All small businesses include risk. I think it can be argued that the businesses who have the most risk are in the situation that I warn against. They are the ones dealing with a single vendor. I’ve talked about the satellite retailer who can only sell Dish Network or DirecTV and whose entire business is at the whims of those 900lb gorilla corporations. Thankfully, those satellite companies are both being disrupted at a rapid pace although I feel bad for anyone trying to make a living as a direct employee of one of these satellite companies. The working environment in a shrinking corporation is harsh.
These days you can see these types of vendors at home shows. They are the people selling pool systems or drainage systems, or any other product or franchise where part of the deal is that they are 100% exclusive to the vendor, and can not, by contract, have other product lines or services. Usually the owner is also heavily invested in the day to day operations of the organization. Typically it gets worse when there’s an after-the-sale service component (think cell phones or alarm systems) where the company whose product they are retailing ultimately ‘owns’ the customer relationship.
That’s what’s happening in the situation I’ve read about, only the little guy is producing the product and the customer is the 900lb gorilla. The company in question is Discovery Inc, the parent company of every reality tv show and reality tv based channel on earth. Full disclosure, I’m a customer and a fan, and I’ve even written about their products in the past. Back to Discovery, if they don’t own all of the reality TV channels, they definitely have the majority share of the market. That makes the market a monopsony. As I understand it, their business model is to buy shows from independent production companies that make reality TV. You can see this if you watch a great deal of the programming as the name of the production company is typically tacked onto the back of the show.
The traditional model that Discovery used was simply “here is some money, now go build me this”. It’s a little bit more complicated than that but the basic premise is there. Discovery will bankroll the production of a season of shows in advance. Now Discovery has come up with what can only be described as a scheme to make their books look better. What discovery is doing, and what I think is reprehensible, is they are saying “This is what we want, here is a bank that’ll work with you, go borrow some money and deliver me this”. It’s the same model most of Corporate America uses when they adopt American Express as their company card and require their employees to use it. If you don’t know, when you sign the American Express agreement, the individual, not the company, is ultimately liable for paying the bill even if the corporation is the one getting and paying the bills. If the company has problems, Amex goes after the employee. Discovery is doing the same thing. Notice how discovery isn’t on the hook until they get the show? All the risk moved to the production company. Unlike many traveling office workers, little reality production companies know this. They expect that Discovery will use this as another tool to squeeze them. This puts their companies and everyone who works for the companies at risk if Discovery has issues, or even chooses to have issues, paying the bills.
As you get further into the details it gets even more wacky. Discovery is promising to pay interest on the loans that are taken out by the production companies. Anyone with common sense would ask “ what’s the freeking point? Why doesn’t Discovery just take out the loan themselves?” It’s easier for a corporation. There is a thing commonly called corporate paper, i.e. corporate debt. Without going into the details of why corporate bonds make more sense than a thousand little loans from a third party creditor to cash flow production, the simple answer is ‘the books’. Less debt on the books for the corporation is better for the corporation, even if it could be argued that the lower debt is just smoke and mirrors. To me, it’s another win for creative CFO’s whose job it is to make the books look great. Depending on the metrics the Chief Officers get bonuses on, what we are really talking about is the ivory tower making more money on the backs of the company’s partners. Yes, I know that sounds like leftist rhetoric but I wonder what the situation would look like if the partners had half the seats on the board of directors?
In defense of the move, the somewhat reasonable argument being made by Discovery Plus is that they are producing more content for the new streaming service and this helps them do that. That part makes some sense as content creation is expensive. Reasonable is not the truth, the whole truth, and nothing but the truth. I think it has to do with the great big merger Discovery is planning. Ultimately they decided to merge with Warner Media although I’m sure there were others in the conversation. We can’t forget that C suite gets stock options, and being a streaming goliath on par with Netflix / Disney would definitely shoot that stock right up.
Unfortunately when that happens, Discovery, the product I love, and the supporter of all those production companies, is now just another sub business of the larger Warner organization, even if the name is Warner Discovery. The natural outcome of this is that there is much less focus on making the Discovery content great. The division simply becomes a money making machine. At that point in a company’s lifespan, often called maintenance mode, the CxO’s spend their lives constantly tweaking to squeeze every last penny.
What goes away? I think there’s a huge loss of focus on creativity at least from the senior managers. In the same way there’s limited focus on the long term. An example would be how much time the company leadership spends on developing and nurturing their content creation supply chain. If the big focus is the quarterly numbers, then nurturing small production houses to become big future producers is an afterthought. Sadly, like Dish Network back in the day, the professional partnerships are lost. The company simply doesn’t care about the people who got them where they are. With Dish it was the independent retailers who got sidelined when Dish brought sales in-house and to large corporate partners. With Discovery it’s the little production companies who may disappear eventually.
This is why being tied to one vendor, or in this case, one customer, is really bad. If you are a little reality tv production company, where are you going to go with your great new idea? Do you pitch it to Discovery, hope they go with it, then take out a loan and hope the rug doesn’t get pulled out from under you by a partner who’s always working in their own best interest?
Ideally, in a perfect world, It’d be great if every last one of these production companies put their stuff on Vimeo, youtube, and maybe even their own production company owned streaming website. Then it’d be the streaming version of a local co-op or employee owned company.
As I was growing up we only had three TV networks. Cable disrupted that with great content, then Cable consolidated. Eventually streaming happened, and now streaming is consolidating. Soon we’ll be back to three or four networks, or streaming companies as the case may be. Bigger, unfortunately, is not necessarily better, especially when it’s not organic. I don’t know how many small TV stations owners got stomped on when consolidation created the big networks. I don’t know how many people were affected as small CATV channels were also consolidated.
Competition is good, for companies, for customers, for vendors. The more competition the better. This is well understood. Consolidation is generally bad. We’ve let way too much consolidation happen for far too long justifying our lack of antitrust actions based upon “consumer welfare” thinking versus a focus on enhancing competition, which, by its very nature, will allow for enhanced consumer welfare.
The CFO’s and money people always want to consolidate and it’s almost inevitable over time. Less competition in any market equals more power and profit, at least until something disrupts it. That’s the lesson here, if you, your business, and the people you employ are delivering products in an industry that’s consolidated to the point where you have limited choices in who you sell to, then maybe it’s time to rethink your business model. That way you can avoid shouldering all the risk for the 900lb gorilla of your industry like the reality television production houses are getting pummeled by Discovery. You know, that concept, and the story of pivoting a small business away from being dependent on a single customer to many customers would make a great reality tv show. If your in the reality tv industry, feel free to use that idea. In return I only ask one favor. Don’t go get a loan facilitated by Discovery to do it!