Disney’s streaming strategy is perhaps one of the most talked about pivots and moves in recent years of all large American companies. There are many reasons for this. First, Disney is a beloved brand and owns many other beloved brands that touch consumers in many ways. Second, with the rise of Netflix and the decline of pay TV, Disney’s response and strategy changes are extraordinarily important and interesting when analyzing the industry.
While perhaps caught off guard initially, Disney CEO Bob Iger has made bold moves in recent years to position the company to succeed in the next era of media and entertainment. Disney’s streaming strategy has come more into focus, and we now know that the company will have a three-pronged approach to streaming that they believe will position Disney well for the next era of media consumption while not canibalizing existing revenue too cannibalizing.
In 2019, Disney has both announced its flagship streaming service which will be known as Disney+ and has made additional moves to secure increased ownership in Hulu (and complete operational control of the service). Disney’s streaming strategy revolves around its three services: Disney+, Hulu and ESPN+.
With that in mind, let’s take a look at 5 keys to Disney’s streaming strategy moving forward:
Three services with bundling potential
If you are an avid sports fan, Disney has you covered. ESPN+ offers sports fans viewership of games and events that are not broadcast elsewhere. For many, ESPN+ is the only place to watch their team’s games and events. If you are looking for a streaming service that appeals specifically to your family, Disney+ is potentially a “one stop shop” for family-friendly movies and shows. In addition to sports and family-friendly media, Hulu offers personalization when it comes to the TV you want to watch.
With the three services, Disney believes it has one or more services that can appeal to anyone. Interestingly, however, they also have the ability to bundle these three services into a single price where consumers can essentially get all three services for less than what they’d pay if they subscribed individually to each.
Bundling is probably an underrated idea at this point since the traditional pay TV cable bundle has been under attack for years now. But many forget that bundling actually services a good purpose for consumers. The point of bundling is to be able to provide more to consumers than if they had to buy everything individually. A bundle can and should be a win for consumers, and Disney’s strategy will include this option.
Hulu and AVOD
From a numbers standpoint, Disney stands to benefit from the growing Advertising Video-On-Demand (AVOD) trend across streaming services. Hulu generates additional revenue through advertisements. Many companies are jumping at the opportunity for strategic advertising partnerships with newer streaming services. Here are a few ways that Hulu leverages AVOD:
- Hulu distributes ads in offline programming. Viewers can download content from Hulu and then view the content offline. However, as a consumer, you will sit through ads should you take this route. Hulu sells the ad space.
- Hulu also sells ad space for Hulu Live TV using dynamic ad insertion (DAI). This is attractive to companies as they are able to reach a specific audience through Hulu’s platform.
- Hulu uses Nielsen’s Digital Ad Ratings (DAR) to measure its advertising exposure accurately. This is attractive to companies and businesses looking to market effectively on a streaming platform.
Hulu was already an industry leader in AVOD, but this part of Hulu’s business could expand greatly with Disney’s name attached to it. Disney’s worldwide reputation makes it a great way for companies to advertise to markets that were previously unaddressable.
Moreover, many analysts believe that more money will shift to AVOD streaming from linear television for a few reasons. First, demand is shifting from traditional cable to streaming services, especially in the younger demographics. And second, AVOD technology will allow better targeting for advertisers than traditional cable TV. While traditional cable TV enables advertising based on the television show and the perceived demographics associated with viewing such a show, AVOD can get much more granular. Advertisements can be targeted down to the individual level as opposed to just the show level based on demographic information, viewing patterns, and more. Advertising revenue in the AVOD space has the potential to continue to grow for both Disney and others (e.g. Roku) for years to come.
Outside of those attending any of Disney’s resorts or parks, most consumers interact with Disney through third parties such as a local movie theater. Bob Iger noted recently that in some ways, they don’t really know their customers. Iger sees this as the key to the longevity of Disney’s overall business and influence. Iger wants to capitalize on the passionate groups of Disney fans across the board:
when you look at the fans of Disney — you look at Disney fans and you look at Pixar fans and Marvel fans and Star Wars fans — those are incredibly passionate groups of millions and millions of people around the world who’d like more connection to the product. Knowing who they are gives us the ability to essentially create a relationship with them and for them across all of our businesses.
Iger threw out ideas such as certain discounts to parks or events in correlation with subscriptions to Disney+. Being more intimately connected at the individual level of Disney’s unique fan base is imperative for direct-to-consumer relationships. The ability to market certain products or offers to certain fans is a great way for Disney to understand their customers better.
For example, if a subscriber to Disney+ is a heavy viewer of Marvel movies, Disney will be able to personalize what products or offers are given to this customer. This works across all the different fan bases under the Disney umbrella and can impact revenue across all business segments at Disney. And, it’s a win-win potentially; both the consumer and Disney benefit from a tighter direct-to-consumer relationship.
The next generation of Disney fans and consumers
Disney’s streaming strategy is key to Disney’s aims to be relevant to both the current and next generation of Disney fans and consumers. Understanding the consumer is everything and the insight into this generation of consumers that Iger provided is impressive:
I think when you look at what people are spending their money on today and the fact that people demand a high price-to-value relationship, when they look at 150-plus channel package and they realize that they’re buying a lot of channels that they may never find and may never have any interest in watching, I think today’s consumer doesn’t really look as positively at that as perhaps they once did. And if you look at younger demographics, I think it’s even more profound. It’s just the way of the world.
We live in a world where the goal of a consumer is not only to buy at a low price, but also to purchase something that is easily accessible, time effective, and can be easily integrated into one’s life. By acquiring Hulu and keeping it separate from Disney+ and ESPN+, Disney is able to meet the needs of this next generation. Iger and his team are betting that the three streaming services, plus the ability to bundle them together, along with the powerful brands and intellectual property that make up the Disney content portfolio will be the backbone for Disney’s penetration into the next generation of fans.
Data sharing and infrastructure
An underreported element of Disney’s streaming strategy is that of the backend infrastructure. Disney’s moves here to back to when it acquired a stake in BAMtech which was the streaming video service spun off from Major League Baseball. Disney needed streaming infrastructure and streaming engineering expertise, and they solved this through BAMtech. BAMTech has powered MLB, WWE, HBO Now and more. It also powers Hulu Live TV and ESPN+. Disney now owns the majority stake of BAMTech as it is a key piece to Disney’s future.
But its not just BAMTech. Developing a full blown technical infrastructure to power and serve Disney’s three streaming platforms that each have global ambitions is no small exercise in engineering. It requires investment and time, and Disney is well on the way.
By unifying all three streaming services with one backend infrastructure, Disney has many advantages that it can leverage for its streaming strategy. First, it eliminates the need to build admin functionality and backend features individual for each service. Instead, Disney can build one billing system, one user management system, etc. and each streaming service can leverage these backend services. The ESPN+ team doesn’t need to build user management functionality while the Disney+ team also builds it. Instead, it’s all in the backend and each service can leverage these common functionalities.
This not only lowers costs across the three services and makes the entire strategy more efficient, but there’s a user benefit as well. For instance, if I’m signed up for Disney+, also signing up for ESPN+ will be super easy. The system already has my user information and my billing information. I should be able to add-on ESPN+ in a single click or two. Removing the friction for signing up for additional services will be a crucial feature of Disney’s streaming service.
Moreover, Disney should also have a tremendous data advantage here. Netflix has long had a major data advantage compared to other platforms and companies. By investing in the technology, Disney will be able to learn tremendous insights about its consumer base and leverage these data points in business decisions for decades. While they have catching up to do with respect to a company like Netflix, Disney’s data advantage has an even larger impact as it can impact business decisions across the enterprise even in other operating segments (e.g. theme parks).
Disney’s streaming strategy is one of the most interesting things to watch in media and entertainment. Watching the services roll out and Bob Iger’s grand strategy unfold before our eyes will be something all media industry analysts and investors will be watching closely.
Since announcing Disney+, the stock has already popped significantly, so it’s tough to say that right now is the best time for an entry point into the Disney stock. While the strategy is impressive, there will be hiccups along the way. Disney is still starting at zero with respect to Disney+ subscribers late in 2019 while Netflix will have closer to 175 million paid subscribers at that point in time. We remain bullish on Disney long-term, but can’t advocate buying the stock now after it’s major move up. Perhaps broader market weakness will present opportunities for better entry points into Disney as an investor.
We will continue to discuss Disney’s streaming strategy and how it impacts the business and the stock.