s Facebook and Instagram, and Snapchat and TikTok offer more content that both users and advertisers are increasingly comfortable considering as premium content.
I see it now in my own behavior: I watch more YouTube on my devices and especially on TV than any other streaming service. I just signed up for a YouTube Premium subscription. YouTube revealed at Upfronts in now reaches over 150 million unique viewers on connected TVs in the U.S., at least 50% of content consumed on YouTube is creator content (as YouTube CEO Susan Wojcicki revealed to YouTuber Hank Green in a 2020 interview.), and a recent Think with Google research post revealed 68% of Gen Z YouTube viewers agree that creators are why they visit YouTube. They also now distribute the NFL’s Sunday Ticket broadcasts.
But there is little discussion of how demand may be changing *because* YouTube’s model is beginning to dominate across screens. I wonder whether in this emerging world of data-driven distribution and infinite choice that legacy media’s assumptions about what consumers will pay for are no longer true. For example, the surprisingly poor underperformance of “The Flash” ($247 million grossed worldwide on a $400 million budget (with marketing)), “Indiana Jones and The Dial of Destiny” ($154 million grossed worldwide on a $400 million budget (with marketing)) and Pixar’s “Elemental” ($194 million grossed worldwide on a $300 million budget (with marketing)) at the summer box office all may point to declining demand for theatrical.
This point relates to trend #1: if the variable of ARPU is fragmenting beyond the basics of subscriptions or affiliate fees, that would imply the consumer is willing to pay for new services related to or beyond the content. Former WarnerMedia CEO Jason Kilar frames this demand as “beloved characters and worlds matter”. Meaning, a show or a movie is a value proposition of fandom, but not necessarily what fans will always pay for to be connected with “beloved characters and worlds”.
Also, Peter Chernin of The Chernin Group has believed since he was President and COO at News Corporation that technology’s disruption of media results in content aggregating at two extremes: the big blockbuster hits and niche products. He argues: “What’s gone, and gone forever, is the bland middle.” But this summer seems to be proving that big blockbuster hits may no longer deliver what consumers need from “beloved characters and worlds”.
The X factor in all this is AI. Virtual production and AI-enabled tools have emerged that lower the barriers to high-quality video content creation (BCG Senior Advisor Doug Shapiro has a good ongoing Twitter thread of these tools here). The immediate assumption is that the sheer scale of free content production they now offer threatens to create a whole new category of content to compete with the creator economy and Hollywood. But is there actually demand for this content where people will pay for it instead of something produced by humans?