Disney n Chill
The Walt Disney Company's plan to build a digital distribution platform for all Disney movies will rival Netflix but may also prove to change how and where we watch the newest movies release coming to a theater near you.
Technology is threatening the movie industry. This was the fear in the 1950’s with the invention of the TV, then again in the 1970’s with the VHS and in the late 1990’s with the DVD. All three innovations changed when and where a consumer watched a movie. The fear always hinged on whether the consumer would still go to the movie theaters despite these more convenient and flexible options back home. However, movies remained a steady staple of entertainment despite these technological innovations because movie theaters remained the only supply chain for a consumer to view the most current movie releases. However, the recent digitization of the content supply chain by over-the-top(OTT) providers such as Netflix has altered the consumption behaviors and demands of moviegoers and is requiring The Walt Disney Studios and other movie studios to alter the distribution channels for movies to include an at-home option for upcoming new releases.
For The Walt Disney Studios, the leader in the movie industry with properties such as Star Wars, Marvel and Pixar, it is becoming inevitable to embrace the increasing demand by consumers and the potential new revenue stream by simultaneously releasing a movie in both theaters and on a digital platform. Exhibit 1 shows that although the annual box office revenue for North America has grown in total grosses over the past decade, the average ticket price has been inflating at a similar rate as well, revealing that the number of total tickets sold each year has been flat lining .2 Simply, movie going has become more and more expensive and less and less people are buying tickets. The real concern for Disney becomes recapturing consumers and revenue for their films other than at the movie theater box office.
| EXHIBIT 1 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 |
| Total N.A. Box Office | $ 10,600 | 10,200 | 10,800 | 10,900 | 10,400 | 11,100 | 11,400 |
| 3D | 2,200 | 1,800 | 1,800 | 1,800 | 1,400 | 1,700 | 1,600 |
| Standard | 8,400 | 8,400 | 9,000 | 9,100 | 9,000 | 9,400 | 9,800 |
| Avg. Ticket Price | $ 7.89 | $ 7.93 | $ 7.96 | $ 8.13 | $ 8.17 | $ 8.43 | $ 8.65 |
| Tickets Sold | 1,343 | 1,286 | 1,357 | 1,341 | 1,273 | 1,317 | 1,318 |
| *Total US Box Office, 3D, Standard, and Tickets sold in Millions
Source: Motion Picture Association of America, “2011-2016 Theatrical Market Statistics” (PDF file), downloaded from MPAA website, https://www.mpaa.org/research-and-reports/, accessed November 7, 2017. |
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The short-term solution to recapturing missed revenue and delinquent moviegoers at home was for Disney to license their films to Netflix. The Netflix platform allows consumers to watch unlimited home entertainment releases from the comfort of home at a monthly price. While Exhibit 2 shows the average monthly subscription price to be more than a movie ticket, Netflix provides their customers with close to 6,500 movie titles able to be streamed directly to the living room without the hassle of waiting on DVDs to arrive in the mail or going to the movie theater.1 In September 2017, Disney made a long-term play to create their own over-the-top digital platform to distribute their content directly to the consumer, bypassing Netflix as a means of digital distribution.3
| EXHIBIT 2 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 |
| Revenue | $ 2,162 | 3,204 | 3,609 | 4,374 | 5,504 | 6,779 | 8,830 |
| US Subscribers | 20 | 37 | 33 | 37 | 42 | 47 | 51 |
| Streaming | NA | 26 | 25 | 31 | 37 | 43 | 47 |
| DVD | NA | 11 | 8 | 6 | 5 | 4 | 4 |
| Avg. Subscription Fee | $ 12.20 | $ 11.84 | $ 9.11 | $ 9.85 | $ 10.92 | $ 12.02 | $ 14.43 |
| *Revenue, Subscribers in Millions
Source: Netflix, 2010-2016 Annual Reports, https://ir.netflix.com/annuals.cfm, accessed November 2017. |
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As Disney marches towards a 2019 rollout of the streaming platform they must start to create consumer awareness and understanding through platform specific films in the medium term, similarly to how Netflix created original shows like House of Cards or Narcos. Doing so will position the Disney OTT as an unique offering that contains exclusive Disney content along with the already bolstering lineup of films. Additionally, Disney will need to arrive at a subscription price that captures the value the Disney brand and content warrants a consumer to pay for access. Most importantly, Disney is the first studio to construct a digital pipeline directly to the consumer for their content to flow, and what may not be as long term as some may think, Disney will start to fill the pipeline with movies that are also being released in theaters, embracing the consumer’s natural tendency to watch from the comfort of home.
If Disney were to release its films on a day-and-date basis, in which a movie is made readily available at both theaters and on the Disney streaming platform at the same time, then the growing concern will be what will the major movie exhibition companies such as AMC, Regal and Cinemark do to combat it? The last time such a strategy was attempted to be rolled out by a major studio, Universal had to back out of the its day-and-date release of Tower Heist due to exhibitors refusing to screen the film.4 Should the exhibition community make such a stance, can Disney afford to take a revenue hit in their film division that is barely a contributor to the overall Walt Disney Company(Exhibit3)5? Or can they drive enough consumers to their newly conceived digital platform to offset the revenue loss from not releasing their movies in theaters due to anticipated boycott?
| EXHIBIT 3 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 |
| Total Revenue | $38,063 | 40,893 | 42,278 | 45,041 | 48,813 | 52,465 | 55,632 |
| Film Revenue | 3,375 | 4,168 | 3,691 | 3,620 | 4,525 | 4,120 | 5,780 |
| Movie Theater Box Office | 2,050 | 1,733 | 1,470 | 1,870 | 2,431 | 2,321 | 3,672 |
| Home Entertainment | 1,325 | 2,435 | 2,221 | 1,750 | 2,094 | 1,799 | 2,108 |
| Film % of Total Revenue | 9% | 10% | 9% | 8% | 9% | 8% | 10% |
| *Revenue in Millions
Source: The Walt Disney Company, 2010-2016 Annual Reports, https://thewaltdisneycompany.com/investor-relations/#reports, accessed November 2017. |
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Endnotes
1 Netflix, 2010-2016 Annual Reports, https://ir.netflix.com/annuals.cfm, accessed November 2017.
2 Motion Picture Association of America, “2011-2016 Theatrical Market Statistics” (PDF file), downloaded from MPAA website, https://www.mpaa.org/research-and-reports/, accessed November 7, 2017.
3 Ricardo Lopez, “‘Star Wars,’ Marvel Films Moving From Netflix to Disney Streaming Service,” Variety (September 7, 2017).
4 “Cinemark Threatens Boycott Of Universal’s ‘Tower Heist’ Over Early VOD Experiment,” Deadline Hollywood (October 6, 2011).
5 The Walt Disney Company, 2010-2016 Annual Reports, https://thewaltdisneycompany.com/investor-relations/#reports, accessed November 2017.
Cover Photo
1 Netflix, 2010-2016 Annual Reports, https://ir.netflix.com/annuals.cfm, accessed November 2017.
5 The Walt Disney Company, 2010-2016 Annual Reports, https://thewaltdisneycompany.com/investor-relations/#reports, accessed November 2017.
In going head-to-head with Netflix by launching its own direct-to-consumer digital streaming platform, Disney might succeed in capturing market share in the digital streaming space providing it can effectively manage potential risks associated with its new business model.
1) Walt Disney movies and shows have traditionally catered to a younger audience (between the ages of 4 -13) and as a result most Disney blockbusters are ‘family friendly’ with G or PG13 ratings. Target consumers in this segment are both parents and children. While children have little purchasing power in choosing which streaming service to subscribe to and how much to pay for it, I wonder if the content offerings on the Disney streaming platform are varied enough to entice parents to pay for a subscription. Netflix will likely continue to serve as a viable competitor in this content space by offering family and child friendly movies and shows even after its distribution deal with Disney comes to a close.
2) In addition to the revenue losses that Disney might sustain from a decline in movie theatre ticket sales, Disney’s digital streaming service could also potentially cannibalize its cable TV channel which makes a plethora of classic and new Disney movies and shows available to its viewers. Will the content offerings through the on-demand streaming platform be differentiated enough to entice consumers to pay for a subscription when they have access to many of the same Disney movies and shows offered through cable TV? If there is significant overlap in content across its online and cable distribution channels, Disney might see viewership and advertising revenue from Disney’s cable TV network migrate to its online streaming service or vice versa.
Great post and fascinating topic!
Given Disney’s distinctive brand, a large content library and the scale of its studio, it has the strongest leverage against Netflix (for library content) and exhibitors (for the new release), out of all the networks and studios.
Traditional media companies have done a poor job of colluding against Netflix, as 1) most of them are too small to have the critical mass of content required for a viable OTT product, 2) the allure of getting cash from licensing content to Netflix is too strong compared to the cost of investing in their own OTT. On the exhibition side, studios have done a slightly better job of shortening windows and experimenting with day-and-date releases, to extract more economics from the exhibitors, but the effort is not enough. In both cases, the root cause of media companies’ frustration is essentially the monopoly of distribution.
I believe that going against distribution monopolies is necessary and urgent. I also believe that Disney is the best positioned to do it. However, what is really needed is more collusion among traditional media companies. They have been disagreeing with each other on all the important existential issues e.g. Disney not getting on board with DTC business models to bypass movie theaters (e.g. the Screening Room); Universal has its own set of calculations because of its parentco Comcast; smaller media companies not being able to say no to Netflix (recognizing that Netflix and movie theaters are slightly different issues here); halfhearted effort by major players to put together Hulu. Lack of cooperation among traditional media companies may lead to their own demise.
I’m not sure Disney can go head-to-head with Netflix on its own subscription service. While Disney has a better chance of making it work than most content providers I think consumers may balk at paying subscriptions for multiple different services with offerings from only a single studio when they can pay a single subscription to access a greater variety of content from TV and Movie studio companies through platforms like Netflix and Amazon Prime.
One option for Disney would be to treat their own digital on-demand platform as an intermediate play that complements the theater and Netflix experience by trying to capture customers who may not be willing to go all the way to theater to watch a new movie but might be willing to pay extra to see it before it ends up on a service like Netflix. They could make a deal where 2-3 after a movie launches in the theaters, families can go onto a Disney streaming site and pay per movie to see new releases – these could be offered from this period until several months later when they make their way onto Netflix. The hope would be that those who are die-hard disney fans will still go to the theaters to see it soon after release, but that as time goes on and those who are continuing to see it in the theater are doing so more out of convenience they can expand the pool of people paying a premium for early viewing by making movies also available in peoples’ homes.
To your point about how little of Disney’s total revenue comes from their movie business I think that the biggest value in a Disney streaming play would come not from the revenue from the streaming itself but rather from the data Disney can collect and use to cross-sell its other business lines and experiences. For example, if it operated its own streaming network Disney could send parents suggestions for Christmas toys related to the shows and movies their kids have been watching on their platforms. Or they could offer personalized vacation bundles that highlight specific attractions on their cruise lines or in their theme parks that correspond with that families most-watched content. Finally, by seeing who’s most engaged with particular shows over time, Disney could better allocate theme park space to be representative of their most popular current content improving the value of that offering. The possibilities of leveraging the streaming data for cross-sales are likely the primary reason Disney is trying to go head to head to Netflix and take back control of the digital streaming experience. Perhaps by pricing at cost or at loss they will be able to succeed in gaining a major subscriber base and using the platform to fuel revenue growth across their entire business rather than in one new business line.
Great article Mehdi!
You bring up an interesting idea of day-and-date releases for movies, which was attempted as you noted for Tower Heist and a few other projects including one by Steven Soderbergh. You assert that film distributors may be reluctant to release a movie for fear of losing revenue when Disney can stream it directly through its own channel. However, there is likely a greater concern of cannibalizing in-theater movie ticket sales (which typically send back 90-95% of box office ticket revenue through to the studio over the first 2 weeks) by releasing a movie that can be simultaneously viewed at a cheaper price than buying a movie ticket. Consider this: a family of 4 goes to a 3D movie and pays 4 x $15 per ticket = $60. If the movie were to be released simultaneously, the family could just as easily pay $10 for a rental fee split amongst 4 people and while the family has appreciated the movie all the same, Disney loses $50. Overall, for most of Disney’s theater content, it is likely not in Disney’s best interest to release a movie in theaters and online at the same day. What would make more sense for Disney is to control more of the distribution of its product at different stages of a movie’s lifecycle in market. For instance, a movie might be in theaters for fewer weeks (as earlier weeks send a higher percentage of box office back to the studio than later weeks), may then go to Disney’s OTT service in a buy-only mode, and may then appear for rent.
One additional thing to consider. As Disney contemplates moving into OTT streaming, it will likely need to re-evaluate the content that it creates for the small screen. As you noted, technology is threatening the movie industry, but there are inherent differences in how a movie can be experienced in a theater vs television vs laptop vs smart phone. I would expect Disney to keep generating spectacle-driven entertainment for a theater which can capture a lot of margin for them and perhaps experiment with more Netflix-like binge television shows and even perhaps mobile content (which no one seems to have a good handle on yet).
I agree with Graham’s point about utilizing the Disney streaming service as an opportunity to cross-sell its products. If instead of making the UI of the subscription service similar to Netflix, Disney could move into a all-service website that allows individuals to have all of their favourite movies/TV, Disney games, Disney products, and Disney travel all in one space. As many individuals above pointed out, Netflix’s model is simply too sticky for Disney to compete with head-on. Therefore, potentially offering a freemium model where a Disney plug in can allow for differentiation from the already in-place movie-subscription offerers, and instead create a Disney-world at home.
In response to the piece about day-of releases, I actually think that there are options for the movie theaters to benefit from this. Instead of offering subscribers opportunities to watch the movie at home, offering a discount/pass option to see the movie in theaters could bridge this gap. For example, if an individual had Disney-Prime (or whatever it would be called), they could be eligible to a discount off a movie experience. The limited foot-traffic in the movie theatre is hurting both companies, so it could be a synergistic way to tie this gap. In addition, by offering it, as well as a release at home within x number of days (as Graham suggested), could be a nice way to ensure that you hit a large portion of Disney-consumers.
I love the post and the custom logo Mehdi! The fact that you used Disney’s signature font in the article image is itself revealing — Disney has higher brand equity than Netflix. In fact, according to Forbes last year, Disney has the most powerful brand in the world.
Source: https://www.forbes.com/sites/kathryndill/2016/02/18/disney-tops-global-ranking-of-the-most-powerful-brands-in-2016/#20bf5ebf3ecd
For this reason I am bullish on Disney’s endeavor to build a digital distribution platform, or to challenge a variety of incumbents in other areas for that matter. Responding to your question regarding movie company response, I think movie companies rely on Disney too much to cut ties. The movie “Frozen” alone grossed $1.3B at box offices. Disney is unique in its ability to capture the hearts and minds of children, who are in turn unique in their ability to capture the wallets of their parents. Children are typically not old enough to go to movies on their own and are apt to plead for their concession of choice. Therefore, Disney movies are unique in their power to increase ticket quantities and other revenue flows to theaters, which puts Disney at an advantage when negotiating with theaters.
For similar reasons, Disney has cornered parents into succumbing to their children’s high consumerism demands. Licensing revenue from Disney movies rakes in over $1B annually, which makes it tough to shield children from the viral nature of Disney movies. As a result, I think parents will likely succumb to paying for a digital Disney subscription, potentially with an additional fee to access day-and-date release movies or will continue to take their kids to theaters. If Disney does move forward with an OTT approach, they should take care regarding pricing to soften the great cannibalization risk point that BT’s comment surfaced.
Over the past decade, Disney has been diversifying from a movie studio into a live entertainment giant by entering into adjacent markets. For example, theme parks, product sales, and other business lines now account for more than 90% of profits. This strategy has effectively shifted the role of Disney Studios from the primary driver of revenue, into a lost leader: Disney produces movies and films not to drive revenue from screening, but to engaged an audience who will later engage with Disney’s other lines of business.
Taking a long-term company-wide perspective, Disney’s entrance into the over-the-top digital platform must be positioned in a way to maximize exposure (and not to maximize revenue). As video on demand service becomes further accessible and offers more exclusive content, it may appear that movie theatres may be going out of business. [1] However, at the same time, consumer entertainment consumption patterns have been shifting towards out of home experiences. [2] The combination of these two trends has driven Movie Theatres to target a more premium segment by offering more than just a screening product, as reflected in the increase in average ticket prices. As a result, there will remain a (sizable) premium experiential market for movie consumption, which should not be neglected. While, the move into over-the-top digital platform is a natural progression of the market, Disney should consider structuring deals with exhibitors to avoid backlash and maintain its touch with the premium consumer of movies.
[1] Josh Dickey, “The end is near for cinema”, http://mashable.com/2017/04/04/movies-theaters-dying-cinemacon-pvod/#ErkQMaJ13PqE, Mashable, April 2017, Accessed December 2017
[2] Eventbrite Market Research, “Fueling the Experience Economy”, https://eventbrite-s3.s3.amazonaws.com/marketing/Millennials_Research/Gen_PR_Final.pdf, Accessed December 2017