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Disney Joins OTT Bandwagon

Aditya Kishore
8/9/2017
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Walt Disney Co. (NYSE: DIS) is ending its licensing deal with Netflix in 2019 and launching its own streaming service.

The Disney announcement follows a similar announcement from CBS Corp. (NYSE: CBS), which announced the worldwide expansion of its streaming service, CBS All Access, just two days ago. (See CBS Streaming Service to Expand Globally.)

Disney is still working out the specifics of the service, but the company said it would be the "exclusive home in the U.S. for subscription-video-on-demand viewing of the newest live action and animated movies from Disney and Pixar."

Marvel and Lucasfilm releases may also be included, but the company is still evaluating whether that content would fit within a broader Disney service.

And like CBS, the ultimate goal is to make this a worldwide service, though for now the focus appears to be on launching an initial service in the US market.

Disney made the announcement during the company's second quarter earnings call. Net income fell 8.9% to $2.37 billion compared to the same quarter last year, and revenues were down 0.3% to $14.24 billion, below analyst expectations of $14.42 billion.

Disney will also be launching a sports streaming service under the ESPN brand in early 2018. Both streaming services will be distributed using BAMTech technology, developed by Major League Baseball. Disney has agreed to acquire MLB's 42% stake in the venture for $1.58 billion, to add to the 33% it already owns. The deal is subject to regulatory approval.

The previously announced ESPN service will be "more robust than the one we had anticipated," according to the company, and will include "approximately 10,000 live regional, national and international games and events a year, including Major League Baseball, National Hockey League, Major League Soccer, Grand Slam tennis and college sports. Individual sport packages will also be available for purchase, including MLB.TV, NHL.TV and MLS Live." It will also include news, highlights and scores.

Disney has not discussed its plans with its pay-TV partners, but said these services will be available via authorized pay-TV providers as well as online from Disney and ESPN, and via their apps.

When launched in 2019, Disney's service will include Toy Story 4, the sequel to Frozen and The Lion King. The company also plans to make a "significant investment" in developing original movies, TV shows, short-form content and other "Disney-branded exclusives" for the new streaming service. It will also include library content from previous Disney and Pixar releases, as well as TV content from Disney Channel, Disney Junior and Disney XD channels.

Disney CEO Bob Iger called the launch of this service "a significant strategic shift for us," stressing that the service allowed the company to connect directly with Disney consumers worldwide, resulting in tremendous potential for new revenues. According to Iger, "the profitability, the revenue generating capability of this initiative is substantially greater than the business models we're currently being served by."

This is not Disney's first attempt to go directly to the consumer. In 2003, the studio launched a doomed movie download service called Moviebeam. The service required a separate set-top box and was unable to garner a substantial user base and folded a few years later.

While not the best omen for a direct-to-consumer service from Disney, there are some notable differences compared to the service announced yesterday. Firstly, there will be no need for a dedicated set-top box (a significant barrier to entry for most potential users). Consumers are also more comfortable using pay-TV alternatives than they were in the past, and there is a greater chance consumers will sign up for multiple OTT services rather than just look for one provider -- cord-cutting has reduced monthly spend on video entertainment, so potentially there are funds that have been "freed up" for a new service.

And there's Disney's greatest advantage, which is that it has an extremely powerful global brand for children's entertainment. That's a considerable advantage compared to a general entertainment service such as CBS All Access, which will compete more directly with the likes of Netflix.

Still, I have always felt the shift towards OTT always included the risk of fragmentation, with consumers having to sign up for too many services. These announcements from Disney and CBS suggest that process is well underway. (See Growth of Netflix Competitors Could be Positive for Pay-TV Providers.)

At some point, it isn't hard to see consumer getting frustrated with the multiplicity of services they have to subscribe to in order to put together a package of content for the family -- which could be an opportunity for pay-TV providers to get them back. This danger exists for many of the newly launched OTT services, even when they are backed by powerful, established brands.

Aditya Kishore, Practice Leader, Video Transformation, Telco Transformation

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kq4ym
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kq4ym,
User Rank: Light Sabre
8/18/2017 | 11:12:58 AM
Re: Fragged
It does seem though as noted that there's, "always included the risk of fragmentation, with consumers having to sign up for too many services," and that factor alone might doom Disney's plan big time. While they have a gigantic market and brand know around the world, there's just way too much competition for consumers to choose from, moving away from simplifying their video lives.
Phil_Britt
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Phil_Britt,
User Rank: Light Sabre
8/14/2017 | 8:06:34 AM
Re: Fragged
While you're right about details, my understanding from the published reports is that the current agreement with Netflix wouldn't enable Disney to make this move any earlier.
242ak
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242ak,
User Rank: Moderator
8/14/2017 | 7:52:24 AM
Re: Fragged
Certainly true, there are existing contracts that must be honored. I think my point is why announce it this far out? It's clear many of the details haven't been worked out, so the goal is probably to help with negotiations. 
mendyk
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mendyk,
User Rank: Light Sabre
8/10/2017 | 9:25:16 AM
Re: Fragged
The Colley quote pretty much applies to pay TV in general (you get 200 channels and don't watch 190 of them). The dirty not-so-secret of the video business is profit margins absolutely depend on the dreck.
James_B_Crawshaw
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James_B_Crawshaw,
User Rank: Blogger
8/10/2017 | 5:20:25 AM
Re: Fragged
Some interesting perspectives in this article:

http://www.thedrum.com/news/2017/08/10/can-netflix-chill-disney-goes-it-alone

One quote in particular from Rachel Colley: "surely paying monthly subscriptions to multiple platforms to access a thin layer of brilliant content and a deep catalogue of stuff you don't want, will be called into question?" 

I personally would resist signing up for a monthly subscription but would be happy to download an app to my TV, enter my card details (once) and pay per view. Looking forward to Frozen 2 :)
Phil_Britt
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Phil_Britt,
User Rank: Light Sabre
8/9/2017 | 6:50:19 PM
Re: Fragged
Long lead time is because it's deal with Netflix runs until then, according to business channel commentators. The time could help Disney get this right and help keep Disney in the mix as cord cutting continues to grow.
242ak
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50%
242ak,
User Rank: Moderator
8/9/2017 | 10:59:45 AM
Re: Fragged
Dennis - Yes, i suspect that is to help with negotiation, and not just for the OTT service. The announcement also serves notice to pay-TV providers who may be pushing back on carriage agreements and fees. Given the current cord-cutting situation, I don't know that it will have much impact, but it's similar to their approach with Moviebeam in 2003-04.
mendyk
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mendyk,
User Rank: Light Sabre
8/9/2017 | 10:47:57 AM
Fragged
2019 seems like a pretty long lead time. I wonder if that lag period is there for negotiating purposes. If this does happen, though, the accelerating fragmentation of content services will be something to watch, as you say.
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