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Disney wins rights locker war, but Netflix rival still over a year away

Disney announced back in August that it was preparing a Netflix lookalike service, built around sits BAMTech technology, but the service will not come out until 2019. News reports out this week, which suggest that the rest of Hollywood is in some way joining Disney is this venture, seem to have got the wrong end of the stick.

Instead this recent news is about the 3 year old service Disney Movies Anywhere. It uses its own Keychest technology to put movie into an online rights locker, when a physical version of a movie is purchased. What has happened is that Disney has perhaps had more success in the electronic sell through market than those who have relied on the rival service UltraViolet, which came out of Sony. UltraViolet has 20 million registered accounts, and it is used by Fandango Now, Vudu, Kaleidescape, Fios, Sony Pictures, and Paramount, for a paired delivery of an online movie version alongside a physical copy.

This is perhaps something simple like a format war, with little at stake. But when it comes to the Netflix look alike there is no certainty that Disney will attract the likes of 20th Century Fox, Warner Brothers and Universal Pictures. This deal over Disney Movies Anywhere “might” be the precursor to a broader deal where Disney takes on Netflix come 2019, with streamed Subscription movies, but it’s unlikely. That service is probably not in every studios interests to sign up for, because it will give an advantage to Disney content.

However by then it may be abundantly clear that the Hollywood studios stand or fall against Netflix, based on whether or not they can starve Netflix of content.

Disney and the rest of the of the US Hollywood studio owners may, like sleeping giants in a Disney cartoon, finally wake up to the existential threat that Netflix represents.

Disney has been talking about building a business to take on Netflix for some time – but the two stories, its existing Movies Anywhere deals and the Netflix buster, seem to have got combined in the telling. The announced deal is simply an electronic sell thru system based on its alternative right locker technology.

Past Disney moves like Moviebeam, disposable DVDs, Movies.com, Movielink and Keychest, were all about a new route to Disney-only content between 2003 and 2012. Suddenly that agenda has changed and it is now about providing technology to all the studios.

It changed because Netflix has more talent and more top shows than Disney has today and if it was not for its theme parks, its ABC broadcaster, or its ESPN cable channels, it would have already been overtaken in size by Netflix in both revenue and market capitalization. Disney is no longer the content Goliath able to conjure the next big entertainment genre at the drop of a hat.

Let’s face it, BAMTech could produce an online service for launch in about 3 months. Disney is not waiting a year and a half for the streaming technology platform to be adapted. It has made a calculation that many of its route to market partners, such as retailers, will have less and less contribution to make by 2019, and it will be the right time to launch ESPN online and Movies Online.

Just take a look at the relative values of the US studios and the companies which own them, and how they have changed over the past 7 years.

Netflix has grown over 1,230% and Lion’s Gate and Comcast have grown their respective market values by over 300%, but they have changed as companies. Lion’s Gate has made some acquisitions, and got new shareholders on board; Comcast in buying Universal has diversified, and is on the verge of getting into cellular telephony. They have very different reasons for value creation.

Time Warner has recovered from the dark days when it was owned by AOL, and has been stimulated by the interest AT&T is paying it as an acquisition. Disney is no stranger to acquisitions, and now owns Marvel, which has emerged as one of the hottest global movie properties. So much so that Netflix has just acquired Millarworld, a comic book imprint founded by Kick-Ass creator Mark Millar, so that Netflix can build in its own movie spin-offs.

Until Netflix majored on original content, it was seen as just another distribution play for the major studios – no threat and something to make up for the lack of Electronic sell thru and physical sales growth. As it has geared up to competing with HBO in particular, part of the Time Warner empire which AT&T is acquiring, it has at first experimented with original content, and then mastered it. It now has a conveyor belt of conspicuous successes, so much so that if Disney, and all of its Hollywood partners refused to co-operate with Netflix, it could still survive without them.

Just 5 years ago these businesses could have killed Netflix stone dead, by simply refusing to work with it. However at that stage DVD revenues were falling and online SVoD rental revenues were seen as a counterpoint.

There has been a further collapse in DVD physical sales since then with DVD sales off by 10% in the first half of 2017. And this year is being seen as a disappointment at the box office with sales off 5%, and something has to be done. But right now the US studios lamely continue to believe that electronic sell thru is the way forward – buy a DVD and get online rights in a right locker. It just isn’t the answer. The streaming movie SVoD shod be launched now.

Clearly we saw Disney beginning to flex its financial muscles when it acquired BAMtech. And even if it had most of Hollywood on its side, there would still be some major obstacles ahead.

Each studio will have to compete with and feed off, the likes of Apple and Facebook. They have both put aside $1 billion for original content productions over the coming years. The studios will want to take some of this cash and do deals for content, but if they do that, the content rights will go to Apple or Facebook and they will be unlikely to retain online rights.

At the same time Apple and Amazon are said to be trying to buy the rights to the James Bond movies, which were usually distributed through MGM. Which leaves less and less content rights on the table.

To make a Netflix style service work, the studios have to learn not to be so greedy, as Hollywood has been in the past, charging too much for a subscription or tying online SVoD purchases to DVD sales, as they are doing with this Disney deal. For a movie that has not completed its theatrical distribution online distribution might go as high as $50, and for one that has, a multiple view license could be as much as $30, when a DVD would be $11 to $15. This type of pricing has always been used because it was an attempt to “preserve” all the various constituencies involved in selling movies – theater chains, DVD retailers, pay TV distributors etc.. To deliver a service which competes with Netflix it needs to go toe to toe with it, offering an unlimited service for $10 to $12 a month or less.

While Disney can line up Toy Story, the Lion King and the Star Wars and Marvel movie franchises, which are pretty powerful, if their partners in Disney Movies Anywhere did the same thing it would be seen as acting in concert and very likely illegal.

But although Disney has had the conviction to do that, it is unlikely that any of the other studios can afford to repeat this deal. And recently Disney signed with a Netflix Asian rival Iflix for distribution in SVoD in that region. But if all of Hollywood did that, it would be seen as singling out Netflix in a conspiracy. Consumers may not like it either and it could backfire.

We know that the Netflix rival will be based on technology supplied by BAMTech, the video streaming platform founded by Major League Baseball, in which Disney owns a 75% stake. What we don’t know is how expensive the service will be, and which other studio’s movies will also be on the service and whether it will be tied to the Movies Anywhere approach.

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