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

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.

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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