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)[1].
Disney’s Media Networks division contains businesses such as Disney Channel, ABC and ESPN, representing almost 43% of company’s revenues[2]. Disney generates revenue on networks through fees charged to satellite, cable and telecommunications service providers, ad sales and program sales[3].
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[4]. Millennials prefer watching content at time convenient to them (on-demand) and location of their choice (mobile) to traditional TV[5]. 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[6]. All the content was licensed from traditional studios. The biggest of them was Disney, which licensed exclusive US pay television rights to Netflix[7]. Grown on external productions, Netflix decided to produce its original content in 2012. Currently company’s production budget exceeds $6 billions[8]. Netflix boasts over 109 million members watching over 125 million hours of video content per day[9].
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[10] joined OTT race.
OTT’s convenience is already driving decline in traditional DVD/ Blue Ray sales[11]. But most importantly for Disney, traditional TV viewing has declined significantly[12], 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[13]. 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[14].
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[15].
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[16]). 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?
(797 words)
[1] Source: https://thewaltdisneycompany.com/about/
[2] Source: The Walt Disney Company Fiscal Year 2016 Annual Financial Report
[3] Sale of rights to use Disney’s television programming
[4] Source: Deloitte, ‘Digital Democracy Survey’ April 2016
[5] Source: http://www.nielsen.com/us/en/insights/news/2017/millennials-on-millennials-a-look-at-viewing-behavior-distraction-social-media-stars.html
[6] Source: https://media.netflix.com/en/about-netflix
[7] Source: The Walt Disney Company Fiscal Year 2016 Annual Financial Report
[8] Source: https://www.cnbc.com/2016/10/17/netflixs-6-billion-content-budget-in-2017-makes-it-one-of-the-top-spenders.html
[9] Source: https://ir.netflix.com
[10] Source: https://www.forbes.com/sites/nelsongranados/2017/09/11/apple-facebook-and-disney-to-shake-up-video-streaming-with-original-content/#14dab9fe13df
[11] Source: http://www.latimes.com/business/hollywood/la-fi-ct-home-video-decline-20170106-story.html
[12] Source: http://www.businessinsider.com/traditional-tvs-demographic-woes-get-worse-2017-1
[13] Source: https://www.forbes.com/sites/nelsongranados/2017/08/09/disney-to-stream-its-own-movies-without-netflix-will-it-succeed/#2896e4684ef0
[14] Source: https://www.cnbc.com/2017/06/16/op-ed-hulu-needs-a-single-owner.html
[15] Source: https://www.cnbc.com/2017/08/08/disney-will-pull-its-movies-from-netflix-and-start-its-own-streaming-services.html
[16] Source: http://about.att.com/story/att_to_acquire_time_warner.html
