Disney’s late move to derail Netflix in direct-to-consumer race
Following Netflix's success, over-the-top platforms are mushrooming, winning the battle for viewers attention with traditional media networks. Disney, unparalleled king of content, is finally adjusting its strategy to compete for audiences switching to digital space.
The rise of direct-to-consumer content distribution platforms is the aspect of digitalization megatrend that I want to discuss in this essay. I will analyze this aspect from the perspective of The Walt Disney Company.
Disney is a highly diversified global media conglomerate. It serves the role of content producer and covers some elements of content distribution chain (theatrical distribution and home entertainment releases).
Disney’s Media Networks division contains businesses such as Disney Channel, ABC and ESPN, representing almost 43% of company’s revenues. Disney generates revenue on networks through fees charged to satellite, cable and telecommunications service providers, ad sales and program sales.
Disney holds one of the richest IP libraries in the world with franchises such as Star Wars, Marvel and Pixar. Nowadays however, distribution strategy and technology prove even more important for the success of media-entertainment company than content it owns.
Around 60% of US customers use streaming services. Millennials prefer watching content at time convenient to them (on-demand) and location of their choice (mobile) to traditional TV. Hence over-the-top (OTT) platforms providing those features have grown significantly during the last years.
The poster child of those changes is Netflix: it began its streaming activity serving a role of distributor. All the content was licensed from traditional studios. The biggest of them was Disney, which licensed exclusive US pay television rights to Netflix. Grown on external productions, Netflix decided to produce its original content in 2012. Currently company’s production budget exceeds $6 billions. Netflix boasts over 109 million members watching over 125 million hours of video content per day.
This success resulted in growing number of other companies following Netflix’s model. Amazon Prime, Hulu, HBO NOW and tech giants like Apple and Facebook joined OTT race.
OTT’s convenience is already driving decline in traditional DVD/ Blue Ray sales. But most importantly for Disney, traditional TV viewing has declined significantly, with viewers moving to OTT. This is a direct threat to almost half (revenue-wise) of Disney’s business.
Netflix and other OTT pioneers are locking customers in their platforms by:
- adding more and more original content
- creating direct relationship with end consumer to adjust communication
- providing unparalleled discovery experience (recommendation mechanism)
The better the platform is in the above dimensions, the stronger the counterargument must be for a consumer to go beyond a given OTT provider and pay for additional subscription. Consumers have only limited time they are willing to dedicate to entertainment and the player providing the best value for money wins.
Disney deliberately acted slowly upon this threat, as accelerating evolution towards OTT model was bound to cannibalize its traditional sources of revenue. However, as the threat to its media networks became more tangible, Disney changed its strategy.
To address this concern in a short term, Disney invested in Hulu together with other traditional studios. However, likely due to unclear leadership of the venture, Hulu did not manage to match Netflix’s scale.
Additionally, Disney launched a medium-term strategy of withdrawing its content from Netflix and announced a plan to launch its own direct-to-consumer streaming platform.
To address this concern further, I would recommend acquiring majority stake of Hulu and turning it into a “one-stop shop” platform for content of “traditional” networks. The deal would mean partially buying out NBC Universal’s and Fox’s Hulu shares. I would also invite Sony and Paramount to the partnership to capture vast majority of traditional content providers. Major players content aggregated on the top-notch platform could be offered under several subscription options.
To distinguish the platform, Disney is uniquely positioned to move media consumption experience beyond movies and TV shows, bringing in books, games, music and merchandise. It should also strive to pioneer in adding virtual reality aspect to the platform.
To even further increase distribution of the platform, Disney should consider partnership with telecommunication company, such as Verizon or T-mobile (mirroring AT&T’s acquisition of Time Warner). Getting direct access to mobile consumers would provide additional lever to personalize content and improve convenience and customer experience.
It remains unclear however, whether it is the right time to undergo a full-scale revolution of a business model. Perhaps Disney should wait a couple of years to fully utilize its highly lucrative traditional channels? Perhaps withdrawing the content from Netflix and other OTT services would be enough to maximize revenues from Disney’s content, without pivoting its distribution model?
 Source: https://thewaltdisneycompany.com/about/
 Source: The Walt Disney Company Fiscal Year 2016 Annual Financial Report
 Sale of rights to use Disney’s television programming
 Source: Deloitte, ‘Digital Democracy Survey’ April 2016
 Source: http://www.nielsen.com/us/en/insights/news/2017/millennials-on-millennials-a-look-at-viewing-behavior-distraction-social-media-stars.html
 Source: https://media.netflix.com/en/about-netflix
 Source: The Walt Disney Company Fiscal Year 2016 Annual Financial Report
 Source: https://www.cnbc.com/2016/10/17/netflixs-6-billion-content-budget-in-2017-makes-it-one-of-the-top-spenders.html
 Source: https://ir.netflix.com
 Source: https://www.forbes.com/sites/nelsongranados/2017/09/11/apple-facebook-and-disney-to-shake-up-video-streaming-with-original-content/#14dab9fe13df
 Source: http://www.latimes.com/business/hollywood/la-fi-ct-home-video-decline-20170106-story.html
 Source: http://www.businessinsider.com/traditional-tvs-demographic-woes-get-worse-2017-1
 Source: https://www.forbes.com/sites/nelsongranados/2017/08/09/disney-to-stream-its-own-movies-without-netflix-will-it-succeed/#2896e4684ef0
 Source: https://www.cnbc.com/2017/06/16/op-ed-hulu-needs-a-single-owner.html
 Source: https://www.cnbc.com/2017/08/08/disney-will-pull-its-movies-from-netflix-and-start-its-own-streaming-services.html
 Source: http://about.att.com/story/att_to_acquire_time_warner.html
Student comments on Disney’s late move to derail Netflix in direct-to-consumer race
Thanks for an interesting read Matt! As an avid consumer of OTT services, I also would love this type of one-stop-shop for my favorite content. With that said though, I am concerned about how Hulu or the traditional media players can maintain their relationship with their existing distributors that currently contribute more than 80% of their revenues (through TV advertising or affiliate fees from being distributed on the cable service providers) while developing their own direct to consumer online platform. I would imagine that as a cable service provider, I would be upset about that content being made available direct to the consumer, which cannibalizes their business and disincentivizes the consumer from purchasing cable television. While I agree that developing the online platform is strategic in the long term, in the near term, revenues from TV remains a significant portion of the way these companies currently do business.
Great analysis of Disney’s actions in this rapidly-changing world. It seems like this sector currently has a significant number of players, and thus far, consumers seem to be OK paying for multiple services and switching back and forth depending on content. However, this user experience is clunky and not ideal – it seems there is definitely room for consolidation, and that could be in a number of various directions among content and platform providers (as you alluded to). I would worry a lot about Disney continuing to sit this out – they definitely retain a monopoly of sorts with the quality of their content, but I would worry that Netflix is catching up quickly (and has recently moved past TV and into full-length feature films) – I think a key question is, in the long term, what will win out on customer stickiness – will quality of content continue to be more important than platform? Or, if the discrepancies in quality of content narrow enough that Disney loses its edge on that front?
Great article! I believe Disney’s strategy to remove its content from Netflix was the right decision for the long term. In a technological age, in which consumers can watch video content on a variety of devices/web-platforms, content remains the key value driver. Given its vast IP library, Disney plans to launch a branded Disney direct to consumer streaming service in 2019 which will compete directly with Netflix. Disney’s direct to consumer streaming service will allow the company to control its content, customize its user experience and reduce any future reliance on stream service providers.
Great essay, Matt, and great analysis of Disney’s moves. I completely agree with you on the rapid growth of OTT platforms in the distribution of media, and how these platforms revolutionized the way consumers interacts with media. This also unlocked huge opportunities with more robust data and the ability to add interactive components to traditional movies. Having said that, I struggle to see how this will significantly negatively affect Disney’s business model. In fact, one can argue that Disney’s production business shouldn’t be very affected, since this only constitutes a shift in distribution platforms. Further, Disney can even leverage some of the new opportunities that Netflix and other OTT providers unlocked, especially when it comes to data and consumer behavior. Regarding Disney’s distribution business (e.g., Disney’s own TV channels), aren’t Disney viewers fundamentally different from OTT consumers? In essence, are you implying that OTTs will replace Cable TVs in the near future? Otherwise, if OTT and traditional cable co-exist, Disney should probably investigate more closely consumer demographics prior to making any operating shifts.
Finally, I have two additional questions based on the above points:
1) Why should Disney enter the OTT space now? Why not wait until the market stabilizes and enter into partnerships with the winning platforms?
2) In a world where the whole movie industry is heavily favoring sequels, and Disney owning IPs of most successful blockbusters, is there really a threat to Disney? (https://www.theatlantic.com/business/archive/2016/06/hollywood-has-a-huge-millennial-problem/486209/)