DISNEY AND THE FUTURE OF TV

Updated: May 11, 2019

Credit from Stratechery

Last week started with a truly remarkable piece of TV broadcasting: Tiger Woods capped an incredible comeback from personal (self-inflicted) turmoil and physical injury with his first major championship win in twelve years at The Masters:



The moment was incredible on its own; that the CBS announcers saw fit to stay silent for two minutes and forty seconds and let the pictures and sounds from Augusta National’s 18th green tell the story spoke not only to their judgment but also to the unmatched drama that makes television the most valuable medium there is.


A few hours later the season premiere of the final season of Game of Thrones brought drama of a different type: scripted, and expensive. The episode is expected to draw around 14 million viewers (and many millions more in pirated streams), and is already a cultural phenomenon.


The greatest drama of all in the television world, though, was on the surface far more banal: on Thursday Disney webcast its Investors Day 2019, where it not only gave details on its upcoming Disney+ streaming service specifically, but also clarified the future of TV generally. And, like any great drama, what is happening it not only a compelling story in its own right, but a lens with which to understand far more than the subject matter at hand.


Disney+ and the Disney Universe

The best way to understand Disney+, meanwhile, starts with the name: this is a service that is not really about television, at least not directly, but rather about Disney itself. This famous chart created by Walt Disney himself remains as pertinent as ever:



I first posted that chart on Stratechery when Disney first announced it was starting a streaming service in 2017, and said at the time:

At the center, of course, are the Disney Studios, and rightly so. Not only does differentiated content drive movie theater revenue, it creates the universes and characters that earn TV licensing revenue, music recording revenue, and merchandise sales.

What has always made Disney unique, though, is Disneyland: there the differentiated content comes to life, and, given the lack of an arrow, I suspect not even Walt Disney himself appreciated the extent to which theme parks and the connection with the customer they engendered drive the rest of the business. “Disney” is just as much of a brand as it Mickey Mouse or Buzz Lightyear, with stores, a cable channel, and a reason to watch a movie even if you know nothing about it.


This is the only appropriate context in which to think about Disney+. While obviously Disney+ will compete with Netflix for consumer attention, the goals of the two services are very different: for Netflix, streaming is its entire business, the sole driver of revenue and profit. Disney, meanwhile, obviously plans for Disney+ to be profitable — the company projects that the service will achieve profitability in 2024, and that includes transfer payments to Disney’s studios — but the larger project is Disney itself.


By controlling distribution of its content and going direct-to-consumer, Disney can deepen its already strong connections with customers in a way that benefits all parts of the business: movies can beget original content on Disney+ which begets new attractions at theme parks which begets merchandising opportunities which begets new movies, all building on each other like a cinematic universe in real life. Indeed, it is a testament to just how lucrative the traditional TV model is that it took so long for Disney to shift to this approach: it is a far better fit for their business in the long run than simply spreading content around to the highest bidder.


This is also why Disney is comfortable being so aggressive in price: the company could have easily tried charging $9.99/month or Netflix’s $13.99/month — the road to profitability for Disney+ would have surely been shorter. The outcome for Disney as a whole, though, would be worse: a higher price means fewer customers, and given the multitude of ways that Disney has to monetize customers throughout their entire lives that would have been a poor trade-off to make.


The Hulu Hedge

This gets at another reason why Disney+ is not really competitive with Netflix (again, with the rather obvious exception that consumers only have 24 hours in a day). Note that in the app there are dedicated Disney, Pixar, Marvel, Star Wars, and National Geographic buttons:



There is other content in the app, including The Simpsons and a smattering of family-friendly Disney Studios movies that don’t fall under these brands, but this is not a service that will be focused on acquiring content for content’s sake, a la Netflix. This is about the larger Disney machine.


Instead it falls on Hulu to be the Netflix competitor, or, probably more accurately, the Netflix hedge. As long as Hulu is around Netflix is not the only alternative for selling streaming rights or original content that happens to exist for its own sake, not because it is part of something bigger. Disney, of course, makes plenty of that type of content as well (particularly after the 21st Century Fox acquisition) and would benefit from there being more buyers than fewer (even if one of the buyers is itself).


Hulu also sells the traditional cable bundle as a streaming service, something else Disney remains interested in supporting. It will also be interesting to see what sort of bundle offer Disney comes up with for Disney+, Hulu, and ESPN+; thanks to Hulu Live that bundle could include basically all types of content except what is on Netflix (and Amazon Prime Video and Apple TV+ — more on those in a moment), which would make Disney not simply the Disney of the traditional TV bundle but the Comcast as well.


The Future of TV

This, then, is what I think the future of TV looks like:




Netflix is an Aggregator, leveraging its massive subscriber base to buy the shows it wants from ever-weakening suppliers unable to break away from their traditional revenue streams, even if they are shrinking (thanks to Netflix). The focus for Netflix will be having all types of shows for all kinds of people all being charged a slowly-but-surely rising monthly rate. To put it another way, the best way to think about Netflix is not as a channel but rather as the new cable company, albeit one solely focused on evergreen content (i.e. not live).


Disney is, well, it’s Disney, pursuing a strategy as unique as the company itself. Disney+ will be a popular service, but the goal is not to build an Aggregator like Netflix but rather something that enhances and expands the Disney machine. Hulu, meanwhile, will continue as a nominal Netflix competitor and general guardian of Disney’s non-branded content businesses.


Traditional TV will be dominated by news and sports, with ESPN, Fox, and Turner the biggest players. All have very strong assets in sports and/or news, and will remain dependent (and why not!) on the traditional TV mix of advertising and ever-increasing affiliate fees.

The long tail of content, including most information and education, will continue to be dominated by YouTube and its advertising-based model.


That leaves the specialists and the resellers, who will have a symbiotic relationship:

The specialists include longtime direct-to-consumer networks like HBO and Showtime, as well as the various attempts by traditional networks to go direct-to-consumer. I suspect most of them will find it difficult to achieve the sort of scale with streaming that will justify making the sort of investments that Disney has committed to, leaving a muddle-along approach that includes traditional TV, sales to Netflix and Hulu, and standalone streaming services.


The resellers will help the specialists get in front of consumers and facilitate the transaction, taking a cut along the way. This was always the model for HBO and Showtime, but now instead of the cable companies being in the middle it is Amazon Prime Video and Roku, and later this year, Apple TV. I think this is also the best way to understand Amazon and Apple’s original content ambitions; the point isn’t to compete with Netflix, but rather to make their storefronts the place consumers go to to subscribe to other services.


Note that each of those five categories does a different “job”, and has a different business model; if “the single most defining feature of the Internet from a business perspective is the removal of the means of distribution as the primary point of differentiation in a value chain”, it follows that the most important part of succeeding on the Internet is building a business model that aligns with jobs instead of the other way around.

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