Disney/Lucasfilm
- Disney will launch its Netflix competitor in 2019, and it will be key to the post-cable TV future.
- CEO Bob Iger said Disney will lean on established franchises, and won't have to compete with Netflix on volume.
- Wall Street analysts are split on whether Disney's approach is the right one.
In 2019, Disney will launch its Netflix competitor, a direct-to-consumer video service featuring its marquee intellectual property, as the mouse house contemplates a world after cable TV. But the service won't look like Netflix in a key way, according to CEO Bob Iger: Disney isn't going for volume.
"We have an opportunity to spend more on original product of course, but not necessarily to go in the volume direction, say that Netflix has gone," Iger said on Disney's earnings call this week. Netflix will spend $8 billion programming in 2018, and continues to pump out TV series and movies at a dizzying clip. But while Iger said the Disney service would need a "critical mass" of content, he signaled that Disney wouldn't be turning on a Netflix-like geyser.
So how will it compete?
'Star Wars,' Marvel, Pixar, oh my
Iger explained that Disney would lean on the strength of its existing franchises and intellectual property to make the service a hit.
"When you go to market with 'Star Wars' movies, Disney movies, Pixar movies, Marvel-branded and branded television shows under those umbrellas," Iger said. "That will give us the ability to probably spend less than if we have gone to market with a direct-to-consumer service without these brands."
"Disney is not going for breadth," RBC analyst Steven Cahall told Business Insider. "You're not going to find them making a cooking show." Instead, Disney is focusing on entrenched IP that it has either built from the ground up, or paid billions of dollars for already. "These worlds they already have a market in," Cahall said.
In this way, Iger hopes Disney will have less flops - or less pieces of content that don't move the needle for its subscribers.
"A really good comparison is HBO," Cahall continued. At a bit over $2 billion for content, HBO spends a fraction of what Netflix does. But that doesn't mean it can't compete.
"More is not better, only better is better," HBO CEO Richard Plepler told CNBC in October. "We're not trying to create the most, we're trying to create excellence across our categories."
A steam engine to fix electric factories
But not everyone agrees that a more targeted approach - depth over breadth - is the right move for the realities of the digital content ecosystem.
"Segmentation [of audiences] online is effectively done by algorithms and the desire of consumers to pay for subscriptions is driven more by the breadth of content rather than affiliation to a segment," Barclays analysts led by Kannan Venkateshwar wrote in a report in January.
Barclays criticized Disney's decision to view the market as segmented into groups like "family" (Disney) and "adult" (Fox/Hulu), and to go after them with separate products.
"In many ways, Disney's solution appears to be a steam engine fix for electric factories instead of a complete revamp of the workflow that new technologies allow," Barclays wrote.
It's all about subscriber growth
One thing that is certain is that Disney will have to attract a ton of subscribers to please investors.
In a note last year, UBS pointed out that Disney's film TV licensing alone is worth $2 billion a year, and that its streaming licensing through services like Netflix is worth approximately $500 million. That's a lot of ground to make up with Disney pushing content into its streaming service.
"Disney will need 32 million global subscribers just to break even at $9 per month," UBS wrote at the time. The analysts called Disney's comittment to the new service "both intriguing from a build the future growth of the company perspective, but also daunting in terms of the amount of lost third-party revenue."
But it might not be about the money at first.
"You could argue [Disney] has a lot of pricing power given what people spend on [Disney theme] parks," Cahall said. "But I don't think they should be looking to maximize revenue early on. You want to maximize subscribers. That's what the equity market tends to like, sub growth."
The theory behind that focus is that by creating a huge subscriber base, you can build more pricing power, and it's one reason why Netflix investors are so laser-focused on sub growth metrics.
Iger has said the Disney service will be priced below Netflix, but hasn't given an exact price (Disney said this week its ESPN direct-to-consumer app would be $4.99 a month, so that could be a guide.)
But the question of what type of entertainment giants will exist in the post-cable TV world is an open one. And the success of Disney's streaming service will be a key data point for those trying to understand where the media business is heading.