Disney (And Others) Looking to Shake up the OTT World

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By Michael Inouye | 3Q 2019 | IN-5602

Disney+ is scheduled to go live on November 12, 2019, and it is creating a stir within the Over-the-Top (OTT) market. Disney has released additional details since last year:

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Disney Announces an OTT Bundle and Preorder Special


Disney+ is scheduled to go live on November 12, 2019, and it is creating a stir within the Over-the-Top (OTT) market. Disney has released additional details since last year:

  • The fee will be US$6.99 per month (or an annual subscription at US$69.99). Disney is also offering a preorder special to its official fan club members for a limited time: D23 members (the membership is free to enroll in and is only offered in the United States) can pay for three years of subscriptions upfront at the discounted rate of US$140.97, which is US$46.99 per year (or roughly $3.92 per month).
  • Bundled packages of Disney+, ESPN+, and Hulu (with ads) will be available for US$12.99 per month (availability starts on November 12).
  • In April 2019, Disney offered its internal projections for Disney+ to be 60–90 million worldwide by 2024 (that is, at the end of Fiscal Year [FY] 2024, which ends calendar 3Q 2024) and 20–30 million in the United States. Original content investments were also projected at greater than US$1 billion in FY2020 and in the mid–US$2 billion range by FY2024—licensed content expenses were estimated to be less than US$1.5 billion in FY2020 and in the mid–US$2 billion range by FY2024.
  • Disney+ will initially launch in the United States, Canada, and the Netherlands on November 12 with additional countries in Western Europe and Asia-Pacific anticipated during the remainder of 2019 and into 2020. Additional rollouts are expected in Eastern Europe and Latin America starting in 2020.

Disney: A Potential Game Changer


While certainly not novel, Disney’s decision to offer annual discounted rates alongside the typical per-month fees (for Disney+ and ESPN+) is the less common practice in today’s OTT Subscription-Based Video on Demand (SVOD) market. The effective discounted monthly rate does leave some consumer surplus on the table, particularly among the most ardent fans and supporters who would maintain an active subscription regardless; it does effectively lock them in as consumers for an extended period of time, and given how easy it is for OTT subscribers to churn, the end result is that it could ultimately favor these packages. Securing longer-term commitments is also important for newly launched services where content (and in particular, new content) might be in short supply. Some customers may watch some of their past favorites and catch up on missed content but then quickly fall into a period of inactivity; for a month-to-month subscriber, they might churn and wait for new content to get added. Disney is also relying heavily on its existing, albeit very rich, back catalog of content, so locking in users for a year (or more) is a good way to weather any potential churning after the initial launch excitement wears down.

While other companies are preparing to launch OTT services (including Apple, NBCUniversal, AT&T/WarnerMedia, and Discovery/BBC), Disney might have the greatest impact on the competitive landscape. In addition to the rich back catalog of content it has, Disney also holds the rights to some of the most valuable franchises in the industry today. This will not only serve as a key differentiator but will undoubtedly make marketing original programming for Disney+ a far easier and less costly endeavor—much like CBS All Access has done with its Star Trek franchise. As content owners shift directly to the consumer, it often diminishes the pool of content available to competing services (e.g., select Disney and NBCUniversal content on Netflix). This will alter the competitive landscape, pushing companies like Netflix (or Amazon, Apple, Google, etc.) to continually expand its spending on original programming (including supporting other distribution channels, like movie theaters) to better align themselves with the competition. More spending, however, doesn’t always equate to equitable returns; Netflix’s subscriber growth in the United States, for example, has recently fallen short of expectations based on its content spending.

A Different Ball Game Equals Different Rules


OTT was initially viewed and, in some cases, has been positioned as a cheaper alternative to traditional pay-TV services, but pricing in some cases (e.g., Virtual Multichannel Video Programming Distributors, or vMVPDs) are at close (if not at all) parity, and a collection of OTT subscriptions can also start approaching the fees of some cable TV services. The greatest differentiator for OTT has become content accessibility (e.g., the ability to binge-watch TV series) and perhaps most significantly, differentiated content libraries. Even if we ignore OTT services that cater to specific genres or specific content categories, content libraries are quickly becoming more differentiated than homogenous.

For a time, services like Netflix were able to slowly increase pricing to help counter their growing content expenses, but the introduction of new entrants that are willing to forgo profitability in the near term to pick up market share is exacerbating the challenges being faced by incumbents. Disney is undercutting Netflix, and by offering a bundle with ESPN+ and Hulu (albeit with ads), it is creating a package that could satisfy a relatively wide capacity of customers who only need or want this one bundle. Disney is also doing a commendable job maintaining enough separation between its OTT Domain Technologie Control (DTC) endeavors and the services geared toward pay-TV operators (ESPN+ being a key example). In other words, Disney isn’t abandoning pay TV through these scenarios but rather is finding ways to complement these services and cater to their most loyal fan base.

Disney is also maintaining its family friendly image with Disney+ by capping content at PG-13 ratings—and saving more mature content for other properties such as Hulu (again, the Disney bundle could serve the entire family, from young to mature). For the competition the game plan will need to shift toward differentiation, but they will need to place an emphasis on reaching profitability, even at the expense of subscriber counts or market growth. The subscription pie is only so big; many consumers have cited three to four subscriptions as the ideal number, so market share is going to get redistributed. Disney doesn’t have to spend as many billions of dollars on new programming for Disney+ because it owns franchises that produces US$1 billion hits in the theatrical and home-viewing markets. Netflix is starting to push to more theatrical releases, but it (and most other OTT services) is leagues behind Disney in this regard. First-mover advantages have served many companies well, but with heavy hitters like Disney coming to the plate, the rules might start changing.


Companies Mentioned