The Walt Disney Co.’s decision to take its powerful content direct to consumer via streaming puts its traditional distributors in an unprecedented place.
Already, traditional pay-TV subscriptions are falling. Disney said Tuesday during its earnings call that ESPN’s subscriber total was down 3.5%—a big bite for a network that makes about $7 per month per sub.
“There are many investors who believe that Disney, more than any other company, is responsible for holding what's left of the bundle together,” said analyst Todd Juenger of Sanford C. Bernstein, in a research note.
Related: Disney Earnings Drop as Profits at ESPN Plunge“Those that hold that view have been waiting for Disney to drop this bombshell, signaling the end of the bundle as we know it. Did Disney just do that? The answer depends on how much you want to take the (scant) descriptions of these services at face value.”
To Marci Ryvicker of Wells Fargo, Disney's announcement led to many unanswered questions.
The ESPN service sure sounded like management is positioning it (for now, at launch) as an "add-on" service that would mostly sit on top of the existing ESPN linear networks and deliver extra value and features.
Related: CBS To Launch Streaming Over-the-Top Sports Network
“How does this impact DIS's upcoming affiliate renewals (CEO Bob Iger did state that he has NOT had conversations with the cable distributors on these services just yet)? How will peers and partners react?” Ryvicker said in a note.
During the earnings call, Iger indeed said Disney’s plans hadn’t been discussed with its distribution partners. He seemed to think there would not be a backlash.
“As we enter a new round of distribution negotiations, we have all the confidence in the world and our ability to strike deals that are favorable to the company, given the strength of the product that we offer, particularly the strength of the brands,” Iger said.
“If you look very specifically at ESPN, we still see it as a must-have service for the multichannel providers because of the array of product that ESPN has licensed, and what they produce is original programming for the service,” Iger said. “We have seen, as I think that many of you have, a pretty interesting and dramatic increase in, I'll call it, app-based media consumption. Much of it is on over-the-top direct-to-consumer services.”
How will cable operators react?
“The MVPDs also now face a tough decision. View this as an upsell partnership? But watch your backs when Disney reaches the inevitable pivot point and decides to go around you,” said Juenger.
“Disney makes it sound like they want to position this as a win/win: ‘Upsell your subscribers to new levels of service.’ On the other hand, all it will take is a flip of the switch and Disney can cut the MVPD out of the equation entirely. We can't think of much upside for the MVPDs to be combative with Disney at this stage, at least for the big MVPDs,” Juenger said.
There will be even more pressure on small distributors who are not making money on video and might exit that business to keep making money on high-speed internet.
“But we think the MVPDs will certainly be trying to think of ways to protect themselves against the inevitable future date when Disney goes completely direct,” Juenger said.
Disney’s move will also have an impact on other television network companies. Most likely, they’ll have to hustle to create their own direct-to-consumer streaming businesses.
“What do you do, now, if you're Discovery, Viacom, AMC Networks, Fox, or anybody? Prepare to fight for your spot in an increasingly app-driven world. Maybe beg Disney to let you on their service; maybe launch your own,” said Juenger.
Viacom CEO Bob Bakish has been pushing the idea of a skinny bundle of entertainment networks that would not include broadcasters or sports channels.
“We don't think that scenario is a winning one for Viacom, Discovery, et al., either,” Juenger said. “We think every network ends up with fewer subscribers and less advertising—and much lower margins and ROICs. We also don't blame Disney for creating this situation or for proactively trying to protect their best interests. But we do think it's highly likely Disney's actions could accelerate the inevitable.”
