Forward by Jason Hirschhorn: Disney is a remarkable company. It’s not only one of the few media brands that audiences actually care for, they were able to forge direct-to-consumer relationships decades before “D2C” entertainment became an imperative. Quality, adventure, excitement, creativity – it’s deep in the Disney DNA. And we all feel it. I grew up on Disney. As do my nieces and nephew. Odds are you and your loved ones did too.
With our newest Original, Matthew Ball takes stock of where Disney is today and where it came from – then plots out a vision for the company’s future. If anyone can do it, it’s Disney. I’d bet on them. – JH
Over the past few Originals, I’ve painted a tough picture for the future of media. And in many ways, The Walt Disney Company1has placed itself in a particularly tough spot. Back in 2012, the company made three deals with Netflix that effectively tied up their most valuable content through the end of the decade. Not only would the majority of Disney’s direct-to-video content be exclusive to Netflix starting in 2013, so too would much of its extensive back catalogue. And in 2016, the service would also become the exclusive over-the-top home of the entire Disney library, including all films made between 2012 and 2016, as well as any released through 2019 or 2020 (the exact date is unknown).
Despite its daunting scope, the deal was only incrementally different for Disney. Netflix had simply outbid Starz, which had bought exclusive first-run rights to Walt Disney Studios Motion Pictures since 1994 and the entire Walt Disney Company since 1997. The supplementary sale of Disney’s new direct-to-video releases and decades of catalogue content was essentially found money. There had never been significant licensing demand for most of these titles; all consumption occurred via home video, with the occasional ad-supported broadcast on one of Disney-ABC’s television channels.
In the years since, however, the fundamentals of the traditional entertainment ecosystem have rapidly eroded. In this new, increasingly direct-to-consumer and vertically integrated world, Disney now finds itself in a serious, self-inflicted disadvantage – and one roundly criticized by the investor community. They sold the most important rights to their most valuable content for more than four years, four years in advance and for a mere $300M a year (0.5% of 2015 revenue). As a result, the company had not only impeded its ability to become a scale feed or identity feed, it also helped Netflix become the most dominant video provider in a market where first mover advantages and 1st place mean everything.
However, I’d argue that these deals are – or more likely, have become – more strategic than is understood today. And it enables Disney to surge to the industry forefront by the end of the decade, even if it’s somewhat marginalized until then. Key to this is reviewing the decisions Disney has made since then:
Many have argued Disney’s ongoing reliance on Netflix shows the severity of their initial licensing mistakes (the deal for five original Netflix series occurred within 12 months of the first three agreements). Worse, it shows that Netflix has beaten the House of Mouse just as it has everyone else. Not only is it hard to believe Disney is price maximizing by selling to only one customer, but Netflix’s growing role as the home of all things Disney should give the streaming service significant price leverage. But this concentration is critical for a few reasons. First, Disney is pursuing a platform storytelling strategy, which means driving collective business success, rather than optimizing the returns on any one character, title or even franchise. Fracturing licenses across several services not only undermines this model, it creates a friction-filled customer experience where products, plotlines and audiences can easily fall through the cracks. Conversely, housing them under one (plus Disney’s owned & operated sites) creates “user synergies” – if you loved Daredevil, odds are you’ll watch Jessica Jones even if it isn’t quite your style.
Over the long term, however, I expect this approach to be of even greater consequence. When the Netflix deal ends, I’d bet that the entire Disney catalogue will instantly move to a new Disney O&O service. The fact that it was all contained, used and watched in one place not only creates a stronger ecosystem around Disney content, it gives the audience a single point of transition. All of a sudden – and nearly a decade and half after Netflix, Amazon Video and Hulu launched – we’ll have a massively scaled Disney subscription service. And contrary to popular belief, insiders suggest it will include Disney’s Netflix series, too.
But this Disney subscription service will likely go far beyond just video content. It will also bundle in access to all Disney comics, books, apps, digital games and albums (Frozen!), as well as Disney’s network television portfolio. In addition, subscribers will benefit from discounted theme park passes and merchandise promotions, and in time, the ability to purchase ‘day & date’ theatrical content, too. The groundwork for this, though modest, already exists in Disney’s children-focused UK service Disney Life. While we’ll likely see individualized subscriptions at lower prices (i.e. everything Star Wars, everything Marvel), the core of the offering will be, in effect, Disney as a Service2 (“DaaS”). With new multi-media content released daily.
DaaS also brings unique strategic advantages. By creating a consolidated offering, Disney can diversify its business away from individual title/product successes and with it, the rollercoaster nature of a hit-based business. Instead, the company’s focus will be on the whole Disney offering – every additional unit of content contributes to the consumer experience instead of driving its own end-to-end P&L3. Similarly, direct distribution will enable the company to better ensure the “Disney Magic” by reducing its reliance on 3rd parties, and to grow Disney’s share of Disney IP-driven revenues. And if Disney’s platform filmmaking strategy works, there should be significant value arbitrage in bringing all content in house versus licensing individual content categories to independent services, such as Starz or Netflix. To this end, DaaS will allow Disney to bet more fully on their own IP and storytelling capabilities. One of the problems of the current Netflix deal was that it obligated the Marvel Cinematic Universe and new Star Wars trilogies long before its full-value was made clear. Self-licensing does bring more risk, but it brings significantly more upside too. And finally, a DaaS offering will create both more and higher quality user data for Disney, which should drive better content investments in the future.
Though the shift from distribution partnerships to a directly managed offering will disrupt much of the 92 year old company’s business model, it will also be the most potent iteration of Walter Elias Disney’s corporate vision since it was codified back in 1957:
Only two years after the company’s first theme park opened, Walt detailed an expansive vision for Disney – one where every segment of the business worked in concert. They would develop shared IP, foster shared creative talent and use shared managerial, promotional and financial infrastructure to tell stories that would define generations. Despite the success of this model, Disney was still in the business of selling content: an hour, an episode, a book, a movie, a joke. It couldn’t deliver a sustained experience, establish true direct-to-consumer experiences or escape the tyranny of product and segment P&Ls.
The shift to Disney as a Service will be so significant because it will allow Disney to transform from a company about products, titles and characters to one that sells entertainment ecosystems. Instead of “hiring” Disney for 90 minutes or 30 pages, audiences will hire the company to tell them stories year round and across a multitude of different mediums and formats. This is uniquely possible today – thanks to digital distribution and Disney’s growing experience in multi-product, multi-channel storytelling – but it is quintessentially Disney. And it allows Disney to double down on everything that has made it so great.
That’s what makes Walt’s document so amazing. Not just how old it is and how effective it remains, but that Disney continues to get better at it. What’s more, none of the company’s competitors have been able to successfully replicate it in the decades since. How many companies can speak to the same over such a timeframe?
Much of this is attributed to Disney’s recent bets on “IP”, but this narrative focuses on the company’s boldness without properly crediting its humility. Even after spending more than $15.5B on Pixar, Marvel and LucasArts, the company continued to invest heavily in four home-grown films with “content ecosystem” potential: Tron (released in 2010), John Carter (2012), The Lone Ranger (2013) and Tomorrowland (2015). The pictures enlisted much of Hollywood’s brightest creatives and cost nearly $1.4B to produce and market, but each fell far short of expectations. Three rank among the top 10 box office losses ever (Tron achieved a nominal profit). It’s important to note that over this same period, Disney also began investing in live-action retellings of its animated classics (such as Alice in Wonderland, Cinderella and The Jungle Book). Though highly successful, none of these film were as ambitious, risky or strategically valuable as the company’s quartet of would-be tentpoles4. This suggests, rightfully, that Disney’s business would have been far more modest today were it not for the acquisitions of Pixar, Marvel and LucasArts. But one has to ask how many other studios would have looked at such a tent-pole slate and been willing to invest $15.5B on arms-length studios and foreign IP?
And that’s where the crux of Disney’s culture is made clear. Despite its PG ratings, Disney may be the least sentimental studio. While its competitors focus on forcing their franchises, Disney kills whatever doesn’t work and moves on. What matters is creating stories that fundamentally reverberate with audiences. Whether they’re built or bought, streamed or broadcast, it’s the story that matters; the medium is just the delivery mechanism. Accordingly, it should be no surprise that Disney was first to create a multi-platform content universe, willing to integrate characters they didn’t fully control or benefit from (e.g. Spider-Man in Captain America: Civil War), and has most firmly embraced new content models (e.g. Maker Studios) and formats (e.g. the Disney-Star Wars-Pixar-Marvel mashup video game Disney Infinity).
This sounds academic, but it’s important to contrast Disney’s actions with those of its competitors. DC Comics has been a part of Time Warner since 1969, yet the company has no real theme park presence (i.e. a handful of named rides at Six Flags parks) and has struggled to launch any non-Batman films (only four of eleven released since 2000 grossed more than $100M domestically). Though DC has arguably been the most successful IP owner when it comes to TV, its content remains fractured across CBS, Fox, NBC, AMC, Syfy, WGN and CW (none of which are Time Warner networks, save for CW which it co-owns with CBS). That may be great for the TV studio P&L, but it’s neither fan-friendly nor a true bet on DC IP. Fox continues to obsess on the X-Men and Fantastic Four franchises, despite owning only the film production and distribution rights (with all other benefits accruing to Disney). In addition, the studio lost Star Wars to Disney despite 35 years of distributing the series. And though Fox will continue to release Avatar sequels through 2022, Avatarland will be part of Disney World. When National Amusements split Viacom and CBS, so too did the rights to Star Trek’s film and TV franchises. And so on.
Telling the rest of Hollywood to “be like Disney” may seem unfair, but Disney tries very hard to be Disney. When they bought Pixar for $7.5B in 2006, the company’s market cap was under $50B (and that’s including ESPN). Three years later (during which the company added and then lost $25B in value), the $50B company spent another $4B on Marvel. Even then, Disney felt the need to spend $4B on LucasArts after another three years. And since these acquisitions began, Disney has also invested $30B in CapEx and spent billions more in R&D. Despite this, we’ve seen no other transformative media acquisitions – no Harry Potter, no Pokémon, Riot Games, Blizzard, Shueisha – until Universal’s buy of DreamWorks Animation just last week. These deals would be complex and perhaps messy, but so too were Disney’s. When Marvel was acquired, the company had years left to its distribution deal with Paramount, Universal held the rights to distribute any Hulk-centric films (rights the studio still holds), and, of course, Marvel lacked key rights to the likes of Spider-Man, X-Men, Daredevil and Fantastic Four. More bizarrely, Universal owns exclusive theme park rights to Marvel characters east of the Mississippi (and in Japan). As a result, The Avengers can be found at Universal Studios Florida but not Walt Disney World. Similarly, 21st Century Fox retains the distribution rights to Star Wars: The Empire Strikes Back and Return of the Jedi until 2020. It owns the original Star Wars indefinitely.
Disney’s competitors might be right that they aren’t Disney. And they can’t be tomorrow. It took time and partnerships to build the House of Mouse. Disney hasn’t forgotten. It showed this with its IP acquisitions. It showed it with Maker. And whether it originally intended to or not, the company is now focused on doing it again with Netflix. As always, execution and creative excellence will remain critical – but there’s a reason why Disney is the best positioned of the media companies, despite its rights constraints.
Matthew Ball is a Director of Strategy & Business Development at Otter Media and leads Strategy & Originals at REDEF.
 This piece will exclude all of ESPN, as this business is strategically quite different, operates largely independently and is fundamentally different.
 Making it the unique mixture of a scale feed and identity feed, in part due to the fact there’s no media company that better represents the American identity than Disney’s
 This is particularly important as the margins of individual content categories compress
 The preceding two sentences were added after original publication in order to more holistically summarize the performance of Disney’s film releases.