TECHNOLOGY

If Disney Wants to Break Free of Netflix, It Needs a Platform

Disney announced its terminating its relationship with Netflix and building its own streaming services, which need to allow third-party content.

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BY Alex Moazed - 11 Aug 2017

PHOTO CREDIT: Getty Images

Earlier this week, Disney announced it's striking out on its own into the already crowded streaming space.The company that brought the world mouse ears (and now lightsabers and superheroes) is ending its arrangement with Netflix and launching two new streaming services to distribute some of its content.

While this reads like a Hail Mary on the part of Disney CEO Bob Iger, who's about two years away from retirement, the media conglomerate is joining a movement to unseat Netflix as the king of streaming.

Video streaming is a very crowded space: Amazon and Hulu are gunning for Netflix directly as they license content and produce their own, while many others like AMC, FX, and CBS are moving closer to their consumers with streaming sites of their own, though typically bundled with a cable package.

On top of those, there is a bevy of genre-specific streaming sites, including Seeso for comedy, Shudder for horror, or Crunchyroll for anime.

Disney announced that it's increasing its stake in BAMTech from one third to 75 percent and intends to use the technology as the vehicle for the two streaming sites, one dedicated to sports content from ESPN and the other will feature much of the content targeted toward children.

An Expensive Divorce

Disney's move is part of a larger trend of media companies striving to move closer to the consumer, which operates on the assumption that more revenue can be grabbed from consumers than from inking a deal with Netflix.

On this venture, Disney has already spent about $1.6 billion, which was only to gain a controlling interest in BAMTech. Down the line, there's a heap of marketing and engineering necessary to get these new streaming services off the ground.

As well, depending on the price point, customers could demand more content to justify shelling out more money than they do now to watch Disney content on Netflix.

The big unknown here is if Disney, the world's media conglomerate, can stand on its own two feet when it comes to digital distribution. Can it compete directly with Netflix, Hulu, Amazon, and all the rest?

So far, it appears the market doesn't have much room for new streaming services.

NBCUniversal's comedy streaming site Seeso announced it's shutting down later this year, not even lasting two years and throwing several productions into chaos. Things weren't looking good for the experimental company when it made some layoffs in June.

Netflix announced it plans to spend upwards of $6 billion on original content in 2017, much higher than the $4.9 billion it spent in 2015. By contrast, Disney spent nearly $12 billion in 2015, so it should be comfortable footing the bill for more content.

Alas, it's still going to be a very expensive proposition to get these new streaming sites off the ground and the ROI isn't very apparent.

Disney missed its earnings expectations for Q2 2017, with its cable offerings being the chief drag on the results. Declining subscriptions are wrecking ESPN and Disney Channel revenues, which means the company needs to look elsewhere to make up the difference.

While embracing streaming is ultimately the answer to cord-cutting, building out new services in a time of falling revenues will most likely hurt share prices and investor confidence in Iger.

No More Gatekeepers

If Iger and his team want to go it alone on streaming, they need to evaluate how they expect to bring their streaming plays to scale.

The best path to scaling up the new business units will be to open the services to content created by third parties - in other words, drop the linear approach to streaming and create a platform for video content.

For inspiration, Disney executives should look no further than Facebook, which is aggressively expanding into video content via an entirely new tab dubbed "Watch." It's a brilliant move on Facebook's part considering it's largely paying the content creators by sharing revenues generated by advertising.

Disney would be served well to emulate Watch's format, by courting third parties to contribute content and sharing the revenue with them after the fact instead of financing the whole thing or purchasing distribution rights.

Facebook did admit that it funded some shows directly, but only a small percentage of the amount that will become available in the very near term. In so doing, Facebook was able to ensure the quality of some of the content in order to get traction with the new audience while also keeping costs low to reduce exposure if the effort goes belly-up.

It's unknown how exactly Disney plans to monetize, whether through ads or subscriptions or some mix of the two, but it should pursue the business model that gives it the most flexibility at this point.

The media behemoth currently has a small streaming service in play called DisneyLife, which has largely been a small-scale streaming experiment launched in the UK back in 2015. While the underlying technology won't be adopted for the new services, there are plenty of lessons to be gleaned for next steps.

This move is, at its core, Iger's swan song at the company. For his sake and the sake of Disney shareholders, the company should seriously evaluate its post-Netflix strategies and its attitudes toward third-party content.