Sharp Tech with Ben Thompson - ESPN as Cable’s Grim Reaper, How the Cable Bundle Crumbled, What Taylor Swift Can Teach Content Companies

Episode Date: May 22, 2023

ESPN's ominous direct-to-consumer ambitions, the incentives that drove the collapse of a cable business model that was beneficial to nearly everyone, why YouTube TV might fill the power vacuum, and what companies like Netflix and Disney can learn from Taylor Swift.

Hello and welcome back to another episode of Sharp Tech. I'm Andrew Sharp and on the other line, Ben Thompson. Ben, how you doing? Doing okay, doing okay, just reliving the Bucks victory over to the Miami Heat since we could manage to win a game. But other than that, doing well. Don't lie to the listeners. You're doing so much better than okay right now.

We're recording in the afterglow of a humiliation. for the Boston Celtics at the hands of the Miami Heat. I feel like it's a victory for basketball purists everywhere who have been appalled by Boston's offense and just general comportment over the last week or two and all season long, if you've been paying close attention to the Celtics. So I'm feeling great here and ready to pot. Comportment's a great word.

We're up to a great start. So let's get into it. Pronounced it correctly and everything, you know, here we go. The best words are the ones that are great words and also easily pronounceable, right? Yeah, it would be very, very difficult to mispronounce it. Yeah. Well, speaking of sports, the Celtics game was on TNT, but we will start with news that came late last week. The Wall Street Journal reported that, quote, ESPN is laying the groundwork to sell its channel directly to cable cord cutters as a subscription streaming service in coming years,

a shift with profound implications for the company and the broader television business. And I'll read a little bit more from that story. They write, ESPN would continue to offer the TV channel after launching a streaming option, the people familiar with the matter said. Still, the change could have a major impact on cable TV providers since ESPN is one of the main attractions of the cable bundle. ESPN has begun securing flexibility in its deals with cable providers to offer the channel directly to consumers, the people said.

The financial terms of those deals couldn't be learned. The company is having similar discussions with pro sports leagues as those rights deals come up and has secured the same flexibility from at least two major leagues, the people said. So, Ben, general reactions to this report. It made a lot of waves on sports Twitter. It didn't seem all that shocking to me. Like the idea that ESPN is getting ready to go direct to consumer doesn't feel like it's breaking news. But were there elements of this that were news to you?

Yeah, I think there's kind of like in the very grand, broad scheme of time, this is obviously a very sort of shocking story in, you know, because ESPN benefits in so many ways from the cable bundle and has made so much money over the years. In the short term, though, like Bob Eiger has said on the last two earnings calls that, yes, we are pulling. planning to take ESPN over the top, but just a matter of like figuring out. Right. So like I was kind of surprised at the reaction, but I think this is probably one of those situations where I'm in too deep. Like most people are not reading earnings calls. And so.

And I'm right there with you. I was shrugging my shoulders last week being like Ben and I have talked about this several different times at this point. So you've dragged me into deep as well. Yeah. Sorry about that. My apologies. But I mean, it is a big deal though.

So I actually think this is where the masses have. it right. You go back just big picture and the power of the bundle, the power for ESPN and why would a company like Disney own ESPN? They had a bunch of channels and ESPN didn't just earn a lot of money, but it also let Disney negotiate hard to have. There are other channels make a lot of money. I remember Disney when Sling TV was the first sort of virtual channel bundle. This is back, you know, seven, eight years ago. And they didn't start out with all the channels. Their goal is actually to have sort of all the sports channels. And so I think the one company they didn't have was like the Viacom properties or not

or now sort of Paramount properties because they didn't really have any meaningful sports. And they did have the Warner properties included TNT and they had the Disney properties included, you know, ESPN. And they also had Maker TV. And it's like, why would you have Maker TV? It's like, well, Maker was this YouTube channel that Disney had bought and turned into sort of a network. And the price of getting ESPN was that you had to have Maker TV.

And so that Maker TV, the, you know, like $0.9 per subscriber that they paid or whatever it was, that nine cents, and again, I'm making up these numbers, but it was not much. But that nine cents should be ascribed to ESPN, right? That was the price of getting ESPN. And so the way ESPN contributed to Disney wasn't just as, you know, the price that got itself. And again, getting it from sort of every single subscriber. It was a bundle within the bundles, the Disney bundle within sort of the broader cable bundle. Yeah, ESPN was the rising tide that lifted all the other Disney boats in every negotiation. Right. And they just put more boats into the sea because the more boats they put out there, the more money they could make because the cable providers had no choice but to say no. And the reality is ESPN still has that power. You know, we've talked about YouTube TV not having a fair number of regional sports networks. They don't have any of the Bali networks.

They do have, I think, the NBC networks. But we actually talk about that. Like, why do they have the NBC regional networks? Well, probably because the NBC sports networks, like NBC Boston, to use a pertinent example, goes with the other NBC channels. And so it has sort of negotiating leverage. And when Bali sports kind of on their own, they had nothing to link themselves to much easier to drop, particularly not that many people sort of watch them. But you get to like last December and YouTube TV. dropped the Disney channels for like a day and quickly came back because if you don't have ESPN,

you have a lot of upset customers. And so ESPN still sort of has the juice. But the problem is that the orange that is getting squeezed is like disintegrating in their hand. And so in the long run, it gets to all this issues that we've talked about. If you, if you're, you know, addressable market is limited by the number of people who have cable, you're only reaching half the country or in like an ever sort of decrease. increasing amount. It's not quite down to half yet, but that's a problem. And it's a problem,

not just for ESPN. It's a problem for the leagues that are on ESPN, because they can't sort of reach all the customers that they might want to reach. And so the whole thing is just sort of been disintegrating and falling apart for a while. And yes, this makes sense in that context, but man, it's going to be a really difficult transition for multiple reasons. Well, and as far as the difficulty, my assumption is that this is not, not only bad news for cable companies, and obviously that's the way it was framed last week. Like this is sort of a death knell for cable whenever ESPN decides to drop the hammer. But at the same time, it also looks like bad news for ESPN itself if this becomes their primary

business. And they're not going to be abandoning ESPN's place in the cable bundle if they do go over the top and sell direct to consumers. But I'm sure a lot of people will be peeled off and we'll start just subscribing to ESPN directly. And it just looks like a much less lucrative model going forward if that's going to be the way the landscape looks for them. Right. You make so much more money. You say ESPN, I don't know what the numbers, say $10 a month.

I think I'm actually higher than that. But getting $10 a month from every single cable subscriber is so much better than having to charge only the people that want you. And only the people that want you, number one, there's fewer of them. So you're going to have to charge them much more. if you charge much more, it's going to be harder to get new customers because the barrier to entry is going to be that much higher. It's like you'd have to charge a lot more to get anywhere near the same sort of return you're enjoying with the cable bundle. Right.

When we're talking not like $10 a month, we're talking like $50 a month, right? Yeah. And how many people are actually going to be willing to pay that? It's going to be that much more harder to get in. And the other problem, and this is sort of the big issue about this transition is there was a period when Disney was first, pivoting towards streaming. And my argument was that, well, ESPN needs to buy all the rights because if you're going to pull this off, you need to be the one-stop shop for sports.

But the problem is that, number one, they didn't really succeed in doing that. There's a fair number of rights that are not on ESPN, particularly when it comes to college football. And then number two, they've sort of like got, you know, the last couple of years of trying to exhibit more budget discipline. I think probably the biggest example was last year when they're no longer in the big 10 football business, which has always been sort of a core mainstay as a super important television product.

And if they don't have all the rights, then it's like, how are customers, you know, ideally you would have one sports product that has everything. Well, I think an analogy here is basically if you want to watch sports in the UK, you get sort of sky, right? And that sort of collects everything together. And the thing about streaming is you can actually have all the sports because you have a limited shelf space, right? Like a challenge that ES, the reason why ESPN did.

have all the sports all long is if you're a 24-7 network, you can only show one game at a time. And so, yes, they had extra channels. And by the way, that's where they really made money, right? When you're charging a bunch of money for ESPN 2 and ESPN news. Pay through the nose for ESPN classic, sure. That's right, that's right, which they could justify because occasionally there'd be games on those channels because they didn't, they couldn't fit them all in ESPN. And so you had this weird middle period where it's like, okay, well, if you're going to go over the top, you need to get all the rights. but getting all the rights is really expensive.

And so like, well, actually, you know, we can't do that. We're going to actually pull back. But now they want to go back to being the channel. And it's like if you're a customer who actually just wants to watch sports, like you're going to be in an increasingly sort of difficult position. And ESPN then, relative to the cable networks or the YouTube TVs of the world, their negotiating leverage is going away because it's like, why should we pay, make all our non-sports customers pay for you when they can just go around you can go around us. It's no longer an

exclusive as far as a cable provider goes. And what I find most interesting about the way all this looks now is how all these different players in the market seem to have created a landscape that is worse for basically everyone involved. Right, including end users. Everyone is losing. Yeah, end users are losing. Everything's getting more expensive. I'm about to start paying $50 a month for ESPN cable companies bleeding customers every quarter we could talk about that in a minute but the streamers are all losing money the leagues are losing access to new fans particularly young fans we talked about that with the suns a couple weeks ago and then you know ESPN I really am going to be very curious to see what the price point looks like whenever they roll out this direct-to-consumer

product which could be like three or four years from now it didn't sound like it was imminent or anything. But is there anything that all of these or any of these people could have done to avoid like where we are right now? It's actually kind of interesting. It's kind of a morality tale in some respects where the implication of you saying everyone is going to be losing with this new arrangement is that everyone was winning, right? From consumers to sports leagues to the networks to the cable distributors. The bundle was great for everyone. And I think there was an aspect where the cable bundle worked because it was the only way for TV to get to people's houses, right? You go back to cable starting of these remote towns putting up an antenna because they couldn't get the broadcast from the big city and then running cable to people's houses.

Like cable was like backwards in. It started in rural America and then moved into the urban centers because people wanted access to broadcast TV. And, you know, Ted Turner realized, look, if everyone, if these cable. things are out there. They're looking for content. They already have the infrastructure in place. Content is zero marginal cost. We can distribute it more, especially when the satellite technology comes along. We can send our signal to all these little cable operators all over and they can get it. And we'll make extra money for this content that we're making anyway for Atlanta. And so you end up in this situation where everyone's doing well. And you had two points of greed that I think really

entered the equation. Point number one was the sports leagues without question. They suddenly realized, look, we're a huge driver of this value. We can extract more from this. And this started out with the NBA. I'm going to focus on the NBA because it's the one I know the best and also the NFL in some respects has been much more clear-eyed about this and staying on broadcast TV sort of all along. But the NBA in the early 2000s left broadcast TV to be a cable-only league. And that made sense at the time because 90% of households had cable. So like what were you actually losing. You're losing 10% of households, which whatever. It's worth it to double or 2.5x their rights deal.

And so they go cable only. They renew a few years later, but ratings went down. Now, did ratings go down because of cable or because Jordan retired? Probably more Jordan retired, to be honest, but they did go down. But even despite the fact that ratings went down, they renewed for a higher price. Why? Because for all the things we've talked about, if you wanted MBA, you had to have the ESPN and TNT, which means you had to have, you had to have cable and so they could charge higher affiliate fees, which they could pay higher rights prices for. And so they renew.

You fast forward to 2014, Netflix is starting to become a thing in the early 2010s and streaming. And people are starting to feel threatened by it. And so you had two things happen. Number one, you had the networks looking at Netflix and saying, why are these guys getting a 30x, you know, P ratio or whatever or whatever? some crazy number. Why are they worth so much? All they're doing is streaming our content. And this is sort of a refrain you've seen again and again on the internet, right? You see newspapers mad at Google saying the only reason people use Google is because our content's on there,

right? Or Facebook. The only reason to use Facebooks are content's on there. And they have a rude awakening again and again when actually the problem is everyone's content is on there, which means any one piece of content is not meaningful. It's completely commoditized. And So, but this is a affliction that, that we've seen with content providers again and again, where they, they think we're special. Your success is because of us. And, and it's unfair, right? And so.

Right. And they looked at Netflix and said, you guys aren't doing the hard part. The hard part is making great content that gets people in the door. You guys are just a tech company that doesn't really understand what they're doing here. That's right. So the exact same thing we saw. with newspapers back in the day in Google. So what happened was, so number one, the networks are like, okay, we want to build our own

Netflix. And of course we'll succeed because Netflix succeeds because of our content. So we put our content on our service and we can increase our multiples to be Netflix and, you know, get all our bonuses and all those sorts of things. And so is that point number one? Essentially, that's just trying to impress the market there, right? Well, they felt like Netflix was worth so much more than they were. and they felt entitled to that because, hey, Netflix is using our content.

So you have this, so that's their mindset. But they're like, okay, the cable bundle is still where we make all our money. So how do we sort of preserve the value of the cable bundle? Ah, sports to the rescue. People will still stick to the cable bundle with sports. And so you have these crazy renegotiations in the 2010s. This is where the NBA tripled its rights values, right? the NFL went way up, college football went way up.

You had things like the Big Ten Network, all these sorts of things. And it was basically like, oh, hey, we're going to have our cake and eat it too. We're going to start the plan for pulling our content off of Netflix and watching our own streaming service because we're going to beat Netflix at their own game. And simultaneously, we're going to maintain our cash cow with the cable bundle by having sports on there and no one's going to give up on the sports. And so the sports leagues me like, yeah, yeah, we make your cable bundle. We're going to take all the money for it.

And so what happened was all those sports fees rolled into price increases for customers, right? Because the NBA, T&T signs this big deal with the NBA, for example. They jack up their affiliate fees, which goes through to higher bills for customers. Customers are like, why am I paying so much for this? It's getting astoundingly expensive these days. Right. And so meanwhile, I'm spending half my time watching Netflix anyway. But the thing to remember is at that point, there was.

still a lot of good stuff on TV. The real critical blow came in the next five years when the networks took all their good content off of TV to put it on their streaming services. And suddenly you're a customer saying, number one, I'm paying way more. And number two, the content is way worse. There's actually nothing good on TV. And this, and it's compounded. This made the sports negotiations that much worse because the sports leagues now have these

networks over a barrel, which is usually before the networks that say, yeah, we have lots of customers that watch our general entertainment news, that do XYZ. We're bringing a lot to the table, too. If you're in a negotiation where the only one that is providing value is on one side and the other side's like, yeah, we have some, you know, home improvement shows, you're going to get taken to the cleaners, which is exactly what happened. But again, this is the sports league's greed kicking in as well, because by taking them to the cleaners and jacking up prices for a bundle that was losing its other values, the sports

leagues were getting benefit from the other shows as well, because again, they're monetizing off of everyone paying the bundle, not just the people watching sports fees. And so you ended up in a situation where the bundle was getting way more expensive and the quality was getting way worse at the same time. And so as you lay all that out, what I'm hearing is that essentially everyone was motivated by short-term self-interest and led us to this place where now everyone is screwed. If you look back at it, what does an Xfinity do different if they want to avoid this fate?

Do you try to get everyone together as a collective and say, look, if we play all this out and connect the dots 10 years from now, 15 years from now, this is going to end in a situation where everyone is losing? and is it just like an absence of that foresight that doomed everybody or was it truly like a bunch of executives trying to impress people on a five or 10 year timeline and not really worrying about who was going to be left holding the bag? So I think there is an argument that this was sort of inevitable in the long run with the internet sort of, you know, that's just what the internet does. It sort of dissolves these sorts of things. On the other hand, in retrospect, the best approach would have been to.

embrace Netflix instead of trying to compete with them and say, look, here's another window for our content. We used to sell reruns to, you know, TBS running Seinfeld at 530 every day, but we can sell a lot of these shows that are not going to have very much residual value. Suddenly we're discovering residual value because Netflix wants it for their library, right? And that would have been, you know, and that actually pays off for our new content because people can go to Netflix, they can catch up on the first three seasons of it. show and we have seasons four coming out on ABC or AMC or whatever it is and now we can get caught up and we're interested and we're sort of invested and want to go along with it. And then you basically

view Netflix as this additional windowing, you know, the windowing strategy. You make a piece of content once you want to monetize it over multiple windows. Netflix is just an extra window at the back and you keep your best content and you keep it exclusive for your best channels, which was sort of the bundle. And this shit, like everyone just sort of lost their minds. And this is sort of the morality tale bit about it, which is the cable bundle was incredible, but it was also no one had a choice. That was like the only way to do it. Like if all of the media companies were like ruled by a dictator and could actually decide to pursue a consistent strategy across them, they could have had a better outcome, which is let's preserve the bundle,

let's enhance its value, let's keep Netflix in their place, which sure, we'll make money. And out them, but they're not getting anything that's less than a year old or something along sort of those lines. And that probably would have been the best thing, but maybe that wasn't possible. Once the internet came along and once everyone had other options and you have this sort of prisoner's dilemma where someone was going to defect and make the deal, you know, then everyone was saying, well, I need to do it too. Why am I keeping my best stuff on cable and not building my own streaming service when XYZ company is defecting and going there? That's part of what's so fascinating to me is in isolation, most of the decisions that were made were rational at the time.

Not watching streaming services, but... Well, sure. Streaming services have been a disaster from the beginning. Every non-netflix studio is just lighting money on fire in that particular arena. But still, in general, in broad strokes, a lot of these decisions weren't crazy in a vacuum. Like if you just look at the sole decision that was being made at any given time. And yet, you look at the story last week and everybody is sort of pre-ulogizing the cable era and the cable bundle. And it just all looks so insane when you consider how good all these people had it for so many years.

And now it really looks like they threw it away. and YouTube TV could be the winner at the end of all this. Like a couple months ago, we were talking about cable companies as the ones to potentially re-bundle some of the failed streamers and act as platforms that aggregate all these different products together. It was a nice idea. The idea was sound, yes. No, because you have this problem. You have this problem.

Like, if you're a sports fan, where the heck is the game on, right? Like there's an opportunity to be the directory of everything. Just simplify it. I mean, look, as a consumer, there are so many different products right now that it's just, it's a legitimate chore to figure out what's on where and how to watch it, what I need to pay for it. So if somebody could be a centralized resource that makes it easy for people, there's a lot of money to be made there. and it just looks like it's going to be YouTube and not Xfinity or Verizon or some traditional cable company.

Yeah, I mean, which in retrospect makes sense because one of the great things about, you know, one of the great and bad things about YouTube TVs, you can just go and sign up and then you can just go and cancel. The go and cancel is a bad part, right? You're like, I think this is one of the things that all these companies were not prepared for

when it come to their own streaming services. No one understood the issue of churn because they didn't face churn with cable. If you got cable, you weren't going to cancel it unless you moved house, right? It was just a bill that you paid. And suddenly, when it's just clicking on a web form, it's like, why am I paying for this when there's nothing I want to watch?

I'll wait, you know, I'll wait until the Mandalorian comes out. Then I'll subscribe again to Disney Plus or whatever it might be. And so I think they weren't prepared for churn. That is a challenge for something like YouTube TV. But at the same time, when we talked about that idea of the funnel, right? I want to watch the game. What can I do? Or I want to watch the political debate or whatever it might be.

it's only on cable, oh, I can just sign up for YouTube TV and then I can cancel, right? But there's an aspect where, like, YouTube TV is sort of the obvious sort of solution here. Again, there's the regional sports network issue for some people. But, yeah, I mean, the big prize backing up, the big prize is to be the arraeer, which is the place you have all this video content to watch. How do you find it, right? The discovery is sort of the challenge. And the interesting thing about YouTube is, number one, they have exclusive. access to all the content on YouTube,

which is super compelling and very interesting and an infinite amount. They have this YouTube TV, so whatever is still on pay, particularly for sports, it's one of the best options. I think this is why they're trying, finally, too late, but finally trying to get the YouTube channels idea and get the NFL game, you know, the NFL Sunday ticket sort of packaged to sort of be a tent pole for that.

But ideally, you could go there and you could also sign up for HBO and you can also sign up for whatever it might be. And then theoretically, you have one directory and then it can just direct you to whatever you want to go to. Now, a challenge is, you know, they do have hardware too. They have the little dongle that you can run this on, which is going to be important because if you want to sell access to other channels, you need to be able to run the storefront, right?

Apple's not going to let you sell access on an Apple TV. They want to sell access. And it's funny because Apple actually, Apple's gotten a lot of grief for their TV strategy over the years. and if you go back to 2015, this is what Apple wanted to do when they did the Apple TV app and they were like,

we're going to have one place to find all your shows. And this was the whole pitch. The problem was they were just way too early. Like all the content providers were not desperate enough to sort of like see this as a place to, yeah, exactly. They go, no, we can still build our own business. We can own the customer.

And there's a bit here about like, not everyone has to. own the customer. Yes, it's very valuable to own the customer, but you have to understand what kind of business you're in. If you're a content maker, a content maker is a horizontal business model. You make a piece of content once and you want to monetize it as many places as possible. A streaming service, owning the customer is a vertical business model. You're not going to own all the customers. You're going to own some of them and you want to have some differentiated stuff to draw them in. But there's all these companies let the tail start weighing the dogs. They got jealous of

Netflix and their vertical model and they screwed up their horizontal businesses like Google and Android chasing the iPhone, right? Now, Google reset itself. It's like, oh, actually, we need to serve the iPhone very, very well. And we're going to end up paying Apple $20 billion a year or whatever to make sure we're there. All these companies need that reset. But when they make this reset, the good model that they used to have is gone.

Yeah. Well, I mean, you look at the model they have now. And again, Netflix appears to be the only one. that's actually cracked the code. So with YouTube TV, just to put a finer point on it for people, there were numbers that came out last week. Moffat Nathanson was tracking pay TV throughout the United States. Cable companies continue to take it on the chin.

Comcast dropped 614,000 video customers in Q1. And of the TV services that were tracked by Moffat Nathanson, YouTube TV was the only one. that was actually gaining subscribers in Q1 of this year. And that tracks with my anecdotal experience. Like everybody I know who's cut the cord has then, not everybody, but a lot of people who've cut the cord have adopted YouTube TV because it's cheaper.

So how does it fit into that Apple TV? Like, what do you mean when you say Apple TV was first and YouTube TV is now taking that same idea and making it real? or more effective than Apple was able to. Well, the reality is YouTube TV isn't really that much cheaper anymore, right? Like, like they, they raise prices for the first time a couple months ago. No, no.

They raise prices a lot, I think. Like, they're up a good, like, $30 over what they started at. Well, the people who were subscribing were really living the dream for a couple of years there. And this is the first year where it's starting to net out as like kind of you're, you feel it for sure if you're subscribed to YouTube TV. So the idea is being. like the place people go to watch TV. Right now, it used to be you would turn on your TV and you turn on your cable box, you'd be looking at the channel guide and you would choose something to watch and you would go there.

You move down the line, it's like, oh, I want to watch a show, which streaming service is it? And you have to go like to a website, where is this streamed, XYZ, you find the right app, you have to get it and do that. And that's one thing if you're watching like a show and you might be watching it multiple episodes in a row. It gets much worse with sports when it's live. And it's like, where's the football game? It's on Amazon, right? Where do I get this?

And I think there's this idea of like being the front door of like where you go and where you find stuff to watch. And so Apple's idea in 2015 was we're going to all the streaming service, we're going to build an API. And you can surface all your content in the Apple TV app. Now it's very confusing because there's Apple TV, the box. There's Apple TV the app. And there's Apple TV plus the streaming service, right? So this was Apple TV, the app. And the idea of this was it's like a front door for content, right?

And everything is just there in one place all intermingled from all the places that it comes from. And if you want to watch something, you have to be subscribed to it, but then you can sort of watch it there. And if you search, it's like universal search. It searches across all your streaming services. That didn't really work out. And part of because Netflix refused to take part. And back then, Netflix was sort of king of the world. And they didn't feel any pressure as far as subscriber acquisition.

And so maybe some people used it to some extent. extent, but it never really, it sort of lost steam, even though it was sort of a big focus. And I think, though, that idea and concept still makes sense of being sort of the front door of where you find stuff. But the truth is, is that still takes some measure of sort of leadership and coordination across these companies that have shown zero capability of doing any of that, right? That have shown themselves to be completely self-centered, not very smart, not thinking about the long-term effect. And so the reality is, this is like a hard landing, right, that it feels

like, because there is another alternative where everyone crashes and burns. And we basically end up with, if you think about it, why do we have networks anyway? Why do we have independent apps? Like at the end of the day, if you're a content maker, what value is it that it's under the HBO banner, right? If it's just a show, it's a show, right? And yes, HBO is maybe a bad example. because it does have so much brand value. But you can see a 10-year outcome here where everyone's out of the game and they're just selling to Netflix.

And basically Netflix is basically all prescripted content is just on Netflix because everyone went bankrupt, couldn't make it. Netflix will cut them a big check. Netflix can actually get out of the original content business, which they're not particularly good at anyway, and just be the new cable bundle, right? You subscribe to Netflix.

And then I think ESPN's hope would be then they're just the the sports one, right? So if you subscribe to Netflix for 50 bucks and ESPN for 50 bucks, if you don't want sports, you don't subscribe to ESPN. And that's sort of like,

and then you end up paying basically what you're paying before, right? But there is a little more choice because you can get sports or not sports, which is bad for sports because sports used to benefit

from getting money from everyone. But that might be how it plays out. The problem, though, is you still have these sports rights scattered all over the place, right? Like you have the big 10 now on CBS and NBC and Fox. You have the NFL on all these networks. And so broadcast TV, like, again, people have

started buying antennas, maybe antennas is like, we can all invest in antennas. Yeah, I don't know. And then so YouTube TV, I guess their play would be we're not going to have to own all this content, but anybody who wants to license it to us or sell through our little storefront will happily do business with you. Yeah, well, I think the, so my, I, I, I, I, I, I, I've long, my take has long been the cable bundle will become the sports bundle, where the only people that will subscribe are sports fans. And the reason why it'd be the cable bundle, not ESPN, is because the sports rights are scattered around. And so in that world, I assume that cable bundle would still be the, like the cable providers, but they're all throwing in the towel. No one is like getting these anymore.

And so maybe, like maybe it is going to be a YouTube TV where it would make sense if you want sports, subscribe to YouTube TV. And a lot of those sports are delivered via traditional cable channels. But the only reason you have traditional cable channels is to watch sports. And then also, you know, there can be, you know, Sunday tickets going to be on there. You can imagine they're going to be selling, you know, the NBA version or whatever it might be. It's like, oh, if you want, now, is that going to be, the problem is there's still all these other channels that are charging fees for no one to watch them, right? And so maybe it's going to be a reverse where YouTube, maybe there should be YouTube TV sports. and they cut out everyone that is not a sports channel, right?

And so they can get down to that $50. Like a true skinny bundle in that scenario. Yeah, because the skinny bundle was always like cut out the sports, right? And it'll be super cheap. But like the only things that are on cable that are not available otherwise are news in sports, right? And this was why the Fox move a couple years ago was they went in the opposite direction of everyone. They spun out their general entertainment and their movie business, sold it to Disney for $75 billion, and a deal that is just an absolute disaster for Disney.

And they retained their broadcast networks, retained Fox News, retained FS1, they retained basically sports and sports and news. And they doubled down on we're going to be sort of just the live stuff and shrunk down their company in the process, but with a much more sort of sustainable package of sort of goods that, you know, because the general entertainment was, It was everyone had the same model before. Everyone had ads and affiliate fees. And different types of content are devolving into different business models. And the truth is I keep sort of theorizing and talking about what's the long run outcome. We might just end up with a mess.

Like it just stays messy for a very, very long time. Bad for everyone to take it full circle. Where do you find the content that you want? You know, and I think it's a bummer. I think you, you know, and again, maybe it was just always unsustainable, but, you know, Lou, you see this in music, right? Why is it that, you know, Taylor Swift is so huge and selling out these massive stadiums and, you know, despite the fact she's arguably like, you know, 10 years past her prime or whatever you, I want to say.

Like usually for a musical act, there's like a peak around the third or fourth album and then they sort of decline. They still get the huge shows and stuff like that. But I think there's a bit where she's a cultural touch point. We're just hating on Taylor Swift. cultural touch point. Everyone knows Taylor Swift, right? And that's something you can like talk about and having commonality with lots of folks. And what you see in music is the cultural touch points that music provides have declined a lot. Like, yes, there's still stars, but they're much more nichey than they used to be, right? Because there's not just a few big acts because everyone listens to the same music. Everyone listens to their own particular genre or whatever it might be. And, you know, you felt this with sort of TV, right? used to be a few big shows. You go back to the Seinfeld finale, like tens and tens of millions of people

and all the people that would watch the Thursday night NBC lineup. And that's devolved into, and I think I've argued Netflix made a mistake by not having the week release and not having everyone talk about it. I think those cultural touch points are, are useful and beneficial.

But there's sort of like this, this inexorable push from the internet to sort of-exorable. Inexorable. That's what I was looking for. To sort of sand this down. Everything just gets, you know, atomized, atopized, atomized. Atomized.

Atomized, thank you. Atomized is a good way to explain all of the entertainment business these days. And it's actually interesting when you talk about like the back catalog for some of these streamers. Most of the shows that actually do resonate are sitcoms that were created like 15 years ago. And like hasn't really been replicated. Like that particular model. Yeah. There's no show like friends or.

or Seinfeld or the office, right? Like, the reason they're so valuable is downstream from the fact that everyone... It was the last, like, five-year stretch where people were all watching TV together. And, yeah, I mean, you know, our movie stars, it's hard to find a movie star who's, like, younger than 45 years old or 50 years old these days. Well, we talk about those with the AI stuff, right? When you get to a future where you can recreate actors and movies or you can recreate artists and, you know, mentioned like what if Drake actually licensed his voice instead of like trying to fight this right like are we ever going to have going to live forever yeah and you see this in culture broadly like how much has culture really shifted since the internet came along we're kind of stuck in the 2010s and we've been here for a long time and it's we might be here forever well let me ask you this

philip says is it a generative AI a potentially existential threat to Disney Netflix and the big studios. These studios exist because of the huge up front costs of content production, but the marginal cost is very low, parentheses a lot like software. But generative AI seems to ultimately mean that those scale advantages will end up being vastly diminished when small bands of people and perhaps even an individual anywhere in the world is able to create exciting and fresh new stories and characters we can all enjoy. It seems like an enormous, democratization of content creation is going to completely upend the traditional Hollywood business model, perhaps other countries too. What do you think of that hypothesis?

Well, this is just an example of where AI is a continuation of the trend that has already started, right? Like that's what the internet has already done. And you look at YouTube, we don't need AI to create tons and tons and tons of compelling video content that is, you know, appeals to very specific niches. People's consumption habits have already changed dramatically in my lifetime. Like the generation below me watches and experiences TV and entertainment in a completely different way. And it's, it's very alien. But it's not. No, he's the younger generation going to ever watch sports like we do, right? Like, because there's so many other things to do. And consuming highlights is enough, right? Are you going to actually like sit down and watch a two and a half hour game? Like,

that's crazy. Right. Like, you know, and, and, and, You know, this is, oh, this is the big thing. You know, everyone's like, is streaming is a terrible business. You talk about Netflix. Well, Netflix has figured out. I mean, Netflix, it's funny because way back when everyone was very jealous of Netflix's, you know, multiples, when the reality is they, they're the ones that had the huge cash flow that actually threw off tons and tons of money. Netflix is has positive cash flow. It's not that much.

Who knows it's going to ever be that much? but at least Netflix has started with that business model from the beginning. The real challenge for all these companies is trying to squeeze themselves down from this super profitable, high cash flow business to this much more difficult, you know, sort of like eking out the pennies sort of business. And I think that that applies to everything, right? The sports are used to everyone being able to watch sports and appealing to everyone and making tons of money in the process. All like all these other entertainment, like a YouTube streamer, streaming themselves playing a video. game, they're just trying to scratch out $100,000 a year and they've freaking made it, right? Wow, I get paid to be a professional streamer, right?

And it's a very asymmetric sort of competition that's really difficult for the existing players. I mean, I'm in, I'm in that camp, right? I wrote for many, many years. I was the only person that the only cost of trajectory were a couple hundred dollars a month for a web server, credit card fees, and money for me to live on, right? Yeah. That's and but when it comes to the end user consumption, if they're reading 2,000 words

or techery in the morning, they're not reading 2,000 words in the New York Times or the Wall Street Journal or whatever it might be. It's a very unfair fight in many regards. Now, of course, but why is that possible? Well, I only need to reach a few thousand, right? To be, to be thrilled, right? My only goal in life was to get, you know, a thousand subscribers make $100,000 a year and I thought I had it made. Just be able to do it. Yeah.

just to be able to do it, right? And the internet has enabled all these sorts of things. And, you know, every, you see, I started out, Chuck your radio with the newspaper industry all the time because I was making this point again and again, these entities that assumed large audiences that had differences predicated on physical, on the physical world, like geographic access, exclusive geographic access to a market that was based on owning delivering trucks, owning a printing press, owning advertising relationships.

Why are they struggling? It's not because their content's getting stolen from them. It's because they're in a new environment where they're competing with every content producer on earth and getting intermediated by people that can provide ads by controlling this discovery process in the world of abundance. And I said it again and again all along. The reason I write about this is because this is going to happen to every single industry. And it has happened to every single industry.

It's happening in a major way to video content now. And it's worth noting we never reconsolidated as far as text goes. The New York Times isn't pretty well for itself. It's got to like, you know, but it has what, four million, five million subscribers? Right. Like this idea of there being the one newspaper in the city that everyone read, that world doesn't exist. And people will fret about this in terms of societal impact. We're not even reading the same stuff, right?

You realize to what extent societal harmony was predicated on everyone consuming the exact same information, selling people get information from anywhere, whatever kind they want. And that's probably what's going to happen here. I would say if there's a core mistake I've made is assuming that is not appreciating. I always wrote the bundle was an accident of history that we ever got there. And I didn't fully appreciate that the implication of that is it will probably never be recreated again. Like it just, it was a moment in time and that moment in time is gone. Maybe that moment was going to disappear regardless, but it was accelerated by poor decisions made by people in the bundle.

And it just might be a mess going forward. Well, so on this discrete question, as far as generative AI, is it possible that? No, no, no. From a strategic standpoint, I wonder whether it's possible for like a Disney or Netflix to lean into the spin as it were and say, all right, we're going to integrate some of these user-generated projects and try to, again, sort of expand your horizons beyond just like owning everything that's on your service and be happy to split ad revenue or something with creators who generate compelling stuff.

Like, is that viable to you in terms of a way to sort of insulate yourselves against this rising tide of what I see as kind of mindless bullshit, but it seems to entertain people? I would go the opposite direction. You know, I think the, to go back to the Taylor Swift example, like, there is still nothing more valuable than being a widely known brand. Like the challenge in this world is customer, if you're a content creator, the challenge is customer acquisition, right? It's the reason we have so many sequels and spinoffs is because you've already acquired

the customers. It's so much easier to get them to watch something they already enjoyed the first time. They're already aware of and are interested in than to try to get customers completely all over to get. Like, this is why the whole middle category of movies has died and has died for years is because it's too difficult to go and acquire in this world of everyone everywhere. Where do you even market to people? It's not even like there's a few channels you know you can go to and reach them.

And they have nothing better to do. They go to a theater on Friday night and see what's on, right? You know, people have a million things to do. They have a million things to watch. They have a million channels in consumption areas. So how do you even reach them? So this whole idea of we're going to come up with a new movie with new actors. It's just, it doesn't, the economics sort of don't, don't, don't,

work. So you end up with, to your point, super low cost content where you can experiment, you don't need to acquire that many customers to make it worthwhile, like a strategically, like a YouTube, a YouTuber, all those sorts of things. And on the other extreme, you have a huge name brand that will succeed because of that. And this is where, like, you, and we've already seen this. Disney is used to produce 30 movies a year. Now they produce like 13. And they're all Marvel, right? Why? Because Marvel has that brand name. They have the IP. It's a reason for people to come in. What's the biggest

actions, the biggest movie star in the world? Tom Cruz. Because everyone knows who Tom Cruise is, right? Like, the number one thing the industry needs to do is probably clone Tom Cruise or get AI working on that one right there. Because he'll actually pull people into the theaters, right? But those, like, those replacements are not being created.

That's a reason, I think, why culture feels stuck. Because the way to sort of acquire customers in this world is to bank on what worked before. And so you just keep making the same thing over and over again, trying to squeeze a little bit more juice or that orange or that lime or that lemon or whatever sort of citrus fruit

you want to choose. The shriveled up orange in your hand. That's right. The disintegrating orange. And because creating something new that resonates broadly is very, very difficult. Okay. That makes sense to me. So if you're differentiated and seen as premium content now, try to keep it.

way and let the user-generated content, like, fight it out amongst themselves on different platforms. Right. In retrospect, what Disney should have done. Again, it's super easy to look back. So with that caveat, what they should have done is they never should require Fox. They should have, they should have sold off their general entertainment to, to someone else, to Netflix or whoever it might be. Just double down on their, on their IP. And they should have spun off ESPN, right? ESPN, like, was losing its value to the bundle, but it still was very valuable. And someone who said, I'm going to be the sports guy, and I'm going to acquire all that, all that stuff.

I think Comcast should have acquired ESPN, and Comcast should have doubled down on this is what makes sort of the bundle valuable. But ESPN as an IP only, and then it filters down to the parks, right? Where what's super valuable in a world of virtual world where there's infinite content with AI, it's going to like quadruple. I don't know what quadruple times infinite is, but it's a lot of content that's perfectly customized to you, like then a real life experience. The differentiator will be, yeah, experiences and physical advantages and hardware.

Right. That's why you have that over and over. We talk about the Taylor Swift concert tour, right? Like, it's the biggest thing in the world or the biggest thing in the U.S. this summer, it like minimum entry fee, like a thousand bucks or something like that on the second of the market. Are you going to go? Is she touring through Milwaukee this summer?

I know. We have to, uh, we have to fly to L.A. on the way back to Taiwan in August. Amazing. I have a teenage daughter. Of course, I figure your daughter would want to go. That's terrific news. I'm really happy for both of you.

Yeah. So she hasn't announced the Asia tour yet. I've managed to come at some point and they'll have their pony up again. But yes, of course I'm going to do the Taylor Twist Swift show. So, but that's, Disney has out their parks. Their parks are doing gangbusters. It's how they make all their money.

I think that the, the challenge there is, number one, Disney used to make money on infinitely, scalable content, right? You make something once, you can duplicate it a million times. Like, your profit-making potential is just way higher. Whereas parks, they have to actually build the park, right? They're women in capacity. And a lot of, there's a lot of complaints about the Disney parks that it's become too expensive. And you have to buy fast pass tickets to do XYZ and do all these sorts of things. And so that's been a challenge on one hand. And also, there's a limit on how you can go, right? They just announced they're closing that two-day

Star Wars experience that was like $2,000 or whatever it was. which a friend of mine went to said it was unbelievable, like the best theme part experience he's had in his life. But that was too much, right? So there's a cap on how much you can make from that. I mean, except for Taylor Swift, but there's a cap to how much you can make. And also you're limited in size because you have to actually do assets. And to the extent Disney is an IP company that really pays it off in the real world, suddenly that's a very different business from an investor perspective. That's like a capital-intensive real-world business that is not a media business where it scales sort of infinitely.

And so the grand outcome of all this is you have these super profitable, cash-full-rich companies that have a good multiple, but say, I want that Netflix multiple. That one's even better. I deserve that. They're going to end up with a much lower multiple because their only outcome is to actually own physical assets, which is worth. Well, and it's interesting that it's worth less, though, because that's why I asked at the beginning of the episode, like, are these guys? Of return on invested capital. It's like how much money do you have to put in to earn a profit? It's like Apple has a little multiple than that Google.

It's not, it's not, doesn't mean that business is less defensible or in. It's just the, it's just like the stock price makes no sense to me when we look back at how many people were just like all in on Netflix owning the future, even as the financial side of it, did it. it really makes sense. Like the structure of their business was not as favorable. Ideally, it's infinitely scalable, right? That's the idea, right? Yeah. And I think, you know, Netflix has come down a lot because to your point, I think,

and this is another mistake that I've talked about previously, is the back catalogs isn't worth very much, right? And so, and that's a good example, right? Your long-term projections for the business are fundamentally different if you think investing in content, that content will be valuable for many years going forward. versus investing in content that content is valuable for a month. Right? Like two and a half weeks.

Right. The capital requirements of the business are suddenly much higher, which means your long-term projections of profit are going to be commensurately lower. And so your multiple is going to be lower. And so same thing with Disney, right? Sure, Disney is going to retain a moat. Like their IP is super valuable. And they will have customers, their theme parks are going to only become more valuable over time.

But the problem is the theme parks are capped in how many people they can serve. And Disney has to spend billions of dollars to build them, right? And so their profit potential is less than I'm going to make a movie once. That movie is going to make money for the next 50 years. Right. Yeah. Exactly. Yeah.

And that makes sense to me. There's just an element of it that has always felt a little bit irrational because these businesses used to just print money. And that was not as. They had no idea how they had it. That's why it's so interesting. It's, they had the world's best business model and everyone involved threw it away.

Like it, it's fascinating. It sure is. And I do think after talking for the last hour or so, the most accurate projection looking ahead here is it's all going to be a mess going forward. So we'll leave it there. And with two final questions,

Yeah, I mean, I know we've talked about it a lot. There is an act, like, it's just, I don't know, it's kind of like a reflective period on like, how did, how did we get here? Like, and again, the point where it, it's, it stinks, right? I mean, I made this point years ago that, look, you have to understand that we're going to end up in a world where you're paying the same amount you're paying. I've read, every other than these visions of, oh, when everything was all the car to be so great, I need to pay for all sort of stuff. But then you're not going to get the stuff, right? And also, I think you do need to juxtapose it with how insane the rhetoric was like 10 years ago. Like I was sitting in meetings with John Skipper where he's addressing ESPN employees about everything they want to do in streaming and stuff like that.

And everybody at every company was talking like the possibilities were just limitless in this space. And it was going to be great for everybody. We're all going to get rich and create all these new revenue streams and everything else. And now it's like the lights are going on at the end of the night and everyone's looking around and like, man, we made some bad decisions here. It was greed, right? And again, just to go back to the newspapers, you had this whole thing where, wow, the internet is this huge growth opportunity, right?

Now look at all these customers I could reach. And like there's just a real aspect of business involves trade. And if you're getting something for free, it's probably not free. That audience you were getting for free entailed giving up on your geographic sort of delineation and differentiation there. Like getting greedy of reaching readers all of the world meant you were now competing with readers all over the world. You're competing with publications sort of all over the world.

And it's the exact same thing here. And this is where it sort of clicked with me about this sports bit. Why did the leagues get such a huge sort of in the middle 2010s? And it's like, oh, we can do streaming and keep cable. We just have to pay off the sports leagues to do it. And it was like, I mentioned the daily update. It's like paying an arsonist for fire insurance, right? Yeah.

When you're in a negotiation, this is one of the problems if you're, say, like a podcast subscription service, right? And you go say, I'm going to sign up Joe Rogan. Like not Spotify, but just like a one-to-one. It's like, well, everyone signed up for my service. we have Joe Rogan on it. Well, what does Joe Rogan do? He's going to negotiate to take all the money. You're not going to make any money, right?

The reason why it arguably made sense for Spotify is people use Spotify for lots of reasons to also listen to music, to listen to other podcasts. And so when you have, you need, if you're just in the middle of a one-to-one chain as far as negotiation goes, you're going to have a bad business. You have to have bringing something orthogonal to the, the table or you're going to get taken to the cleaners by by the sort of the content makers and that's what happened to the networks they're like we're going to take away everything that gets people to sign up for cable other than sports and rely on just sports and the sports leagues are okay

then we'll take all the money and then and then even the sports leagues it's like if the landscape becomes more atomized the way we're talking about where there isn't some sort of collective cultural touchstone, whether it's the NFL or the NBA. And the NFL recognized this early on, as you said. It's the other leagues that haven't had the benefit of network TV being willing to fork over like billions and billions of dollars. I think that's part of the reason the NBA. No, that's where everyone being gritty, right?

The NBA in these leagues took all this money even though they were killing their golden goose in the process, right? And honestly, it's hard to look in the long run and see what these established sports leagues do. Now, the NFL is unique because, number one, they've always been disciplined about staying on broadcast TV. Even the cable games are on broadcast in the local network. So they always want to be super accessible. That's been super smart sort of all along. Number two, they're the biggest, right? And so if everyone goes a la carte, the one that's the biggest, like, okay, I'll just make, I'll just take all the money, right? It would

troubles the context of bundling, right? If someone wants to build a newsletter bundle and they want it to succeed, say they want to build the bundle of tech news. Well, you're probably going to want to get your techery in it. But then I come in like, well, why should I only make a few dollars per customer instead of taking all the dollars per customer? Right. Right. Exactly. And so that's why cable coming up for weird geographic reasons was important because you needed a forcing function to build around it, to reconstitute a bundle, to rebuild a bundle. To rebuild a bundle. is very, very, very difficult, if not impossible. Now, YouTube, Spotify, all this, advertising, an advertising network, that is sort of a

something that can only be done at scale. So if you're a smaller sort of provider, like Spotify can build a larger, more expansive, more high functioning podcast advertising network than, say, one podcaster could build on their own. And so you could imagine them having something to bring to the negotiating table where, look, you can make more money with us than you could on your own. And if you don't have that, or in the case of networks, if you gave that away, it's not good.

On that note, we will come back later in the week. If you've got something you'd like to hear us discuss, we still need topics for the next show. Email at sharp tech.fm. Ben, for now, enjoy the Celtics misery. Go hit up Twitter. Hey, as a bucks fan, it's all we have. Exactly.

This is your championship. So we will come back later in the week. Hey, at least we got one. Absolutely. More than Jason Tatum so far, at least. Talk to you later.