The empire strikes back: Disney+ makes a play for the future

Behind the low price, hefty investment and risk of Disney+ is a much greater prize: data and direct customer relationships.

Walt Disney Company chairman and chief executive Bob Iger, left, with Star Wars creator George Lucas inside the ride Millennium Falcon: Smugglers Run at Disneyland in Anaheim, California. Picture: Getty Images.

Disney did not need to launch a digital-video service to remain one of the most profitable media firms on earth. In a busy marketplace for subscription video-on-demand, top content licences are at a premium — and no content is more valuable than Disney’s.

The company is probably going to be behind each of the eight highest grossing films this year. The previous record for such dominance, set in 2016, saw one studio claim the top five spots. That studio was the House of Mouse.

Disney could have chosen to keep doing what it has done for the past decade: collect ever more billions in no-risk profit by simply transferring digital copies of its films and TV series to Amazon, or Netflix, or HBO, or Apple, or Sky.

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Instead, Disney decided to invest in building its own SVOD service, Disney+, which launched on November 12. The first day was marred by technical glitches the company said occurred because demand had “exceeded our highest expectations”.

The move into video streaming is a decision that will cost the company billions in the short run, but Disney+ has a grander strategic logic that, if executed intelligently, should pay off for decades to come.

Disney characters Mickey and Minnie Mouse at the Disney World theme park in Orlando, Florida, USA.

The shift to Disney+ is expensive upfront. First, the company bought BAMTech Media, a leader in digital-video streaming, for $US3bn. Then Disney spent another $US85bn buying 21st Century Fox to expand its store of content and intellectual property (the company also tried to buy British TV giant Sky but lost to Comcast). In coming years Disney will spend billions more on original series and films for its service. It also will forgo about $US4.5bn ($6.63bn) in profit a year by holding back licences to content it was already making, according to analyst Mich­ael Nathanson.

Given the scale of these sums, the industry was shocked when Disney announced in April that Disney+ would cost only $US7 a month (or less than $US6 a month on an annual plan). Netflix’s most popular plan costs $US13 a month. Some interpreted this move as a lack of faith in the offering. Others wondered how Disney could recoup its investment at such low prices; Disney estimates it would break even at 60 million to 90 million subscribers globally.

Disney then announced it would provide a three-year offer that would cost less than $US4 a month. A few weeks later, Disney formed a partnership with Verizon, the largest wireless provider in the US, in which Disney+ would be given free to 17 million to 18 million of its subscribers for at least a year. (Disney would receive a few dollars per active user per month in exchange.) Several other discounts and bundling deals exist. More still are likely to follow.

There are a few tactical reasons for this approach. Not only is Disney releasing its service years after Netflix, Amazon and HBO amassed tens of millions of subscribers worldwide but compet­ition has never been as intense. On November 1 Apple launched its SVOD service, Apple TV+. In the second quarter of next year NBCUniversal (owned by Comcast) will launch its own, Peacock, while AT&T will release HBO Max. Jeffrey Katzenberg, a former chairman of Walt Disney Studios, is also preparing a service, Quibi, to launch around the same time.

The low price of Disney+ will help the service attract subscribers and retain those who are frustrated to be missing Star Wars and Marvel films, as it will be several years until Disney reclaims the full rights to its catalogue.

But more important than short-term tactics is Disney’s long-term ambition. Behind the low price, hefty investment and considerable risk of Disney+ is a much greater prize: data and direct customer relationships.

For decades, the Walt Disney Company has thrived because of the interconnection and cross-monetisation of its divisions. Last year, Disney’s parks and resorts division generated more than twice the revenue and 50 per cent more profit than its film studio, even though one (the studio) is responsible for the other’s popularity. This is what makes Disney+, and its reach, so important. It is about fortifying the entire empire.

For all of Disney’s success, it has never had a direct relationship with most of its individual consumers, let alone known which specific content and characters they like and to what extent. Through Disney+ this will change.

That in turn should allow the company to make more informed decisions about which content and merchandise to produce, increase the efficacy of its marketing and promotion, and sell more Disney-related products and experiences to Disney fans. Generating another $US50 a year in SVOD is trivial compared with the ability to sell more $US5000 Disney family cruise vacations and $US1100 annual park passes.

But to do so, Disney had to launch its own service. Among other constraints, distributors such as Netflix share only limited viewership data and no individual customer information. It is also hard to imagine such services buying Disney+ titles such as Behind the Attraction, a 10-hour series that gives a “deep-dive into the storied history” of popular Disney theme parks. This series is itself an instructive example of Disney’s synergy-centric approach to its video service.

Disney’s multi-product strategy has led some analysts to compare the service with Amazon’s Prime Video rather than Netflix. For that matter, Netflix is beginning to look rather solitary in its strategy. Apple is giving its original content away free to those who buy its phones, tablets or connected TV devices. AT&T is expected to give HBO Max away to tens of millions of its subscribers. The endgame in SVOD isn’t video but entire ecosystems.