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Disney Brings Down the Hammer

Like the thundering crash of Thor’s hammer, Disney sent shock waves through the media industry in December 2017 with a bold move to muscle-up its content by agreeing to pay $55 billion for 21st Century Fox’s movie and television content, cable networks including National Geographic, stakes in Hulu, Sky TV, 22 regional sports networks, and a majority control of streaming-video service Hulu.  For perspective, this is more than three times what Disney paid for the combination of Pixar in 2006 for $7.4 billion, Marvel in 2009 for $4 billion, and Lucasfilm (Star Wars) in 2012 for $4 billion.  This colossal deal, if approved by regulators, will add Avatar, X-Men, Fantastic Four, Planet of the Apes and the rights to the first six Star Wars movies to Disney’s unrivaled treasure trove of characters. 

 

Disney wants to take control of its content and have a direct relationship with consumers to create long-term value.  As strong as the Disney brand is, the only real direct relationship Disney has with its consumers is through its theme parks.  With its own branded streaming-apps, Disney can more effectively compete with the deep pockets of new media companies such as Amazon, Netflix, Apple, Google/Youtube, and Facebook.  Disney can use machine-based learning to effectively serve its media customers in the same way its theme parks collect digital records of the attendance and buying habits of its customers to more effectively market.

 

Consumers today demand what they want, when they want, and where they want.  Old school may call its spoiled behavior, but it is the reality today.  Technology is the enabler.  Television has transitioned from three network channels in the 1950s, to the myriad of cable channels that few ever watched but had to buy as a bundle, to an explosion of content that is increasingly viewed on mobile devices by an empowered consumer who is selective about what content they will pay for.

 

In few months Disney plans to introduce a subscription sports app called ESPN Plus which will stream a variety of live sports and offer sports scores and highlights.  In the later part of 2019, Disney will introduce a family-friendly Disney branded app featuring Disney, Pixar, Marvel, Star Wars, and now Fox movies as well as thousands of hours of television content.  Disney says the price will be “substantially below where Netflix is” due to less volume initially but can increase as content grows.  Disney will produce original series for TV such as a Star Wars live-action series, Pixar Monster series, High School Musical and others.  Since Disney will control Hulu, it plans to stream adult-oriented content that will compete more directly with Netflix.  Netflix’s subscribers have grown from 23 million in 2011 to over 109 million, with about one-half in the U.S., for a stunning 30% growth rate.  Meanwhile, Disney’s ESPN subscribers have fallen from 99 million to 88 million over the same period as viewers switch to the internet from cable and satellite distribution.  Disney has always believed, and we agree, that content is king compared to value of distribution alone.  The combination of Disney’s unmatched content creation with control of distribution will generate a competitive force that any superhero would envy.

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