June 11, 2019 News 0 Comment

D2C ASAP … Not So Fast

By: Mediamorph CEO, Rob Gardos

Originally posted here on the Spring 2019 issue of the M&E Journal.

Capturing the connected consumer is a complex challenge. Are you ready?

A surge of new direct-to-consumer entertainment services reflects the recognition by giant content providers that Netflix and Amazon, which had been thought of as customers, are now their competitors. As the media giants and others jump into D2C, attention to three critical areas — the content supply chain, content portfolio management and financial settlements — will help achieve success.

In 2018, Deloitte’s Digital Media Trends Survey reported that, for the first time, more than half (69 percent) of U.S. households were subscribed to at least one video streaming service, and the average subscriber paid for three services. It also reported that 88 percent of millennial households had a video streaming subscription, with 71 percent subscribing for access to original content.

The proliferation of streaming video options has changed the entertainment landscape forever. Consumers have a dizzying array of choices — from streaming giants like Netflix, Amazon and Hulu, to network aggregators and virtual MVPDs like DirecTV Now, Sling and Sony’s PlayStation Vue, to emerging direct-to-consumer platforms like ESPN+ and HBO Now.

It’s this last category — direct-to-consumer, or D2C — which is top of mind for all M&E executives right now and will grow exponentially in the next 24 months. Its genesis is the belated recognition on the part of giant content providers that Netflix and Amazon, which had been thought of as customers, are now their competitors — for talent, for properties and for the hearts and minds of the viewing audience.

Now that these giants have awoken to the threats, they have been moving with speed and enormous amounts of capital to create their own D2C platforms. The recently closed $71 billion acquisition by Disney of most of Fox and the $85 billion acquisition of Time Warner by AT&T are both intended to create the firepower needed for world-dominating D2C platforms. Nearly every other major content provider is following the leads of Disney and AT&T.

Beyond the obvious infrastructure requirements, what other challenges will these content providers face as they embark on the D2C journey? There are three critical areas that cannot be overlooked to ensure success and minimize risk related to content portfolio management, intracompany content settlements, and the content supply chain ecosystem.

Content supply chain ecosystem

Managing the D2C content ecosystem and the collapsing of supply chain actually increases complexity for content providers. Operating a D2C business has major complexities beyond just delivering bits and bytes. It is about the automation of internal content flows that can handle the massive variability in today’s and tomorrow’s storefront platforms while managing rights where different territories may see different content offerings. Netflix has spent more than a decade making this seamless — to do it at that level on “day one” won’t happen. It is about evolving and having a platform that can actualize legal rights while understanding the technical capabilities of the countless consumption vehicles consumers use.

Content portfolio management

Content portfolio management becomes incredibly important in this new world. For most content providers, their distribution business is a fairly large portion of revenue and profit — this cannot go to zero overnight, so they will continue to be in the distribution game. WarnerMedia’s recent decision to license Friends to Netflix for an additional year is a good example. Deal terms will continue to shorten as content providers look to maximize profit without locking themselves in. These companies will need the data infrastructures and licensing flexibility to drive which content they exploit internally and externally.

Financial settlements

Finally, financial settlements are going to be a critical factor in ensuring that creators and talent continue to be attracted to content provider projects. If participating talent just sees a nice royalty stream like Netflix turned off in an instant through the content provider’s decision, they will be up in arms unless the content provider has a fair, transparent transfer pricing mechanism between the D2C entity and the production entity. There will be ongoing complexity to ensure that this transfer pricing fairly accounts for license and performance royalty revenue in a way that is discoverable, auditable and defensible.

It is critical that content providers drive convergence on their internal content management and external distribution ecosystems to handle the challenges of a D2C business model. On the internal side, a seamless automated connection between distribution, marketing, legal and financial business processes is essential. On the external side, a 360-degree loop that automates the flow of content availability from providers to platforms and tracks consumption will give providers the intelligence they need to continue to exploit content through partners as their D2C offering evolves.

As companies go big on D2C, 2019 should be the year to set up the right processes and infrastructure that will support evolving internal and external business models. The media and entertainment organizations that use data to move from a content-centric to a customer-centric approach will ultimately prevail.

About Rob Gardos

Rob Gardos has been an innovative leader in the enterprise software space for more than 20 years. He has a long career building transformative and progressive technology platforms that change industries. Gardos founded GridApp Systems and served as the CEO (acquired by BMC Software) and was part of the founding team of register.com where he served as the CTO. He also serves on several boards for a variety of technology companies.