No. 326: Lyrical Lemonade Empire

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To understand the future, listen to the kids. In this case, I am recalling a short conversation between my oldest daughter Alexis and me in the spring of 2018. Dad, have you watched the Lucid Dreams video? Oh my gosh. In May of 2018, I was sitting in a conference room with a packed whiteboard of ideas and the math to justify them. In that room, I was laying out another idea to partner with an indie music festival ownership group. Independent music operations yield tremendous power to influence the cultural zeitgeist. Monetizing it is as simple as meeting supply with demand. But rarely do you find the operation with true, organic demand. For this exercise, the math held up. However, I ended up scrapping the idea of brokering a deal between the two groups.

As in most in edgy music scenes like hip hop or EDM, pairing the right product with a primed audience would require a risk tolerance and the willingness to go all-in on the partnership. And just a few weeks prior, the first attempt had fallen short of expectations. I’d spent several days assessing what could have been done differently. I came to the conclusion that it wasn’t worth the trouble.

Hip hop culture is not for the meek, the safe, or the politically timid. But for a merchandising company, it could be lightning in a bottle if executed appropriately. In the Midwest, there are few greater examples of lightning in a bottle than Ohio’s Prime Social Group (PSG), the ownership group behind The Number Fest and other top festivals. For a time, there was no festival that was more skilled at identifying talent that was primed to go mainstream. By the time the festival’s weekend came about – each year – the once-obscure talent would be a household name. The business model was brilliant. And it’s one that an even younger entrepreneur would find perfect.

Dominic Petrozzi is the founder of The Number Fest and, now, a partner at Prime Social Group. I’ve been such a fan of what his partners have built, and I recognized the linear commerce opportunity. This led me to introduce them to The Chernin Group‘s investment group. Their portfolio includes: Barstool Sports, The Athletic, and The Action Network. Though they focus on traditional “indie” media, it was clear that the same type of model could work well in the festival business. In an email between the two companies’ principals, I concluded with:

I have watched [Prime Social Group] grow into something special in the entertainment space, here in Columbus and abroad. I know that PSG is (currently) outside of The Chernin Group’s investment thesis, but I believe this to be a worthwhile conversation between the two of you.

When I mentioned the research for this brief, Petrozzi provided industry insight on a young, hungry media company that was primed for the mainstream. It was the same media group that I scribbled on a Pittsburgh whiteboard in May of 2018. Just a few days prior to that whiteboard session, my oldest daughter suggested that there was something special happening in Chicago music. An avid consumer of Youtube, she knew all about Lyrical Lemonade and its college-aged founder. She loved the music, but she really admired the company’s unique approach to visual production.

The fledgling media company was more impressive than I originally believed. Here’s PSG’s Petrozzi on Lyrical Lemonade’s growth:

Turning down $30 million for essentially an urban / hip hop-centric media company is insanely awesome to me. I think that’s the future in and around the live event space. The revenue generated by content will eventually outweigh all other revenue streams in festivals.

He finished his thoughts with a provocative comparison:

I’m all for the prosperity of the industry. Chicago is a market we’ll never see. I think what [Cole Bennett] is doing is similar to Barstool Sports’ strategy. But cool, indie, hypebeast-based fans instead of pseudo-bro, Portnoy sheep.

What Petrozzi was describing was linear commerce as applied to his industry. And, as far as independent promotions are concerned, there may be no greater example than Cole Bennett’s booming operation.

Linear Commerce and Lyrical Lemonade

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my 2018 music video reel. enjoy. pic.twitter.com/scJo5YOVwm

A recent profile in Complex Magazine tells the story of a coming-of-age videographer and media entrepreneur: a suburban kid thriving in an urban environment. The 23-year-old videographer and founder of Lyrical Lemonade shares a surname with one of the two most visible hip hop artists in his state – Chance Bennett – known to the masses as “Chance The Rapper. But that’s where the comparison ends.

In its early stages, Bennett’s YouTube channel was dedicated to Chicago show recaps, local cyphers, and documentaries about the city’s hip-hop scene. Then, in 2016 and 2017, he began working with artists like Famous Dex, Lil Pump, and Ski Mask the Slump God, and soon became the go-to video director for an entire subgenre that was exploding from SoundCloud pages into the mainstream.

For Cole Bennett and the six-year-old Lyrical Lemonade, the DePaul University dropout is writing the playbook that the more-established leaders in the space wish that they could duplicate. From a 2017 article by the Chicago Reader:

Videographer and manager Cole Bennett launched Lyrical Lemonade as a senior at Plano High School, an hour southwest of Chicago. For more than a year now, his splashy, colorful aesthetic has been attracting rappers from farther and farther afield—at this point, about half the people who pay him to make music videos are from somewhere besides Chicago.

The musical talent is Chicago-based but the center of the state’s burgeoning hip hop scene may be a town of less than 10,800. That’s the home of Bennett and his family. The indie music blog launched in 2013 from the small town of Plano, Illinois – an hour and twenty minutes southwest of Chicago. Here is a quick rundown of the media company’s digital assets, today:

Lyrical Lemonade is a linear commerce engine, a platform that could achieve an organic 7-8 figures in annual sales with organic traffic – alone. Petrozzi’s comparison to Barstool was prescient; a quick scrape of Barstool’s eCommerce data shows a 2019 headed for north of $10 million in annual sales – a small but significant enough portion of a business that is heavily-dependent on podcast revenue. It appears that Bennett and his management partners are similarly positioned to take full advantage of its tremendous flywheel of content, promotion, and sincere fandom.

In 2PM’s No. 314, we discuss our Law of Linear Commerce:

The digital economy rewards the companies that work along the line that partitions digital media and traditional eCommerce. A great product needs an organic and impassioned audience. Captive audiences will need products and services tailored to their tastes. Linear commerce is the understanding that digital media and online retail will eventually meet at the center – along the line – the most efficient path for growth.

Source: Twitter

In the last 60 days, Lyrical Lemonade has migrated from Big Cartel to Shopify, a shift that signals added sophistication to their growing operation. Former employee of independent merchandising agency Haight Brand, Elliot Montanez also maintains the pace of the Bennett’s editorial calendar. According to LinkedIn, Montanez left Haight Brand in 2018 to focus on Lyrical Lemonade’s latest plans.

This includes this week’s CPG launch, the company’s four-pack of canned lemonade. This is the first product that Lyrical Lemonade will offer, in addition to the traditional apparel-based products. The product is an obvious nod to the company’s brand. But the drink also serves as a tongue-in-cheek reference to the illicit party habits that are common within the gritty hip hop circles associated with Bennett and his team.

What separates Lyrical Lemonade from other promotions and media companies is its access. By cultivating talent at its earliest stages and promoting them in the ways that are often limited to mainstream acts, Lemonade has developed a 360-degree promotional pipeline. In this way, the company’s reach extends beyond its digital numbers. The musical acts that are now mainstream owe at least some of their success to Bennett – this translates to continued digital and commerce-related growth.

In talking to Petrozzi, a veteran in Bennett’s industry, the executive spoke highly of the entrepreneur’s prospects. He clearly understand what it takes. The Summer Smash Festival is a marquee event for Lyrical Lemonade; it’s likely the first of many real world opportunities for Bennett and team to authentically reach customers. Petrozzi recognized some of the overlap between his business and Bennett’s but was gracious in his assessment:

Cole is smashing. Summer Smash will be a staple in the festival world in the next two years.

Lyrical Lemonade has sold more than 15,500 units since their recent site re-launch. With an aggregate audience nearly 20 million strong and a retail business capable of high seven figures in 2019 and 2020, there’s a clear trajectory. Bennett – who calls himself a “standard student” – may prove brilliant to turn down the reported $30 million acquisition offer. There will surely be more of them. From TikTok’s upcoming phone to $3 million dollar purses for Fortnite tournament victories, Generation Z’s influence on the market is creating unique outcomes. To understand the future, listen to the kids.

Read the No. 326 curation here.

Research and Report by Web Smith | About 2PM

Member Brief: Brand-First Strategy

In a recent conversation with the CEO of  Shoelace, the journey marketing platform, Reza Khadjavi posed an important question: what is the modern definition of brand-first? With customer acquisition costs (CAC) rising and retention rates emerging as the key performance indicator, the question has never been more critical. It’s a topic that legacy brands know well; it’s a question that the savviest of digitally-native brands have begun to answer for themselves. And while that answer isn’t a universal one, there are commonalities to consider.

This member brief is designed exclusively for Executive Members, to make membership easy, you can click below and gain access to hundreds of reports, our DTC Power List, and other tools to help you make high level decisions.

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No. 325: Consolidation and Cable 2.0

The center of the home is still the room with the television. In that room, there is an arms race happening before our eyes. Streaming properties are adopting an end-to-end format that reflects the very nature of digitally native brands: own the product, own the channel, and you’ll own the consumer. But it wasn’t always that way and it may not always be.

This past weekend, my wife wanted to watch our favorite show. But in my parents’ market of Northwest Florida, that Sunday evening was disrupted. Their home was in a sort of in between, half traditional cable and half streaming services. But without HBO Now, we couldn’t watch the one show that we agreed upon. This situation was not without its irony.

Now-retired, Cleon Smith spent 30+ years as an executive in the cable industry. First for Time Warner, then Comcast, and finally – Cox Communications. It was within the walls of Time Warner that I interned with his upstart broadband internet department: code named “Road Runner.” As GM of the service, his market (the dense triangle of Houston, Dallas, and Austin) launched shortly after the test in Elmira, New York. At 14 years old, I watched his group tweak, market, and launch a product that would shape Texas’ future and then the nation’s. That broadband service, the first of its kind for the general public, would disrupt his company’s core business forever. Or so I thought.

I understood why the streaming industry took off but in the end, those consumers will yearn for simplicity of the good ole’ cable days. We sold a good product.

With the advent and widespread adoption of broadband internet, services like Youtube launched in 2005. And then, like a hurricane hitting an unsuspecting island of plywood homes, Netflix pivoted to streaming service in 2007. That did change everything.

Companies like Comcast, Time Warner, and Cox Communications began to innovate by introducing on-demand options and, eventually, the ability to login to Netflix or Hulu accounts to their OTT devices. But it didn’t end there. Each of the aforementioned properties were disrupted. First, by the Netflix approach to marketplace growth – an innovation that provided millions of cable, Dish, and DirecTV subscribers the incentive to “cut the cord.”

This is an example of a consumer household in 1995:

  • broadcast television: cable or satellite provider
  • basic: cable or satellite provider
  • premium services: cable or satellite provider

This is an example of a consumer household in 2012: 

  • broadcast television: cable or satellite provider
  • basic: cable or satellite provider
  • premium services: Netflix, iTunes

This is an example of a consumer household in 2020:

  • broadcast television: antenna, Hulu+, Sling, DirecTV Now, CBS All Access
  • basic: Philo, Sling, YouTubeTV, Playstation VUE, Netflix, Roku, iTunes
  • premium services: Netflix, Showtime (streaming), HBO Now, Prime Video, Vudu, Disney+

Between 2007 and 2018, Netflix worked to build a proverbial “mall” of properties by purchasing, licensing, or manufacturing intellectual property. It resembled elements of traditional cable but it emphasized the program, not the channel. Netflix Originals were purchased from independent filmmakers and marketed as Netflix’s own. Broadcast television properties like “Friends” and “The Office” were licensed for tens of millions of dollars per year. Hollywood A-listers and top directors were granted $300 million budgets for films meant to rival big studio releases. Yet, Netflix is currently trading at six month lows after news of: historic subscription losses, a small revolt after a $2 price increase, and the loss of two major properties. Industry analyst Andy Meek [1] on the matter:

Netflix lost 126,000 subscribers during the quarter, the first time that’s happened since the streamer actually started producing original content. Yikes. And then when you couple that fact, plus the quarter’s lack of new hit content and the imminent loss of shows like “Friends” and “The Office” with the forthcoming launch of rival streamers from Apple, Disney, and HBO’s parent company, among others — it’s a recipe for disaster and whatever the Streaming War’s version of hand-to-hand combat is, with everyone taking a piece out of Netflix, right?

As Netflix’s value erupted, an inverse relationship manifested: Netflix’s success and the commodification of the studios. The streaming industry increased their leverage by providing more consumer optionality and negotiation-by-wallet power to end users. In the process, cord cutting began to hurt studios as well. Not only are their cable contracts diminishing in value, their streaming payouts aren’t making up for the lost revenue.

Coupled with changes in consumer behavior, contract fallouts between studios and streaming channels, and the continued proliferation of speedier data services – you have the basis for the continued fracturing of the industry.

2PM Data: The Macroeconomics of Streaming

Subscriber losses for selected cable companies in the U.S. 2018 | Source: Leichtman Research Group
Pay TV penetration rate in the United States from 2010 to 2018 | Source: Leichtman Research Group
TV services used as substitute by cord-cutters in the U.S. 2017, by viewer type | Source: Nielsen
Monthly time spent watching OTT services in the U.S. | Source: comScore

The final graph is, perhaps, the most interesting. Disney-owned Hulu has begun to close the gap between their offering and Netflix. With Disney’s properties growing in popularity, analysts anticipate Hulu will continue narrowing Netflix’s lead.

Netflix planned to be the modern consumer’s iteration of cable television – a model that depended on a critical mass of content and viewership. That critical mass had to remain greater than the sum of all potential streaming competitors. For a time, the Reed Hastings-run media company had enough of what America needed: great classics, go-to films, syndicated sitcoms, game-changing originals. And then the ecosystem began to fracture. Properties like “Friends” left for WarnerMedia’s streaming service while “The Office” prepared to depart Netflix’s content menus for NBC’s streaming equivalent. Becca Blaznek on why “The Office” has left Netflix [2]:

Among them is NBCUniversal, which owns the rights to The Office. On June 25, 2019, the company released a statement that they will not be renewing their deal with Netflix, instead bringing the “rare gem” to their platform beginning in 2021. According to the Hollywood Reporter, this will not affect international viewers for the time being.

Like the consumer categories that went vertical to compete in a new economy, so have the studio brands competing for the mindshare of cord-cutting consumers. This had an unintended effect however. While modern consumers prefered streaming over traditional broadcast or service providers, the traditional consumer still prefers their traditional television over other devices for streaming media.

The DTC Evolution

Sales of OTT devices | Source: Strategy Analytics

As media fracturing continues, contract negotiations between studios and existing streaming services will only intensify. This will result in added subscription costs for consumers. The promise of the cord-cutting age was two-fold: (1) improved household economics and (2) accountability. Consumers wanted to avoid the pages of unused television programming that went neglected. Today, it’s typical for a cord-cutter to maintain subscriptions to 5-10 monthly media services to accomplish the same consumer tendency: availability irregardless of usage rate.

Today’s consumer is submitting to this dizzying dance of “subscription / login / password recall / and idle subscription” but without the convenience that consumers found with traditional cable providers.

As such, the disruptor is due for disruption. And in this way, an earlier inference may have been mistaken and my dad could end up right. With cable and data providers like Comcast, Cox, and AT&T controlling the pipeline and studios increasingly at odds with new-age streaming services, the momentum is tipping in the favor of tradition. While OTT boxes like Roku and Apple TV have made subscriptions and programming search infinitely easier, the 1:1 connections between consumers and streaming agents continues to subvert the innovation’s original intent: ease, consistency, and value.

It’s likely that the traditional media consumer has reached their limit. Cord cutting was an economically-driven phenomenon. Foregoing the streaming economy in exchange for returning to traditional cable is a question of programming availability and ease of access (try logging into Netflix on a relative’s cable box).

Streaming services will be bundled. It’s likely that we’re near the point of OTT carriers marketing the opportunity for consumers to purchase pre-negotiated, economically-friendly bundles of streaming services packaged. With no-login, one collective price, and less of a fear of missing out – the past has become the present. Disney’s streaming offering may be the sole victor here; their value and reach may outlast a shift back consolidation. For all others, the fracturing market of streaming video on demand (SVOD) has begun to cannibalize the direct to consumer opportunity that was the initial appeal.

In this manner, there is similarity between retail’s DTC cost-elasticity and SVOD’s elasticity. For online retailers, CAC has risen as digitally native brands flooded the market (performance advertising inventory remained constant). For streaming media companies like Netflix, CAC has risen as studios flooded the streaming market and costs to feature their properties became prohibitive. While Facebook and Google’s ad inventory’s limitations have resulted in price elasticity, the SVOD parallel is slightly different. The streaming consumer’s spend is nearing its point of elasticity. And the end game may be consolidation, a result of the yearning for good old cable days.

Read the No. 325 curation here.

Research and Report by Web Smith | About 2PM

Additional reading: (1) Member Brief: The Netflix Report (2) Monday Letter: The Hundred Year Titan (3) This wonderful thread by Nate Poulin that further contextualizes this report.