Disney+ Coming, ESPN+ Clears 1 Million Subs, and Other SVOD Growth

Disney recently provided some additional details regarding its planned Over-the-Top (OTT) service, first and foremost giving it a name: Disney+. The “+” moniker follows a similar naming convention Disney used for its OTT ESPN service (ESPN+), creating some cohesion among the company’s growing OTT presence, at least outside of Hulu. Speaking of which, Hulu presents an interesting wrinkle, now that one company (after Disney finalized its acquisition of 21^st Century Fox) will have a controlling interest in the service (60%). While some pundits have suggested that Disney would have been better served investing in Hulu instead of launching Disney+, there is likely room for both, as the latter is expected to offer more family- and children-friendly content, while Hulu extends to a wider audience.

Disney has stated it will remain fiscally responsible to the other shareholders (30% Comcast, 10% AT&T), but plans call for increasing investment in programming (including originals). In this ecosystem, Disney+ will look more like a complementary service to either the Virtual Multichannel Video Programming Distributor (vMVPD) Hulu TV service (which passed 1 million subscriptions earlier in the year) or Hulu’s other 20+ million subscribers and ESPN+ (also passed 1 million subscriptions). While Disney lost out to Comcast on its bid for Sky, the company still plans to expand into Europe and Disney+ should have less friction to launch internationally.

Disney’s acquisitions (including companies like BAMTech Media) and strategy reflects the increasing push to deliver content directly to consumers, along with the importance of original programming. While the U.S. Subscription Video on Demand (SVOD) market generates a significant amount of focus, activity is ramping up around the world, with China exploding onto the scene. Netflix may have directed additional international attention on OTT SVOD services on a wider international scale (and Disney will expand its services), but China has remained relatively isolated due to restrictions imposed by the government. As a result, an almost separate industry exists in the country, and while Average Revenue per User (ARPU) is considerably lower, online video viewers have shown willingness to pay for content. As a point of reference, by 3Q 2018, Netflix cleared 130 million paid subscribers worldwide (more than 137 million total), but the three largest SVOD providers in China, often referred to as BAT (which includes Baidu/iQiyi, Alibaba/Youku, Tencent), collectively surpassed 200 million subscriptions by ABI Research’s estimates.

In addition, mobile OTT viewing in international markets is expected to see strong growth in the coming years, with additional fuel coming from 5G. In many of these high growth markets, however, revenue is often limited and investments in content push services into the red. iQiyi, for example, which raised US$2.25 billion from its Initial Public Offering (IPO) earlier this year is planning to raise an additional US$500 million in convertible senior notes to help address increasing content costs. This is leading some services to focus more intently on original programming to exert more direct control over content costs (in addition to differentiation), in effect replicating what we are seeing from Direct-to-Consumer (DTC) content holders like Disney and other SVOD services (e.g., Netflix, Amazon Prime, Hulu, etc.). DTC could result in some content restrictions to incumbent services; for example, AT&T  is planning to launch (late 2019) three versions/tiers of a new streaming service (content from Warner Bros., Turner, and HBO) and WarnerMedia’s Chief Executive Officer (CEO) John Stankey was quoted as saying: “Some of the incumbents should expect that their libraries are going to become a lot thinner.”

Incumbents are already going up against new streaming services, and they could begin losing parts of their libraries or face higher rates to secure content rights. Operators are already adding or partnering with existing streaming services, such as Netflix integration or Amazon Prime Video (Orange Spain and Movistar are examples outside of the United States). Adding interactive features/services is another way to differentiate services and create additional revenue opportunities, which could include social elements (e.g., chat), trivia games, gambling, etc. While second screen applications have not had much success in the past, issues like latency and performance were detracting factors, which could be addressed with lower latency streaming. Pushing other types of content like eSports could also help differentiate services and attract younger audiences. Regardless of the strategy, incumbents will have to continue to evolve and adapt to the changing landscape, and it is imperative to remain active in this regard to avoid being left behind.