August 15, 2017

Put a Fork in It

More big news out of the media world last week, as Disney announced it will be pulling its content from Netflix when the current license agreement expires at the end of 2018. At the same time, Disney paid $1.58 billion to increase its minority stake in BAMTech to 75%. As a result of these two moves, the house of Mickey will launch two direct-to-consumer streaming services of its own — ESPN in 2018 and a Disney-branded service in 2019.

What do these moves mean for the future of TV? Plenty. Read on….

The Netflix Wholesale Licensing Business is Dead.
The difficulty with something as big as the evolution of the US pay-TV markets is always the time it takes to unfold. Everyone ‘knows’ (thanks in no small part to TDG’s pioneering work over more than a decade) that the future of TV is an app. In the meantime, however, it’s not, which leaves individual company decision-makers stuck with suboptimal choices.

For movie studios and content providers like Disney, licensing content to Netflix over the past several years was just such a choice. Let’s be honest, these deals were always problematic. The hitch was that the benefit (in incremental licensing dollars) was direct and immediate, while the costs (in terms of helping Netflix build its own brand and subscriber base) were long-term and diffuse.

Netflix, to its credit, played this game masterfully and used other people’s content to build a 100-million subscriber (and $75 billion market cap) global juggernaut — roughly three-fourths of Netflix viewing today is still third-party content (although that number is steadily dropping). Looking back at all those sweetheart Netflix licensing deals, even the most Pollyannaish studio executives would have to say, “What were we thinking?” Or maybe just, “Oops.”

Better late than never, my mom used to say. Disney’s decision to pull its content from Netflix is the right one and really can’t happen soon enough. Netflix wants to produce originals. The rest of Hollywood needs to hold them to that, even if it means future consumers will have to stream Star Wars and Toy Story somewhere else –- which brings us to our second point.

The ‘One Stop Shop’ is Dead.
The reaction to the Disney – Netflix divorce from the consumer perspective is equally interesting. I have seen few, if any, stories about how cool Disney’s new services are likely to be, and how this creates even more choice for consumers (both of which are true, in my view). Instead, the prevailing narrative is about how Netflix subscribers are going to ‘lose’ Disney content and now need to subscribe to yet another streaming service. This is also true, but what it really demonstrates is the basic human tendency towards loss aversion.

All change involves loss. The transition from legacy pay-TV to the world of TV-as-an-app was never going to be loss-free. A world filled with content choices is unfortunately also a world in which consumers have to actually make content choices.

We seem to understand this in all other realms. I don’t hear people complaining that they have to buy tickets to both the NFL game and the NBA game. (How unfair! There should be a one-stop shop for live sports events!) Nor do I hear people complaining that I have to pay separately for the ice cream at ColdStone after eating dinner at the Red Robin next door. (How unfair! There should be a one-stop shop for food!)

The bottom line: the era of the ‘one stop shop’ for video entertainment is coming to an end. In the (near) future you’re going to have to get your Disney content from Disney and your Netflix content from Netflix. It’s just that simple. That’s as true for Netflix as it is for the legacy MVPDs.

The TV ecosystem is a big battleship, and it certainly doesn’t turn on a dime. Change is real, however, and it is both accumulating and accelerating. Disney’s decision to pull its content from Netflix and launch its own consumer streaming services in 2018 and 2019 is proof positive of that fact. For studio licensing folks, this means accepting that the Netflix wholesale trade is over. For consumers, this means the end of the ‘one-stop shop.’ In both cases, I’m pretty sure we’ll learn to get over it.

Stick with TDG and stay ahead of the curve.

Joel is a Senior Advisor for TDG and serves as an advisor and Board Member to the video ecosystem and technology companies. He lives near Seattle, WA.

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