When one of the most recognizable brands in the world makes a strategic shift, an obvious question is how that shift will pay off for the company and its investors. The Walt Disney Co. (NYSE: DIS) announcement earlier this week of two new streaming services is just such a moment.
Disney took a controlling stake (75%, up from a 33% prior stake) in BAMTech, a streaming platform on which the company plans to build an improved ESPN streaming service and a new Disney-branding service. The new service will be the exclusive U.S. home for subscription video on-demand (SVOD) viewing of new live action and animated movies from Disney and Pixar beginning in 2019.
The new service results in the termination of Disney’s contract with Netflix Inc. (NASDAQ: NFLX) for subscription streaming of new releases.
In the company’s conference call, Disney CEO Bob Iger said:
These announcements marked the beginning of what will be an entirely new growth strategy for the company, one that takes advantage of the opportunities the changing media and technology industries provide us to leverage the strength of our great brands. … I think you have to look at both of these [ESPN and Disney streaming services] as huge priorities for the company. This is, what I would characterize as an extremely important, very, very significant strategic shift for us.
The key word here is “distribution.” By taking control of the distribution of its own content, Disney could charge consumers what it charges pay-TV operators and still make money. It could charge consumers a higher price that is still below what a pay-TV service could charge and make even more money. But that might cause the cable and satellite companies to drop their current deals for Disney and ESPN content.
Without speaking directly to the price of either the ESPN or Disney service, Iger said:
What we’re going to go for here is significant distribution because we believe one way to be successful in the long run is for both of these services to reach a maximum number of people.
That shouldn’t suggest a huge discount on what we might be able to charge, but it should suggest at least initially a very reasonable approach to our pricing. We don’t necessarily enter this with a notion that we’re going to cannibalize our existing businesses significantly, but we have had a discussion about whether our pricing strategy can have an impact one way or the other on that.
Hulu, in which Disney is a partner, launched its live-TV service, Hulu With Live TV, in May at a monthly subscription fee of $39.99. But this service includes around 50 channels and is a direct competitor to some cable packages.
HBO Now, a standalone streaming service that does not require a cable subscription, costs $15 a month.
Our guess is that Disney will price its ESPN service, which it says will stream 10,000 live events a year, at less than $15 a month. The company doesn’t reveal how much ESPN costs pay-TV providers, but there seems to be a consensus that about $7 to $8 of a monthly cable bill goes to pay for ESPN. But as cable and satellite subscriber numbers decline, neither the pay-TV firms nor Disney can make up that lost revenue without raising prices. That suggests that the price for the new ESPN streaming would likely have to be higher.
The Disney-branded streaming service may or may not include the Star Wars and Marvel franchises. Iger noted that Disney may continue to license new titles to a pay-service like Netflix. He also said that the company has discussed separate Star Wars and Marvel services.
The big question is whether Disney thinks its brand is as strong or stronger than HBO. Because the new streaming service will be available only in the United States to begin with, HBO’s strong U.S. lineup of content may set the top price Disney can charge for its own branded service.
If Disney adds in either or both of the Star Wars and Marvel franchises, the price could go higher. Then, as Iger noted, the problem becomes one of overlap: are Star Wars and Marvel fans also Disney fans or are they “completely basically separate or incremental to Disney fans”?
Keeping the Disney-branded content distinct and launching separate Star Wars and Marvel services appears to offer the best opportunity to maximize profits in the long run. Stay tuned.