Disney is finally ready to jump into direct-to-consumer online video. What will the services look like, and did Disney really need to buy BAMTech to deliver them?
What Disney plans to do
Disney announced three things in association with its fiscal Q3 earnings announcements:
- Acquisition of a controlling interest in BAMTech for $1.58 billion
- Launch of an ESPN-branded multi-sport video streaming service in early 2018
- Delivery of a direct-to-consumer (DTC) SVOD service in 2019.
The SVOD service will be the exclusive home for new Disney movie releases beyond 2018 and will host an extensive library of movies and shows from Disney-owned brands like Pixar and Disney Channel. Disney will not renew its existing distribution agreement with Netflix, which ends in 2018.
The ESPN service will draw on content from MLB, NHL, MLS, and others, but will not include NFL.
Why Disney is going DTC
It’s no secret that ESPN has been struggling with falling ratings and audience. That malaise continued in Q3, with lower advertising income and higher programming costs the principal villains. But the problem isn’t confined to just sports. Disney Channel, which targets young children, and Freeform, which focuses on teens, each have lost 4M viewers over the last three years. These trends appear to be continuing. Disney’s cable networks segment saw operating income fall 23% in the fiscal Q3 results. This is the fourth decline in the last five quarters.
Disney simply can’t stand by and watch as revenue through traditional distribution continues to decline.
Disney’s UK SVOD experiment
Disney has not been sitting on its hands regarding DTC services. It has taken steps in the UK to recapture children as they flee online. It launched a standalone SVOD service, called DisneyLife, in 2015 for £9.99 ($13) a month.And it has been tweaking the content mix to make it more appealing to the audience there. It started out as full multimedia experience, but Disney has started to focus more on videos and games in the services rather than interactivity and reading.
Disney’s experience with DisneyLife will be invaluable as it moves to develop similar products in the U.S. market.
SVOD service will not compete with Netflix
Netflix has been working to establish itself as the general entertainment service everyone needs. Outside of news and sports, the company has a subscriber covered in just about every other category. The formula has worked spectacularly, with 52 million U.S. and 104 million total subscribers.
The Disney service is liable to be very different. It is promising to stack the service with new original movies, TV shows, and short form content. However, it must walk the line between attracting online viewers without contributing to cord-cutting. It also must balance its DTC efforts against its investment in Hulu.
That means the Disney SVOD service will probably be much more limited than Netflix. It will likely be primarily a vehicle for Disney’s big-name movies.
ESPN DTC service will be limited
Though Disney says the new service will deliver 10,000 live regional and national games per year, it too will be limited by traditional distribution agreements. For example, MLB games will likely be out-of-market only, as is the case with MLB.com today. Also, MLB.com, MLS.com, and NHL.com will all still be available as standalone services. For the super sports fan, ESPN DTC could be appealing, but for a hockey fan, NHL.com will likely still be a better deal.
Does Disney need to own BAMTech?
Disney’s takeover of BAMTech was widely expected, but may not have been necessary. There are two schools of thought on owning the technology platform used to deliver online. Hulu, for example, owns the technology upon which its services are built. According to Tim Connelly, Head of Business Development for Hulu, this has allowed it to move quickly to implement new features. On the other hand, CEO of Sling TV Roger Lynch does not own his own platform, and cautions against it, saying “it’s not easy to do and build yourself.”
The truth is there are many video platform providers with proven scalable solutions. Any one of them would bend over backward for Disney’s business and do anything it asked to keep it.
Disney’s ownership of BAMTech could also have a negative impact on its current customer base. HBO Now uses BAMTech, but Time Warner (HBO’s parent) might not be happy to be dependent on a Disney company.
Why it matters
Disney’s move into direct-to-consumer online services is necessary if the company is to effectively track its audience online.
Both the ESPN streaming and Disney SVOD services will be limited as the company attempts to balance existing distribution partnerships and revenue sources against online needs.
The BAMTech acquisition was probably unnecessary and may reduce its value in the process.