April 17, 2019

A True Disruptor? Thoughts on Disney+

Last week, Disney offered specifics on its new direct-to-consumer (DTC) streaming service, Disney+, including a detailed view of its first year of content offerings, an app demo, and a launch date: November 12, 2019. But without a doubt the show-stopper was the $6.99 per month price point—a 46% discount from Netflix’s most-popular $12.99 offering.

There is a fundamental consensus that the Disney+ production was well conceived and executed. But the question was never whether Disney would put on a good show and lay out a compelling spin. It was whether the new service would be as disruptive as the hype that preceded it.

I have a few thoughts on the subject…

What We Know About Disney+

The App
During the investor meeting, Disney demonstrated that the Disney+ app was designed to include an interface very much like that of Netflix and other streaming services, with five hubs to facilitate navigation: Disney, Pixar, Marvel, Star Wars, and National Geographic. (When you got it, flaunt it!)

Other features of the app include the ability to download content for offline viewing, create individual profiles, view programming in 4K, resume viewing where you left off, parental controls, and recommendations based on past viewing. The streaming content will be powered by Disney Streaming Media (formerly BAMTech), the technology company that Disney purchased from Major League Baseball in 2017.

The Content
On launch day, Disney+ service will offer roughly 100 movies and 5,000 television episodes, with incremental additions during the first year. By the end of year one, Disney+ content will include a roster of Disney classic films, 25-original series, 10-original movies, most of the Star Wars movies, the entire Pixar library, family-focused movies and television shows from Fox, National Geographic content, Marvel movies and TV shows, plus all 30 seasons of the Simpsons, totaling 500 movies and 7,500 television episodes.

Disney CEO Robert Iger further promised that every Disney movie in its catalogue will eventually be available on the Disney+ service. Other promised content includes exclusive distribution of all Disney’s theatrical releases beginning in 2019, including Captain Marvel. To minimize cannibalization, these high-value titles will not debut on Disney+ until they are out of the theatre.

In order to compile this vast library of exclusive content, Disney will end its relationship with Netflix—one that, until now, served both very well. For reference, the first Netflix/Disney streaming deal was brokered in April 2012 and covered 2012-2016. TDG commented at the time that Disney was eager to forge a more meaningful online presence and Netflix was the easiest way to make that happen. At that same time, investors were questioning whether Netflix had legs beyond 25 million US subscribers, so the Disney partnership was a welcome relief.

From 2016-2019, Netflix was the exclusive distributor for Disney’s first-run live-action and animated feature films. Netflix also purchased the rights for a roster of Disney classics and paid a license fee for five Marvel shows and Star Wars titles.

From 2012 until the end of 2019, Disney will have enjoyed a huge revenue boost from Netflix (an addiction it may find hard to break), while Netflix will have built the biggest SVOD service on the planet and disrupted the entire business of film and television. As this relationship comes to an end, it is important to reflect on who, if anyone, came out the better for it. (See TDG’s prescient essay on the subject from 2017.)

How Disney+ Stacks Up Against Netflix
History aside, we will soon reach the point where ‘Big-3 SVOD’ (as we called the triumvirate of Netflix, Amazon Prime Video, and Hulu) must be expanded to the ‘Big-4,’ with Disney taking a seat at the table. And as Disney sees it, the target is Netflix, with Hulu and APV but notes in the margin.

So how will Disney+ stack up against Netflix?

CategoryDisneyNetflix
Price$6.99$12.99
ContentFamilyBroad
Original Series25+700+
Original Movies10+200+
LaunchNov-19Jan-07

As illustrated, it is clearly not doom and gloom for Netflix. While it will certainly be more expensive than Disney+, Netflix boasts significantly more content in terms of volume and genre. Additionally, Netflix has done an excellent job in terms of personalization and it seems to be paying off. According to TDG’s own research, Netflix subscribers average 4.4 years tenure, much higher than both APV and Hulu.

That being said, Netflix is vulnerable, especially with Disney+ coming to market at $6.99 per month. For one, it is now highly unlikely Netflix will increase prices until at least 2021, as (1) Disney+ is locked in at this price for at least a year, and  (2) TDG’s research found that the latest round of Netflix increases testing value limits, even before Disney+ comes to market at a bargain-basement price.

Netflix must also be concerned that other studios will follow Disney’s lead and pull their higher-value content from the SVOD service to populate their own DTC services. (TDG warned of this emerging tribalism in Q1 2018.) The loss of Disney content aside, multiple content developers going direct to consumer en-masse will have an adverse effect on Netflix. Netflix is keenly aware of this risk and it has been reported that 85% of new spending will be towards original programming.

And though the Disney launch announcement went off without a hitch, there remain a number of unanswered questions about Disney+

  • How many people can stream Disney+ at the same time?
  • How long can consumers expect the $6.99 price point?
  • What is the time frame between theatrical release and streaming release?
  • How much can Disney afford to lose before it will be forced to cut back on content or raise prices?
  • What devices will support Disney+? Will it choose to be platform-agnostic or partner with streaming competitors like Amazon and Apple?
  • How will Disney overcome its streaming failure in the UK with DisneyLife?

Contextual Risks
The dynamics of the Netflix/Disney+ competition are hardly unique, as (1) Disney+ may take the air out of all major SVOD services, existing and emerging, and (2) the SVOD industry in general has become saturated. Many consumers are feeling overwhelmed by the range of choices and reaching limits as to the number DTC services they’ll pay for and use at any given time.

Macroeconomic Environment
The economy has been strong and a downturn would likely see streamers cut back on the number of services that they own and even downgrade their service. If this would happen, highly-leveraged businesses would be at grave risk.

Subscription Fatigue
With all the DTC brands in the marketplace (and more to come), the idea of subscribing to only a couple services and seeing the content you desire is nearly impossible. The result is an increase in subscription fatigue, so-called ‘toggling’ (starting and stopping SVOD services once a show season is binged), and, somewhat paradoxically, an increase in piracy, which is starting to raise its head again.

Technology
Technological innovations are changing our economy incredibly fast. Netflix has been around for 22 years, but for its first 10 years, it was a DVD rental business. Broadcast and cable networks are now relics of the past and streaming is all the rage. There are disruptive technologies lurking (e.g., 5G) that can serve to change the balance of power in the industry.

Predictions
Disney will, of course, bundle its three streaming services — Disney+, ESPN+, and Hulu — and offer discounts for multiple subscriptions. Moreover, it will make Disney+ available to Hulu with Live TV subscribers at a slightly discounted rate (not much room to go below $6.99/month). When this happens, traditional premium channels like HBO and Showtime could feel the pinch, as Disney+’s exclusivity will impact all services that depend on third-party content.

Additionally, as it did with BAMtech, Disney will purchase the remaining 33% of Hulu that it doesn’t currently own (Comcast does), and use the platform as its distribution point for its non-family-oriented content (such as much of the 20th Century Fox library it recently obtained).

Conclusion
Disney’s investor day on April 11th ensured investors and the marketplace that the company will be a considerable force in subscription streaming for years to come. With that being said, TDG does not believe that Disney+ will overtake Netflix in the next five years, either domestically or internationally. That being said, we do believe that Disney+ is a viable product and will be able to gain, maintain, and grow a loyal audience for years to come.

 

A 20-year veteran media executive, Rob Silvershein’s success in today’s competitive media environment is a direct result of his unique experiences spanning traditional, emerging, and startup media platforms. He is an accomplished strategist and spends most of his time advising media companies on how to structure themselves for long term success. He currently lives in Manhattan Beach, CA.

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