Disney’s Streaming Dreams: How Disruptive Is Its New Netflix-Style Strategy, Really?

disney business fundamentals
Illustrtion: Cheyne gateley

The Mouse House is moving to cut the cord: Disney plans to launch at least two direct-to-consumer streaming subscription services, for ESPN and Disney movies and TV shows, in the next two years.

But right now, it’s not clear how dramatic the change will be for Disney as a whole. More than anything, it looks like a hedge against declining pay-TV subs — a desire to better control over its destiny in a streaming world.

What’s important to realize is that Disney is not turning its back on the traditional TV biz: The ESPN over-the-top service, set to debut early next year, will exclude NFL and NBA games from the 10,000 live events in the lineup. To watch ESPN’s pro football and basketball action, you’ll need to buy a regular TV bundle.

In addition, the Disney-branded subscription package will include Disney and Pixar films — after it yanks them away from Netflix, ending its three-year output deal with the streaming colossus beginning with 2019 theatrical releases. But where movies from Marvel Entertainment and Lucasfilm’s “Star Wars” franchise wind up is TBD.

Whichever way that pans out, it shows Disney isn’t at this point ready to throw everything it has into a subscription VOD rival to Netflix. In fact, it’s conceivable Disney could sell SVOD streaming rights to “Star Wars” and Marvel pics to Netflix for the right price.


Toy Story 3

Disney to End Netflix Deal, Sets Launch of ESPN and Disney-Branded Streaming Services

Wall Street analysts generally applauded the conglomerate’s OTT plans, despite near-term pressure on earnings because of the investment in the new business lines. That includes Disney’s buying a 75% ownership of BAMTech, the streaming-video company created by Major League Baseball, for a total investment of around $2.6 billion.

“It’s a rare and impressive pivot” for a large, publicly held company, RBC Capital Markets analyst Steve Cahall wrote in a research note. “Few megacap companies have the breadth and depth to pivot as Disney is.”

On the surface, it looks as if Disney is adopting the dual-distribution model HBO pioneered: It wants to sell retail OTT services directly to households, while continuing to sell wholesale TV programming through pay-TV operators. That “arguably reduces the consumer value of Netflix, which remains the biggest strategic challenge to linear networks in the expanded basic bundle long-term,” Credit Suisse research analyst Omar Sheikh wrote in a note.

But the wildcard in this is what the retail pricing of Disney’s OTT services will be — which will be the main determinant for how rapidly it can ramp up internet subscribers, and how quickly that will contribute to the (already) shrinking pay-TV subscriber universe.

For the Disney-branded OTT service, the company’s bet is that it can earn more coin running its own version of Netflix. That deal represented $300 million in annual revenue for Disney, according to Morgan Stanley estimates. (Side note: A silver lining for Netflix is that it will be freed up to spend that cash on other content.)

Will Disney be able to make that up with its own built-from-scratch SVOD offering? If it sets pricing at $10 monthly, it can hit that number with 2.5 million subs — however, that’s before factoring in delivery, support and marketing costs, which it doesn’t have with the existing Netflix pact.

Low cost is the main reason cited by U.S. consumers for signing up for a streaming-video service: 34% said a cheap monthly price was the top factor for subscribing, according to a May 2017 survey of 2,267 U.S. adults 18 and older conducted by ad-tech vendor Fluent. Other reasons were being able to stream on any device (26%), access to exclusive original content (20%) and “breadth of programming” (13%) among consumers in households with annual income of over $50,000.

“It will be interesting to see how Disney prices their services — and if it will be low enough for a large enough number of Americans to sign up for them in addition to their core Netflix subscriptions and the growing number of people getting on Amazon Prime,” said Jordan Cohen, Fluent’s chief marketing officer.

The ESPN sports package may hold promise. About one-fourth of Americans (23%) say they’d pay for a streaming service that would allow them to watch sports on any device, according to the Fluent survey. However, football and basketball are the biggest draws, with 74% of consumers citing football as the sport they’d pay for on streaming and 49% citing basketball — and again, the new ESPN OTT service will not include NFL or NBA games.

And here, too, pricing is a looming question. By 2019, ESPN affiliate fees are expected to hit $9.17 per sub, according to SNL Kagan. Even backing out rights costs for football and basketball, can ESPN price the OTT service attractively while still earning a decent margin? And will people opt for a skinnied-down internet version of ESPN that doesn’t have NFL or NBA games?

However fruitful Disney’s foray into OTT is, observers give the company credit for ripping off the Band-Aid to prep for the future — even if it’s still hedging its bets in several ways. “Disney had no choice but to make a massive move to place digital OTT platforms first, given the bleeding of traditional cable and satellite television packages that historically have been its cash cow,” media consultant Peter Csathy wrote in a blog post.

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  1. LOL says:

    Your TV has a microphone? Weird. Or is it that you have no idea how streaming works? Yeah, I’m guessing it’s the latter.

  2. paully says:

    Buying Netfilx would have been very expensive.. My Roku stick has a large number of streaming options at the push of a button.. This seems like a smart move and you know Disney can stream everything like 1950 MM Clubs, and all the Disney weekly 1 hour Sunday shows..
    Add in the fact that most Disney stuff has a subtext (ask Mom and Dad “take me to Disneyland) this will work..

  3. Edward Chmiel says:

    I for one will not be using the service. Even the ESPN one – its strangled, so what good is it? I might however watch a Disney movie on Netflix, but not willing to pay more. Bad decision Disney. In fact, I am very close to cancelling Netflix because there is plenty of content on Amazon Prime, and I get a lot more for my money.

  4. Bas says:

    Non Disruptive..If Content Providers like Disney start treating Distributors including Internet titan like Netflix so bad then mergers between both group us ought to happen and should become the Norm. Even Netflix acknowledged that with the acquisition of Millarworld. And Comcast owning NBCUniversal and AT&T pending acquisition of Time Warner is the Future.

  5. Mr.Mike says:

    I don’t know why Disney and other studios are fixed on streaming. What people would definitely pay for – me included – is pay-per-view. No monthly subscriptions for content one would never watch or need access to.

    Apple is minting billions with iTunes, why wouldn’t the studios follow that model, which clearly works. For movies, give me premieres at $29.99 (blockbusters) to $9.99 (smaller films) per title and $1.99 per title for the back catalog.

  6. dee says:

    I already subscribe to Netflix, Hulu (with no commercials) & Amazon Prime along with the channels on my cable TV. That’s it – no more. There are only so many hours in the day and my TV watching is already covered with what I wrote above.

  7. L. Kemp says:

    nice to have competition for NetFlix! They havesome good..but a LOT of pure junk. Further, they do NOT listen to their subscribers. I, for one, would like to see what they have to offer. Hopefully, no zombies, ‘gay rights’,

  8. Bill B. says:

    Not remotely good news for the consumer, but that is not one of their concerns.

  9. Nathan Boyle says:

    I dropped Netflix a year ago and didn’t go back. I dropped cable TV four years ago and not only don’t want to go back, I found having to surf channels and watch half-over shows and movies distasteful. Nothing to miss there. I have pared back the number of services I subscribe too and only have Amazon Prime-which I use for its full feature set, not just video streaming. Hulu just doesn’t sell me with their model and habit of limiting what you can see while also adding commercials to a subscription service. The other services? Meh. I find myself watching YouTube more and more, along with other free streaming. I will look at Disney’s offering, but doubt it changes anything. Nothing is going to bring back the bundle, nor support dozens of subscription services at the same time. People will do what gamers already have come to do, pick one, subscribe, go off-sub for those they aren’t actively binge watching.

  10. A man in a suit says:

    If you’re signing up for all these services, you’re not cord-cutting, you’re just switching providers. The original goal was to stick it to the cable monopolies and if you consume OTA broadcast or FTA satellite or your own DVD collection, then congrats, you have cut cord. But if you consume a lot of streaming video content, you still depend on final mile delivery via high speed internet. A service that will remain a monopoly or duopoly for most and rates are certain to rise significantly.

  11. Stu says:

    This is just my personal anecdote, but I certainly won’t be paying Disney for something I was already getting included in my Netflix subscription. It’s perfectly easy enough for me to save that additional money and just pirate any Disney content I would have been paying for via Netflix.

    Also worth noting.. I was a rabid pirate of TV and movies before Netflix swooped in and offered an amazing service for a reasonable price — no commercials, one-stop shopping for content, and great customer support. Anything that wasn’t available on Netflix, pirated.

    I also stopped pirating music that’s been made available on Spotify.

    When will content creators learn that we only care about their content, and not their thoughtlessly assembled streaming service? The technology is not trivial. Let the professionals at Netflix handle it, and stick to making the content.

    ALSO… even if the additional cost was insignificant to me, I’m still not at all interested in needing multiple platforms and apps to access the content I want. If EVERYTHING I wanted to watch was available on Netflix, I’m sure I’d be more than willing to pay more for the service. Until then, I’m happy toggling between Netflix and Plex (for my pirated content).

  12. samchenblog says:

    Disney is too late….typical corporate ego – CEO thinks he can do better and then fails, then he try to recover….they should have bought Netflix 3 years ago when stock was cheap…now too expensive to buy Netflix and they want to go cheap…..not gonna happen…most households will spend on Netflix, then Amazon, then maybe hulu…and maybe sports package, thats already $30-40 on top of basic Internet fees…no room for niche streamer like Disney or CBS..CBS is even more delusional…..

    • Fred says:

      Your post is on the money! No way the CBS All Access service will succeed.. Not enough programs and CBS viewers are upset that Star Trek and The Good Fight (2 of the CBS streaming services hottest properties at the moment is available on CBS broadcast. Disney has a better chance because of the enormous content, but like you mentioned it’s likely too late. Who wants to pay for yet another streaming service? They should have bought Netflix when they had a chance. Now its just too expensive . Apple is pretty much the only company with enough extra cash to buy it.

  13. Consumers won’t be paying for a subscription to every service that is out there. Maybe Disney may benefit but not all studios. Netflix curbed piracy by making it easy for most content.

  14. Cath says:

    As long as they are producing DVDs for their movies, many parents and adults will pay for those physical items for the home. Watching Disney on Netflix or even cable TV is convenient but considering how many times kids watch the same movie over and over it is easier to just toss it in the DVD. Whether parents would be willing to pony up the extra monthly money is a big question especially if you already have Amazon Prime or Netflix or Hulu or HBO or whatever.

  15. Not seen many publications mentioning Disney Life, their service in the UK which without doubt has been a place where they’ve been both experimenting and taking learnings from ahead of a wider roll out (be in Disney Life, or a new evolution)

  16. Too late. ABC/Disney held onto their relationships with old cable and satellite contracts when the market was crying out for a la carte. Now they have finally figured out that the trends are true and not going away and they have lost a huge amount of brand loyalty over the last five-ten years. I don’t know that those customers will now be willing to pay for something that they have learned they can live without.

  17. Jeff says:

    Stupid move! First, it’s distribution networks that are feeling the pinch from cord cutters, not content providers. You see Comcast paying Disney any less for ESPN? I certainly won’t pay Disney the same amount I pay Netflix, especially when I can download that content for free. Folks with kids might sign up, if enough of their back catalog is included, but grown adults? Nah. And what good is ESPN without football or basketball? I get ESPN WITH those, on any device I own, anywhere I am, now, from YouTube TV. Why would I want to fork over another fee to get less? And if they want to pull their content from other providers like they are from Netflix, well, there are other worlds than these. But ESPN is still in denial that it’s currently losing subscribers like mad, so there isn’t a lot of intelligence at the top to start with.

  18. I am really surprised that it took them this long to come up with this! Disney has had a cable presence going back some time (25-30 years?). Netflix has been around several years now, so why did it take the usually cutting edge, entertainment giant to jump on board?
    Regardless, it will be a major online portal for families–both the sports and the Disney themed stuff. The other part about Marvel and Lucasfilms is indeed going to be a curiosity.

  19. abrevaiteone says:

    when using abbreviations the first time make sure explain what it is! (OTT is?) Huh

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