Is Disney Too Late To Succeed In Streaming?

The Sleeping Giant Awakes: 

DisneyLife comic has announced that as of 2019 it will pull its Disney and Pixar movies from Netflix and start its own streaming service. This move is not surprising. In fall 2015, Disney launched the first multimedia subscription service in the U.K. called DisneyLife, which includes TV shows, movies, books, and music. I argued then that it was inevitable that this would eventually be a more ubiquitous, global platform.

Well, the time has come and Netflix viewers (especially kids!) should beware; starting in 2019 there will be no middleman. Netflix will no longer be streaming Disney and Pixar titles and U.S. consumers will have to go directly to the source, a Disney streaming service, though Marvel Netflix shows will continue. Disney also announced that it will launch an ESPN video streaming service in early 2018, including MLB, NHL and MLS content. So this is not just one more experiment, it is a strategic move towards direct-to-consumer digital distribution. Will Disney succeed?

The Precedent

By starting its own streaming service, Disney is trying to stake out its place in an ever-growing digital media space. It is a similar phenomenon observed in other industries, where top players realize that they should have a strong presence in digital distribution, and decide to “reintermediate” the market with their own direct-to-consumer service. The problem is, they do so late in the digital transformation, only after their cash cow business with traditionally high margins and a captive market starts to falter.

This case is no different. Disney has been struggling lately, with lower profits and flat revenues in the last quarter, driven by five straight quarterly decreases in operating income from the unit that houses ESPN. To make things worse, during Disney’s Netflix distribution experiment, the streaming space has become saturated with direct-to-consumer services. It all started a little more than two years ago when HBO launched its own stream service HBO Now, opening the floodgates for many other mainstream top players to adopt direct distribution.

How Disney Can Succeed

It always startled me that Disney licensed its top movies to Netflix, albeit for a limited 3-year period. With premium, durable, and exclusive content, Disney has had all along the loyal and young user base necessary to have its own direct-to-consumer site, charge a premium, and be more profitable in the long run by reducing distribution costs. Now it seems the sleeping giant is awakening, and the question is whether it has done so in time, or whether the Netflix distribution experiment will prove to be costly in retrospect.

Based on my study of other late reintermediation efforts, I believe Disney’s execution must be flawless for it to succeed. The good news is Disney is earning back control over its distribution to do so. Here are some success factors that come to mind:

• Experience: Disney has been experimenting with its own platforms, learning from its trial runs of DisneyLife in U.K. and a short stint in China, the Disney Movies Anywhere site, and its stake in Hulu. Disney must use the data and insights available from this experience to design its direct-to-consumer site.
• Technology: Disney also announced on Tuesday it will invest $1.58 billion in a bigger stake of Bamtech, a powerhouse in streaming technology created by the Major League Baseball association. This is what you call preparing for success. Disney cannot afford to lose loyalty due to congestion buffering, a pixelated or frozen scene (I do not mean a scene from the movie), or any other tech glitches that could kill the Disney experience.
• Innovation: With a blank slate, Disney has the opportunity to truly differentiate and bring digital video consumption to a new level. It can develop a slick multimedia experience that combines movies and TV shows with books, music, and merchandise, something others can't easily do. Also, the experience can be tailored to the content, user, and occasion. For example, 5G is around the corner, which will allow movie downloads in seconds rather than minutes on mobile devices. Disney could offer a download option for movies, many of which are watched over and over by kids, and increasingly on mobile devices. And how about some virtual reality cream for this cake? Yummy, my kids will love it.
• Marketing: Marketing efforts will be key, to appeal to the 100 million plus Netflix subscribers who currently enjoy Disney movies with the subscription, and to those who already subscribe to aggregators like Amazon Video, Hulu, and to numerous direct-to-consumer services like HBO Now.

Coming late to the game, Disney’s execution should be flawless. But if anyone can do it, it’s Disney with its magic and deep pockets. I am cautiously optimistic.