Walt Disney is to launch direct-to-consumer ESPN and Disney-branded services online in what Chairman and CEO Bob Iger described as 'a major strategic shift in the way we distribute our content'.
Disney is investing $1.6 billion in BAMTech to increase its stake from 33% to 75%, taking control of the streaming technology company.
The long-rumoured online ESPN service will launch in early 2018, with the Disney service launching in 2019. Disney will end its US output deal with Netflix for streaming rights to Disney and Pixar movies. Upcoming titles released theatrically from 2019 - including new instalments of the Frozen and Toy Story animation franchises - will be exclusive to the Disney platform. In addition, the studio said it would produce original movies and TV series for the service.
Disney made its first investment in BAMTech, a spin-off of MLB Advanced Media, in August last year. The acquisition is subject to regulatory approval.On completion, BAMTech will be managed by a separate board.
Disney said the ESPN-branded service will feature 10,000 live events, including Major League Baseball, NHL ice hockey, Major League Soccer, Grand Slam tennis and college sports. Importantly, subscribers of the linear ESPN channels will still be able to access the channels through the app via authentication. Sports packages including MLB.TV, NHL.TV and MLS Live will also be available via the service.
While the ESPN service is likely to be available only in the US from launch, the Disney-branded service is potentially be global - though launches outside the US will depend on existing distribution agreements. Apart from first-run Disney and Pixar titles, and originals, the service will also draw on Disney's massive library. Marvel and Lucasfilm titles may continue to be licensed to other providers like Netflix, said Disney.
On the same day, Walt Disney reported results for its fiscal third quarter ending on 30 June. Overall revenues were flat on a nine-month at $42.4 billion. Operating profits were down 5% over the first nine months at $12 billion. Operating profits at its media networks segment were down 11%, due to lower ad revenues and increased programming costs at ESPN.
Iger claimed that no company is better placed than Disney 'to lead the industry into this dynamic new era'. The Disney chief also spoke yesterday about a future where there is a much more direct relationship between content creators and the consumer. Even so, for the immediate and medium term, Disney will be keeping one foot firmly planted in a traditional industry world with its content continuing to be distributed by theatrical and pay TV operator partners.
Take the ESPN service: Iger said the company had not had any conversations with pay TV operators before deciding to go ahead with the plan and said it had always had the freedom to take ESPN direct. However, he added that the sports network is still a 'must-have' service for pay TV operators. ESPN's diminishing subscriber base and audiences and declining profits have been a recurring theme of successive quarterly results announcements. The cable networks division accounted for two-thirds of overall Disney operating profits in the first nine months of the fiscal year, underlining the need for Disney to do something to reassure investors that it has a plan to exploit the ESPN brand by going direct-to-consumer - following in the footsteps of HBO and others.
An online sports service which Disney has described as 'customisable' makes powerful sense given that ESPN has more live sports available than it can programme on its linear channels. Through the app it will not only be able to offer the more popular US sports like baseball and ice hockey, but could reach more niche audiences with sports like cricket or eSports. At the end of last year, BAMTech signed a $300 million six-year deal with Riot Games to stream League of Legends tournaments.
No details of pricing were disclosed, but Disney could take a leaf out of HBO's playbook by offering the service at a similar price to a traditional pay TV service - at around seven dollars a month for a basic service. This would reduce the risk of more pay TV customers cutting the cord.
An ESPN Direct service - particularly one backed up by a robust technology platform - could well offset the decline in the traditional pay TV business by appealing to a wider pool of non-pay TV customers.
However, the rationale for the new subscription video-on-demand Disney service looks less clear-cut. Disney has been down this road before with Disney Blast in the early days of the internet and more recently Disney Life, so far only available in the UK. News that Disney would not be extending the Netflix deal for Disney and Pixar blockbusters in the US hit the streaming company's share price - but it would definitely be a bigger blow to Netflix if the Marvel and Star Wars franchises were also going.
One of the reasons Netflix has been successful is the wide range of content available on its services. While there are clearly standout Netflix titles like House of Cards and Stranger Things which pull in new subscribers and generate word of mouth, the appeal of the service is more its depth of catalogue rather than the presence of a few tentpole film franchises. It is hard to see a single studio service - even one backed by the mighty Disney - gaining the same traction. And outside the US, Disney has lucrative and long-standing relationships with pay TV partners like Sky, Canal Plus and OSN which it does not want to jeopardise.
With the continuing decline of the US pay TV subscriber base and falling ratings for linear channels like Freeform and the flagship Disney Channel, perhaps the direct Disney-branded service is better seen as a more cost-effective and flexible premium brand rather than a Netflix competitor.