(Welcome to the “Most Important Story of the Week”, my bi-weekly strategy column analyzing the most important (but often not buzziest) news story of the last two weeks. I’m the Entertainment Strategy Guy, a former streaming executive who now analyzes business strategy in the entertainment industry. Please subscribe.)
One of the entries on my “Damn, I wish I wrote that article” list is offering strategic advice to Disney as they got ready to launch Disney+ wayyyyy back in 2019. Frankly, I’ve always found the strategic challenges facing the traditional-studio-helmed-streamers more interesting than Netflix or the tech behemoths. Back then, I would have had a lot of tactical advice for Disney, including releasing TV shows weekly, deploying a “vault” strategy for library classic films, and finding some more anchor library shows.
I also had two larger philosophical points for Disney+. Call these the strategic vision that—again, it’s on me for not putting this in writing—that they needed to focus on:
First, they needed to achieve profitability in streaming as fast as possible.
Second, they should’ve ignored Wall Street as long as possible.
Heck, they didn’t do the first piece of advice because they disagreed with the second. As a result, they pursued growth at all costs. For a while, this worked and Wall Street loved them. Then it didn’t, and Wall Street returned to loving Netflix, their first true streaming love. A lot of the problems at Disney ever since—the hemorrhaging of the Marvel brand, the struggles of Pixar at theaters, the amount of money they lost, the firing of Bob Chapek—arguably stem from their focus on Wall Street.
That Wall Street focus stuck out to me as I collected stories for this week’s “Most Important Story” column. We had two major contenders for the top story, one of which everyone covered (the split of Warner Bros and Discovery) and one of which not nearly enough people covered (Hulu’s final valuation according to an arbitrator), but both of which were heavily influenced by making strategy for Wall Street.
So let’s discuss those two stories, plus Netflix gets into the fight game, the streamers lean into IP even more, OnlyFans’, A24’s and Mubi’s mindboggling valuations, and more.
Most Important Story of the Week – HBO/Max/Discovery+ and Warner Bros. Discovery…What Went Wrong?
A few years back, I argued that a barometer for the streaming wars would be seen via Nielsen’s The Gauge. Basically, if streamers like HBO/Max, Paramount+ and Peacock could grow faster than Prime Video and Netflix, then the streaming wars were getting more competitive. At times, that has indeed seemed to be the case, as those smaller traditional-studio-streamers started making Nielsen’s The Gauge.
Recently, though, none of the streamers (besides YouTube or the FASTs) have sustained their growth, which means none of those streamers are catching up to Netflix (who isn’t growing much either).
Imagine a world where, instead of sitting at about 1.2% of usage in America, HBO/Max had gotten to 3.6% share of living room TV. In that world, we’re probably definitely not having a conversation about WBD splitting itself up.
That’s the key question, then, when looking at this Warner Bros. Discovery split, whether you go back to the 2019 AT&T takeover or the 2022 Discovery merger: why didn’t the HBO streamer grow their market share? I’ll break my answer into two parts. In the first, we have the strategic situation or the “extrinsic” things outside of WB/D’s control. In the second, we have the strategic decisions or the intrinsic factors that kept HBO/Max (you pick the name) from really growing.
Extrinsic Factors
- Explanation 1. WBD started too late/Netflix had too big a lead. It’s funny to say that HBO/Max started too late in the streaming wars, when I vividly remember watching Game of Thrones on HBO Go back in the 2010s and really liking its user experience compared to Netflix. Alas, if we mean when did Warner Bros finally go “all in” on streaming—though I’ve said I hate that framing—then yes, arguably Max’s rebrand in 2020 was much too late and gave Netflix/Prime Video/Hulu too much of a head start. In general, I agree with some of this explanation, but I don’t think the timing ordained HBO/Max to failure.
- Explanation: 2. International growth separates Netflix from the rest. This is probably the explanation I like best. In particular, Netflix’s head start didn’t matter as much in the U.S., but internationally. HBO already had licensing deals in the most valuable markets globally, which limited their streaming app’s reach.
- Explanations 3/4. Big Tech owns the platforms (and can fund crazy losses). My researcher/editor would lose his mind if I didn’t mention the market power/Big Tech angle here. I’m sympathetic to the idea that the ownership of platforms, especially Amazon’s Fire TV/Amazon Channels, gives those streamers a leg-up in the streaming wars. By owning the platform, they can guide users much more easily to their own content and monetize it better. This would apply to Google as well. Related, and much more likely, I also think Amazon, Apple and probably Google lose money on many streaming endeavors. (We just had a big leak on this for Apple.) If you have one set of companies that have to make money in streaming and one set that doesn’t, the former will always struggle to compete.
- Explanation 5. Debt is a motherf***er. I’ve written plenty about why I think mergers and acquisitions in general hurt the economy by slowing growth. But usually that happens when they actually work, and they work when they actually accumulate market power. However, plenty of mergers don’t work, and often the debt required to complete the deal saddles companies with onerous financing they can’t pay. That’s a good explanation of what happened with WBD: the combined benefits didn’t ameliorate the debt load. If Discovery could have paid half as much to grab Warner Bros., they still might be splitting, but each company would be in that much better of a spot.
These explanations by themselves don’t fully satisfy me, though. Now, I don’t think you could look at the situation and say that Warner Bros.—whether owned by AT&T or Discovery—was in a strong strategic position, but that still doesn’t explain entirely, to me, why they couldn’t catch up to the market leaders.
Intrinsic Explanations
- Explanation 6. David Zaslav is an idiot/AT&T were morons. If the “town”—meaning Hollywood as measured by the chattering classes online—had a take, it’s this. Most pundits think Zaslav is an idiot and are cheered on by fellow journalists/writers/observers when they say that. Personally, though, I hate this explanation. Beyond the personal attacks—which I avoid—what matters is why his decisions didn’t work.
- Explanation 7. HBO was always an (awesome) add-on. I always thought that WBD had the makings for a fun “bundle” of services à la Disney/Hulu/ESPN+. You could use Discovery as your free/cheap option, then use Warner Bros films for a premium tier, and have HBO as the valuable add-on over the top. When every streamer in town went to a “super app” approach, it looked like this take had lost. But, as I wrote last issue, the streamers are now pivoting (somewhat/nuanced-ly) back to niche streamers. Indeed, WBD has also aggressively marketing HBO as an add-on, with a recent deal with Starz and a valuable deal with Disney+/Hulu from last year. In other words, HBO might just be what it was during the cable era: a nice-to-have add-on.
- Explanation 8. The Different Customer Bases Couldn’t Merge. One funny explanation I saw/read was that “it never made sense” to bundle HBO titles next to Discovery’s. How embarrassing to put The White Lotus next to Doctor Pimple Popper! To which I say…have you seen Netflix? Or Prime Video? Or fricking YouTube? Seriously, most of the other streamers put trash content next to prestige films and TV shows all the damn time. The issue is how you pull it off, and I’m sympathetic that the combined HBO/Max never had enough content offerings to serve enough different audiences. Plus…
- Explanation 9. Related, maybe HBO was the wrong partner for Discovery. In my second-to-last article for The Ankler, I wrote about the genre each streamer should “get into” next to expand their audiences. That’s an interesting way to think about this problem for both Discovery and HBO. If Discovery and HBO just had too big a gap in their brands, who else might they have worked with? In this case, maybe the dream should have been Paramount-Discovery, combining Discovery with Paramount Global’s Pluto TV to own the FAST channels landscape. The audience overlap with CBS and Discovery just feels much tighter. As for HBO, imagine them paired with Disney. That would have given Disney the adult fare they needed and an excellent add-on.
- Explanation 10. The UX didn’t deliver for the content. Related, HBO for years outsourced their tech stack to MLBAM to power HBO Go, which Disney bought in the 2010s. In this case, I think that dug too deep a technology hole to catch up with Netflix and Prime Video. In this explanation, sure, content is king, but the traditional studios never made up their lost ground in the technology side of the house.
- Explanation 11. Every HBO/Max decision seemed focused on Wall Street. And now I bring it back to the start. Going back to “Project Popcorn” when HBO released their Covid-19 films day-and-date in theaters, through to the constant name changes and up to the licensing decisions to Netflix, it just feels like the leadership at Warner Bros/Discovery always focused on giving Wall Street what it wanted (including paying down that huge debt pile) as opposed to just making a great product for customers. I’d add: a lot of streamers loved to copy Netflix without asking how Netflix’s strategy would or wouldn’t work for them.
This last point, though, really, really, really sticks with me, and likely explains the biggest strategic mistakes made along the way.
As a coda, though, I’m writing this almost like it’s an obituary, when it’s not. HBO Max will continue, and Warner Bros still has a great studio, content library and theatrical output. HBO Max will remain an absolute must-have add-on for many streamers. Not to mention a big user base. If it’s up to me, though, going forward, I’d focus on the great strategy and forget Wall Street for a little bit.
Almost Most Important Story of the Week – Hulu’s Comcast Valuation
We probably shouldn’t take too much from the final conclusion of the Hulu/Disney/Comcast saga…
…but I can’t help myself. Sure, the Warner Bros. Discovery splitting up news is the most important story of the week, but the Hulu valuation is the most interesting. The news, for those who missed it, is that an independent arbitrator issued their final verdict and determined that Hulu is worth $27 billion overall, so Disney owed Comcast an additional $450 or so million to close the transaction.
That number blows my mind.
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