On Monday, The Information published Jessica Toonkel’s article about the upcoming departure of Peter Faircy from Discovery. The article was a contemporary illustration of the difficulty that large media companies have growing new businesses. As Tookel puts it:
“Tech and media firms have different levels of patience as well when it comes to fostering new ventures. Media company executives, overseeing debt-heavy mature businesses whose growth has peaked, are frequently looking for quick ways to develop new sources of growth.”
What’s interesting to me is how she describes the difference in strategic orientation between David Zaslav—the legacy media executive—and Peter Faircy, who comes into Discovery with a tech/consumer focus. (For the purposes of this note, I’ll assume each is characterized fairly.) Key differences:
- B2B vs. B2C: Legacy media focuses on the channel first—how do I do a deal with a distribution partner that will push this business to as many consumers as possible? (From my own experience in media, this usually includes a minimum guarantee.) Tech/consumer focuses on the consumer first—Faircy created processes to analyze the minutiae of consumer preferences with the focus of creating a product that would pull the greatest demand and sustain it for the long haul.
- Timeframe: Legacy media businesses are living quarter to quarter. As I’ve noted previously, small new businesses with different dynamics than the mothership have stories that are just too complicated to tell, so they need to get profitable fast or they will be terminated. Toonkel quotes Comcast CFO Mike Cavanagh as giving its new streaming service Peacock a deadline of 2024 for profitability. Compare this to the 10- to 20-year timeframes in which Amazon reportedly thinks.
I’m not arguing that one of these approaches is better than the other, but they do help to explain the general conservatism of legacy media.
The tech/consumer approach treats the acquisition of a customer as the potential start of an ongoing relationship. With an ongoing back-end that has a high margin, it’s worth putting significant up-front investment into both developing the product and acquiring the customer (eg, sales/marketing). This upfront investment creates the phenomenon we saw in the Disney English operating plans—to accelerate big revenue, you must dig a much bigger investment hole first.
The legacy media approach tends to be more incremental and is best illustrated by the history of cable channel launches. A new launch depends upon an agreement with a distributor that bundles it with a package that already has millions of subscribers, so there is less expensive up-front investment in marketing or product to create a strong consumer draw. The actual offering is value-engineered so that its cash downside is limited.
In light of this it will continue to be interesting to watch the evolution of two new streaming services.
Jeff Katzenberg and Meg Whitman’s Quibi seems to be trying to play both strategies concurrently. On the one hand, it is structured as a tech play—it will ultimately live or die on B2C relationships. Because of this, the payoff will be long-term, and it has invested heavily up front in programming and tech. On the other, it is impatient for scale in a way that is characteristic of legacy media, having raised $1.75 bil as startup capital and implementing a subscriber push strategy through a partnership with T-Mobile. One obvious goal is to compress the timeframe to profitability—acquire the millions of subscribers that will make the bottom line pencil out. Based on early results, it’s not clear that enough work and analysis has gone into the proposition to make those consumers stick around.
Superficially Disney+ is following a similar approach—a direct-to-consumer business being launched at scale with Verizon and others as distribution partners—but there are differences:
- The investment is more conservative. The vast majority of the content on Disney is battle-tested branded programming—examined through one lens, Disney+ is just the latest iteration of Disney’s content-recycling strategy that took place via theatrical in the 1970s, VHS in the 1980s and 1990s, DVD in the 2000s, and Blu-Ray/online sales in the 2010s. And while the technology backbone is different, Disney’s investment in Hulu has given it experience in running a streaming service. In both regards, it’s taking a much smaller risk than Quibi.
- Disney is getting in front of the tech/consumer story to neutralize the legacy-media effects. Paradoxically, the scale of the Disney+ launch will make a much larger loss less dilutive to Disney’s stock. The sustained investment Disney expects to make in the service has been made very public. The rationale behind the investment has been explained to analysts and investors and the long-term story has been plugged into valuation models, yielding a more favorable result that smaller investments buried in divisional P&Ls.
As a final thought, the Covid-19 pandemic will have interesting effects for Disney+. Continuing investment in its direct-to-home entertainment service is one of the most obvious plays for Disney when most of its businesses will be in one or another crisis and the company’s P&L is already far off plan. As the saying goes, “Never let a good crisis go to waste.”