During a conference call with investors on Tuesday, Disney (DIS, Financial) CEO Robert Iger discussed the company’s initial plans for its direct-to-consumer offerings when it rolls out its new service late next year to compete with the digital streaming powerhouse Netflix.
Disney will not try to compete against Netflix (NFLX, Financial) in terms of volume of content but rather will allow consumers to pick and choose individual content instead of the Netflix omnibus one-stop shopping approach. Iger’s vision for the company’s foray into the direct-to-consumer streaming market is for Disney to offer customers a skinnier version of Netflix.
“We feel that [the Disney-branded streaming service] does not have to have anything close to the volume of what Netflix has because of the value of the brands and the specific value of the programs that will be included on it,” Iger said on the call.
Iger believes that the company can best compete with Netflix by allowing consumers to pick their own packages and content.
Iger has stated that Disney will address specific content needs of customers by providing three distinct types of packages it hopes will appeal to potential subscribers with diverse tastes: Hulu, a sports channel and a family-oriented Disney package, with the possibility of providing discounts for combinations of the different services. Iger is betting that consumers are more interested in making their own decisions for content, rather than sifting through a plethora of content Netflix provides.
At first blush, Disney’s strategy for competing against an entrenched Netflix seems rather weak. Iger’s approach rests heavily on his belief that customers will prefer quality over quantity. This is rather presumptuous in light of the fact that Netflix is now offering both quantity and quality.
Netflix has recently been ramping up its original content offerings. Its earlier attempts at production were rather uninspiring. However, the quality of its original content has improved dramatically.
It is somewhat mystifying why Iger dismisses these latest Netflix original offerings as inferior to some of the dated Disney franchises. Netflix customers' appetite for original content is now insatiable, and any company that is going to compete in the steaming market will need to emulate Netflix's approach if it is going to be successful.
Given Netflix's dominant position in the digital streaming market, its successful business model should not be dismissed so cavalierly by Disney. Iger is approaching the strategy from a myopic Disney-studio-only perspective. While there is no doubt that Disney has built a franchise with many of its movies, a global audience may find that some of the existing franchises (X-Men) are getting long in the tooth. There are only so many sequels that can be successfully rolled out after the original.
In short, although Iger believes that the tried-and-true Mickey Mouse properties are sufficient to compete against the digital-streaming companies that are going to enter the fray shortly, he may discover that a 21st century global audience market doesn’t share his views.
His approach may have made sense in a pre-Netflix world, but it is rather presumptuous in today’s market where consumers’ hunger for original content is insatiable. Netflix has responded to users’ expectations; Disney will not.
Iger’s plan seems like old wine in new bottles: His family-focused package is no different than what consumers have been offered on cable for the last 20 years. His approach is indicative of the difficulty of transforming legacy studio and cable entertainment companies into more nimble original content direct-to-customer service.
Given the staggering sum of $71 billion paid for the Fox (FOX, Financial) properties, Disney is going to need to show shareholders that it can convert the prized studio assets into value for the company.
The other difficulty for Disney’s strategy is that it is presenting consumers with a three-pronged package. However, those who elect for Hulu may be disappointed with the offerings, finding the choices rather slim relative to the extent and scope of available content on Netflix. As such, many subscribers are going to prefer the one-stop shopping approach provided by Netflix.
It is also to interesting to note what Disney will not be offering potential consumers of its new digital service recent hit movies such as Black Panther or Frozen. Potential Disney subscribers will discover these films are available only on Netflix or Starz. Much of Disney's existing content, which includes most of the its films from the past decade, will not be available due to licensing agreements with third-parties, including Netflix.
Disney concedes that its strategy is for low volume, low price and lower value than the Netflix model. While this may improve the company’s free cash flow in the near term, it is a far cry from Disney becoming a global entertainment service in a strong position to challenge Netflix with a concomitant valuation reflecting its prominence in the digital streaming market.
It remains to be seen whether Disney’s more limited programming content approach will be sufficient to woo additional customers beyond its loyal fan base.
I have no position in any of the securities referenced in this article.
