2023 Exec Playbook: Thrive or Survive (Part 1)

(Re)Introducing the RockWater Roundup

Welcome to the RockWater Roundup newsletter. Each week we provide insights on media x commerce news. Our goal is to help operators and investors build better.

I'm Chris Erwin, the founder of RockWater, a financial and strategy advisory firm. Formerly I was a digital media exec, VC, and investment banker. You can read more about me and RockWater on our website, and my LinkedIn profile.

Our team has published an industry newsletter since 2017. Today we start co-publishing on LinkedIn's newsletter platform. Why? We want to reach more readers and build upon our awesome LinkedIn community.

Today we kick-off with a long form article, part 1 of our 2023 Exec Playbook: Thrive or Survive. Most of our newsletters are under 5-minute reads, but every now and then we drop a banger.

So let's get to it...

Introduction

This year I have a more practical approach to 2023 predictions. We call it the 2023 Exec Playbook.

I will describe the current market as our RockWater team sees it. Then I will lay out key business decisions that leaders must make to navigate the market, inspired by market activity our team is observing. Our focus will be on builders at the intersection of media / tech / commerce.?

The goal is to give operators a playbook for how to maximize return on time and capital, and do right by their stakeholders.

I intend to be data-based, prescriptive, and inspirational.?

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Table of Contents

• US Market Overview
• 2023 Exec Playbook

- The Rich Will Get Richer

- Accelerate Your Path to Profitability

- If No Path, How to Salvage Your Capital

• Areas of Opportunity
• Conclusion

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US Market Overview

Overall, the broad markets are facing material headwinds.

• The cost of capital is increasing. The fed funds rate is currently 4.50 - 4.75%, and the Federal Reserve has signaled their intention to lift the rate above 5% in 2023. These rate hikes will continue increasing the cost of capital across all debt and equity markets.

• There will be less access to capital. Input costs just increased for financier business models. Lenders and investors now have higher ROI hurdle rates for return on capital allocated to companies. This means companies will be held to a higher standard. In a macro economy with headwinds across corporate earnings and consumer income, an increasing share of companies won’t have the performance against KPIs required to raise new funding.

• Further, many investors still perceive uncertainty in the markets, and won’t deploy capital till they have a better grasp of future performance. Specifically, they’re unsure how much farther down markets will go, and how long it will take before a rebound – could be six months, or two years. Uncertainty causes purse strings to remain tight. Case in point, venture funding fell 35% in 2022 to $445 billion, down from $681 billion in 2021. Also, Q4 2022 funding was down 59% YoY. Lastly, while there’s a decent amount of dry powder in venture, estimated at $299 billion, deployment will be slower than in recent history, particularly when compared to the anomaly of 2021.

• The consumer has less discretionary income. The $931 billion of pandemic stimulus checks have stopped. Rent and eviction moratoriums have ended. 2022 inflation was 6.5%, with food at 10.4% and energy at 7.3%. Asset market values have declined, with S&P declining 20% in 2022. Household debt rose 2.2% to $16.5 trillion, the fastest pace in 15 years, and much of it is variable rate. Consumer savings declined from $2.3 trillion to $1.2 trillion. The result is a consumer with less spending power. We saw this pan out in Q4 US retail sales, which were down 1.1% MoM in December, marking a dismal end to the holiday retail season.

• Company revenue and earnings are down. For Q4 2022, the blended QoQ earnings decline for the S&P 500 is -4.6% per Factset. This would mark the first YoY decline (estimated to be -5.7%) in earnings since Q3 2020, the height of the pandemic impact. Less consumer spending, as noted above, means less company revenue and earnings.

• Companies are cutting costs and doing layoffs. From big tech to media conglomerates, to startups. Cutting costs means less spend on partners (including content producers), advertising agencies, vendors, and technology platforms. This has a trickledown effect on B2B companies, where financial performance will suffer. On layoffs, the data is well captured at Layoffs.fyi, which tracked 160,000 tech layoffs in 2022, and 78,000 in just January of 2023 (of note, this doesn’t include large cuts across PT contractors).

Yet, there are also some signs that things aren’t so bleak.

• The economy grew the past two quarters. GDP, adjusted for inflation, increased at an annual rate of 2.9% in Q4 2022. But of note, growth slowed from 3.2% in Q3, and 2022 GDP growth YoY was 2.1%, down from 5.9% in 2021.

• Historically low unemployment rate. In January 2023 the rate edged down to 3.4%, bolstered by 517,000 non-farm payroll job additions. The number beat estimates by more than 2x. Further, the labor force participation rate has been rebounding, up to 62.4% in January from a 20 year low of 60.1% in April 2020.

• Consumer net charge-off rates remain low. Bank of America’s Q4 2022 earnings reported consumer net charge-off rates of 0.5% vs an average of 1.6% in 2005. If entering a recession, these would be higher. But for the overall US, the charge-off rate on consumer loans for all commercial banks was 1.28% in Q3?2022 and?has been rising from 0.94% in 3Q 2021.

• Advertiser spend is growing. While spend growth will slow from previous estimates, it still grew YoY in 2022, and is expected to continue growing in 2023.

• Consumer confidence grew. January’s University of Michigan consumer sentiment and December’s Conference Board consumer confidence indexes bounced up MoM, at 8.7% and 6.8% respectively. But, both are still down YoY.

Yup, there are mixed signals from the economy. But we believe the key indicators collectively present the likelihood of a distressed market for at least the next 12 months. As corporate advisors, where our job is to recommend capital preservation and growth strategies, we approach this market cautiously, yet opportunistically.

Simply, we believe the market will shake out in two ways for builders:

1. The rich will get richer
2. The rest must either seek a path to profitability or, if that is unlikely, make quick decisions to salvage their capital

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2023 EXEC PLAYBOOK: The Rich Will Get Richer

Capital, revenue acceleration, and attractive M&A opportunities will continue to flow to the best companies. The flow will be based on successful past performance, high-growth potential, and access to liquidity.?

For companies within our purview here at RockWater, these include…

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ASSET CLASS: Live Sports.?

While live sports viewership is actually declining, tentpole sporting events consistently aggregate and engage audiences better than most other IP. In turn, advertiser CPMs are actually up; a 30-second spot for Sunday Night Football went up 2% YoY, and is up 37% from the 2015 / 2016 season. This explains why live sports rights are increasingly being bid up by video streamers who seek unique programming that will drive user sign-ups and retention, and that will also help recruit advertisers for new ad-based business models. Further, live sports create countless fan experience and monetization opportunities before, during, and after the tentpole event.?

The live sports premium is playing out in deals like the excitement around the WWE’s planned multi-billion $ sales process, Manchester United’s planned sale for over $3.5 billion, YouTube’s $2 billion / season deal for NFL’s Sunday Ticket, Apple’s $2.5 billion deal for the MLS, PIF’s $784 million investment into LIV golf, and Redbird Capital’s $1.2 billion acquisition of AC Milan.

Valuation multiples could compress due to higher costs of capital, but demand will remain very strong relative to other assets.

Smart growth tactics we’ve seen from live sports operators include the WWE signing digital megastar Logan Paul to help appeal to younger audiences. Paul’s rapid success since signing in June 2022 catapulted him to a recent match with reigning champion Roman Reigns for the WWE Universal Title in Saudi Arabia. Viewership was up 70% on Peacock from last year’s Crown Jewel event (outpacing Peacock’s 61% subscriber increase).?

Also noteworthy is the 16th “party hole” at the TPC Scottsdale, when Sam Snyder’s hole-in-one infront of 20,000 rowdy fans became a social media sensation last Feb. We recommend the PGA and partners lean into this momentum for this year’s event. Ideas could include YouTube Shorts promo formats based on last years’ highlights, tapping influencers to sell tickets on their Shop pages, a Sam Synder-brand collaboration for exclusive product drops celebrating last year’s experience, social filters to encourage UGC, and custom-tailored sports bets.

Lastly, we’re also big fans of the “Nick-ification” of sports. Where a kids TV channel simulcasts NFL games with its sister network, has a player and kid personality host a football highlight show, and holds a golf competition called the Slime Cup. It inspires exciting new thinking for how to put a kids-oriented twist on straight sports content. And thus, tapping into the audiences of tomorrow.

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ASSET CLASS: Premium Creators.

Premium creators guarantee audience and engagement at scale. As well as a pipeline of good ideas for new content and business launches. That makes them a risk-adjusted growth bet.?

Therefore, streamers want them to drive sign-ups and retention, investors want to back or partner with them, advertisers want to target their audiences, and fans want to buy products and experience from them.?

We recently saw this in Paramount tripling down on western-drama king Taylor Sheridan, which is reminiscent of the deals Netflix did a few years back with the likes of Shondaland and Ryan Murphy.?

Also, we saw blue-chip investors backing the most premium talent or talent organizations, like TCG partnering with top digital-manager Night to form a $100M investment fund and also investing directly into Night the management company, and Kim Kardashian and former Carlyle partner launching PE fund Skky partners.?

And the largest stars are launching more category-dominating CPG products, like Logan Paul-KSI’s PRIME sports drinks which broke $250 million in sales last year, and just became the UFC’s official global sports drink in a multi-year deal. As well as MrBeast launching his Feastables chocolate bars after the wild success of MrBeast Burger.

Smart growth tactics for premium creators include focus on even further increasing audience reach.?

We’ve observed increased emphasis on expansion into international markets through content localization. For example, MrBeast has over 7 international channels across Spanish, Portuguese, Russian, and French. He also hires local celebrities for dubbing to generate PR buzz once new videos are released, like how he used the Spanish voice actor for Spider Man for his Spanish YouTube channel. Also of note, the world’s largest kids creators like Vlad & Nikki and Like Nastya have some of the most expansive global content reach, publishing in numerous languages including English, Spanish, Arabic, Japanese, Russian, French, Portuguese, and more.?

Also, as it relates to CPG products, premium creators are rapidly diversifying into physical distribution channels. With iOS 14 causing the disappearance of the cookie, and increasing saturation across paid social channels, solely relying on digital distribution is no longer the winning playbook. Therefore, creator-led CPG brands are highly focused on striking partnerships with retailers to get shelf placement.?

For example, Paul and KSI’s PRIME has a sprawling retail distribution network including Target, GNC, The Vitamin Shoppe, Walmart and Kroger Family Stores, as well as select retailers in the U.K. and Canada. And speaking of international growth, PRIME plans to expand to the Australia, India, South Africa, and UAE markets soon. Another good example is Barstool’s One Bite Pizza, which can be found at Walmart, Ralphs, Kroger, and other national chains.

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ASSET CLASS: Premium IP.

Similar to premium creators, premium IP also guarantees audience and engagement at scale. As well as the opportunity to drive revenue growth from newly emerging fan behaviors and content business models. This means significant upside remains, whether the IP is a couple years old, or 20 years old.?

Premium IP can be found across a vast array of sources, from production companies, past film franchises, and kids book authors, to historical sports personalities and YouTube channels.

Our thinking is inspired by deals like French media conglomerate Mediawan paying $300 million for a 60% stake in Brad Pitt’s Plan B Entertainment, The Game Theorist YouTube network selling to digital media aggregator Lunar X, Paramount’s $900 million deal with the creators of South Park, Apple TV+’s acquisition of NBA-legend Magic Johnson’s docuseries, and Netflix’s $500 million acquisition of Roald Dahl’s literary estate. Of note, The Game Theorist and Plan B still have the key talent attached post deal, as Matthew Patrick (Game Theorist founder) will still be the creative mastermind behind future content, and Brad Pitt will still maintain a leadership role and 40% stake in Plan B.

Again, like live sports, valuation multiples could compress due to higher costs of capital, but demand will remain very strong relative to other assets.

How can premium IP owners make their assets more attractive?

Re-package it for modern consumer experiences, and meet audiences where they are today. This creates an exciting opportunity to extend IP by reimagining worlds and characters from past stories to create new digital-native formats and assets that will excite modern fandoms, and re-engage old ones.?

Examples include the Warner Bros July 2022 release of MultiVersus, a broad appeal free-to-play multiplayer fighting game. It utilized animated IP across multiple film properties from Batman and Superman to Scooby Doo and Tom and Jerry, and even refreshed the IP with new roster additions. When the game released across multiple platforms (Xbox, PlayStation, Steam, Epic) , it debuted as the #1 best-selling game, logged over 20 million players, and was a top-5 game streamed on platforms like Twitch and YouTube Gaming.

There are 2 key takeaways:

• MultiVersus saw enormous growth from unifying different cinematic universes and fandoms into a competitive game that was optimized for livestreaming on Twitch and YouTube
• Frequent IP additions helped keep the game fresh and gave it staying power, leading to a season 2

*NOTE: poor game mechanics did impact growth and buzz after initial launch. Goes to show that nailing consumer experiences and UX in modern digital environments, and not just IP repackaging, is also critical for long-term success.?

We also think of the social marketing campaign behind Spider-Man: No Way Home. It was the first feature release to really harness the power of TikTok UGC to capture mass market awareness. The marketing teams collaborated with TikTok on a custom Spider-Man filter from the movie, kicked off the social posting schedule 9 months before the movie release date, and did a variety of creator collabs. One cool tactic was the creation of a TikTok account based on the famed newspaper in the Spiderverse, The Daily Bugle, which drew high views and comment engagement.??

The results were 34 billion #spidermannowayhome views on TikTok, 2.1 million digital downloads during the movie’s 1st week of release, and $1.9 billion box office (global top 7 all-time). 3 key takeaways:

Give fans the tools to be the IP’s biggest ambassador, and they will run with it

• Launch dedicated campaigns with camera filters, trend challenges etc to amplify a moment (e.g. film release)
• Use multiple social accounts to create an immersive mousetrap for the IP, and expand cinematic universe (e.g. Daily Bugle)

Of course, this is all easier said than done.?

Initiatives like this can really fall flat, or be total marketing fails. Remember the backlash against the viral meme campaign for Paramount’s remake of Ghost in the Shell??

Good execution requires right brain creatives, from Hollywood development execs and podcast producers to double AA game and Roblox developers. These creatives must find a way to blend the old with the new, and harness the lore that will both appeal to nostalgic fans of the past, and create and excite new future fandoms.?

When done right, the opportunity is massive. Smart strategy here will drive premium exit valuations, or will unlock value from legacy IP acquisitions.?

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ASSET CLASS: Video Games.

We could have put video games into the premium IP category, but the landmark dealmaking and capital flows to the sector in 2022 warrant a separate category.

There were about 3 billion gamers worldwide in 2022, and the number of gamers is expected to grow by 10% over the next two years. Also, whether it’s happened already, or not yet but is on track, video game user consumption and overall revenues will be bigger than film / TV / music combined. Further, kids spend more time gaming than in all other media, kids now want their allowance in Robux, and parents now increasingly catch up with their kids over a game of Fortnite VS a sit-down meal.?

Gaming isn’t just media or a source of premium IP, it’s Gen Z’s digital watercooler.?

This explains why gaming had a banger of a year. There were $127 billion of gaming deals in 2022, up 68% from $187 billion 2022. Three big deals that drove the market were Microsoft’s $69 billion acquisition of Triple AAA gaming holding company Activision (which we believe will find a way to FTC approval), Sony’s $3.6 billion acquisition of independent game studio Bungie, and TakeTwo’s $12.7 billion acquisition of mobile-game giant Zynga.?

Of note, gaming M&A is slowing, proven by a slower 2H 2022 in dealmaking. Further, mobile gaming revenues declined 6.4% YoY in 2022 to $92 billion. But, as highlighted by Playtika’s recent $814 million bid to acquire Rovio and Merriam-Webster’s acquisition of Wordle-clone Quordle, an industry slowdown could drive more industry consolidation to drive revenue and cost synergies through scaled combinations.?

Overall, gaming has the most attractive tailwinds in user growth, time spent, and monetization in all media and entertainment. So more deal activity when valuations are temporarily compressed, either within the industry or by outside strategic or financial buyers, would not surprise us.?

And very quickly, on the metaverse, I align with Poparazzi founder Alex Ma’s take captured in The Generalist….”I’m skeptical of the short-term. But in the long-term I think that’s where the world is trending.” Though the recent $32 million investment into Plai Labs by a16z shows the intersection of gaming, web3, and social still piques investor interest.

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ASSET CLASS: Premium Social, Commerce, and Enablement Technology.

The past few years were a record period for early stage and growth investments into new technologies that powered content x commerce business models. These technologies are a large component of the $104 billion and growing Creator Economy, which is defined by The Information as “global startups serving the millions of individuals making money off their online followings”.

This category was one of the biggest funding winners, with 325 US Creator Economy startups raising $9.5 billion since early 2021. We think of big fundraises like WhatNot becoming the first US-based livestream commerce unicorn valued at $1.5 billion, and OpenSea’s $300 million raise at a $13.3 billion valuation (though with a precipitous drop in YoY NFT volume, the mark-to-market here is likely pennies on the dollar).???

But, Creator Economy investments have tapered considerably, with 2022 funding down 50% YoY to $2.5 billion, and Q4 2022 funding down 79% YoY to $274 million. But, there will be bright spots for those companies that can point to exciting new technologies, rapid user growth, and / or proven business models with accelerating revenues.?

Recent transaction highlights include Discord’s purchase of the Gas social app that enables teen compliments, ThriveCart’s $35 million raise to grow its ecommerce platform for digital good sellers, new creator-brand marketplace Flagship coming out of stealth with a seed round, and GoldenSet Collective raising $10 million to offer equity financing solutions for digital creators.?

In the broader media, tech, commerce market, we're energized by Atmosphere's Series D round at a $1 billion valuation, which was just announced this week. The company provides streaming TV entertainment for businesses, and represents an exciting innovation within the FAST ecosystem (shout-out to the team over there, who are past RockWater clients).

There’s also an exciting new wave of social media companies like BeReal, Poparazzi, Mastodon, Locket, etc, who seek to eschew the now-broadcast VS social network, and ad-based business models, of social 2.0 platforms like Facebook, Instagram, Snap, and YouTube. This is well captured in Social’s Next Wave by The Generalist.

Another company and business model on our watch radar is Famous Birthdays, a bootstrapped platform that predicts the next wave of creators. The company has been growing consistently since launch in 2012, and has an ad-based business model and a newer enterprise subscription. New tools like this are attractive to a wide array of platforms, from media agencies seeking to optimize IM and ad spend, to studios who seek more data-based casting decisions, and social platforms who want a broader market talent barometer to inform their algorithms.

Revenue performance highlights include LTK’s announcement of its $3.6 billion in sales through LTK creators in 2022, and Whatnot accounting for 90% of user sessions of the top 8 US based livestream shopping apps.

Overall, 2023 funding will be below 2022 levels, but funds still seek to deploy capital. Their business models depend on it! But take note…

…standout performance in technology development, user growth, and monetization won’t be enough. Early-stage companies must get better at operating against KPIs and telling data-based stories. That means setting strategies and executing operating plans that allow builders to easily measure performance against peer industry KPIs.?

In turn builders will more quickly prep fundraise collateral, identify capital need based on user adoption / order values / margins / headcount needs / etc, set a market-aligned valuation target, and know what is needed to accomplish with new funding to set their company up for the next funding round.

This will send clear signals to investors why and how they’re an outperformer in their market, and that they operate like an investor-backable team. In turn, they’ll have a higher rate of lean-in from investor outreach, be able to have smarter and more productive Q&A about business model / growth plans / funding terms, and more quickly get to yes / no.?

We’ll unfortunately see some high-potential technologies not get a proper at-bat or chance to swing for the fences, simply because they didn’t know how to tell the right story to investors.?

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OPPORTUNITY: Attractive M&A and Roll-Ups.

Lastly, there’s a revenue-acceleration strategy we expect many of the top builders to deploy in this unique market moment: M&A dealmaking.

Companies with access to liquidity, whether flush from 2H 2022 funding rounds (kudos to those who moved quickly to secure financing), or strong balance sheets from good operator performance, are salivating. In 2023 they’ll acquire companies or assets at attractive valuations. The targets will be companies and leadership with inadequate resources or in distress. Or the targets could be leaders with a lack of interest to weather the storm (i.e. burnt out), or who are skeptical about the near to medium-term future and would rather take the “bird in hand”.

The result will be a market with a wide array of acquisition targets with high-intent to sell, and quickly, and less buyer competition to drive up price.

These are very attractive buy-side M&A market dynamics.

Opportunistic buyers, who get creative in their dealmaking to enable win-win deals, will do best. Maybe a target company wants to sell outright. Or maybe the target seeks a partial sale at a discount, with a chance for earn-out if they perform as the economy rebounds. Or maybe the target seeks to sell off a business unit that’s non-core, or that requires capital they don’t have to run the business unit effectively.?

There will be many formal sales processes run by investment banks that buyers can participate in, but the highest-ROI opportunities will be in the deals that are manifested through proactive outreach to target leadership. Followed by thoughtful discovery and fact-finding, creative brainstorming, and smart deal structuring. The most strategic buyers will create opportunities by approaching dealmaking as “partnering” with the target VS being hostile (though in unique circumstances, hostile takeovers may be the right strategy).?

The above approach is particularly relevant for early stage and growth co’s. Smaller deal values means most investment banks won’t engage. Further, target leadership at these companies is likely less experienced in M&A. This creates the opportunity for target leadership to be guided to a mutual win opportunity when met with the right buyer sensibility.

The end result is a big win for builders with dealmaker chops. Successful M&A will enable an accelerated path to scale, launches of new business lines, and access to strong human capital. It will be a leapfrog moment, and setup the acquirers for an even stronger future once the economy rebounds.?

Supporting market activity includes Audacy’s planned sales process for portfolio asset Cadence 13, Podx continuing its global audio spending spree, RBmedia’s January acquisition of Ukemi Audiobooks and Dharma Audiobooks (and 6 other acquisitions since 2020), Alts.co buying the Inverse Cramer newsletter so the founder could focus on his core Twitter brand, the above-mentioned Playtika bid for Rovio while the mobile game industry faces revenue headwinds, Doing Things Media buying social brand Overheard to scale up its social and meme brand portfolio, and Vox acquiring Group9 in an all-stock deal to grow scale as digital publisher economics get tougher.

NOTE: I’m not privy to all the actual dynamics behind these deals beyond what was reported. But in my professional opinion, these targets do exhibit some of the target characteristics I called out at the top of this section.

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The above companies and assets will outperform in 2023. They’ll be setup for outsized success once the economy rebounds. But this list is highly concentrated and doesn’t account for the majority of companies operating at the intersection of media, technology, and commerce.

Aka “the rest”, who are connected by two universal truths highlighted in the above US Market Overview section…

• Capital has dried up. Investment criteria is elevated, and I’m increasingly hearing from investors that “deal flow is high, but quality is low”. If a company can’t speak to strong performance against market-standard KPIs and tell a compelling data-based growth story based on customer acquisition and spend metrics within their category, the company’s fundraise will be a grind with an unclear outcome.

• Revenue headwinds. Companies are cutting budgets, thereby reducing spend on vendors, technology providers, and marketing. Advertiser spend is slowing, particularly those “experimental” budgets. Studios and streamers are cutting content budgets. Consumer discretionary spending is down, meaning less wallet for goods and experiences from brands, creators, and content franchises. Read: less business and consumer spend = less revenue, which means lower profit, and thus reduced cash runway.

These 2 dynamics demand immediate deployment of a new operator strategy. We recommend two paths forward…

• Path to profitability and resilience
• Salvage capital

In part 2 of the 2023 Executive Playbook, I’ll explain specific tactics for each strategy based on inspiration we’re seeing in the broader market, and from our own clients at RockWater. I’ll also highlight new pockets of opportunity in media x commerce, and where there is potential for venture returns.

More to come over the next few weeks...

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If these insights are relevant to projects you're working on, ping us here. We love talking all things media, tech, commerce!