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Disney+ omits UK, Amazon from first launch round

The latest drip in the continuing feed of announcements over the impending Disney+ streaming service drew as much interest for its omissions as in confirmation that it will launch in Canada and the Netherlands at the same time as the US on November 12, 2019. With Australia and New Zealand following a week later, attention immediately focused on why the UK was not included in this first round of international launches as the world’s largest native English-speaking country by population outside the US. The Netherlands was chosen as the primary foreign test market because of its high penetration of broadband as well as SVoD and predilection for English language content.

The other string in this round of announcements concerned platforms initially supported and again the most notable feature was an absence, this time of Amazon’s Fire TV devices. All other major platforms were on the list, that is Apple TVs and iOS, Google’s mobile Android and Android TV devices, Microsoft’s Xbox One, Sony TVs and PlayStation 4, and Roku streaming players. Users can obtain the service via in-app purchases on those devices, or directly online by subscribing to Disney+.

Both omissions can be understood from history, especially the lack of Amazon support. A feud has been smoldering between the two companies since 2014, resulting as much from corporate egos as genuine strategic tension, even though the low-level war was kindled by Amazon’s strong-arm negotiating tactics over distribution. Amazon has consistently blocked Disney and Marvel titles from pre-orders, delayed shipments of DVDs and restricted sales in various other ways as part of contract negotiations.

Ironically such tactics, also employed against Warner Brothers for movies and Hachette for books, could have come straight from the lexicon of Amazon CEO Jeff Bezos’ arch enemy Donald Trump. Use of them against Disney too confirms that Bezos is happy to engage in conflict on high plains and in this case, as against Trump, his company could end up with some bruises, given Amazon’s ambitions as a super aggregator of content.

On the other hand, Amazon is also a competitor over content distribution and already Disney has cut Netflix out of that, so Disney’s stance over Fire TV can also be seen in that context. Nevertheless, Disney’s streaming strategy is to maximize the reach of its own service by being available on as many devices as possible and so there is still a fair chance there may a compromise that adds Fire TV to the list of launch devices before November 12.

As for the UK omission, Disney’s only comment is that it will be launching in just four countries anyway at the outset and others will follow over the next two to three years, according to CEO Bob Iger, who cited ongoing contract negotiations. Since Disney owns all the content on offer, such negotiations can only be with regulators or distributors that currently hold rights.

This raises two points. Firstly, unlike some of its competitors, Disney only plans to launch its streaming service in countries when it has regained full rights over its assets. Netflix by contrast is notable for its flexible strategy with different content catalogs in each country to reflect the rights it holds. Secondly, a number of countries impose content quotas, with the European Union having agreed a Directive that when enacted will require 30% of a service provider’s assets to be made within a member state. Netflix had anticipated this and is establishing a production hub in Spain, while Amazon has been producing local content such as Good Omens in the UK and Bibi & Tina in Germany. But Disney is less well prepared.

This comes back to the UK which, although supposedly exiting the EU, has been contemplating enacting that Directive or something like it to impose its own content quotas. But that is unclear while Brexit is still ongoing, as is whether the EU would accept UK-made content as part of the European quota. As a result, Brexit is almost certainly a significant factor in delaying the launch of Disney+ not just in the UK, but also other European countries apart from the Netherlands which had been singled out early on.

These issues are short term but there are other factors to ponder when considering the ultimate fate of Disney+. It is true the pricing is very competitive and Disney has now confirmed Disney+ will also be bundled with Hulu and ESPN+ in a super package at $13 a month, very attractive to families where the parents also enjoy adult content and sports. Marketing via this drip feed of announcements has also been effective in building up steam ahead of the launch, at least in the US.

Our concerns though have been reported consistently and just two weeks ago we noted the Q2 operating loss of $553 million plaguing Disney’s direct-to-consumer division during Q2, directly linked to the upcoming OTT video service. These losses are associated both with the technical platform acquired for $2.5 billion when it bought BAMTech in 2017, and also content.

Full year 2018 results showed losses of over $1 billion associated with ownership of Hulu and BAMTech, while Q1 2019 operating loss for the D2C segment more than doubled to $393 million. On top of Q2’s operating loss hole to the tune of $553 million, losses for the first half of 2019 associated with the D2C division already total $946 million – making it nearly $2 billion in losses over 18 months. Disney forecasts D2C losses to inflate further to $900 million in the next quarter, again doubling from quarter to quarter. At this run rate, fourth quarter 2019 losses associated with video streaming will hit $1.8 billion.

Throw the BAMTech purchase price into the mix and D2C operating losses are set to exceed $7 billion by the year end, without factoring in other costs incurred before 2018 on top of ballooning production and licensing costs. Disney’s content strategy is heavily US-centric, resulting in very high content production costs, in stark contrast with Netflix which has laid down international roots and struck up collaborations on the ground, including foreign language material. Netflix is several years ahead of Disney on that front and, as the latter catches up, content costs will escalate in those territories, partly because of the growing competition.

Something will have to give, and we question whether Disney’s aggressive pricing combined with loss of revenue associated with pulling its content from Netflix will enable the huge spiraling investment in content to be sustained. Disney is betting heavily on quality trumping quantity, noting that Disney+ will include 7,500 episodes of current and past TV shows, along with 500 movies. That is less than 20% of the selections currently available on Netflix in the US, which includes about 47,000 TV episodes and 4,000 movie titles.

Of course, that is far more than anybody wants to watch but does mean that Disney will have to continue making blockbusters that stand out and even then its appeal may be largely confined to families. The Disney+ strategy is certainly high risk and while it is likely to be successful in the US where Netflix will feel some of its heat, its prospects are more uncertain elsewhere where its key rivals are several years ahead in laying down content production roots.

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