Member Mailing #265: Jeff Bezos & David Zaslav Learn "It's Good to Be The King"

But, it is not clear how one plus one will equal three for MGM content within Amazon’s streaming ecosystem or for HBO Max & discovery+ within Warner Bros. Discovery

Jun 02, 2021

Both Amazon's Jeff Bezos & Warner Bros. Discovery's David Zaslav have been crowned new kings of Hollywood after recent transactions.
But, without a Disney-like PARQOR Hypothesis-type ecosystem in each company, it is not clear how one plus one will equal three for MGM content within Amazon’s streaming ecosystem or HBO Max and discovery+ within Warner Bros. Discovery.
Is the outcome that WarnerMedia is better off with Discovery? Or that CEO David Zaslav is perceived to be more powerful with a larger portfolio?
Is the outcome that MGM is better off being within Amazon? Or that CEO Jeff Bezos is perceived to be more powerful in Hollywood with MGM’s content library now within Amazon?
In short, what exactly are both new kings building in the long-term with each transaction?

Normally I save GIFs for Friday’s Mic Drops, but this GIF seems to be the best available version of the quote above from Mel Brooks’ History of the World, Part I.

I thought of it after realizing how both David Zaslav and Jeff Bezos have been effectively “crowned” by Hollywood as new kings of streaming: Bezos now owns the MGM library of 17,000 titles for Amazon Prime Video, with the biggest “catch” being James Bond. Zaslav will become CEO of a global media business positioned to become #3 globally behind Netflix and Disney.

Funnily, this contrast reflects how both outcomes reflect neither CEO is buying their way closer to Disney’s five out of five BEADS as an aspirational objective:

✅ an Aspirational Brand
✅ Existing user base at scale
✅ Multiple Avenues to monetizing the same IP, and
✅ Daily value proposition (something new for fans to consume daily)
✅ Sales Channels: Online (digital) and offline (physical) commerce

In Zaslav’s case, the acquisition was much more about scaling content library as a driver to scale streaming internationally, and not so much about building an ecosystem with multiple Avenues to monetizing the same IP. Whereas for Bezos, the acquisition was about expanding its content library to monetize across Amazon Prime Video and IMDb TV, and improving the Daily value proposition of its streaming services Amazon Prime Video, Fire TV, Twitch and IMDb TV.

In short, neither Zaslav’s nor Bezos’ objective with these acquisitions is a better ecosystem for better monetizing consumers. So, neither outcome reflected my PARQOR Hypothesis prediction for 2025 (from March) that “the best strategies will aim to be Disney, or aim to own a genre”.

Which leads to the logical question: what is the objective of spending billions to get bigger if the objective is not the optimal ecosystem for streaming services most likely to succeed?

Part of the answer lies in Mel Brooks’ quote above: it’s good to the king. Both Bezos and Zaslav have been crowned new kings of Hollywood, and the scale of their respective businesses (Warner Bros. Discovery will have estimated 2023 revenue of $52B, $14B of EBITDA, and $20B in content spend) make them obvious power players.

But otherwise, without a Disney-like ecosystem within each company, it is not clear how one plus one will equal three for MGM content within Amazon’s streaming ecosystem or HBO Max and discovery+ within Warner Bros. Discovery.

The King vs. The Ecosystem

What is being built in the long-term with each transaction?

Is the outcome that WarnerMedia is better off with Discovery? Or that CEO David Zaslav is perceived to be more powerful with a larger portfolio?

Is the outcome that MGM is better off being within Amazon? Or that CEO Jeff Bezos is perceived to be more powerful in Hollywood with MGM’s content library now within Amazon?

Because both sets of questions generally point away from a Disney-type ecosystem being built for both media businesses: Zaslav has shown no signals of aspiring to build more consumer-centric ecosystems, and Amazon and Bezos have shown no clear precedent how it will monetize MGM’s content library, both within Amazon Prime and IMDb TV, and beyond streaming.

Warner Bros. Discovery

In the Warner Bros. Discovery merger, Discovery board member John Malone makes the argument that a global competitor to Netflix and Disney+ is being built:

Malone thinks the new firm could join Netflix and Disney+ as a true global powerhouse.
"I think we are not only going to be the third such platform, but I think we'll be very competitive with the other two in terms of being able to satisfy the entertainment and curiosity and information needs of the world, basically, a worldwide platform," Malone said.

Put differently, Zaslav was following "Barry Diller’s advice to “go big” and to “own nonfiction programming and be an essential streaming service”, as I wrote two weeks ago.

But Malone also offered a separate, more skeptical take to The Wall Street Journal’s Ben Mullin:

The true test for Mr. Zaslav is whether he can turn the company’s twin streaming services, HBO Max and Discovery+, into rivals of industry leaders such as Netflix and Walt Disney Co.’s Disney+. Signing up streaming customers will become even more urgent as consumers continue to abandon traditional TV service.
“In businesses like global distribution and creation of content, scale is the name of the game,” said John Malone, a media mogul and major Discovery shareholder, who is betting on the company’s success. “So can they get enough scale with the content that they can afford to create to be a major competitor to the other established streamers? That’s the question.”

Zaslav is the “king” of a potential global competitor to Netflix and Disney+, but it is not clear whether that potential global competitor will be able to scale. As I argued two weeks ago, Zaslav will be building Warner Bros. Discovery with “traditional b2b deals under the assumption the digital world rebundles.” Those types of deals require compromising on user data and tend not to scale.

I would add a PARQOR Hypothesis twist on this: it is not clear what self-reinforcing mechanisms of scale are available to Zaslav within Warner Bros. Discovery without a Disney-like ecosystem. If past is precedent, it does not look promising: AT&T struggled to scale its Wholesale user base when offering HBO Max to customers (according to its recent investor calls, it had better success with churn).

Bezos has already built that ecosystem with Amazon, but Zaslav seems to have little interest in heading in that direction, best reflected in this excerpt from The Information about his dynamic with former Global Direct-to-Consumer unit head Peter Faricy:

Discovery said abruptly in mid-June that Faricy would leave, even though one of his biggest projects—a mass-market streaming service internally called Discovery Plus—hasn’t yet launched. His departure comes after months of mounting tensions between him and Zaslav, The Information has learned. The two differed over how much autonomy Faricy would have as well as how fast new streaming services should grow and how much priority to give to big distribution deals with cable firms and other companies, say people with knowledge of the situation.

In other words, Zaslav may be a consumer-obsessive CEO, but his resistance to Faricy’s approach to “streaming from a product and user perspective” suggests he is a less consumer-obsessive CEO than Jeff Bezos. A consumer-obsessed ecosystem will be the least likely outcome for Warner Bros. Discovery, and that challenge begins and ends with its new king.

Amazon MGM

As for Bezos, the optics are clear that he is more powerful in Hollywood - where the world’s wealthiest man ($177B net worth) owns the $165MM Warner Estate and is a regular at awards shows. He now is bringing MGM’s 17,000 titles to 200MM Prime Video subscribers and 120MM Monthly Active Users across Amazon’s ad-supported platforms, including IMDb TV.

I wonder whether, despite the optics, the acquisition of MGM’s library benefits IMDb TV and Amazon Advertising most. The Wall Street Journal’s Sahil Patel (now with The Information) wrote in “With NFL Deal, Amazon Accelerates Its Streaming-TV Advertising Ambitions” ($ - paywalled):

Amazon said adding exclusive NFL games will encourage people to sample its original content. But as pandemic lockdowns turbocharge the growth of streaming TV, the heir apparent to traditional TV’s $70 billion ad market, Amazon also has been striving to expand its streaming offerings for marketers.
[…]
Amazon’s streaming-TV ad sales grew faster in 2020 than its more-established ad segments such as search and display, albeit from a much smaller base, according to a person familiar with the company’s ad business. Streaming TV now comprises roughly 15% to 20% of two top ad-buying agencies’ spending with Amazon, executives at the firms said.
[…]
One of Amazon’s biggest challenges is offering enough high-quality programming to capture more ad spend.

MGM’s library adds more high-quality programming to IMDb TV to help Amazon Advertising capture more ad spend, and reduces the ongoing variable costs of third-party licensing fees, which were only going to grow as IMDb TV continues to grow.

It is also worth recalling the recently announced, untitled spinoff of the Amazon Prime Video series Bosch, which is the first of its kind: an SVOD cancelling a series and launching the spin-off series on its own emerging free AVOD. It is not unreasonable to assume Amazon will pursue similar experiments with MGM IP on IMDb TV. But, as I wrote back in March, there remains a question around the economics of the move:

…put in terms of Prime Video vs. IMDb TV, Amazon and the Bosch producers are willing to trade away the economics and lower risks of guaranteed revenues (Prime subscriber payments) in exchange for a share of less guaranteed, but likely growing, sponsorship and advertising revenues.
If we use Peacock and Hulu’s $5 to $7 monthly average revenue per user (ARPU) as a reference point, Amazon is communicating with this move that the $5 to $7 monthly ARPU is more valuable to it than the Prime Member who is worth ~$10 to $12.99 per month. In other words, it believes with moves like the Bosch spin-off it can get more users at a lower ARPU to watch Bosch than Amazon Prime subscribers at a higher ARPU.
Those economics read like an unusually risky bet.

In other words, if we consider these economics for the Bosch spinoff as precedent, Amazon Prime Video may be the optimal channel for recouping the economics of the $8.5B deal, but not necessarily the optimal channel for scaling views. As for whether IMDb TV will be the optimal channel for recouping the economics of the $8.5B deal with Bosch-like spin-offs of MGM library titles, we have no precedent for understanding whether it will scale and/or attract advertisers for MGM library content.

So, it is not clear how Amazon is going to monetize the MGM library beyond theatrical distribution, attracting and/or retaining Prime subscribers, and serving ads to high-quality programming. Those are clear revenue drivers, but again, the PARQOR Hypothesis tells us that those, alone, are insufficient for a media business in 2021.

Obviously, with a price tag of $8.5B there is an economic rationale for the acquisition. But, that rationale is hard to discern based on the little we know about the economics of Prime Video and IMDb TV.

This makes the return of Jeff Blackburn to Amazon as SVP of Global Media & Entertainment particularly notable. One of his objectives is to oversee a “more integrated strategy” as Dade Hayes of Deadline reports:

One company insider told Deadline that Blackburn is expected to execute a notably more integrated strategy. He will weave together parts of the Amazon empire that haven’t yet made one plus one equal three. “There’s this really extensive ecosystem and all of these businesses that have been assembled over a number of years, but everyone hasn’t really been completely in sync,” the person said. “The hope is that we can start to do more cross-pollinating and collaborating.”

Will Amazon get closer to a PARQOR Hypothesis-type ecosystem than before? The hiring of Blackburn is a step in that direction and gives us an incrementally better sense of Amazon’s vision.

Conclusion

Both Bezos and Zaslav have made Hollywood bets that are big, broad in ambitions, cost billions, and have made them kings. In short, their respective strategies had two things in common:

first, they each made big bets on content libraries; and,
second, neither had the objective of a BEADS ecosystem.

As I wrote in a March Member Mailing attempting to predict 2025 through the lens of the PARQOR Hypothesis,

…the value of the PARQOR Hypothesis framework is not that it is prophetic. Rather, it provides an optimal outcome for 2025 which two market participants (and one non-participant, MGM Resorts) have already achieved, and against which we can assess each streaming service’s existing business models, objectives and strategies.
The framework sheds a particularly dynamic light on companies that fall under “BEADS is not the objective, but is within reach”.

Amazon has four out of five BEADS - as much as Amazon is an iconic brand, I do not believe it is an aspirational brand. MGM does little to nothing to solve for Amazon becoming an aspirational brand.

As for what is now Warner Bros. Discovery, the PARQOR Hypothesis reflects a mix of WarnerMedia (three out of five BEADS for HBO Max pre-merger) and Discovery (0.5 out of five BEADS for discovery+ pre-merger) that presents a few questions. If Disney looks like this:

✅ an Aspirational Brand
✅ Existing user base at scale
✅ Multiple Avenues to monetizing the same IP, and
✅ Daily value proposition (something new for fans to consume daily)
✅ Sales Channels: Online (digital) and offline (physical) commerce

Warner Bros. Discovery is gunning for 400 million streaming subscribers. It is not clear how it gets there, as-is:

❌ Aspirational Brand
✅ Existing user base at scale
⁇ Multiple Avenues to monetizing the same IP, and
✅ Daily value proposition (something new for fans to consume daily)
Sales Channels: ✅ Online (digital) and ⁇ offline (physical) commerce

In short, post-merger Warner Bros. Discovery is not closer to a BEADS ecosystem. Those types of ecosystems are optimal for scaling streaming services, as Disney proved with Disney+, and for building affinity around a brand and IP.

I wonder whether the optics of these deals invite the types of questions the PARQOR Hypothesis demands: at $8.5B, MGM reflects less than 1% of Amazon’s current market cap. Moreover, Amazon is spending $11B per year on original content, and 175MM out of 200MM streaming Prime Video content at least one time in a year is a big number. Does it matter that Amazon could be more of an Aspirational brand?

As for Warner Bros. Discovery, an estimated 2023 revenue of $52B, $14B of EBITDA, and $20B in content spend by 2023 offer carrots for AT&T shareholders -who will own 71% of the new entity - and Hollywood. Does it matter that the PARQOR Hypothesis raises legitimate questions about whether this business can scale in streaming?

My answer to both questions is an emphatic yes. There is much more both businesses can do to better serve customers, and it is no accident Amazon is moving aggressively in that direction now under Blackburn. So it is surprising that Zaslav is suggesting he will be less customer-oriented at a time when he needs to be more customer-oriented.

It’s good to be the king… until it isn’t.

The PARQOR Substack