A Whole New World: The Digital Evolution of Disney
Facing an exodus of subscribers and a decline in ratings for its sports programming, Disney has been forced to re-think its content distribution model. Can Disney pull off the magic trick?
“Things Will Look Better in the Morning” – Bagheera, The Jungle Book
With the rise of digital media, for most consumers, the days of buying DVDs and CDs is in the past. Digitization of the distribution of media content to consumers has been redefined by over the top services (“OTTs”), most notably, Netflix, boasts a 64% OTT market share, a user base of 120 million and accounting for 35% of peak period downstream traffic in the US. [2] Traditional media content producers have been forced to adapt the way in which they supply their end customers with content. Facing the new reality of either partnering with the 800-pound gorilla, Netflix, or creating exclusive platforms in order to compete. In 2012, Disney entered into an agreement with Netflix to bring all of the studio’s films exclusively to Netflix, including Disney’s live-action films and Pixar’s franchises. [3] The new partnership served as a reliable cash stream for Disney, bringing in, by Analyst estimates, approximately $325 million for the right to stream its content. [1]
“Sometimes the Right Path is Not the Easiest One” – Grandmother Willow, Pocahontas
Despite having partnered with Netflix to stream its content through their services, Disney experimented with different proprietary OTT offerings, including internally developing an application called DisneyLife. The app was released in November 2015 on a limited basis in the UK, offering old Disney movies and TV series. The proprietary offering was largely a failure and was never released outside of the UK. [1]
In June, 2017, Disney’s BoD assembled in Walt Disney World to discuss the ways in which technology was disrupting the company’s business lines and how it was going to respond. The most alarming takeaway from this summit was that cord cutting was occurring at a much faster rate than anticipated, with live streaming for youth programming massively under-performing, while Netflix experienced rapid growth. [1]
In August 2017, Disney made the decision to double down on its streaming efforts, announcing that it would be acquiring a 75% stake in BAMTech, the streaming-video company created by MLB, for a total investment of around $2.6 billion. In addition, Disney introduced two new subscription streaming services, both built by BamTech – one focused on sports programming to be offered through the ESPN app (Spring 2018 launch) and another featuring movies and television shows (2019 launch). [1] In addition to the decision to launch its own subscription streaming services, Disney announced that it is developing a series of original television shows to be released through its application.
Given that Disney has historically utilized a paid subscription model through its cable provider partnerships, it would seem that the leap for consumers paying for a discrete offering could be reduced compared to other content providers. Disney has experimented with this approach for ESPN, which has experienced considerable pressure in user subscriptions, falling from 99 million subscribers in 2013 to 90 million subscribers in 2016. [4] Disney offered consumers the ability to subscribe to “skinny bundles” of ESPN channels priced at $40-50 per month, which, while early, has been well-received by consumers. Further, as Disney thought about ways in which to reach a younger audience, it established a partnership with Snapchat in 2015 to create temporary video stories. [5]
“Reach for the Sky” – Woody, Toy Story
While I think that Disney has taken positive steps toward reducing its vulnerability to the cord cutting trend, I am concerned about its ability to create relevant content to compete with the power houses, including Netflix, Amazon, Hulu, HBO etc. I would suggest either 1) acquiring or partnering with a popular OTT in order to bundle the offerings, 2) continuing to increase relevance by continuing to acquire studios similar to the Marvel and Lucas Film acquisitions or 3) go all in on original television content to establish shows with considerable buzz as a number of competitors have done successfully.
“If You Can Dream It, You Can Do It” – Walt Disney
- Should Disney pursue a model of becoming a scaled content owner with intellectual property exclusive to the platform to its own platform (a la Game of Thrones / HBO or Stranger Things / Netflix)? What are the pros and cons?
- In 2015, the rumor mill was active with suspicion that Disney would acquire Netflix. How do you view the pros and cons of growing an OTT platform organically vs. through acquisition? What would you have done?
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[1] Koblin, Brooks. 2017. “Disney’S Big Bet On Streaming Relies On Little-Known Tech Company”. Nytimes.Com. https://www.nytimes.com/2017/10/08/business/media/bamtech-disney-streaming.html. [Accessed 15 Nov. 2017].
[2] Facts, Netflix. 2017. “Topic: Netflix”. Www.Statista.Com. https://www.statista.com/topics/842/netflix. [Accessed 15 Nov. 2017].
[3] Disney’S Streaming Service Has Won, And It Hasn’T Even Launched Yet”. 2017. The Verge. https://www.theverge.com/2017/11/11/16637732/disney-star-wars-marvel-pixar-streaming-service-netflix. [Accessed 15 Nov. 2017].
[4] Why Disney Still Believes ESPN Is On A Winning Path – Market Realist”. 2017. Marketrealist.Com. http://marketrealist.com/2017/05/why-disney-still-believes-espn-is-on-a-winning-path/. [Accessed 15 Nov. 2017].
[5] ESPN Launches A New Version Of ‘Sportscenter’ To Snapchat”. 2017. Fortune. http://fortune.com/2017/11/13/espn-sportscenter-snapchat/?iid=recirc_f500profile-zone1. [Accessed 15 Nov. 2017].
I think the questions the author posed at the end are very interesting, and can potentially be stronger action plans than the recommended ones now. I think Disney is at a good position to take on HBO and Netflix in terms of creating original content, because they are potentially only playing the investor’s role, just as Netflix is. Disney can go after the same projects as Netflix, and come out winning the bid because of advantage in capital. The challenge would be to acquire contents that are consistent with Disney’s brand name. Acquiring an OTT platform is also promising. With numerous players in the market, including Netflix, Hulu, Amazon, it would be hard for Disney to join the game at this stage offering the limited selection of contents of its own. Therefore, being a shareholder is a good idea, in order to enter the market and to protect its brand. The Disney quotes are a nice touch to the article.
This industry is in such rapid transition, it is really exciting. I see very little merit for Disney, unquestionably a pioneer and the current industry leader for original content, to acquire a large OTT provider. OTT platforms – Netflix, Amazon, Hulu – bring increasingly less to the table, in my mind.
OTTs provide two services for the end movie watcher: 1) aggregation and organization of content, and 2) scaled price negotiation for content. On the first point, the value added nature of organizing video content is becoming less valuable by the day as user experience design and user interfaces become increasingly friendly to use and easier to develop. Disney should be able to create simple platforms that allow it to share its deep treasure chest of rich content with consumers. I see no reason why in the future, I will not have an ESPN app, a Disney app, and an MSNBC app, likely the only three that I would utilize. Each app will cost a few dollars per month. For me, Netflix is nothing more than an organizer of apps on my device. The OTTs have started to realize this, explaining their rapid transition into content. Historically, all the powers rests with the content providers. The value of organizing data is less clear. Remember those DVD stands that hold 100 DVDs. They were the predecessor to Netflix.
To the second point, Netflix is nothing more than a slimmer version of cable. Yet with Netflix, I am still paying for a lot of content that I do not utilize. I am happy to forgo Netflix’s minimal pricing power with the studios to benefit from a truly slimmer, customized bundle. If cable is the VCR, then Netflix is the DVD. I’ll skip both and opt for the digital option.
As a titan in the media and entertainment world, Disney appears to be an organization that can influence the evolution of streaming services. However, based on your essay, it appears they are struggling to stay ahead of the curve and are instead playing catch up with the current OTT giants – namely, Netflix. How has Netflix responded to Disney’s attempts to bring their streaming services in house despite their exclusive partnership? Also, I’m curious as to how Disney’s media sales have dropped as more users switch to streaming. Although $325 million may come off as a success in the first year of their partnership, I would hesitate and assume they lost much more than this in revenue as many customers avoided their traditional selling platforms. Generally, I believe it is better to bring services such as this in house, to decrease reliability on others (in this case, Netflix), but it appears Disney has yet determine a way to do this successfully.
Thanks for sharing this article about the challenges facing Disney as the delivery mechanisms of media content change rapidly. I had not appreciated the way in which Netflix, Hulu, and other OTT’s pose a threat to Disney’s business model. Disney built its iconic brand and market position by differentiating itself through content production and it seems that it will need to continue to pursue this strategy to sustain the business going forward. I am intrigued that Disney has decided to partner with and acquire streaming services. My perspective is that they should continue to partner with market leading streaming services and provide their content over multiple services as opposed to making their content exclusive with particular services (to the author’s first question). It seems unlikely that there will be only one winner in the OTT race, and if Disney is able to develop partnerships with many of these players to deliver its differentiated content, it can position itself with more leverage as it encourages OTTs to negotiate with each other to partner with Disney to deliver different types of content that it produces. Disney’s core competency has been, and should continue to be, in content production and if I were on the Board, I would not advise building an OTT organically; rather, I would encourage the Company to continue to invest heavily in content development while fostering strong relationships with leading OTTs.
I’m extremely impressed with Disney’s bold decision to launch their own streaming service, even though it’s not yet clear if it will be a success. The rise of Netflix is a classic example of “disruptive innovation” (https://hbr.org/2015/12/what-is-disruptive-innovation): when it was launched, its competitors chose not to fight it – not because they didn’t think it would succeed, but because its model had fundamentally different incentives. Content creators like AMC and Disney were happy to play along and put their shows on Netflix because it represented a brand new revenue stream for them. However, now that Netflix has aggregated the consumers, it has started producing its own content in a big way (Stranger Things, Orange is the New Black, etc.). It’s not hard to imagine a time in the near future where Netflix doesn’t need outside content providers at all anymore because its original content library is big and popular enough, and if cord-cutting continues there will be no one left to buy this content from the traditional networks. By playing along with Netflix, the content providers like AMC will have funded their own demise.
Disney was smart enough to see this coming and they may be the only content provider with a broad enough library (Pixar, Marvel, Lucasfilm, etc.) to make it on their own. The execution will not be easy, and there are still many questions to be answered (e.g. how does live programming like ESPN fit in?), but if they can pull it off, I predict many future strategy cases being written about this decision.
Great and very topical piece. As I was reading I started thinking about the question in reverse, (or, which content company COULD profitably break free of Netflix) – your answer might very well be Disney (given its Niche, differentiated and arguably hard to substitute content and world famous franchises). Their portfolio I would argue has some of the strongest “consumer pull” media assets of all of the movie studios.
In general, it appears that Netflix are clearly cognizant of the power of content providers for their anchor content (hence significant investments in owned content). So if nothing else, Disney needs to find a direct route to the consumer as Netflix’s long term strategy of cutting reliance on “imported in” content plays out.
For Disney, a fully owned branded channel makes sense, firstly from a monetization perspective but also as a way to truly own the conversation and relationship with the consumer which they can further deepen (through offering “bonus” content; featurettes, classics, upcoming trailers) and monetize (sell merchandise, theme park tickets etc on the platform) – it is not clear that they would be able to build this sort of platform by partnering with an existing player.
“Giving up is for rookies”
– Philoctetes, Hercules (Disney movie)
I really enjoyed this piece. I think that from a strategic POV Disney should obviously aim to own the distribution of its content for three reasons:
1 – The value of data aggregation and analytics will only improve with time and whoever owns customer data will be able to make better content in the future. Leaving that data in the hands of others (e.g., Netflix) will only lead to
2 – Importance of owning relationship with new generation of consumers. What makes Disney such a powerful brand for our generation is that we grew up on those shows/movies. The Lion King, Hercules, and so on were part of the childhoods of hundred of millions around the world. Having your own platform will allow you to better direct and create that relationship with consumers.
3 – Disney’s IP is so strong that it can probably pull it off. I see the argument for a lot of studios not to get their own platform because their content is not wide or deep enough. Disney could create a streaming service targeted at kids and has more than enough amazing content to make it work.
First of all, I want to salute the author for their quote selection throughout the piece. When I think about Disney’s competitive advantage, I think of 1) its basically unmatched level of historic intellectual property, and 2) its ability to acquire new IP and scale it through it’s existing organization and processes, ala Marvel and Star Wars. To that end, I think acquiring or becoming an OTT sits between those two goals; while it allows it to most effectively leverage and profit off of it’s existing IP, it distracts Disney’s (previous) core mission of being a content & ancillary revenue developer. To me, the House of Mouse can use it’s weight to force competition between the various OTT’s for the right to host its content, and obtain favorable agreements without wading into the operational complexities of becoming a technology business (supporting points 2 and 3 as described by the author). As the media landscape becomes increasingly fragmented due to independent studios and web-based content providers, Mickey can focus on keeping his outsized ears to the ground to understand what up-and-coming properties can be spun up into their expertise of scaling brands and negotiating licensing agreements.
Matt – Thank you. It was a pleasure to read your essay and I highly appreciate the quotes from some of the best movies around. Well done.
What can Disney do? Do build on a finance saying, in the streaming business, “content is king”! I see Disney in a very strong position. They have some of the best movies and a very strong brand. Their connections in the industry, the amount of available capital and their brand reputation should allow them to produce even more original content. To my mind, I would urge Disney to double down on developing an own OTT streaming service where they offer their content. Offering material from ESPN as well could serve as an important differentiator from their more family-oriented content. In addition to that, their new developments should aim at adding content which is not related to the family-segment, in order to have a diversified portfolio.
What a great post! My first reaction is based on Disney’s long history in the television/movie space. I often think that massive, well-known companies have remained successful overtime because these companies have continued to find ways to innovate. Disney is much more unique. Disney captures an audience from their adolescence – their segment and target of the market are different in many ways. The amount of work they have done in this “magical” adventure space as it pertains to young people, I believe, will be tough to challenge by Netflix/HBO, etc. To answer the second question you posed, Disney should not acquire Netflix. Netflix is a great platform to stream its music; however, I am not sure that’s where Disney wins or build efficiency. It wins in continuing to create great content. It wins by growing and educating young children to fall in love with its platform. This is a long-term battle that I believe Disney can win.