Why is Disney walking away from a deal which nets them as much as $300 million a year?
That’s what Ben Weiss, chief investment officer at 8th & Jackson Capital Management, wondered when Disney announced its intention to end its licensing deal with Netflix in 2019 in order to launch its own streaming service. By Weiss’ reckoning, Disney makes between $200 and $300 million a year in pure profit from its Netflix deal.
That’s it? They probably have that much cash just lying around Disney Headquarters, like, “Here’s the break room, here’s the mail room and here’s the money room where we stash our mad cash. We like to sometimes stand and stare at it, get lost in thoughts of how rich we are. And you bet your ass we Scrooge McDuck-swim in it.”
No, but seriously, Disney is insanely successful (or at least they would be if freakin’ ESPN wasn’t in such a cord-cutter-induced tailspin right now, but that’s a story for a different day). You probably think they can recoup that profit from Netflix no problem even with everything they’ll now have to spend on advertising, server maintenance and original programming to make their streaming service palatable.
Weiss ran the numbers, though, and here’s what he found:
To replace the up-to $300 million that will disappear when the Netflix deal ends, Disney would need to attract 8 million subscribers, paying $10 a month, assuming a 25 percent operating margin. With the proliferation of competition in the streaming market, it will be difficult for Disney to sustain this level of scale with 9-month-old films and library content.
As a frame of reference, Amazon Prime has 80 million U.S. subscribers (although only around 70% of those subscribers actually use the streaming video part of their membership) compared to Netflix’s 51 million, Hulu’s 32 million, HBO Now’s 2.4 million, Showtime’s 1.5 million and CBS All Access’ 1.4 million (the HBO and Showtime numbers don’t include cable subscribers). That’s the market Disney is jumping into, and they’re not only doing it with their Disney-branded products but also with ESPN since they will launch a separate streaming service for the beleaguered sports leader next year.
You bet against Disney at your own peril, but we can’t automatically assume they’ll pick up those 8 million necessary subscribers no problem just because they’re Disney. I mean, they probably will because, again, Disney, but Weiss wonders if they’re cooking up something special. What if they’re planning to make their new movies available on their streaming service at the same time they’re playing in theaters? There’s been no suggestion that they’re actually heading that way. In fact, when Disney’s CEO first announced this new service reports got the distinct impression that many details have yet to be figured out, such as whether or not the new Disney service will just include Disney-branded programming or also LucasFilms and Marvel. But Weiss laid out the case for a day-and-date strategy anyway:
On a broader level, day-and-date theatrical releases, supported by on-demand digital accessibility, will help Disney forge stronger emotional bonds with its most important customers: children. The current Disney model of windowing content through a Byzantine distribution strategy denies kids ubiquitous access to Disney and Pixar films. By making its movies available everywhere, on-demand, for all kids, Disney films will deliver more moments of comfort, hope, laughter and inspiration. Access will make the heart grow fonder.
Would the theaters stand for it? If it was anyone else, absolutely not. But if it’s Disney how can they say no? Plus, even though to this point Disney has been the fiercest opponent of premium video on demand proposals it might be because they’ve been building up to this very moment where they could keep it all in house.
This is the type of idea which has come up before and keeps getting kicked down the road. The studios hate the voluntary windowing system determining when movies can play or be sold where, but the theaters insist it’s central to their business model. Could Disney blow it all up in 2019? Just because one analyst thinks so doesn’t mean it’s actually happening. Disney might still be of the belief that why use Frozen 2 to suck in subscribers in 2019 for $10 a month when you can charge $10 per person at the theater all the while knowing that everyone will see it multiple times? At least for now. Their move into streaming might be made with an eye toward the future, one where day-and-date premium video on demand is a real thing by which point they’ll already have millions sucked into their Netflix-lite service.
What do you think? Let me know in the comments.