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NBCUniversal: A Path to Going D2C

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NBCUniversal needs to make an investment in itself, not other digital entities, to go direct-to-consumer, positioning it to better capture changing viewership habits and make smarter content bets.

Introduction

Few industries have been disrupted by digital innovation like media and entertainment. A traditionally B2B business, digital disruptors like Netflix, Hulu, and Amazon have begun to reshape the business to become much more B2C. And with this shift, traditional sources of revenue are weakening, forcing incumbents to rethink how they should do business and how they monetize their content, often looking to merge or acquire with other horizontal or vertical firms to gain scale quickly.

One such incumbent is NBCUniversal (NBCU), the international film and TV studio and distributor that is owned by telecommunications giant Comcast. With a large film and TV studio (Universal), broadcast channel (NBC), and cable networks (Universal Cable Productions), NBCU has seen all of its businesses suffer from digital disruption. While the firm has done some things to date to capture some of this disruption (to be discussed in more depth below), it has not done enough. This post will make recommendations from an investment and organization standpoint as to what NBCU should do to best compete in the future.

Digital Investments to Date

To date, NBCU has focused its digital investment on third party partners. In March 2017, NBCU made a $500 million investment in Snap, the third of a string of investments in digital entities that the company had made, following $400 million in Buzzfeed, and $200 million in Vox.1 In all, the company had spent around $1.5 billion in digital businesses 2016-2017.2

What’s interesting to note here is that NBCU is still relying on others to forge the relationship with consumers, rather than going to direct themselves. It’s only foray into establishing an OTT (over-the-top) channel, the comedy oriented SVOD service called Seeso, was a failure, and the company shut the service down in late 2017.3 For a company that has so much content, it decidedly went niche in its first, and only, D2C offering, likely a defensive and risk averse move as it hoped to preserve its traditional revenue streams.

This, however, is the wrong approach, as NBCU should aggressively move into the D2C space itself. Going D2C is necessary, as TV viewership, and resulting advertising dollars and cable affiliate fees, has declined, as shown here:

With the increase in cord cutters every year, offering a D2C service will become only more necessary as time progresses. NBCU has the scale and ability to enter this business itself.

Invest in D2C Technology

There are two reasons why NBCU has not made a large investment to go D2C. The first is that the company generates a large piece of revenue by licensing its content to other D2C players like Netflix and Hulu. The second is that there are large upfront capital expenditures required to build a streaming service. This is exactly what NBCU should do, however. One of its biggest competitors, The Walt Disney Company, did just that when it purchased a majority stake in BAMTech, totaling its investment in the company at over $2.5 billion.4 Disney understood that it needed BAMTech’s streaming video technology to build the backbone of what would eventually become two D2C services (one ESPN-branded that launched in April of this year, and one Disney-branded that will launch in 2019). NBCU should make a similar push to acquire or develop technology in-house to build a streaming service. This is a crucial first step, as providing a quality and seamless viewing experience is necessary, especially if the company decided to provide live feeds from its TV entities.

Once an investment in technology is made, NBCU can announce the creation of its own SVOD service. And, unlike Netflix, it does not need to vastly ramp up its content spend to have a competitive offering. With its vast array of media properties, NBCU generates enough new content and already has a vast library of content to offer a legitimate SVOD competitor. While it should make certain pieces of content exclusive and/or original to the service, it will not need to drastically ramp up content spend.

Reorganize Company Around D2C Distribution

To date, NBCU’s digital investments and initiatives by its Digital Enterprises group under Maggie Suniewick.5 While this is a step in the right direction, it still ensures that digital is a parallel business to its traditional ones. The company needs to reorient itself away from relying on others for distribution to a distribution company itself. To do this, they should create one distribution arm for all of its content, with its D2C offering at the core of that group. Disney made a similar organizational change, reorganizing so that one of its major business units became Direct-to-Consumer and International.6

What this effectively does is position the company to think about its D2C offering first for its content, and then think through other monetization and distribution opportunities as appropriate. Some content may be best for other distribution opportunities, but this ensures that NBCU’s own D2C service would get the first look. It also allows its other businesses to continue to operate mostly as is, since the D2C offering would be a second window behind theatrical or linear TV distribution.

Using Consumer Data to Make Better Content Bets

The final benefit of having a D2C relationship is the consumer viewership data that comes with it. To date, NBCU develops and produces content in the traditional sense, based on the experience and talent relations of its executives. In this sense, it makes content in a black box, without knowing beforehand (with the exception of sequels) if a piece of content is likely to work or not. By creating a D2C service, NBCU can use the viewership data to better inform its content decisions. As a result, they can make smarter bets on what content to develop and produce, lowering the risk of content failure.

This does require them to create a feedback loop from the D2C distribution unit to the other NBCU business units. It also requires a shift in mindset from its creative executives, who have not used consumer data to date when thinking about content decisions. In theory, this creates a virtuous cycle for the company. As it gets more user data, it gets better at using that to make new content decisions, which then eventually get distributed on the SVOD service, making the service more valuable as the content better tailors itself to consumer wants.

Conclusion

It’s clear that Disney provides a good example for how NBCU should move forward to best capture the digital disruption taking place in the entertainment industry. That being said, it can also use its unique strengths, particularly with its parent company Comcast, to its advantage. Perhaps Comcast could provide the technology needed for a D2C service, as it has parallel products like its Xfinitiy 1 cable box. And while Disney’s streaming service will be very much family oriented, NBCU can offer a more comprehensive content offering, putting it more in competition with Netflix to achieve a wider audience. The company needs to take the first step to make the bet on itself, rather than its current practice of placing big bets on others.

 

1 Peter Kafka, “NBCUniversal explains why it just invested $500 million in Snap,” Recode, March 3, 2017, https://www.recode.net/2017/3/3/14801168/snap-nbc-investment-steve-burke-letter.

2 Peter Kafka, “NBCUniversal explains why it just invested $500 million in Snap,” Recode, March 3, 2017, https://www.recode.net/2017/3/3/14801168/snap-nbc-investment-steve-burke-letter.

3 Denise Petski, “Seeso Makes It Official: Will Shut Down “Later This Year”,” Deadline, August 9, 2017, http://deadline.com/2017/08/seeso-shut-down-1202145753/.

4 Maury Brown, “Disney Accelerates Purchase Of BAMTech And Announces Streaming Service With ESPN,” Forbes, August 8, 2017, https://www.forbes.com/sites/maurybrown/2017/08/08/disney-accelerates-purchase-of-bamtech-espn-disney-will-see-new-digital-streaming-media-apps/#7c83c8384a5d.

5 Peter Kafka, “NBCUniversal explains why it just invested $500 million in Snap,” Recode, March 3, 2017, https://www.recode.net/2017/3/3/14801168/snap-nbc-investment-steve-burke-letter.

6 Dawn C. Chmielewski, “Disney Announces Reorganization, Names Kevin Mayer Head Of New Direct-To-Consumer Unit, Adds Consumer Products To Bob Chapek’s Portfolio,” Deadline, March 14, 2018, http://deadline.com/2018/03/disney-reorganization-kevin-mayer-direct-to-consumer-bob-chapeks-consumer-products-1202337810/.

 

6 thoughts on “NBCUniversal: A Path to Going D2C

  1. Thanks for an interesting and insightful blog post. I agree with you that these traditional studios (Disney, NBC, Warner Bros…) should go direct to consumers to embrace the digital challenge, instead of relying on partnering with third-party digital distributors. As the rise of cord-cutting and trend of “skinny bundles”, D2C is critical for traditional studios to avoid being commoditized (solely as a content producer) and get access to customer data to better create and distribute content. I am surprised that NBC didn’t really leverage its parent company Comcast’s technology and infrastructure (Xfinity) to go D2C first. Besides the two reasons you mentioned, I guess the organizational or even legal restrictions also account for it.

  2. Great post. I definitely agree that companies like Disney and Universal should adopt a more direct to consumer strategy and leverage AI and machine learning to develop content that will appeal to audiences across different geographies and reduce the time it takes to develop original content. This may require a giant overhaul of the current business and operating model and will most likely cause a lot of resistance from talent these creative companies may not be able to afford to lose which in my opinion will be the biggest pain-point of digitally transforming (not to mention the heavy spending on infrastructure).

  3. Thanks for the interesting post! I don’t follow the entertainment industry that closely so I wasn’t aware about Disney’s recent move into the D2C space and agree that the imperative to move to this model is stronger with each passing day. I assume that at some point all content creators will have to move in this direction in order to survive, but I also wonder what the competitive dynamics will look like at that point. Will consumers be expected to buy separate $9.99 subscriptions to all production studios they are interested in? Will this competition drive subscription prices down and content prices up, making the economics less attractive? Will the old cable companies create streaming packages to re-aggregate the production studios in an online format? It will be very interesting to see how this all plays out in the long term, once the initial migration to digital has been finalized.

  4. Great post! I wanted to push back a little bit on the idea that a necessary competitive advantage will be using data. I think high quality, recent content is the key to a successful D2C product.

    They should definitely move into D2C. The only advantage Netflix/Hulu really had to begin with was the fact that they were a first online mover, and they have a somewhat user-friendly interface. However, they advertised these great data, personalization algorithms as their secret sauce, but that’s not actually how consumers like to consume content. In reality, people go to Netflix to binge content that they can talk to their friends about. That’s part of why Netflix has invested so heavily in original (and attempt at high quality) content. People don’t actually want an algorithm to tell them about an obscure movie from the 1950s that has a great strong female lead I can identify with. That removes too much of what makes content enjoyable – people want the blockbuster hits they can talk to people about. People watch media partially to have common ground / common characters to talk about.

    That being said, NBCU totally has high quality content they should leverage. If they crack the right business model, and throw their premium content into a streaming service, it should succeed. I don’t think Hulu and Netflix have anything they don’t already have or have the ability to build in house. It’s hard to create good content, but it’s easy to create a container.

  5. Thank you for the post! Super interesting. I don’t think moving into the distributor space is as easy as it sounds. There is a heavy technological investment required and many of the incumbents now (ex: Amazon, HBO, Disney, and Netflix) are creating great content while providing exceptional user experiences. While I agree that content will ultimately win, given the costs of adding new subscriptions to consumers, experience in the streaming service is still important. Consumers may be hesitant to sign up for an NBC subscription if the experience is lacking, which may ripple and hinder NBC’s investment into content. As a strong content player, which holds significant value on its own, NBC may find more success in doubling down on being the premier content producer and selling its content at higher values.

  6. Thanks for the thoughtful insights. I agree NCBU has been fairly ‘dip-toe-into-the-water’ by making strategic investments instead of a large product investment and launch that would, as you say, require an organizational and structural reorientation. I think these investments could be seen as letting others experiment for you. The truth is, those are three entities (buzzfeed, vox, snapchat) are all approaching the dissemination of news and general entertainment content in three very different ways. It would be risky for NBCU to go all in on one method (say even a propriety streaming platform, which could ultimately be the most competitive move) but they have gathered an incredible amount of learnings from the actions of those three companies.

    I think the next phase of NBCU will look very different than the current, and I agree they are going to make some bigger bets in the future to stay relevant. But I think if any company correctly figures out how to create the feedback loop you mentioned using their own propriety data, they stand a chance in changing their processes efficiently and intelligently enough to stay competitive.

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