This past week has felt like the calm before the next round of seismic shifts about to hit the media marketplace in 2023 (last night The Financial Times’ Anna Nicolaou wrote about how Hollywood executives are bracing for a brutal “year of turmoil”.
The easiest earthquakes to predict will be Q4 2022 earnings calls over the next three months, starting with Netflix on January 19th. We will hear about cost-cutting measures at Disney, how AMC Networks management envisions its survival, and overall, whether Wall Street can be convinced to be positive about the future of media companies (and platforms like Roku, Netflix and Spotify).
They won't be convinced because their expectations are weird.
These are the four trends and market signals for identifying seismic market shifts in media in Q1 2023.
Total words: 1,600
Total time reading: 6 minutes
This is the same trend as from Q4 2022 but with a minor tweak because there are two dynamics at play.
“Say what you will about the shortcomings of legacy media’s efforts to take on Netflix, but they end 2022 with databases of millions of credit cards. Disney has hundreds of millions of credit cards. That is a competitive advantage that legacy media companies have never had before.”
A question in Q1 2023 is whether we will get clearer signals as to what they will do with this newfound competitive advantage, if anything. I certainly hope so.
This points to the second dynamic: do they have enough scale to succeed? And if they do, what is the best business model?
Back in August, I wrote about how Kevin Mayer, the former Disney Chairman of Direct-to-Consumer and International and now Co-CEO of Candle Media, predicts the marketplace will split into “four or five big global services” at most. Also, former WarnerMedia CEO Jason Kilar’s predicted in a Vulture interview early in 2022: “there’s going to be a relatively short list of streaming services that are must-have. My hunch is there’s probably going to be three must-have general entertainment streaming services.”
If both are right, we should start seeing signals for the three to five who are best-positioned with consumers in the long-run (I think Netflix is inevitable one of them).
“Who is the “someone else” with the next exciting, premium-quality story to tell at extraordinary scale? The math of blockbuster hits (1%) tells us there should be as many as 20,000 creators in MrBeast’s league. But it’s not clear there are even 2,000.” [NOTE: I also wrote about this problem for Members last month].
There is also something Kilar said in a Twitter conversation with me last year: “One of the biggest opportunities in entertainment is to delight the biggest fans in ways a one-size-fits-all model is not designed to do. The emerging roster of modern creators clearly gets this and has leaned into it from the start. Walt Disney would be proud of them.”
Meaning, it’s not only worth trying to identify 2,000+ other creators who join MrBeast in the top 0.1% of YouTube. It’s also worth paying closer attention to their business models. MrBeast has successfully launched a fast-food chain and a chocolate business, and YouTube star Dave Dobrik just launched Doughbrik's Pizza in Los Angeles, CA.
But perhaps the most interesting YouTuber to follow right now is Logan Paul, one of the top 0.1%, who is currently dealing with an embarrassing public relations snafu. Another YouTuber and crypto journalist named Stephen Findeisen aka CoffeeZilla exposed Paul’s game CryptoZoo as a scam.
Paul has successfully made the unusual leap of also becoming a WWE wrestler. But this CryptoZoo exposé is a helpful example of the ambitions of this new generation of talent, the unusual accomplishments of this talent and the limits of these ambitions.
As for TikTok, it launched its Creator Fund in 2020 and launched Pulse in 2022 for revenue sharing with the makers of the top 4% “most engaging” videos across 12 categories, including beauty, fashion, cooking, gaming, and books.
So we should be seeing the beneficiaries of those initiatives begin to emerge in 2023, too.
This trend effectively reflects the overlap of the other two trends from Q4 2022: “Linear channels seem doomed” and “There is no such thing as a Connected TV [CTV] household”. Scarcity is the linear distribution model’s historical moat — the linear model enabled multichannel video programming distributors (MVPDs) to aggregate millions of households locally, regionally and later nationally.
I wrote last week: "the problem with scarcity as a value proposition to investors and advertisers in 2023: the technological, operational and financial structures required to create scarcity don’t seem to have an obvious business logic to them."
Total pay TV distribution is estimated to have dropped by as much as 6% in Q3 2022. Also, Amazon and Google offer their own CTV devices and apps, and they are able to aggregate ad inventory in the household across audio devices, tablets, and smartphones, too. A recent survey by the IAB found that CTV spend will go up by 14.4% and every digital channel is projected to see ad spend growth in 2023. But, linear TV is expected to decline by 6.3% year over year.
An “X factor” to watch for in 2023 is retail media networks (RMNs). According to BCG, a retail media network is essentially an advertising business that a retailer sets up in order to allow advertisers to buy advertising space across the retailer’s owned (onsite) properties and paid (offsite) media, using consumer data to connect with consumers throughout the buyer journey.
The IAB found that • 6-in-10 buyers (61%) are investing or considering investing in RMN advertising. GroupM recently estimated retail media spend to reach $110.7 billion dollars in 2022, an upgrade from its September forecast of $101 billion.
Also, last week I highlighted how the NFL’s deals with Amazon and YouTube over the past year have changed the paradigm of scarcity two times over. I concluded: "The YouTube-NFL deal reflects YouTube as *A* center for these market dynamics: it captures linear audiences with YouTube TV, connected TV users with YouTube and over a billion short-form consumers with YouTube Shorts. But, with an estimated 84MM homes with access to linear via virtual MVPD or traditional pay TV (cable, satellite or telco) in the U.S. (including YouTube TV subscribers), YouTube is nowhere near becoming *THE* center for these market dynamics. "
In October I wrote about “How Linear's Decline May Fuel Gaming's Next Decade”. 9 in 10 Gen Alpha and Gen Z are game enthusiasts, according to recent research from NewZoo. I also wrote about media competition is increasingly about attention in November’s “Bo Knows Media”.
Wall Street seems to understand that capturing consumer attention and time are now the high stakes, win-or-die games for media businesses. Meanwhile, the number of scripted series for adults ordered by U.S. TV networks and streaming services tumbled 24% in the second half of 2022 compared with a year ago, and has plummeted 40% since 2019, according to Ampere Research. Also, according to the IAB, film production rates and theatrical attendance are going down. So, movies and TV series are capturing less attention.
EA CEO Andrew Wilson told the Goldman Sachs Communacopia + Technology Conference that EA currently has a player base of 600MM and growing who engage with EA one-and-a-half hours per day “playing games and connecting with their friends”, on average. On its Q3 earnings call, EA management promised investors “a new creative platform for our Sims community giving them more collaborative ways to play, create, connect, and share stories with their friends.”
So, legacy media companies looking for growth from Gen Z and Gen Alpha will struggle to compete by betting on streaming without gaming offerings (and on this point, Netflix’s aggressive move into gaming is notable).
The other takeaway is one I mentioned under “Linear TV is doomed” last quarter, and which I wrote about last month in “Is AMC Networks A Canary In Cord-Cutting Coalmine?”: we're at Peak TV, and therefore the post-production market has been running at full tilt/maxed out. What happens when (and not if) demand declines and/or productions are canceled?
As I wrote last month:
"It’s not clear what percentage of legacy media productions are built on Unity and Unreal Engine platforms, both of which are used in gaming, too. But, the implicit market dynamic is obvious: the more the supply of legacy media productions is reduced by the changing economics of the linear business and disappointing economics of streaming, the better-positioned gaming companies will be to capture some of the post-production marketplace for their 2030 objectives of producing more original titles."
And if gaming captures that supply, that permanently reduces the supply of talented VFX designers for TV and movies. The end of Peak TV will have more repercussions in 2023 for streaming than many seem to be considering.