Making Sense of the Merger: Disney, Fox and OTT
Let’s take a look at key takeaways from Disney’s Q&A where they fielded analysts’ questions on the future of their OTT service and properties.
Three Different OTT Options:
- Sports-focused (ESPN, FOX RSNs, Sky Sports, Hotstar, Fox Deportes)
- Family-focused (Disney, Marvel, Pixar, Star Wars, Nat Geo, Freeform)
- Adult-focused (ABC content, FX/FXX, 21C television content, Hulu as a delivery platform)
If the merger goes through, Disney’s sports portfolio will include ESPN, 22 regional sports networks, a 39% stake in Sky Sports, 30% stake in Tata Sky, Hotstar Sports and Fox Deportes.
Domestically, the 22 regional sports networks are a major acquisition for Disney. In the Q&A, Bob Iger, president of Disney says, “there’s huge passion, as you know, for regional sports; almost tribal in nature in terms of that passion. We love it because it’s the local complement to the national footprint that is ESPN. Where ESPN will be able to take advantage of local inserts and the like to essentially strengthen its product, and [sic] the RSNs will be able to take advantage of some of ESPN’s programming and strengthen it.”
The regional acquisition is essentially an add-on to ESPN’s current offering, creating an ESPN+ product. Iger explains, “ESPN’s national footprint can now leverage local inserts and strengthen it’s [sic] product and vice versa. The OTT platform that will come out of this will serve the ultimate sports fan.” We’ll likely learn more about this after February’s investor meeting.
With the existing multi-channel universe, consumers have a difficult time viewing games due to regional blackouts caused by rights and ownership issues, along with other programming challenges. If the national and regional rights are under one umbrella, it could potentially eliminate these complex licensing matters.
Internationally, this deal shows a significant investment into the Indian market. Hotstar is already extremely popular, garnering over 700 million viewers each month, and has a variety of channels, its own ability for IP creation in multiple Indian languages and more.
And in Europe, Sky Sports is an established brand with strong viewership and a far more advanced delivery platform from a technical point-of-view. At the moment, because of their existing popularity and consumer loyalty, it seems Disney has no plans to interfere with their brands
How this gives Disney leverage when negotiating league rights is yet to be seen, but we know Hotstar recently outbit Facebook (by $1.9 billion) for the rights to IPL’s cricket tournament for the next five years.
When looking at Disney’s existing tentpole properties, Lucasfilm, Marvel, Disney and Pixar already enthrall child audiences with smart, quality entertainment. Adding National Geographic to the existing roster, with its high-end nature- and environment-focused programming, makes for an awfully well-rounded Family genre.
Adult Programming (ABC/Hulu)
Because FOX will have controlling stake in Hulu and its licensing deals with Netflix will be expiring, there is an opportunity here to fuel Hulu with more FOX content, which could ultimately make Hulu the home of adult programming. With ABC and FX/FXX leading the charge and joining forces, this now gives Disney’s overall portfolio capabilities to bring to the table content that they weren’t necessarily creating before.
OTT Price Point
Disney’s goal is to be priced substantially below what Netflix currently charges, because the volume of content will not be quite as robust out the gate. As we begin to see these separate platforms bundled together, it will be interesting to see how the pricing is structured.
Disney is looking to go to market with three standalone options. Although distinct and unique in terms of their individual content, the roll-out of all three will be managed with the same technology, infrastructure, customer acquisition & retention approach, data analytics, ad services and more.
The idea is to give consumers an option that is reasonably priced and with the ability to bundle services that fit their household entertainment needs and wants. For example, if you’re strictly a sports fan, Disney doesn’t want to force you to pay for family content if you don’t want or need it.
They’re imagining and creating a world where consumers will have more authority over the packages they tailor for themselves. As far as putting everything in one app for consumers who do want it all, Disney doesn’t appear to have plans to offer that, but time will tell. For now, it looks as though this will be an a la carte entertainment experience.
Iger’s plan is to take the best of both companies and combine their efforts. By joining together both people and product, the goal is that it will result in synergies and increased efficiency. Disney makes clear that this is not an all-of-us or none-of-them approach, as both groups have strong talent pools and a lot of potential to continue generating great IP. Iger says, “our approach is going to be essentially to field the best team with the best product out there.”
Monetization: Licensing Deals VS Original Content
Fox is currently monetizing content from other platforms, so as Disney begins to focus bringing its content back to its own service, they will essentially lose these revenue streams. This is a long play for Disney. Time will tell how this affects their ability to fuel other services, but many of these existing deals have some runway before they expire, so the revenue will continue to flow as this transition happens.
“We believe that in order to be in the OTT business for the long-run, and we think it’s the right thing for us to do as a company, we ultimately need to take back control of our content. To license it, in effect, to ourselves and to build that business right, both by taking product that’s made for platforms like motion picture theatrical release, but also by using the capability that we have or that we’re buying and creating products specifically for those services. Either by using IP that they already own, that we already own, and in effect remaking it.” (Iger, Sr. Management Q&A)
Looking at Disney’s tentpole properties, Iger’s team is already developing film and TV content that will be DTC on their own platform. He states, “I’ve talked about a Star Wars series, Marvel series. I’m not going to get specific but we know already what we’re thinking about there. In some cases we’ve actually hired creative entities to do that.”
On whether or not FOX’s TV unit will create exclusively for its own OTT or continue relationships with third-party platforms, Iger goes on to say, “Well, we certainly are intent on creating a larger, more unified television production studio for the company. One that is creating product [sic]. Not just for the platforms that we’ve talked about, but we’ll probably maintain relationships with third parties as well because it’s generally good business. But it’ll be used to feed the various businesses that we’ve talked about. The existing channels as well as the OTT service [sic]. And that’ll probably be the priority. But we wouldn’t rule out the ability to with a possibility of creating and selling to others.”
The merger will take some time with regulators, but overall early signs show Disney is serious about competing against current and future OTT giants, all of whom currently benefit from Fox and Disney IP. Although Netflix currently dominates, this can shift quickly as Disney’s sheer mass of content and brand reputation could pull many consumers away from their current platform of choice.