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  • What do modern business models look like? | RP 86

What do modern business models look like? | RP 86

Disney's synergy map, market penetration in F1 vs NBA & the Unreal engine behind video games

Hey friends!

Last week’s newsletter had a 40% open rate. The top link you clicked on was Noah Smith’s essay on Generative AI. A warm welcome to the 1 person who signed up since then!

In 1967, Walt Disney broke Disney Animation down into multiple business models. He then drew this on the back of a napkin:

Disney called this a synergy map. This diagram shows how each line of business elegantly feeds the company’s flywheel. Over the past 50-odd years since the famous animator’s passing, the map and its distribution models have evolved, but the idea of synergy — building a multiple businesses into a united flywheel — remains embedded in Disney’s DNA. The core of which continues to be the intellectual property (IP) that Disney Animation churns out.

In today’s newsletter, I’m summarizing two articles that shed light on what business synergy looks like in the present day:

The first one gets into how F1 managed to turn a rich man’s sport into one that the masses follow avidly. The second one outlines how Epic Games built its business and is poised to become one of the sleeper picks of the tech industry.

And with that…

1. On market penetration: F1 vs the NBA —

“Part of the brilliance of Drive to Survive is that it made everyone a star, from the most obscure midfield driver to team principals and CEOs; the powers-that-be in Formula 1 want to make sure they pay that off by not forgetting about the fans.”

I recently came to a shocking realization: In 2023, I’ve spent more time watching F1 than basketball. This is surprising because I grew up dabbling in basketball and watching the NBA. I did not grow up go-karting or watching F1.

In my world, a career in racing is on the same lofty rung as horseback riding, golf, and country club memberships. It’s a path that is decidedly not for a kid like me, for whom getting a car for my birthday was a privilege and not a given.

Still in the past few months I found myself talking about Daniel Ricciardo more than Steph Curry.

What happened? 

This article offers some answers. Here, Ben Thompson talks about how in recent years, F1 has been able to crack the US market, while the NBA — purveyors of a decidedly more popular sport — has seen a steady but gradual decline in its viewership.

According to Thompson, part of it is thanks to Netflix’s Drive to Survive. Part of it is due to the organization’s diligence at earning new fans through new venues and fan-friendly rules. This combination led to brisk growth in F1’s viewership since the docuseries premiered in 2018

In contrast, the NBA has kept games on cable and continued to allow rules and behaviour that don’t make for great entertainment. Thompson explains:

“The [NBA] allows entertainment-killing nonsense like flopping and intentional fouling and endless timeouts and interminable reviews to continue, and refuses to shorten the season — increasing the importance of every game and making it more likely that star players play — for fear of losing gate revenue (and, until very recently, regional sports network revenue). Far too many players, meanwhile, seem to treat fans with derision, asking for trades or simply not trying, with seemingly zero appreciation that they are harvesting money that is downstream of structures put in place decades ago, which are rotting out as more and more CasualFans can’t be bothered to find an antenna, much less pay for cable.”

As a result, the ratings for the NBA finals has declined over the last five years, even when the 2022 finals featured two big market team — the Celtics and the Warriors:

In other words, F1 made it easy for non-fans and casual fans to dip their toes into the sport throughout its season. The NBA didn’t.

Critiquing the league’s approach to its biggest moneymaker, the NBA Finals, Thompson writes, “If interest was not sown throughout the year then the harvest may be smaller than hoped, particularly when it comes to the casual fans that drive the biggest ratings.”

As a casual basketball fan who only tunes in to playoffs if my local Toronto Raptors make it, I won’t go out of my way to pay for cable. I would watch the NBA if it was already in a bundle I owned, like Netflix or Disney+. But honestly, after spending hours watching Drive to Survive, I’m more likely to fly to Las Vegas or Montreal to watch an F1 race live than I am to pay for an ESPN subscription.

2. The Unreal Engine powering Epic’s business flywheel —

I love learning about business models. In this essay, entertainment and media analyst Matthew Ball explores how Epic Games — best known as the maker of hit games like Fortnite, Gears of War, and Infinity Blade and as the company behind the gaming industry standard Unreal Engine — might be the quiet juggernaut that will dominate the technology industry in the years to come.

Video game companies have done an exceptional job at double- or triple-dipping into their value chain to generate revenue. While Epic is not the top grossing company in video games right now — the crown belongs to Activision — it does have an incredibly dense map of business that puts it on a strong upwards trajectory:

At the core of these businesses is the Unreal Engine — Epic’s proprietary game development software.

The majority of new game studios use Unreal because it is the most widely-deployed third-party gaming engine. For context, there are only two engines that dominate the $200 billion gaming industry: Unreal and Unity. While Unity is lightweight and easier to use, Unreal is more robust and ideal for richer, visual games.1 Riot Games, for example, chose Unreal to publish two of the most popular games in the world right now: League of Legends and Valorant.

Because of its ability to allow third parties to build virtual experiences, Unreal has slowly expanded into film, TV, and live events in recent years. Disney’s 2019 The Mandalorian, for instance, was shot entirely on Unreal. Ball writes:

“The entirety of The Mandalorian, from its unnamed ice world, to the desert planet Nevarro and the forested Sorgan — and every set within them — was almost exclusively shot on a single virtual stage in Manhattan Beach, California. This was critical to the show’s ability to offer film-grade visuals at half a film budget and more than twice the running time.”

Why is this important? 

  1. Consumers are demanding more immersive virtual experiences.

  2. Unreal’s specialty in handling complex, cross-platform virtual environments positions it as a frontrunner to handle the needs for film, TV, live events, and even architecture.

Ball explains:

“[Using Unreal or Unity] allows for not just easier and more sophisticated rendering of their models, but also the ability to present fully functional simulations based around them.”

In other words, as we spend more time in virtual worlds, we will want more realistic experience — experiences that video game engines are able to deliver. Being the most widely deployed, cross-platform engine, Unreal is uniquely positioned as the frontrunner in this race to power — and extract value from — our digital future.

This essay from Ball is the first piece in a multi-part series on Epic Games’ business strategy and its network effects. If you’re curious about the intersection of entertainment and technology, I highly recommend digging into this along with the rest of the series.

What’s next?

Thanks for reading all the way down!

I’ll be staying on the topic of media, entertainment, and technology for the next few weeks; there’s so many more business models to dive into.

If you find articles on companies or industries that have interesting business models, please send them my way! I’d love to read them and feature them in the newsletter.

With that, have a great weekend.

Stay strong, stay kind, stay human.

Till next week,

roxine