More than any other media giant, the Walt Disney Co. is endowed with a corporate brand name that means something to consumers. The goodwill that the Disney moniker brings is the foundation of the Mouse’s bold attempt to challenge Netflix at its own game with the launch in 2019 of a stand-alone streaming service featuring Disney- and Pixar-branded theatrical releases, as well as other film and TV productions.
But as much as Disney sees a chance to capitalize on its unique position, the company has also been under more pressure than any of its media peers to make a big move to combat the steady drumbeat of negative news surrounding its single biggest driver of earnings, ESPN.
Disney’s market-shaking Aug. 8 announcement of the Disney-Pixar service and an enhanced ESPN streaming offering came on the same day the Mouse reported fiscal third-
quarter earnings. The numbers for Disney’s cable group again demonstrated the erosion of ESPN’s earnings power amid what Disney chairman-CEO Bob Iger called, in an understatement, “a rapidly changing market.”
Disney’s hand was forced by both opportunity and the urgency to give nervous investors something to think about other than the steady drip-drip decline in ESPN’s subscriber base. But Disney was not alone among its media rivals in using the bully pulpit of earnings season to announce initiatives designed to shake up the status quo in content distribution.
21st Century Fox unveiled a deal with Comcast to offer Comcast cable subscribers FX Plus, a commercial-free option for FX and FXX programming both new and old for an extra $5.99 monthly fee. CBS Corp. said it was preparing to take its CBS All Access subscription service into international markets for the first time, starting with Canada. And CBS plans to launch a streaming sports channel using the same playbook as its CBSN digital news service.
|Ben Mounsey for Variety|
All of these moves are bold efforts by traditional media players to adapt to the business environment largely pioneered by Netflix. Viewers have quickly become accustomed to having on-demand, commercial-free streaming access to programming across any device.
The traditional TV ecosystem of cable and satellite providers offering huge bundles of channels has been slow to respond to the shifts in consumer behavior. But now the largest programmers and forward-looking MVPDs, like Comcast and DirecTV, are taking baby steps. It’s a tricky line for Disney and its cohorts to walk, because MVPD affiliate fees are still the biggest profit engines for the largest media conglomerates. Iger expressed that delicate balance in a post-earnings interview on CNBC.
“We’ve seen general erosion in the multi-channel ecosystem,” Iger said. “That’s probably due to a number of factors: people not signing up until later in life, some cord-cutting, some migration to skinnier bundles. It’s a combination of things. It’s still, by the way, an extremely profitable product for our company and for a number of other companies.”
Industry analysts predicted that Disney’s move and others unveiled this month signal a transition that will only accelerate the deconstruction of the traditional cable bundle. As Bernstein Research analyst Todd Juenger observed, this is likely to spur a response on the distribution side.
“We think the MVPDs will certainly be trying to think of ways to protect themselves against the inevitable future date when Disney goes completely direct,” Juenger wrote in a research note.
Disney’s plans for the movie service are the most ambitious effort by a major programmer to go it alone with a purely direct-to-consumer streaming product. Even HBO Now and CBS All Access are variations on programming offered through traditional distributors. But Disney’s still-unnamed service will be strictly available through the company’s proprietary streaming channel. As such, Disney aims to cut out the middleman, which in this case is Netflix.
Starting with its 2019 slate, Disney will reclaim its post-theatrical Disney and Pixar movie rights from Netflix, which set a groundbreaking pay TV output deal with Disney that began in 2016. Disney’s go-it-alone initiative is enabled by its acquisition of a majority interest in BAMtech, the streaming media platform company launched in 2015 by Major League Baseball.
Iger enthused to investors about the profit-making potential unleashed by the BAMtech platform for the movie service as well as the enhanced ESPN offering. The digital architecture of a streaming-only service opens up a world of possibilities for targeted advertising and data services.
“We think the time is right to do that, given the trends we’re seeing in consumption, the value of the Disney brand, the product cycle and all the other opportunities that the BAMtech platform now gives us,” Iger told CNBC.
The steady drumbeat of ESPN subscriber losses in the traditional MVPD ecosystem, and the ratings erosion across Disney’s cable and broadcast channels, have become a drag on earnings. In its fiscal third quarter, Disney logged a 3.5% decrease in total cable subscribers, and that’s even with gains factored in from the new wave of digital MVPD start-ups, notably DirecTV Now, Hulu and YouTube. The foundation of media conglomerate earnings for nearly two decades has been the cash machine provided by cable affiliate revenue, but as that growth is clearly slowing, media companies have to think outside the cable box for growth strategies.
International markets are already a focus for opportunities for the majors. Disney’s bid to build a global direct-to-consumer movie service is no surprise. Nor is CBS’ effort to expand the CBS All Access footprint, just as it has aggressively mined linear distribution opportunities for Showtime, which for decades had been strictly a domestic brand.
“One year from now we await how much more competitive the international OTT [market] will be as media companies wake up and go direct to consumer,” MoffettNathanson analyst Michael Nathanson wrote in response to Disney’s announcement.
The recent jockeying among programmers, MVPDs and streamers also comes at a time when the TV industry is grappling with the sheer volume of competition, particularly when it comes to original scripted programming. The deep pockets of Netflix and Amazon have helped the major studios turn a profit on series productions as the traditional first-run and off-network markets contract. But that may also be changing.
“We continue to see a competitive marketplace for product [in subscription streaming], but we also want to make sure that we’re licensing things in a way that’s consistent with our strategy of making things more available and not less,” James Murdoch, CEO of 21st Century Fox, told investors on Aug. 9. “So, monolithic, global, exclusive deals with Netflix are troublesome with that strategy, and we think there’s a broader marketplace for us to license into.”
Murdoch echoed Iger’s comments about the need for programmers to take a more active hand in shaping their programs and channels that are offered to the public. Juenger speculated that Fox’s acquisition of European satcaster Sky, if approved by U.K. regulators, could give Fox the technological infrastructure to aggressively pursue direct-to-consumer options.
“Television is becoming much, much more competitive, and that’s driving innovation in terms of customer experience as well as packaging innovation, with some narrow bundles and some wider ones,” Murdoch said.
Judging by these recent deals, that experimentation has only just begun.