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Disney Stream May Become a Flood

Neil Boyd-Clark, Managing Partner, Media Analyst

The Australian Broadcast TV industry has been stunned by the entry of CBS via their purchase of the Ten Network. Yet, the most significant news in the global media industry, might be the announcement by Bob Iger that The Walt Disney Company will launch a sports focussed subscription video on demand (SVOD) streaming service called ESPN in 2018. This service is to be followed by another movie focused global streaming service with Disney, Pixar, Marvel and Lucasfilm studio content in 2019.


Lucasfilm’s ‘Star Wars: The Force Awakens’ (2016) is the 3rd highest grossing film of all time, with the next in the series set to release in December, 2017.

Disney, by virtue of its ownership of renowned movie studios Disney, Pixar, Marvel, Lucasfilm and the most valuable US cable channel, ESPN, is seen as the leader of the traditional premium video content players and hence the move to develop its own SVOD services is significant. Disney is a part owner of SVOD service, Hulu, which in itself made a significant step forward earlier this year by combining traditional live broadcast and cable TV channels together with its library of movie and TV content as part of its upgraded streaming service.

For a short while it looked as though the traditional movie studios, led by Disney, NBCUniversal, 21st Century Fox and Time Warner (by virtue of their shared ownership of Hulu) would use Hulu as their major content streaming “portal”. A portal such has Hulu might have become the “go to” destination for viewers looking for a broad range of premium video content, avoiding the nightmare scenario where increasingly confused viewers struggle to identify where to find the content they want to watch, when they want to watch it. These “portal” aspirations were undermined to an extent by Time Warner who launched their own SVOD service, HBO Now, based on the hugely popular Game of Thrones franchise, but it is CBS which is the bigger risk to the “portal” concept.

CBS is in a somewhat unique position to exploit the SVOD opportunity, because several years ago, Sumner Redstone the majority owner of CBS, split his media interests between Viacom (which retained the cable channels like Nickelodeon and MTV) and CBS (which retained the CBS Broadcast Network). Thus CBS has no legacy cable channel revenue to protect. This dynamic, together with the fact that CBS has not become an equity owner in the Hulu SVOD service alongside Time Warner, Fox, Disney and Comcast (all of whom have significant cable channel revenue to protect) has emboldened CBS to launch its own SVOD services – CBS All Access and CBS Showtime. Both services have had reasonable early success with some reports suggesting each has accumulated more than 2 million subscribers in barely 24 months. The HBO Now and CBS All Access SVOD services are different to the SVOD aggregators like Playstation Vue, YoutubeTV, SlingTV or Walmart’s Vudu who mainly acquire content from third party studios like Disney, Lionsgate, 21st Century Fox et al, because they provide content predominantly produced or owned by a single studio.

The key advantage of a studio based SVOD service from a content owners perspective is the control it allows. Complete control of content facilitates a global approach to streaming as content licencing agreements in various geographies can be more easily managed. So far, HBO Now and CBS All Access are US focussed, but it must only be a matter of time before they follow Netflix to the rest of the world. To this end, CBS is already building its international brand through the acquisition of broadcast networks like TEN in Australia, which will ultimately facilitate an SVOD launch.

The emergence of niche SVOD services like the anime focussed Crunchyroll (owned by AT&T and the Chernin Group), the horror focussed Shudder (owned by AMC Networks) and the car focussed Motor Trend on Demand (owned by the Enthusiast Network) might have contributed to Disney’s decision. However, it is more likely that the prospect of CBS launching genre specific SVOD services like CBS Sports, with global potential, has prompted Disney to advance their sport SVOD ambitions. Hence Disney’s announcement that by taking early control of BAMTech, their streaming Joint Venture with Major League Baseball and the NHL, they will be in a position to launch an ESPN branded SVOD service in early 2018.

Disney will be careful not to disenfranchise their cable and satellite distribution partners by streaming ESPN cable channel content only to those SVOD subscribers who are already cable channel subscribers. Disney’s ESPN cable channel will supplement the ESPN SVOD service. In other words, the cable networks will still have control of the ESPN cable channel video content for which they pay Disney significant cable channel affiliate fees (ESPN cable channels constitute about 25% of Disney’s total earnings).Disney will at the same time have the opportunity to build a direct to consumer relationship with sports fans in their own right, by offering additional sports content (not already on ESPN cable channel) which cable subscribers may not previously have had access to. One of the advantages of SVOD over cable channel distribution is that SVOD can be an almost one to one experience, making it ideal for servicing fragmenting audiences, looking for evermore niche sports viewing. As such ESPN SVOD may be able to satisfy sports fans that did not want to pay for the full bundle (they will still need an ESPN cable subscription) or those who want to watch non-mainstream sports content (e.g. Big Bash cricket or Dutch Hoofdklasse field hockey in the US). The launch of an EPSN SVOD service will incur additional cost for Disney and is earnings dilutive in the early years, but it comes with the advantage of giving Disney the opportunity to become the leading sports streaming service provider.

If the logic behind Disney’s ESPN SVOD service for sport is sound, then it follows that Disney must also have been concerned about the prospect of a competitor entering the SVOD space in their heartland: the children’s genre. Hence the announcement of a second global streaming service using Disney, Pixar, Marvel and Lucasfilm content, to be launched in 2019.

Taking this argument to its logical conclusion, suggests Disney must believe that the SVOD market place will follow the path taken by the cable channel market place where evermore niche focussed cable channels like Fox News, ESPN, History Channel and Nickelodeon etc. saw the demise of general entertainment cable channels.

While Hulu will remain an important distribution channel for Disney content in the USA, if Disney successfully launches its own genre based streaming services, it is likely that Fox and NBCUniversal will follow suit, opening the gates to a flood of new SVOD services.


Disney’s ‘Wall-E’ (2008) is an example of Pixar’s many hits, and was one of the most critically acclaimed films of 2008. Pixar are renown for titles like ‘Toy Story 3’ ($1bn) and ‘Finding Dory’ ($1bn) while Disney Animation’s 2013 film ‘Frozen,’ broke box office records, grossing $1.3bn worldwide.

A proliferation of subscription streaming services, would mirror the experience of the cable channel industry, which saw an explosion of cable channels as video content providers fragmented video offerings by genre and demographic to the point where a premium cable subscription today, may include over 200 channels of linear video content. This proliferation of cable channels, has had an unfortunate downside as subscribers have become frustrated by the fees they are paying for content which they were not watching. The premium cable bundle fee has become an access fee rather than a usage fee opening the door for cheaper SVOD services, like Netflix to emerge, first in the US and now globally.

SVOD does not itself change the access fee issue, but the availability of a library of content, facilitates binge viewing and therefore converts some of the access fee into a usage fee, if consumers limit their subscription to shorter periods (e.g. switch on SVOD only for the school holidays, or work holidays, or in winter etc.). A proliferation of SVOD services plays into this dynamic as consumers frustrated by the need to search a multitude of streaming services for the content they want to watch turn to binge viewing behaviour.

Many assume that consumers will effectively “rebuild” their premium cable bundle by subscribing to multiple SVOD services with the content they want to watch. But with a huge range of studio based SVOD services available, it is equally possible that consumers will instead opt for the binge viewing experience, consuming all seasons of a particular show available on a particular SVOD service, before switching off the subscription and repeating the exercise with a new SVOD service. The end result of turning a few streaming services into a flood of streaming services, could be a nightmare for consumers and an even bigger nightmare for the SVOD industry (actors, writers, directors, producers and all). This is because increased content costs and greater churn behaviour will pressure margins, and lead to pain for most industry participants. Disney recognises that live sport is a genre which does not easily lend itself to binge viewing and this move will ultimately set ESPN SVOD apart, as a must have streaming subscription service for the discerning consumer.

This article has been prepared by Arnhem Investment Management Pty Limited ABN 17 129 606 775, AFSL 332484. It has no regard to the specific investment objectives, financial position or particular needs of any specific recipient. You should seek your own professional advice in relation to any financial product referred to. You should also obtain the product disclosure statement relating to any financial product referred to and consider the statement before making any decision about whether to acquire the financial product.

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© Arnhem Investment Management, 2017