Last month, Disney won a $71.3 billion bid to purchase 21st Century Fox, and the merger is a lot more than just an acquisition. It signals an industry paradigm shift that pits traditional media companies like Disney up against streaming tech giants like Netflix, Amazon, YouTube, and (soon to be) Apple. No longer can these media companies sit back and focus on just creating great content while relying on outside distributors (cable companies, movie theaters, etc..) to buy and sell that content. Instead, they must amass IP warchests and then leverage them to create their own direct relationship with consumers, typically via subscription streaming apps.
And with Disney’s acquisition of Fox, its IP warchest will be huge. Even without Fox’s assets, its content library is substantial. In addition to every Disney movie ever made, it owns most of the films in both the Marvel and Star Wars universes. It owns every Pixar movie. Then there’s the entire back catalog of Disney and ABC shows. And don’t forget ESPN, arguably one of the most profitable content companies in human history.
Add Fox’s content into the mix, and now Disney has access to most of the rest of the Marvel universe and several franchises ranging from Avatar to Ice Age. There’s also the entire TV lineup of both Fox and FX, so shows like The Simpsons, Family Guy, and Modern Family, as well as edgier fair like Fargo and Atlanta. By the time the Disney acquisition is complete, it’ll have enough content to easily compete against the billions Netflix is spending on original shows and movies.
And well before this merger was pursued, Disney set in motion a pivot toward launching its own streaming platforms. In August 2017, it acquired majority ownership of BAMtech, the company that builds OTT streaming apps for Major League Baseball. At almost the exact same time, it announced it was pulling all its IP from Netflix and all other streaming apps.
Its plan? Though not all the details have been revealed, Disney seems to be set on launching a brand new streaming app sometime in 2019. This app will only include “family-focused” fare, meaning that its PG-13 Marvel and Star Wars content will probably be about the edgiest work you’ll find on the app. It’s already developing original shows for this platform, including a Star Wars TV series directed by Jon Favreau. And it recently debuted ESPN+, a streaming app that’s meant to be complementary to the main ESPN channel without cannibalizing its lucrative cable subscribership.
Not many streaming companies can launch with a content library this large, and that level of quality IP is bound to establish Disney as an instant player in the streaming space. And yet…I think launching such an app would be a strategic blunder, and instead Disney should buy Comcast’s 30 percent stake in Hulu and place its entire content library (minus ESPN) on that app instead.
Oh yeah, in my summarizing of Disney’s haul in the acquisition, I (conveniently) forgot to mention that it’ll gain majority ownership of Hulu. Prior to the merger, Disney, Fox, and Comcast/NBC each owned equal 30 percent stakes in Hulu, with WarnerMedia making up the remaining 10 percent. Now Disney owns 60 percent, and I think it should take full ownership and abandon the idea of launching a new app from scratch.
Why? The streaming app space is already incredibly saturated, and it’ll be even more so come 2019 when Disney plans to launch its new app. Fire up a Roku and you’ll find hundreds of OTT apps, with dozens of new ones launching each month. Though the cable cord cutting trend will only continue to accelerate, Disney will be forced to swim upstream (no pun intended) against established players that have already been on the market for nearly a decade.
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There are only a handful of streaming apps (Netflix, Amazon Prime Video, and Hulu) that have broken the 10 million mark for paying subscribers. Even well established players like HBO and CBS are still in the single-digit millions for their standalone apps. Both Amazon and Netflix have north of 100 million subscribers, with Hulu playing a distant third with its 20 million. But that 20 million would give Disney a huge advantage over any new entrant that must start with zero subscribers.
Many analysts believe that Disney plans to use Hulu to house its more mature content — stuff like Fox’s R-rated movies and the FX TV shows, but splitting up its content library in this way would be a huge mistake. Netflix is set to spend $8 billion on content this year, releasing a new original TV show and/or movie every single week. Current trends indicate that the average consumer is only willing to subscriber to a handful of $10-a-month streaming apps at a time, and it’s crucial that Disney have as large a content library as possible when going up against the tech behemoths. If you combine the entire IP of Disney and Fox with Hulu’s original content and its already-existing subscriber base, I believe Disney will have the arsenal it needs to play catchup to Amazon and Netflix’s sizable leads.
By this point you might be asking yourself: what makes you think Comcast will play ball and sell its stake to Disney? After all, its executives can read the writing on the wall; they know the cable cord cutting trend is accelerating. Why give up its stake in one of the biggest streaming players?
Well, for starters, Hulu isn’t the only streaming iron Comcast has in the fire. Its Xfinity X1 is available on streaming platforms and is getting rave reviews for its UX. At the moment, it’s only available to traditional cable subscribers, but it’s only a matter of time before Comcast begins selling streaming-only subscriptions, which will allow it to penetrate regional markets where its cable isn’t currently laid down.
With a minority stake in Hulu, it’s doubtful that Comcast can be all that excited about taking a backseat while Disney steers. And even better, Disney has access to other assets for which Comcast has shown a lot more interest.
With Disney’s purchase of Fox, Disney is inheriting Fox’s 39 percent ownership of UK-based cable company Sky. As it so happens, Fox and Comcast are currently in a bidding war for the remaining 61 percent of Sky, and I would argue that Sky holds a lot more value for Comcast than it does Disney.
Sky’s operations are much more similar to Comcast’s core competency, and it would also aid the cable giant in its international expansion. Disney, on the other hand, is focused on weaponizing its entire IP library with a direct-to-consumer streaming platform, and operating a cable company would be a distraction.
This scenario makes a swap an ideal scenario. Comcast gives up its 30 percent stake in Hulu, and in return Disney hands over its 39 percent ownership of Sky. As it turns out, I’m not the first to suggest this avenue; the debt-ratings agency Moody’s recently made the same recommendation.
“From a strategic standpoint, we believe a Disney-Fox marriage edges out a Comcast-Fox combination,” Moody’s analyst Neil Begley wrote in the report. “Disney’s ability to monetize intellectual property across all of its lines of business is second- to-none in the industry. A Comcast-Sky marriage makes strategic sense because both are pay-TV providers and Comcast is a cable distributor first, content company second.” …
A scenario in which Disney were able to acquire Fox, and Comcast were able to acquire Sky would be the most desired outcome for bondholders of all companies and likely avoid one or the other becoming one of the world’s most indebted non-financial corporations.
There’s a reason Netflix began developing its own original content; it realized that, as new streaming companies entered the market, acquiring IP would become more expensive and be used as leverage to lure away subscribers. But that’s not the only reason Netflix is the leader of the pack. Its early foray into streaming, combined with a superior tech platform, gave it a big leg up and has endeared millions of customers toward its brand.
Hulu, which launched more than a decade ago, has similar advantages and would have a higher likelihood of success than any Disney app launched from scratch. Disney just spent a buttload of money to get a whole bunch of IP under one corporate roof. Now is not the time to then unbundle that content into multiple apps.
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