Mic Drop #22: Investors Get Bearish, Quickly, on Paramount+ ($VIAC) & discovery+ ($DISCA)

Are ViacomCBS and Discovery executives incentivized to build streaming services that can compete with the likes of Disney and Netflix?

First, a quick bit of self-promotion. I had a fun conversation with Cross Screen Media’s Michael Beach (summary here). For those of you who have not met me (yet), I share a bit about my unconventional career path over the first 15 minutes.

I also discuss:

  • The background on PARQOR and its mission (14:28)

  • My thoughts on ViacomCBS’s Streaming Investor Day (28:05) and Paramount+ vs. Pluto TV (36:54)

  • Thoughts on AVOD-only vs. SVOD-only vs. hybrid AVOD/SVOD models (42:33)

  • Why Coopetition is the single development I am most excited about in the streaming marketplace (51:40)

  • Why Netflix Co-CEO Reed Hastings’ No Rules Rules is the book I would recommend everyone should read right now (and why you should follow it up with Disney Chairman Robert Iger’s The Ride of a Lifetime (56:23)

You can also listen to the podcast version on:

Michael’s weekly newsletter, State of The Screens, is an excellent source of curated data on the streaming and broader media marketplace. Sign up for it here.

Mic Drop on Visionary vs. Fiduciary Framework

It has been a brutal week for the stocks of media companies that I have been bearish on: ViacomCBS and Discovery Communications stocks are both down 45%+.

The bulls have lost money, the bears are making money, and I don’t make stock predictions so there’s no reason to drop the mic on my being “right” here.

But, when Bank of America writes that ViacomCBS’s move to streaming was the “right strategy” for the company, “but hard to execute”, or when UBS warns, “we remain concerned regarding the ultimate scalability of the service in relation to the decline of the linear business”, it is worth a proper mic drop…

Instead, I’m going to “drop the mic” on the value of focusing on those big objectives through the lens of incentives: are ViacomCBS and Discovery executives incentivized to build streaming services that can compete with the likes of Disney and Netflix?

I call this my “Fiduciary vs. Visionary Framework”, where:

A visionary executive has an entrepreneurial vision of where the marketplace is headed, and is incentivized to build a bold strategy around that vision. A fiduciary executive is strategically, operationally, and financially constrained within legacy business models. Visionaries are more agile decision-makers than Fiduciaries.

Visionary executives have thought through where the marketplace is headed 8/10/12 steps ahead, and orient the incentives of their teams towards executing towards that vision.

The other, intangible element to visionaries is how there is genuine enthusiasm in the pursuit of their vision, which naturally “infects” the rest of the executive team and investors with enthusiasm for the momentum of their business. I have found with Visionary executives that there can be an intangible energy in the room that bubbles and percolates, a bit like being in the same room as a rock star…

As for Fiduciary executives, the most important thing to understand is that it is not negative to be labeled a “fiduciary”. In fact, it’s quite the opposite: if a corporation with a market cap in the hundreds of billions is entrusting an executive with an entirely new business line with life-or-death implications for its media assets, that is an extraordinary responsibility for an executive.

Needless to say, executives carrying the weight of that responsibility tend not to bring rock star energy into a room.

There may be no better term to describe that responsibility that than the legal term “fiduciary”. The Investopedia definition is simpler than the Law.com definition, so it is helpful here:

A fiduciary is a person or organization that acts on behalf of another person or persons, putting their clients' interest ahead of their own, with a duty to preserve good faith and trust. Being a fiduciary thus requires being bound both legally and ethically to act in the other's best interests.

Both in my definition and the legal definition, the key phrase is “constrained by” or “bound by”. Fiduciary executives are constrained by multiple factors like financial capabilities, operational capabilities, talent technological capabilities, investor priorities, skillset… the list is a long one, and gets even longer if we dove down into individual limitations as categories.

Perhaps the biggest constraint for a fiduciary executive is vision: whereas a visionary is laser-focused on their vision of the marketplace - like Reed Hastings envisioning a streaming-first service in the 1990s and building Netflix towards launching a streaming service in 2007 - a fiduciary is laser-focused on someone else’s vision of the marketplace.

In the case of legacy media companies like Discovery and ViacomCBS, that vision has less to do with where the marketplace is headed 8/10/12 steps ahead, and more to do with management seeking to play catch-up with the rest of the streaming marketplace.

A Lack of Vision at Both ViacomCBS and Discovery

What has been clear to me for a while now, and is now clear to both Bank of America and UBS, is that both ViacomCBS and Discovery have talented executive teams executing against limited visions of the streaming marketplace.

In the case of ViacomCBS, the vision is both limited and flawed, as my critique of the service to Observer’s Brandon Katz reflects:

“Sports plus breaking news plus kids plus Pluto is a business,” Rosen surmised. “Everything else they’re better off selling to Netflix.”

To rephrase Bank of America’s critique, ViacomCBS executives have picked the wrong battle in trying to compete with Netflix around original content. In fact, Netflix is proving in real-time to be better at finding audiences at scale for ViacomCBS content with iCarly, which was #4 in the U.S. according to Nielsen and The Entertainment Strategy Guy’s new weekly streaming ratings.

There is the perception that library matters, but I think a clear value proposition for consumers matters more (e.g., “I pay for $5.99 for Paramount+ and I get [X]”). Paramount+’s value proposition is too messy: “I pay for $5.99 for Paramount+ and I’m not sure what I get beyond Star Trek and March Madness” is not an entirely unfair statement.

The lack of a clear value proposition gets in the way of ViacomCBS executives working towards a clear vision. This invites the logical question: what is the vision for Paramount+ that ViacomCBS executives are working towards? Without a clear answer to that, the execution seems messy, and investors agree.

As for Discovery and discovery+, the challenge is scale. I wrote in January in “Mic Drop #11: A 2021 discovery+ prediction comes true, already”:

Discovery seems to have focused on getting discovery+ out to its target customers, but without a clear definition of what its target audiences want on streaming from Discovery . 

In other words, discovery+ is a streaming service that has a lot of work to be do on product channel fit: what will fans of Discovery content get from discovery+ that they are not already getting from linear TV offerings?

That is what UBS is saying, too, when they “remain concerned regarding the ultimate scalability of the service”. discovery+ probably feeds a hyper-loyal, passionate consumer base of Discovery shows and talent. But, after them, why should anyone else pay for the service?

That said, it is also worth considering what former Disney DTCI Chairman Kevin Mayer told CNBC what he thinks of Discovery and discovery+:

The big, global, successful streaming operations -- there are going to be a few of them. There won’t be more than a handful. But you don’t have to be a big, dominant global player to be worth a fair amount of money.

Take Discovery. I think that’s a great company. And I think it’s I think Discovery+ will do very, very well. It’s already doing very well. I think David Zaslav is really smart and a really good CEO. Is it going to be Disney+? No. Is it expected to be Disney+? Is it priced like Disney? No.

So you have to put it all in context. Discovery+ is not going to be 200 million subscriber product around the world. I don’t think he ever would say it would be, although I don’t think he’s given a forecast, as I recall.

His point is: a niche service for loyal fans is a business model. Discovery has smart, fiduciary executives to build something that will be “worth a fair amount of money”. Even if not at close to the scale of Netflix or Disney+, discovery+ will be a win for Discovery shareholders.

We cannot think of discovery+ in Netflix or Disney+ terms because the Total Addressable Market for Discovery content on a streaming service, worldwide, is more niche. The problem is, investors have been confused by Discovery’s ambitions in streaming, to date, to believe that the opportunity is not niche, and are now changing their minds accordingly.

Disney and Incentives

With the mentions of both Robert Iger and Kevin Mayer in this piece, it’s worth highlighting how Iger remembers preparing for the August 2017 announcement of Disney’s acquisition of BAMTech. Iger met with heads of Disney movie studios and television operations to solve for the question of how to determine “what projects in our pipeline would be released in theaters or placed on our TV channels and what would go on the app”. His challenge was to incentivize them to do so:

“These are all executives who have been trained for years to grow their own businesses and are compensated based on their profitability. Suddenly I was saying to them, essentially, “I want you to pay less attention to the business at which you’ve been very successful, and start paying more attention to this other thing. And by the way, you have to work on this new thing along with these other very competitive people from other teams, whose interests don’t necessarily line up with yours. And one more thing, it won’t make money for a while.”

In order to get them all on board, I not only had to reinforce why these changes were necessary, but I also had to create an entirely new incentive structure to reward them for their work. I couldn’t penalize them for the purposeful erosion and disruption of their businesses, and yet there were no early bottom-line metrics to assess “success” in the new business. “

As I wrote above:

Visionary executives have thought through where the marketplace is headed 8/10/12 steps ahead, and orient the incentives of their teams towards executing towards that vision.

In 2017, Iger was the visionary - he had foreseen the disruptive effects of streaming with video on the iPod in 2005 - and he was surrounded by fiduciary executives. In order to incentivize them to solve for problems related to Disney+, he had to “create an entirely new incentive structure” to convert those fiduciaries into fellow visionaries,

Iger effectively is telling us that new incentives help to convert a fiduciary executive into a visionary executive.

What broader vision have ViacomCBS and Discovery executives been incentivized to build for the streaming marketplace? It remains unclear for both businesses, and that is what investors have been reacting to this week.