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14 February 2019

Disney admits its D2C gamble is a long game

Only a week after conceding that its Direct-to-Consumer gamble had already devoured $1 billion in development of Disney+ and ramp up of ESPN+, Disney now admits that cutting Netflix from its catalogue will cost a further $150 million in lost revenues. This gamble is billed as a necessary risk to compete with Netflix but there are other formidable adversaries, notably Amazon, Google and WarnerMedia. The latter is its most direct competitor as the other Hollywood megalopoly, arising from AT&T’s $108.7 billion acquisition of Time Warner, finally confirmed in June 2018 after an antitrust lawsuit filed by the US Justice Department had failed to block the merger.

But WarnerMedia’s strategy appears clearer cut. We are not alone in scratching our heads over where Disney is heading with D2C. As we pointed out last week, some Disney observers have argued its multiple revenue streams are an advantage when really they are a liability, especially as three of them, cinema, licensing movies to traditional TV networks and selling DVDs, are dying or nearly dead.

The key point though is around streaming models, where Disney’s strategy contrasts with Netflix and Amazon, as well as WarnerMedia. It owns 80% of ESPN for sports, Hearst Communications holding the other 20%, which at least sets it apart from Netflix, although other rivals are also in this game, as Warner is with Turner Sports. Then it has its 30% stake in Hulu, about to become 60% after Disney’s acquisition of 21st Century Fox which holds a similar share. We note though that even the 30% stake in Hulu lost Disney over $500 million in the last fiscal year, so that is yet another cost associated with the group’s grand streaming strategy. That makes it look like Disney’s plan to create yet more content for Hulu, rather than its forthcoming Disney+, is a case of throwing good money after bad.

We can though see where that is coming from, a belief that streaming revenues will be maximized by dividing content up neatly into silos with distinct audiences. Disney+ would be the family outlet, while Hulu would focus more on adult and perhaps sports content.

To an extent that is right and is what Netflix and Amazon have done, but with the crucial difference being the silos are within their own platform and available with a single subscription. In any case, the Disney strategy would require some of Hulu’s current family and kids content to move over to Disney+, which for all we know will happen.

At the moment though, Disney’s D2C strategy is a mess and looks like continuing to bleed cash as further content acquisitions will be required in the early days of Disney+ if it is to be seriously competitive on the global stage.