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Did Disney just blow up the entertainment business?

August 8, 2017, 4:03 PM · The Walt Disney Company just lit the match to blow up the entertainment business as we know it. Granted, other companies — as well as the federal government — for years have been piling up the dynamite to fuel this explosion, but it looks like Disney will provide the "one little spark" that could make it blow.

Disney announced today that it will end its distribution agreement with Netflix and launch its own direct-to-consumers online video streaming service in 2019. Why is this a big deal? Because it could allow Disney to push a whole lot of other companies out of business. But if Disney's not careful, this move could put Disney's own future at risk, as well.

Imagine if film studios owned their own movie theaters. If you wanted to see the latest Pixar or Star Wars movie, you'd have to go to the nearest Disney-owned theater. Want to see the latest Fantastic Beasts or Wonder Woman film? You're off to the local Warner Bros. theater. Fast and Furious or Despicable Me's Minions? They are at Universal's theater. And so forth.

That's what could happen online if studios all end up developing their own streaming services, as Disney now is proposing to do. Instead of having Netflix or Amazon licensing films and TV shows from multiple studios, each studio could have its own service, forcing customers to subscribe to a whole bunch more services if they want to see everything Hollywood has to offer.

Of course, most of us can't afford to do that. So we will end up subscribing only to a few services. And that could force smaller studios out of business, if not enough people subscribe to their services and they can't sell their films and shows to bigger studio-controlled ones.

Netflix actually anticipated this happening, which is why in recent years it has dropped billions of dollars to essentially become a studio and create its own original programming. Netflix wanted to ensure that it hooked enough consumers on its own Netflix originals before other Hollywood studios pulled their content to create their own streaming services.

Now, some of you with really long memories — or legal training — might remember that example I gave of movies studios owning their own theaters was not hypothetical. That's actually how studios operated in the early part of the 20th century. However, a 1948 Supreme Court case, United States v. Paramount Pictures, ruled that practice illegal — a violation of federal anti-trust laws. Studios were forced to sell their theaters, theaters were free to book films from any studio, and eventually more studios got into the business as established Hollywood players no longer could block the access to screens.

So if studios controlling the places where their films are shown is illegal, why can Netflix make its own shows? For that matter, why can NBC create its own TV shows, or Disney show its own movies in its theme parks?

Well, in 1948, television wasn't yet a well-establish medium, Disneyland hadn't opened, home video stood decades away, and the Internet was just science fiction. Movie theaters were the only places for filmed entertainment to be shown. If a studio controlled those, then there were no other options for independent studios or filmmakers.

Over the years, the federal government hasn't succeeded in applying United States v. Paramount Pictures to studio control in other media, mostly because TV networks, streaming services, and even theme parks continued to license content from other studios, in addition to their own. So long as independent producers have access to the market, the precedent established by United States v. Paramount Pictures doesn't seem to be an issue.

But let's keep talking about access to the market for a moment. Because here lies the huge risk to Disney. Imagine if NBCUniversal decides to create its own streaming service, in response to Disney's move. That's not a stretch — Universal has a huge library of films and TV shows that would make its service an attractive option for millions of consumers. (Do you know what is the highest grossing animated franchise of all time? It's not anything from Disney or Pixar. It's Universal's Despicable Me.)

NBCUniversal actually would have a huge advantage over Disney in online streaming because it is owned by Comcast, one of the largest providers of Internet access in America. What if Comcast decided to allow its customers access to an NBCUniversal streaming service at a discount? And not to count any time watching that service against their data cap?

What if Comcast took it further, and charged its customers extra for an Internet plan that would allow them to watch Disney's streaming service? Or if Comcast barred its customers from accessing Disney's service altogether? Disney doesn't own an Internet provider, so it would have no way to protect its access to the market if competitors such as Comcast took this approach.

Fortunately for Disney, the federal government has had a policy of enforcing "net neutrality," which prohibits Internet providers from favoring any one type of requested content over another, such as the ways I described above. Unfortunately for Disney, however, the current administration, almost all Republicans, and even a few Democrats are trying to eliminate net neutrality. Comcast could get to wipe a Disney streaming service off the Internet for its customers, if they succeed.

So Disney either needs to deploy its lobbyists to Capitol Hill to step up campaigning for net neutrality... or it needs to get a move on with that long-rumored merger with AT&T.

One way or another, the entertainment business is about to get even more political. Disney's move will increase pressure for entertainment companies to merge or take over competitors in order to survive. And it likely will force independent studios and filmmakers to get creative to save their business as access to the market narrows.

But Disney's move also could create enormous opportunities for filmmakers and creative talents working with or within Disney, as the Mouse will need a lot more content to keep its streaming customers happy.

Like I said, things are about to blow up in Hollywood. Throw some popcorn on the fire... and let's get ready to watch what happens.

Replies (27)

August 8, 2017 at 4:25 PM · I wonder if Disney is thinking that this is also going to be the only way to get ESPN to be profitable again...

I also wonder if the new app's insatiable appetite for content is going to cause Song of the South to be released in the States.

August 8, 2017 at 4:43 PM · @Jeff Elliott

FACT CHECK: ESPN once again reported another "profitable" quarter.

May want to check your data source.

August 8, 2017 at 5:06 PM · Okay, let's go with "no longer losing subscribers at an alarming rate."
August 8, 2017 at 5:27 PM · I wonder how this move will affect Hulu, which is jointly owned by NBCU, Fox, Disney/ABC, and Turner?
August 8, 2017 at 5:29 PM · Well, this really shouldn't surprise anybody. Distribution of anything is on a bit of a slide.

Part of ESPN's problem is that sports team want a piece of the action. That is why the Bulls, Cubs, Sox, and Blackhawks all appear on Comcast SportsNet. It is half owned by the teams (well, owners) and the other half is own by Comcast (pre merger). Keep the money in Chicago instead of sending it to CT or CA.

Robert and my Alma Maters Northwestern and University of Illinois are in for the prize as well with the B1G TEN Network.

Why pay somebody else for something you can do yourself?

It was either going to be Disney or NBCUniversal. Disney decided to draw the first blood.

August 8, 2017 at 5:32 PM · I'm curious how the El Capitan Theatre in Hollywood gets around the United States vs Paramount ruling. They show exclusively Disney movies and I believe they are owned by Disney. If Robert or any legal experts could weigh in, that would be much appreciated!
August 8, 2017 at 5:35 PM · Synergy on steroids! It makes me think Ben Sherwood, current President of Disney-ABC Television Group, could very well be in line to succeed Mr. Iger as CEO.
August 8, 2017 at 6:52 PM · Something tells me this is a political announcement on the part of Disney to soften the competition and display their willingness to "go it alone" if others, like Netflix, don't start making better deals. It was said that Disney's entire animated film library would be on NF this fall.

While Disney has the money but they don't have enough programming. There is more to the announcement than meets the eye. Bet on it!

August 8, 2017 at 7:05 PM · Will definitely be hard for other companies to not have Disney, Pixar, Star Wars, or Marvel on their services. I know I would probably switch over from Netflix to the Disney service when it came out.

Though, the Office alone may be enough to keep my allegiance.

August 8, 2017 at 7:44 PM · Netflix produces Marvel properties like Iron Fist, Jessica Jones, Luke Cage, and Daredevil. Will they withdraw those licenses? Disney wanted to stream their own movies for years, but they failed. I wonder how this time is better.
August 8, 2017 at 7:51 PM · Disney films will continue to appear on Netflix through 2018, and it appears that the Marvel relationship might continue beyond that.
August 8, 2017 at 9:45 PM · Is Iger still on Trump's advisory board?
August 8, 2017 at 9:49 PM · But didnt AT&T just merge with Time Warner??

AT&T would have to divest some assets to merge with Disney such as DC Comics and Looney Tunes.

I bet you Comcast would be more that interested in acquiring those properties. At least it wouyld make them more willing to relinquish the Marvel Theme Park rights east of the mississippi river if that were the case.

There was a rumor that Verizon might be interested in Disney but they seem too leveraged to make a bid on Disney.

Disney might considering then buying a bunch of internet providers to come close to the reach that Comcast and AT&T has such as Clear Channel and/or Sprint.=)

August 9, 2017 at 12:09 AM · AT&T & TW isn't a done deal, regulators could knock it back, but given that TW is basically exclusively content and AT&T is the delivery method (telecoms) I can't see that facing much of a major challenge as there's basically no overlap. A Disney deal would be more complicated.

I'm disapointed about this, I hope it's US only not worldwide... ABC1 (AKA non stop Scrubs and 8 simple rules) died as a channel here a long time ago. ESPN carved out a niche for relaying US sports and put that all in Jeopardy by playing against Sky (read as "Fox does DirectTV") for Soccer rights (it won some rights but the whole business failed and closed down). I know Disney do offer a kid marketed streaming platform, but I'm not going to sign up to yetanotherplatform (tm).

August 9, 2017 at 1:07 AM · As fast as technology changes now, that seems like a long way off. So many things could be so different by then anyway - completely different delivery systems, devices,...
Could get very interesting.
August 9, 2017 at 4:48 AM · I have seen so much negative news about this move. I think its a great idea and I actually have it because it already exists in the UK as Disney life and its only £5.00 a month. It is good but it will be brilliant once they can add star wars and marvel to its roster
August 9, 2017 at 5:07 AM · Disney has always tried to be the maverick in terms of control of their intellectual property. The way they kept movies in their "vault", pulling them from availability, limited many of their films' TV presentations to the Wonderful World of Disney, even down to how their VHS tapes were all in those puffy boxes that never fit in properly with the rest of your movie collection.

Disney likes to be separate, to improve their brand recognition, and are capable of doing that due to how the company has developed and controlled its inventory. And, sure, Universal has a vast array of entertainment sources to consolidate their product on the net. But as Warner's and Paramount have shown in the past (with The WB and UPN, respectively) not all studios are created equally. Just because Disney can do it, or Universal (or even Fox) doesn't mean they all can.

Should be interesting to see how Disney's profits go, and see how many try to follow suit. And how many fail, and end up crawling back to services like Netflix.

August 9, 2017 at 6:10 AM · Sounds very similar to Disney Life? Launched in the U.K. A while ago at £9.99 a month, then got reduced to £4.99, and now you get a year free when you book a Disneyworld trip.

So based on all those reductions it can't be going that well!

August 9, 2017 at 6:11 AM · @Anthony - BTN is a joint venture between the B1G Conference and Fox. While it operates as a separate entity with it's own subscriber rules, it is backed by Fox, and utilizes Fox-owned talent, equipment, and support staff. The Pac-12 network operates the same way (under Fox), but obviously hasn't been nearly as successful as BTN. Being an alumnus and supporter of the University of Maryland, which recently moved to the B1G, I have read a lot about BTN, how it works, and what makes it successful. It's success is solely because of the contract Fox developed with cable/satellite providers that requires that they all provide service to viewers in B1G territory (which now includes the lucrative DC and New York City markets with the additions of Maryland and Rutgers) as a basic cable channel (not on a separate sports tier), and MUST pay rights fees to broadcast the network to every single subscriber or risk losing access to Fox, FS1, FX, FXX, Fox News, etc... It's a brilliant strategy, and has netted the conference billions that every other major conference has tried to replicate without success.
August 9, 2017 at 6:28 AM · In terms of this Disney streaming service, I think ESPN is the linchpin, and how they choose to manage content from the "Worldwide Leader" will be critical to the success of the network. CBS/Viacom has failed miserably to launch their own streaming service (CBS All-Access) because there's very little original content (Star Trek: Discovery, which was supposed to launch at the start of the network won't get off the ground until later this fall), and most of the other content is undermined by DVRs and VOD through cable systems.

Honestly, Disney could launch a streaming service solely around ESPN and be successful, but by lumping all of the company's content under 1 umbrella allows it to appeal to a wider range of users. In reality, they already have a streaming service as all of their networks (and catalog of Disney movies) are available for direct streaming through individual applications (ABC, Disney Channel, Disney XD, Freeform, ESPN, Disney Movies Anywhere, etc...). The only difference with this service would be that all of the individual apps would be gathered under one service and instead of validating users through their cable subscriptions (or movies they own in their digital account), users could pay Disney directly for access.

How Disney manages access and content will be critical. If ESPN is still available on cable/satellite packages at the same price it is through the new streaming service, potential viewers are likely to stay with their current providers. Disney has to make the service appealing financially, while not losing their core audience. I'm not sure how many users have switched to viewing ESPN through the app, but I can say that I watch ESPN probably 30-40% through the app (frequently as a second screen while I'm watching another ESPN-broadcast event on my television). There have been surveys recently to indicate that the number of televisions being sold over the past 2 years has significantly declined, with the thinking that fewer and fewer people are actually watching TV in their homes and increasing viewing on phones, tablets, and computers. If that is indeed the case, then this move to a streaming service positions Disney to cut ties with cable/satellite providers the second that model collapses, which could occur within the next 5-8 years.

August 9, 2017 at 8:05 AM · Isn't this the 3rd or 4th time Disney has tried to do this? And once again they have no IT infrastructure to support it. This time buying the leftovers of MLB Advanced Media to do the heavy lifting. MLBAM has some interesting tech, mainly the great MLB At Bat. However, I don't think that's included in this deal. It sounds like only the "streaming tech" division is included in this deal. I haven't had MLB.tv for a couple of years, but their streaming service was not great. Barely able to maintain an SD signal most of the time.

Hopefully things have improved.

August 9, 2017 at 10:11 AM · @Jeff D - The company that Disney acquired to manage this streaming service is called BAMTech. As you noted, the company manages streaming for MLBTV, but also does the same for HBO, NHL, and WWE. The only issue I've had with MLBTV is that it blacks out local teams even if you're not in the local area. For instance, while traveling to Cedar Point, we would have been unable to watch the Washington Nationals even though we weren't in DC and the Nats weren't playing the Tigers, Indians, Reds, or Pirates (the Baltimore Orioles, our other local MLB team was playing the Tigers, so a local blackout would have applied in Sandusky, OH). However, that really has nothing to do with BAMTech or their ability to provide service.

I know a lot of people that have WWE Network, and love it, and we occasionally use HBOGo without any issues. Remember that streaming services are only as good as you internet connection, so if you have a crappy ISP, it doesn't matter how good the streaming service is.

Clearly BAMTech will need to do some serious upgrading to handle the numbers that ESPN (and ABC Sports) will pull. There may also be issues involved with certain league contracts that may not allow ESPN to stream events exclusively, or at all (I know CBS was prohibited from streaming certain NFL games last year). However, the fact that Disney spent $1.58 billion (over a third of what it cost to purchase the lucrative LucasFilm) to acquire the company means they're serious about this venture.

August 9, 2017 at 10:21 AM · I wonder if they will pay the ISP providers to have their content delivered quick and fast through the internet pipeline? I had HBO Now on Apple TV and it buffered all the time. I dropped it and stream it from Amazon and magically no buffering......
August 9, 2017 at 10:38 AM · From an Englishman looking in, what a fantastic reasoned article and steller responses. Best article and comments I have read for a long time on any subject. We could be seeing a genuine paradigm shift in media distribution. I honestly don't know if it will be good or bad but as long as this website is still accessible without subscription........who cares!!
August 9, 2017 at 1:34 PM · And it's only (at this point), supposed to be Disney (and Pixar) content.

Marvel, Star Wars, etc. could still be licensed to Netflix.

This isn't surprising (and it's 2 years away), so it's possible things / agreements could change.

Plus Disney's deal with Netflix is relatively new, (and Netflix cycles content ll the time)

August 9, 2017 at 5:14 PM · Disney will be fine...They have deep pockets with Star Wars and marvel license and can now print money...They can afford top writers and directors for content of all types...As soon as they announce line of marvel and I'm sure Star Wars spin off tv series it's a wrap...the only question is where do I sign up?
August 11, 2017 at 2:53 PM · This could put Universal out of business.

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