It's People Stupid - Why Challengers Beat Big Media & Legacy Brands

On the surface, we live in a world governed by large corporations. They have great power, not always to the world's benefit. But peek below the surface and a different image appears: legacy companies are not doing as well as challengers. Only those legacy players who value the independence and creativity of others, are thriving. Today we explore why this is so important to everyone, legacy, creative and challenger alike. Let's begin with a coffee...

It's not Bladerunner just yet (copyright Alcon Entertainment)

Underneath the headlines

Just the other week, I had a coffee with one of my fellow writers from my writing club, who is also a documentary maker in the sustainable fields. Like so many creators these days, she expressed concerns about artificial intelligence and the might of the big corporations hurting her job and the people around her. I understood the feeling. Yet, at closer inspection, there is flip side to that story.

When you follow the headlines, what you see is crazy. Over a hundred billion paid by Paramount for Warner Brothers. Seventy odd billion for Activision Blizzard. Electronic Arts bought from the stock market by the Saudi's. Tens of thousands of lay-offs in the gaming industry, social media industry and deep worries for lay-offs in the film industry. Meanwhile, chip makers and AI companies are at valuations that bring Icarus to mind and in the fast-mover corners of the market deals keep being made, share prices keep going up.

All while the world is experiencing a multi-crisis.

The list goes on and on. And I'm sure my readers could add many examples of Big Corps pilling up the media and financial power, while the rest of us are slowly but increasingly squeezed away from it. You'd be forgiven to think that these deals shape the market in ways no one can do anything about. And of course, in a profound way, they do. Many, if not all of us in the creative, tech and media spaces are in this weird 'in between' world right now. It's not exactly the Upside Down, but things are at a standstill, with our creative business either largely on hold, or changing in unrecognizable ways that are mostly negative.

Yet, there is a golden rule in humanity's existence. The more things change, the more they stay the same. Step back from it all and squint your eyes a bit, you'll see that something else is going on simultaneously. Something more ominous for these legacy players, which actually explains most of their behavior. And something much more hopeful for everyone else. There is a counterweight at work. But before we get there, let's first apply some scrutiny...

Scrutiny of the power

When you look closer, cracks start to show. That EA deal consisted of around 20 billion in B-rated loans from JP Morgan. That's the lowest of the low, also known as a 'junk loan', signifying a healthy distrust from experienced bankers to see their returns. Which by the way, is a problem that the entirety of Saudi backed entertainment is facing, due to sportswashing concerns. Aside from the corruption, the Warner Brothers deal has equal questionable status, with fears of vastly overpaying for the franchises, and a huge 'old-skool' media portfolio on the decline. Notably, Netflix shares went up big time when it became clear they wouldn't buy WB.

The seventy billion for ActiBlizz paid by Microsoft was also quite high. The whole deal was prompted by a sharp decline in shareholder value, because Blizzavision was in dire straits due to horrible working conditions, falling revenue, caused by widespread bullying and sexism, starting with its CEO. Even a suicide was attributed purely to in-company bullies. The company had also piled game-mistake upon mistake, with its management layer seemingly detached from the reality in gaming. Personnel had nowhere left to go, since even HR were hosting parties that weirdly glorified convicted rapist Bill Cosby.

The lay-offs due to artificial intelligence in the gaming industry and the social media platforms, with Meta on top, are in their press releases attributed to AI developments. Most people in those industries know the story is actually very different: it's not AI at all, but over-hiring during the pandemic, with AI now used as an excuse to fix the self-inflicted wound.

Take Two CEO Strauss Zelnick, responsible for the biggest franchise in gaming Grand Theft Auto 6 was very vocal about the mismanagement of his competitors. In his words: "The big tech companies who laid off thousands of people and said it was because of AI were not telling the truth. They overhired in the pandemic and they were sloppy about it" (Source Gamesradar article link here). Sure, he believes that AI will be useful, but adds: "Technology doesn't create. Technology enables human beings to create".

Notably Apple, who did not over-hire and is steadily working on furthering AI, but not leading the AI-charge, is doing fine. It is actually increasing their workforce (source Bloomberg article link) while also increasing their money earned per worker. For the record again: that increase is not attributed to AI. It is attributed to Apple just doing a great job selling quality products.

So, what is really going on? What is the truth underneath it all?

AI as a net-negative makes space for challengers

Well, one truth is that the loop in the AI business - chipmakers artificially buffing the share prices of agent providers... who then buy the chipmakers products again - has everybody anxious for a bubble and a crash (my article on that on Medium here). While useful, and in some cases in science and medicine changing the game, the general consensus is that generative AI overall is very slowly starting to see productivity gains, in low single digits on average, and really nowhere near the numbers their valuations suggests.

As you will undoubtedly known already, the math of this loop doesn't add up either. Yet, I'm about to give you the insight that the math at the moment actually works toward a net negative right now... Here's the reasoning. Without diving into too far here, when it comes to generative AI (note: not predictive AI, that's a different ball game) the general consensus is that the productivity gains aren't there and will likely only start to appear in a few years from now, gradually growing.

The biggest standout number was the 95% of companies seeing zero return (yes, zero) as MIT measured. This doesn't mean we won't see gains in the future. Vanguard for instance estimates a 50-ish percent change that AI may drive productivity surges... yet that's only a 50% chance... and will not materialize starting the 2030's according to them. Furthermore, in Gartner's hype cycle, AI has already passed the hype part. And I could go on. All of this is quite the problem, because for the math to work, the productivity gains would have to be roughly 40-ish percent per year.

Moreover, the significant backlash to everything AI, and the resistance to its billionaire class founders, seems to be growing quite the bit faster than the revenues. Revenue for instance of 'normal' websites and media online are under immediate pressure and falling across the board because of AI. And the cost of water and energy slurping data centers are not just astronomical, but nowhere near any sensible return-on-investment.

Maybe we gain some extra time in search, and there are niches such as cosmology that make great strides with machine learning. But society at large also loses a lot of time, money, energy and effort dealing with content-slop and safety concerns. And since the productivity gains aren't really there yet at the needed scale, that means that the true cost of AI is very likely to be a net negative on a global economic scale.

What it also means is that the hyperscalers and other legacy players in this field, are not holding a strong hand, when they keep shoving those AI-fueled chips on the table. The more you look at it, the more it looks like a bluff.

Supply chains change the game

All of that means there is suddenly much more space for challengers to jump in in the media space, which we'll show in a bit. In the consumer brand space, we see a similar development yet with a different cause, namely that challenger brands in niches are outperforming legacy brands, at least in relative terms. In this case however, that's not due to AI-investments, but running behind on sustainability (the Seamless-trend article link here) and diversity (follow this link for tips on that revenue changer).

Plus, they are beholden to the market effects of supply: legacy players in the consumer fields tend to have long, complicated supply chains. The challengers however, just use the 'long-tail' of the web to sell their niche products. There's plenty of small and medium-sized brands in the world that sell exclusively through Instagram for instance. It's also more product-based now: search in the long tail has changed the game, and made it more product-centric than brand-centric, making you especially successful if you create products that are green and sustainable.

And then there are the big advertising and media companies, who have been in a race to the bottom long before AI came along. Their revenues are large but their margins are not. I won't go into it too much here (read my articles on B2B Storytelling as a counterweight and storytelling with data in the links. But the gist is this: when everyone is on the efficiency-train with AI-tools and performance marketing... no one has the edge anymore.

The vast commoditization of this industry has led to tiny margins and market-wide distrust in consumer brands worldwide. It's in an incredibly weird space: while every year marketing budgets go up... brand trust goes down in tandem.

The take-overs are defensive

I am of course, not suggesting that there isn't trouble on the horizon for us artists and creators. What we are seeing here is that in many spaces in the market the potential for challengers is becoming greater, yet there are still many forces working against the challengers to make greater impact.

What I'm trying to show is that when you look closely, we are in a period of diversification, as opposed to a period of consolidation. You'd be forgiven to think the opposite, with the news and all. But the give-away is that most take-over deals are actually defensive and not offensive: they are made to maintain revenue and margins in shrinking business models of legacy players.

To give you an example, Paramount lashed out against Netflix in the union fight it is currently in against its own workers. This type of lashing out is extremely uncharacteristic to say the least, if not downright unfathomable. In a healthy market, with healthy players and healthy competition, a healthy company wouldn't have to say anything, let alone lash out. Now instead of strength, all you show after forking out a hundred billion, is that you are in absolute panic mode.

The value of people... can be in the millions

This situation is indicative of my point. The most important mistake that I see underneath it all is relying on endless layers of managers - now collectively known as 'corpos' by gamers - instead of relying on the people who actually make the goods, services and entertainment products. The valuations of these takeovers and mergers have a high arbitrary feel because of this, sparking the question if the valuations are real or just figments of imagination from management layers.

To give you an example of how it can be done better, and how real value of personnel can work: the key to the success of Valve and their Steam game distribution service is that they never had any management layer. Every employee has always been free to do whatever they wanted, there are not 'managed' and the top brass does not intervene. This has led to trust in the output of these employees, and to this absolutely crazy number...

...In a company that has somewhere between 300 and 400 employees, each of them is worth about 50 million in revenue per year.

Yes, you read that right. Its head honcho Gabe Newell has bought himself some super yachts as a result. But before you slip into anti-billionaire mode... he handsomely rewards all his people. And he uses his prime yacht for ocean preservation, research and ocean conservation, absolutely leading the charge in sustainable innovation.

Differences between legacy players

In fairness, it must be noted that not all legacy players are making the same mistakes. Nintendo is doing all right. Samsung is flying. Apple is strong as always. Despite some critical receptions left and right, Netflix is still on a very nice trajectory. Google and Amazon, even though their gaming divisions have (again) flopped and they did over hire during the pandemic too, are still both happily trudging along.

Other legacy players are in between doing okay-ish and slipping away, with losses but also wins, balancing things out. Disney for instance hasn't been doing all to well quality-wise with their biggest franchises Star Wars, long-term revenue with the Europark, revived-Disney-classics and Marvel. But they also haven't made really crazy mistakes. Their middle-of-the-road output of late has been enough to sustain them, fueling hope that at some point, they'll be able to get back into the right groove.

Microsoft have made big mistakes with the Xbox brand and its underselling console and is having trouble with Github and it's AI product sales. Yet is setting itself up nicely in the virtual reality space, working on digital tools that are likely to be very beneficial to the working world. They have also managed to straighten the ship with ActiBlizz, delivering quality on the old Blizzard franchises, who hadn't gotten a lot of love under their previous management. Now, they're on the rise again.

The gaming industry as the best indicator

In the gaming industry especially, the overt, and frankly rather gigantic, mistake in the past decade of legacy players has been their investment in large, online 'forever' games that have subscription models. In the wake of such games like Fortnite and League of Legends, the managers of these companies had decided that all other gaming genres were 'dead', such as single player games. Yet it has been these single player games across the board that have been very popular, while almost all new 'forever' games have flopped, with loses into the hundreds of millions per game.

Sony comes to mind here. Although in general still a highly successful player, they have made some notable misses of late. They had bought Bungie, thinking this developer would deliver five of those massive subscription-service games in five years. That did not happen. Instead, Bungie - under huge pressure from Sony managers - now closed down their cashcow Destiny 2 and have so far been unable to get their Marathon game up to high enough player counts. The biggest flop from Sony was even worse: 400 million spend on the game Concord, that was so unpopular it had to be taken offline two weeks after release, after making only one million back.

Other middling players are Epic Games, Ubisoft and Embracer Group. The latter hasn't necessarily been doing badly - and crucially holds the rights to The Lord of the Rings franchise - but they did over-invest into (too) many franchises, leaving them with cashflow problems when inevitable content delays occur. Ubisoft still has great franchises but here management has been very detached as well, leading to the same investment mistakes into 'forever' gaming. This, combined with harsh working conditions, sparking unionization and a complete overhaul of the organization. Speaking of 'forever' games, even Epic Games is taking a hit with Fortnite waning and their Epic storefront still not really thriving. Although they always have their Unreal videogame engine as a strength, servicing the industry at large.

With all of the above in mind, what is it that marks success or failure? What is the key to successful long term investments and revenue? Well...

It's people, stupid.

The Problem with management is too much management

The through-line in all of this is how big legacy companies treat their actual makers, their ability to understand customers and the empathy and understanding - or lack thereof - within management to what it takes to create something. Or in short: how big the gap is between leadership, their creators and normal people.

The bigger the gap, the more mistakes, the higher the losses... and the more you'll see those defensive moves on the markets looking like bluffs.

Meta is the prime example here, and of all the legacy players, it is doing the worst. Yes, they still get big, steady revenue from social media we all use, although they feel the pressure from other platforms, Tik Tok leading the charge. But don't let that revenue fool you in the slightest. Their investments into any sensible future, have for more than a decade now, all flopped miserably and consistently. They may still have big pockets. But they keep putting those pockets on fire themselves.

First, they went all-in on the 'metaverse', a new online space that would encapsulate all online spaces, or so they hoped. By hundreds of millions gamers this was met with years-long ridicule that still continues to this day. It was as if Meta was trying to invent the videogame, while that medium already exists as the largest entertainment industry in the world. And they thought that their metaverse would become some kind of brand space, while almost all other attempts to do so in the past have failed.

The sheer stupidity was so profound it boggled the mind. Right now, Meta is again all-in, this time on artificial intelligence, but there is not even a hint that this will pay off in the slightest. The average poker player reading this, will undoubtedly wish to one day have Zuckerberg at their table: a guy that is this prone to all-ins, is what we refer to as a 'fish'.

All you do is throw out the line.

In the meantime, Zuck has gone truly diabolical towards his own workers. Secretly, the company had been recording all the work - including key-strokes (!!!) - from its own personnel, training their AI agent. Then, he proudly - yes proudly - announced that it would lay off ten percent of its workforce, because of this secret AI training.

Not only were they betrayed by their own leaders actively wanting to kill their jobs and replace them, but for weeks the entire workforce was left in the dark who would be laid off, sparking massive anxiety in the company. It should come as no surprise that Zuckerberg is known as 'The Eye of Sauron' to his own workers. The man is so deranged, he even thinks the nickname comes from a place of love.

But I digress. The point is, that when you look closer at legacy players, a pattern emerges: the more detached their management is from reality, the more money it loses. And the closer it is to people and personnel, the more money it makes.

The big difference here seems to be trust in employees, and making an actual effort to understand audiences. The more distant a legacy player is from humanity - which these days translates into the embrace of AI - the less money they are actually making. Sure, pockets are deep, and take-overs can keep up appearances. But for how long? New forces are on the rise.

The rise in challengers

We'll again look first at the gaming industry, a great indicator of how markets are really doing. The mistakes of legacy companies has had a positive effect. It has led to a notable surge in indie games. The success stories of the last decade have been small to medium sized development houses and their small to medium-sized publishers - all independent - releasing hit after hit. Most of the time, the headlines tell us that a new indie game has made back its development costs in one or two days upon the release into early access... so not even into the actual release dates.

The medium-sized devs have success stories such as Baldur's Gate 3 and Claire Obscure. While Balatro, Vampire Survivors and The Blue Prince lead the charge for small devs. But that's just scratching the surface. It's still a very tough business mind you, but its indie success stories really do outshine the legacy players in relative revenue by several miles. And frequently, in absolute revenue as well.

And the film industry? Actors, directors, producers... even the runners in this industry have seen a two-decade long uptick in work, due to streaming platforms. Where it used to be a fight to get the best work in just a handful of Hollywood produced movies, nowadays almost all filmworkers worth their salt have a steadier income due to the avalanche of tv-series out there. And if all else fails, one can simply generate a steady income with a nice podcast these days.

Besides, independent film is on the uptick as well, with the horror genre leading the charge by the way, both in output and in the best ideas. There used to be the promise (or fear?) that YouTube and Twitch would start to offer film quality output, and that its casters would become as professional as for instance the late night hosts of regular television. Yet, the opposite is happening: those casters that really perform at the highest quality, are getting contracts and film-space in older, regular media, including the cinemas of this world. And the content makers at the top, such as late night hosts, have grown their audiences worldwide by embracing new media.

The spaces of YouTube and Twitch, and similar Asian players and more local players worldwide, have allowed many creators to thrive. There are the usual influencers of course, marred in scandal from time to time, but there are an incredible amount of very good, very serious content makers in countless of niches. Some of these have even graduated into film now, creating an entire new generation of filmmakers working independently and at manageable costs. Models such as Patreon-backers have further cemented the independence of these makers, so they become less dependent on one legacy platform.

Merging legacy and challengers

Here we see how legacy and challenger have merged and have become interdependent. For instance, in the wake of this, a new phenomenon has arrived in the form of deeper sponsored content in the branding space. The most successful players are now those that make meaningful content, often off-line, within the 'passion spaces' (a phrase I borrowed from Havas Play, a content subsidiary of the worldwide Havas Media concern) of audiences in art, music, film, sport, gaming, entertainment and alike. This is merging independent creators with legacy brands, often to much better financial and brand-trust results than 'just' advertising.

In many ways, its the challengers that are actually backing up the revenue from legacy players, even those who are failing. The shift we see happening here is away from efficiency, into effective audience engagement. Plus, it's just more fun. And again, it's due to these media-creatives having free reign: management layers have less grip on them, leading to much more positive results.

AI reveals the mistake of not investing in people

As creators, we have always been in a fight. We fight ourselves first and foremost, because we have a calling to create and battle our mental flaws to get there. To us, it is more than a job, it fills our lives with purpose. As such, we have also always been in a fight with non-creators. They often do not understand the muse, and think they can just repeat previous creative success by copying it.

It is more than ironic then, bordering on the karmic, that in the 'Age of AI', those that invest on people connections are the ones thriving. Spotify comes to mind, a platform that has allowed millions of musicians to finally publish outside of the 'old' legacy players, and build a living. Spotify is actively battling AI music slop, understanding that it's the music from actual people that drives their model.

On the flip side of the argument came Reddit. Making a lucrative deal with AI-agents worth 100 million, who immediately flooded the platform, Reddit immediately lost 400 hundred of millions of dollars in their cash-cow of normal advertising, facing a revolt from human users, and has been in panic-repair mode ever since. I trust Reddit will crawl its way out of this, however the mistake is still glaring.

I'd argue that artificial intelligence is actually the force that reveals the biggest structural problem not related to AI: the problem of not investing in your people, your creators and audiences. In other words, those who seem hell-bent on AI, are usually those who were already not investing in people before its rise. And they are now the ones desperately hoping that AI will save them.

Not just in revenue. But also from having to admit the mistake.

Same old, same old

Of course, the nuance is that these types of managers are still powerful. They have been favored for decades by a system that rewards number-crunching and punishes creative output. An entire educational system is build to promote this, instead of promoting human development. And The incredible corruption of late does not help any of this either.

Yet, corruption has always been the worst revenue model in the long term. Those who forego the needs of others are those who get into financial trouble in the end, which is exactly what we see right now. They may still have deep pockets. But limitations on their inhumane strategies are just as clear.

Only the legacy players who value empathy over efficiency are the ones thriving at the moment. More often than not, the legacy companies making actual good revenues, are the ones embracing the freedom and independence of their creators. And I feel that we should applaud those players for it, while simultaneously punishing the bad actors.

AI is neither the problem nor the solution

So, on the surface, something like the AI-actress Tilly Norwood being invented to replace real actresses, seems to be a big problem, making all creators and artists anxious. But below the surface, it highlights the actual problem: studios churning out generic stories regardless whether it was created by AI or not.

So yes, again, us creators are in trouble. Yet I'd like to remind you that this problem has been there long before AI agents were invented. So in conclusion, AI is neither the problem nor the solution. In fact, the human equation, or lack thereof, is the actual indicator of success. Possibly even more so now.

So yeah, it's the same problem as it always was. Same old story of non-creators not valuing creators. I'm not saying that this isn't a big problem. What I am saying is that it is nothing new. And also, it's not something we haven't handled before. The irony underneath all of the above, is that the more creators break free from these non-creators, the more money, fame and success legacy players will actually have.

Let's wait and see when - or if - that penny drops.

Love, as always,

Rogier

Want more insights? Check out my book The Whole Story - The Ultimate Guide to Storytelling if you too want to learn more!

(If you're still struggling creatively with all of this stuff going on, strengthen your creative health with this article on universal creative energy, this one on storytelling through manifesting, and this on how to look at success with manifesting)

The Whole Story - The Ultimate Guide to Storytelling