Member Mailing #231: A Difficult Road Ahead for Discovery+ in Streaming & Alternative Models
Discovery bets on streaming despite growing evidence Disney and Netflix have already captured the space
Two weeks ago, I asked in a blog post "Are There Better Options for Discovery in Streaming than its “SUV”? I concluded:
We do not know what [the SUV] will be priced at, and the SUV does not have scale, yet. In fact, right now it has a customer base of zero.
With existing partner Amazon it quickly gets reach to 40MM households, and presumably can lock down deals with Roku and Comcast, thereby getting it into nearly 100MM households total. But it also has carriage deals in place with cable providers and MVPDs that it needs to be sensitive to, and it is unlikely to imitate Disney's approach in the UK of eliminating cable channels (The Disney Channel, Disney XD, and Disney Junior) in favor of its Disney+ streaming service.
I think Discovery will launch its SUV, but one has to wonder whether Discovery is already considering it to be too costly. As Zaslav's Europe quote, above, and its acquisition of free-to-air New Zealand TV channels suggest, its international opportunity is not in OTT streaming. And, looking at HBO Max's launch and Peacock's launch, its domestic opportunity may underserve the value of its IP in the U.S. On top of all of this, they have lost their global head of streaming.
One has to wonder whether Discovery is reconsidering its streaming strategy given that all evidence suggests that demand for its content may be best maximized outside of an owned-and-operated streaming platform.
Yesterday, Tim Peterson of Digiday reported:
Discovery plans to debut its direct-to-consumer streaming service — which will be called Discovery+ — in the first quarter of 2021, according to agency executives. Some agency executives had been told that the TV network group was aiming to launch the standalone streamer in the fourth quarter of 2020, but were skeptical of the timeframe given a lack of details about the service’s pricing, sponsorship packages and distribution plans.
[...]
Discovery+ will feature an ad-supported and an ad-free tier, and the ad-supported tier will carry a maximum of five minutes of ads per hour of programming, according to the agency executives. Discovery has not shared with the agency executives how much money it will charge for people to subscribe to the service.
In other words, Discovery will launch Discovery+ in Q1 2021, but there are key details (pricing, sponsors, distribution partners) missing three to six months before launch. So, there is evidence that Discovery will launch, and also evidence that Discovery is still evaluating (but not re-considering) its go-to-market streaming strategy.
First, Is Discovery Making a Similar Mistakes to Comcast/NBCU with Peacock?
Discovery Chairman David Zaslav is currently selling his "SUV" streaming service as "Disney+, but for cooking and house-flipping shows".
But who are the customers for this? And why is this the best business model for them?
I wrote back in January that Peacock fails basic value proposition design because "it has too many customers and a confusing value proposition". I saw "too many customers" as:
Consumers, which broke down further into
Free tier
Premium SVOD+AVOD tier
Premium SVOD-only tier
Comcast X1 customers
Cox Communications customers,
LatinX
Brands
MVPD/distribution partners
Investors
Those are very different customers NBCU needs to please. The same is true for Discovery, with the only difference being its consumers fall into only #2 and #3 in of Peacock's consumer bucket.
We have heard little about cord-cutters wanting a Discovery+ app, which implies it is Brands and Investors who want Discovery to launch one. They have good reason given that, in the U.S. alone:
an estimated 78% of U.S. households now subscribe to one or more streaming services, and
Advertisers will spend $61 billion on total TV advertising in the U.S. in 2020, and are increasingly spending more on Connected TV inventory to get in front of incremental audiences that are more difficult to reach on traditional TV
Second, the IAC MGM Hypothesis Test
Discovery meets some, but not all of the criteria of the IAC MGM hypothesis:
It has an existing user base at scale, globally ("3.8 billion cumulative subscribers and viewers worldwide"), according to its 10-Q)
It offers daily access to the brand, online and offline
It has online and offline to online sales, though the linear business is much stronger than the digital business, and it does not own theme parks or any other form of offline business (NOTE: the IAC analogy was to Disney, and MGM owns resorts and casinos nationwide in the U.S.)
However:
Discovery itself is not an aspirational brand for consumers, but it owns aspirational brands
It is a collection of linear and digital content brands, but has not built an ecosystem in which it can monetizing its brands, content, and talent in multiple ways.
So, it would fail IAC's criteria for a media business positioned to "catch the streaming wave and provide a business that met the coronavirus moment".
Discovery has good demand-side reasons for launching a service, but none of them seem to be related to consumers asking for Discovery+.
The Bigger Problem: Discovery Is Not A Digital Native
The minute Discovery+ launches, two problems will immediately surface:
What territory can Discovery defend in streaming once it repurposes TV content for a digital medium?
As I asked on Twitter, is Discovery talent better off monetizing their talent on a Discovery SVOD? Or monetizing their own audiences via Patreon or "on Instagram, YouTube and maybe even TikTok"?
The first question is about whether audiences will consume Discovery content in OTT the same way they consume it on linear TV. The second is a more complicated one: can keep its talent happy with its business model for Discovery+; or, in other words, will talent still want to work with Discovery if it cannot scale?
These are obviously related questions.
Reader Salil Dalvi makes some great points in a great exchange about answering the first question. I am going to use a few bullets from it to flesh out an answer to this question.
What Territory Can Discovery Defend In Streaming?
While there is obviously a market for the branded show/merchandise/IP business in celeb cooks, I would worry this is nowhere near as big a business as discovery’s legacy model.
— Salil Dalvi (@sd_so) September 17, 2020
Discovery already has two big problems in streaming: the sudden departure of Global Streaming Head Peter Faricy in late June (which, according to a tweet I randomly found, was because he did not want to move to NYC); and, Discovery has changed its tone about Food Network Kitchen from being bullish to Zaslav acknowledging to investors they are problem-solving:
Well, look, everything that we've done, we've been in the direct-to-consumer business for the last couple of years with the Eurosport Player, with Dplay, with Food Network Kitchen and each one of them, we've learned, we've fallen down, we've picked ourselves up. What do people like, what do they want more of, how do we create a product that people love every month, reduce churn, how do we get partners to help us?
It also has a third big problem: Netflix and Disney are the two winners in streaming (according to Diller), and they continue to actively invest in the unscripted vertical, where Discovery's strengths lie. Disney continues to launch more original content for its National Geographic Hub on Disney+ for 100MM+ subscribers worldwide. More importantly, Netflix's new head of global television, Bela Bajaria, was previously in charge of unscripted programming and international, local-language content. The latter is more of a business priority for Netflix's continued international grown ambitions than the former.
Discovery will be funding unscripted for streaming with an eye to taking on Netflix's international install base of 150MM+, and Disney's 100MM+. But, unlike both, it will be offering an ad-supported model.
However, it has one advantage:
Food TV’s advantages are narrowing.
One enduring advantage is that Food and HGTV are fundamentally video wallpaper. The content is FANTASTIC for low-engagement, low conflict viewing over HOURS.
In other words, made for linear.
— Salil Dalvi (@sd_so) September 17, 2020
Both the production value and the economics for Discovery content may be better for linear than for streaming (something I also dove into last week).
Is Discovery talent better off monetizing direct-to-consumer on social, without Discovery?
Food Network Kitchen was supposed to be an affiliate-sales driven model for talent:
At launch, customers will be able to order ingredients through the Food Network Kitchen app using Amazon Fresh in select cities. In 2020, the service will let consumers directly purchase the equipment being used by the Food Network Kitchen chefs.
Now, with Food Network Kitchen being described as a "learning" experience (Faricy was a key driver behind this), that seems less feasible as a business model. Maybe Discovery was "too early" to the game with interactive TV on Amazon. But, we have yet to see interactive TV capture anywhere near to the 100MM households of QVC and HSN-type TV-driven consumption (and, both QVC and HSN have been thriving with 10% viewership growth during COVID).
So what should Food Network talent do if Discovery streaming is unlikely to reach scale? The obvious answer is this:
The other problem, is that they probably need to be on digital to attract the next generation of talent. They should be replicating the YouTube model of Bon Appetit or Vice Munchies.
— TZM (@TZM_TMT) September 17, 2020
In other words, Discovery faces a problem: they can invest shareholder money into an "SUV" streaming service; or, they can focus on investing in new talent with new business models on new platforms, and then perhaps aggregating them into a streaming service. A new generation of consumers are increasingly gravitating towards new talent, but brands and investors want to see a streaming service for living rooms.
Which leads to the next question: at what point does Discovery talent look at a Discovery SVOD service operating at a fraction of the scale of Netflix and Disney, and begin to monetize their talent elsewhere? At what point do they realize that an affiliate link on a YouTube Channel or Instagram profile may drive more engagement and revenue than an old or new episode of a show they produced for a Discovery-owned channel?
I think we will see signs of that in 2021. It is becoming easier for talent to drive affiliate sales and views on digital and social channels than it is for Discovery to drive views within a yet-to-be-launched streaming app. These affiliate and commerce dollars are increasingly available, and the rapid success of platforms like TikTok or Instagram's Reels tells us that talent can find scale elsewhere, and quickly. All they need is a production model that makes sense for them and their audiences (not easy).
Conclusion
Discovery's efforts in direct-to-consumer streaming have experienced difficulties, and the road ahead for Discovery+ seems like a steeper, more uncertain climb. On top of this, I have not even touched upon the negotiations Discovery would face with a Roku or Amazon around the economics of its business. But, advertisers/brands and investors want to see it, and consumers are increasingly, if not inevitably, shifting towards Connected TV streaming in their living rooms.
This leads to two questions:
What territory can Discovery defend in streaming once it repurposes TV content for a digital medium?
As I asked on Twitter, is Discovery talent better off monetizing their talent on a Discovery SVOD? Or monetizing their own audiences via Patreon or "on Instagram, YouTube and maybe even TikTok"?
Discovery seems worried about the first. After a recent announcement that Discovery is buying the New Zealand free-to-air TV business from MediaWorks, the country's biggest independent commercial broadcaster, I asked why it would be investing in free-to-air (FTA) at the same time it is investing in Discovery+:
I think Discovery will launch its SUV, but one has to wonder whether Discovery is already considering to be too costly. As Zaslav's Europe quote, above, and its acquisition of free-to-air New Zealand TV channels suggest, its international opportunity is not in OTT streaming. And, looking at HBO Max's launch and Peacock's launch, its domestic opportunity may underserve the value of its IP in the U.S. On top of all of this, they have lost their global head of streaming.
One has to wonder whether Discovery is reconsidering its streaming strategy given that all evidence suggests that demand for its content may be best maximized outside of an owned-and-operated streaming platform.
Put another way, FTA is paid streaming's biggest competitor in international markets, so it is reasonable to ask why Discovery is currently investing in both streaming and FTA if streaming is the future of the living room.
I think the answer is obvious from the above: it knows Barry Diller may be right, and it may have already lost to Disney and Netflix.
So what should it do instead?
That is the second question. Here is Salil's framework for answering it
My own recommendation would be to talk about
1-being a last man standing on linear 2-reinventing linear formats on legacy platforms to capture more of that audience 3-announce an investment fund to manage foodtech and home tech businesses: will include cross platform content.
— Salil Dalvi (@sd_so) September 17, 2020
You can click on the tweet to see how Salil walks through his thinking for each of three bullets.
One particularly interesting part of his answer is the investment fund:, "the IDEA is to use Discovery’s balance sheet to expand their operating definition of the food and home categories." In other words, take some percentage of its $1.6B in cash and/or equity and invest in line items outside of its two core drivers of advertising and distribution. It has already done that, in some ways, with its investment in digital media company Group Nine Media.
But the problem an investment fund would be solving for is deeper, as Salil argues:
A big challenges for discovery is that food and home content is not like “traditional video”- it is atomized across shows, clips, how-to and data. “TV” as defined by the hour show format is a narrower slice of these categories’ total consumption. And a Huge chunk of it is FREE.
— Salil Dalvi (@sd_so) September 17, 2020
In other words, there are new content models emerging being driven by free, and new monetization models where Discovery talent are increasingly able to monetize their personal brands without Discovery (something its Magnolia Network joint venture appears to have been built to address). Rather than investing in a certain loss in streaming because its advertisers and investors demand that outcome, Discovery is better off investing in new models that are "orthogonal" to the legacy media business.
What do those businesses look like? In some ways we know: low-cost content that can scale easily across content verticals and sponsorship models. But the rest is still being figured out, and to survive, Discovery needs to invest in and learn more about those models than it does an "SUV" streaming service. Its competition is not just Disney and Netflix in the content verticals it thrives in - its competition is also free.
It seems inevitable Discovery+ will lose audience to Disney and Netflix in streaming homes seeking unscripted content. The opportunity for Discovery seems to lie beyond streaming, something its FTA investment in New Zealand implies. But it cannot continue to rely on advertising and distribution revenues alone. It needs to realize that with its talent lie the seeds of its future business model.
This is not the moment to be betting on a certain loss - this is the moment to understand "what comes next" in food and home content while Netflix and Disney and others are investing heavily and succeeding with Discovery's existing model.