Disney leads the way

May 1, 2019

Disney leads the way

May 1, 2019
CEO Bob Iger and his team took no half measures.

I have already argued it a few times here: broadcasters are going to convert from business-to-business to business-to-consumer organizations in the coming years. During the last IMTC, Casten Almqvist, CEO of the Swedish Bonnier Broadcasting, gave a very interesting lecture on what all this means for an organization.

The arrival of Netflix and Amazon in Scandinavia fundamentally shook up the media landscape and immediately created the need for broadcasters to profoundly adjust their strategy. Almqvist single-handedly converted the Swedish channel TV4 into a B2C company, but it took about five years to do so. However, the champion of change from traditional media companies is not in Scandinavia, but in the United States. Disney is fundamentally transforming itself into a primarily B2C-oriented organization. Now, of course, the owner of Mickey Mouse already had an edge over other media companies through its extensive theme park operations, where Disney has already gained significant experience in consumer marketing. But the vast majority of Disney's revenue is in its movie and television production and channel portfolio, with ABC and ESPN being its best-known brands.

Until two years ago, Disney followed the same strategy as other media companies. It welcomed streamers like Netflix and Amazon and made a lot of money from these new customers. As with many American studios, Netflix quickly became one of the biggest customers. However, the growth of the streamers began to gnaw at the Disney top management, who had to grind their teeth as American audiences increasingly turned their backs on traditional TV channels. Viewing time on the new platforms increased exponentially and this led to the insight at Disney that with its (top) content new, major competitors of its TV channels were being built up.

It has to be said, CEO Bob Iger and his team took no half measures. Disney announced first of all that it would remove all of its content from Netflix. Of course, that didn't happen overnight, but in the coming year, Disney will be releasing its own products on its own streaming service. In addition, the company realized that it needed more volume to compete with Netflix. The 21st Century Fox content library was acquired in March this year, bringing a large number of interesting titles into the hands of the expanding media group.

It is a mega debt burden, because Disney did not just have a good seventy billion in cash to finance this acquisition. Subsequently, preparations were made to set up its own streaming service called Disney +. This will start in the second half of the year for a price of 6.99. But it does not stop there: ESPN, the champion of the sports subscription channels, is also starting with an SVOD offer. In addition, Disney now owns 60% of Hulu, one of the fastest growing media companies in the United States.

In an investor call this month, the company confirmed aggressive targets for the number of subscribers it wants to achieve: in five years, Disney + should have 60-90 million subscribers, ESPN 10 million and Hulu 60 million, but there is a big catch and hot loss. Disney expects that these streaming activities will not become profitable for another five years, and the company has a vision, for sure. Let's hope that the investors also give the company the time to execute this logical, but also daring strategy to the last gasp.

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Streamers and Screamers

The streaming market is gradually becoming mature. There will still be significant growth, but the tumultuous numbers from the early phase are now behind us. The number of new entrants of any significant size is also drying up, so we can gradually begin to take stock: which companies will survive, which will fail, and what new developments can we still expect?

Let's start with the latter. A few years ago, it seemed that local players could only compete with the big American Tech competitors by working together intensively. In hindsight, this has not materialized at all. Initiatives like the French Salto went under, Britbox eventually became a ‘BBC only’ endeavor (ITV sold its share), we hear little about the Flemish Streamz, and NLZiet in the Netherlands is now cleverly positioned as an alternative to cable, while NPO and RTL are building their own streaming platforms.

Most broadcasters have now realized the critical importance of their brand and are eager to add a +, Play, or MAX behind their names to establish their presence in the digital world. By using the content budget both analog and digital and coming up with smart combinations, they are able to create a new future. With good technology now widely available and no longer a significant barrier, there is no doubt that local broadcasters take charge of their own digital future to survive. The latest in that lineup is Channel 5 in the United Kingdom, which is going to exploit all digital activities under one brand name, 5.

Moreover, the major international media players face significant challenges in keeping their traditional businesses afloat. The write-offs that Paramount and Warner Discovery (WBD) have taken in recent months (each amounting to nearly ten billion dollars!) speak volumes. The traditional business is increasingly under pressure, and investors see that too. For instance, WBD’s stock received a downgrade from Standard & Poor's (to negative). That must cause a lot of pain in the boardrooms.

What does all this mean for the streaming market? First of all, it means that many more local brands will survive than previously thought. All traditional broadcasters are rapidly transforming into digital media companies because they know that otherwise their days are numbered. While the number of local players increases, the number of international players will, however, shrink. The large American media companies are under immense pressure and can no longer afford the investments needed to build international streaming services.

Who will be left standing? Netflix, of course, which systematically expands its first-mover advantage. Prime Video, backed by Amazon's commercial engine. Disney, naturally, with its broad portfolio, will survive despite the painful managerial road it has traveled. And the aforementioned WBD, which continues to invest heavily in (HBO)MAX. Finally, DAZN, though it is still burning through cash. With Apple, you never know. But the other international players are not going to make it. That is certainly something few could have predicted three years ago...

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Victims

It seems that the media sector is resisting the attack of Big Tech by the media sector successfully.  Netflix and Amazon completely dominated the fast-growing streaming market and had strategically maneuvered themselves into an excellent position. After all, streaming was going to claim a share of the viewership market for itself, especially the younger audience. Streaming now has a share of more than a quarter in many countries and that has actually happened incredibly quickly.

In addition, the American majors were feasting on the new customers they could serve. From my own experience, I know that Netflix will became one of Warner Bros' most important customers. It seemed more and more that the media companies were going to make themselves dependent on the new streams. Until Netflix came up  with its 'originals' strategy and most content providers immediately understood the threat.

The result is known. Each self-respecting media company started its own streaming service with Disney as the big pacesetter. Many other companies followed and now the average consumer can no longer see the wood through the trees. Should you subscribe to HBO Max, Viaplay, Peacock Discovery+?  Most of these newcomers have deep pockets through their parent companies. But it is inevitable that, when the marketing money runs out, there will be casualties. There is no room for all these newcomers and it is only a matter of time until the first companies will have to drastically reduce their investments.

In order to provide its own streaming service with enough content and to cope with the Techcompanies, a true takeover boom has taken place in recent years. Who doesn't remember the deal of the century, when Disney acquired Fox Studios. Comcast's mega acquisition of Sky isn't that long ago either. The pinnacle passed the past year: Warner Media, which was acquired by telco AT&T two years ago, was resold to Discovery. Officially, this is a merger, but if you look through the deal, you will see that Discovery is in charge in the new organization. The new boss of this consortium, David Zavlav, comes from the Discovery stable and takes hard decisions in Warner house.

These days, this led to new victims of the stormy developments in the media sector, the top and middle management of the acquired companies. The Murdochs sacrificed their own families in the deal between Fox and Disney. The acquisition of Shine Endemol by Banijay also led to a true exodus of management. The way Discovery decimates the number of Warner managers appeals even more to the imagination. CEO Jason Kielar disappeared quickly and behind him a series of other managers, especially from the distribution organization. To the surprise of many, Discovery cut into its own meat this month, when Benelux CEO Suzanne Aigner had to leave the group. Good news this time for the people on the shop floor: so much has to be produced that their jobs are preserved. There are already victims enough…

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Transformation

Change in the media sector occurs at the speed of light. Just over ten years ago, Netflix was a relatively unknown phenomenon and began its first major original production, House of Cards. This month, Dutch Telecom Paper came with remarkable news: in the Netherlands, streaming has surpassed broadcast in terms of viewing time. It's not different in other countries in Northwestern Europe, not to mention the USA. A true paradigm shift!

It is clear that broadcasters, both public and commercial, need to change fundamentally. A paradigm shift, like the one mentioned above, requires profound changes in business operations. After all, these organizations all face the task of changing from traditional broadcasters into digital media organizations. Top-notch change management is required, and the question is whether they have the courage to take major steps. Some broadcasters believe they can keep their heads above water with a few minor adjustments. Often, they talk about transformation, but in reality, there is little of it. Simply tweaking things isn't enough; a fundamental change of course is needed. Thinking digital-first becomes essential, which has a massive impact on business operations.

Ask TV4 in Sweden and TV2 in Norway, and in their wake SVT and NRK. In Scandinavia, Netflix and Amazon Prime had an early impact. The leadership of these broadcasters quickly realized that these new competitors would make life difficult for them. As is typical in Scandinavia, swift interventions were undertaken, and strategies were overhauled. It soon became clear that this was not going smoothly: two years after formulating a new strategy (with a strong focus on streaming) then-CEO of TV4, Casten Almqvist, concluded that the TV4 ship had not yet changed course. What became apparent? The existing management had no incentive to change and was blocking the necessary transformation. Taking employees along on that journey and, if necessary, replacing them is the core of a successful transformation.

In Britain this now is understood. The BBC was early with its iPlayer. ITV has been fully committed to ITVX for the past two years and is making significant strides. Lastly, Channel 4 is moving full steam ahead, with more than thirty percent of its revenue coming from digital. RTL Nederland is the uncrowned king in the Netherlands and has managed to turn Videoland from a problem child into a promising digital platform. In Germany, broadcasters are also beginning to undergo a profound transition, with commercial channels operating a lot faster than their more conservative public counterparts.

Netflix founder Reed Hastings once called Sven Sauvé, CEO of RTL Nederland, a dinosaur when he refused a licensing deal. But it wouldn't surprise me if a large number of European broadcasters will manage to survive in these turbulent times. As long as they transform!

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