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To take on Netflix, Disney faces a challenge in embracing technology

CEO Robert Iger has proven he can build a content behemoth, but Disney's technology track record is spotty.
Image: Chadwick Boseman as T'Challa in Black Panther
Chadwick Boseman as T'Challa in "Black Panther."Marvel Studios

Disney is known for its success on the big and small screens, but rivals from the technology world are forcing the company to confront a difficult question: can it transfer that dominance to a Netflix-style streaming business?

This is the question hanging over CEO Robert Iger, already credited with leading Disney to new heights. Under his leadership, Disney has managed to do what was previously thought impossible — release a stream of billion-dollar blockbuster movies including “Star Wars: The Last Jedi,” “Black Panther” and “Avengers: Infinity War.”

But the days when Disney could concentrate on churning out movies and TV shows are coming to an end. Now, the Disney chief has to push his company in a new direction — how to develop the technology and infrastructure to create a new online, direct-to-consumer entertainment service.

“The real challenge for Disney is that most of the times Disney has touched technology, it’s blown up,” said Rich Greenfield, an analyst at financial analysis firm BTIG research and an outspoken an influential analyst at BTIG and a regular critic of Disney. “It’s been the polar opposite of every time they touch content.”

Disney is already playing catch-up to Netflix when it comes to distribution technology, and Netflix has been ramping up its own content production. In May, Netflix briefly overtook Disney’s market value despite making far less money, signalling that investors see a brighter future in Netflix’s direct-to-consumer model.

Anticipation is building for “Disneyflix,” the industry nickname for the company’s forthcoming Netflix competitor.

“Investors underestimate how difficult direct-to-consumer is,” Greenfield added. “Success is not going to be measured in millions. It’s ‘Can DisneyFlix be in 100 million to 200 million homes worldwide?’”

A better mousetrap

Disney recently locked into place the first big piece of its strategy. At the end of July, Fox shareholders voted to approve Disney’s $71.3 billion acquisition, a move that will transfer the ownership of TV shows such as “The Simpsons” and Fox movie franchises like “X-Men” into the Disney fold. Disney’s bid won out over a rival bid made by Comcast, owner of NBCUniversal, the parent company of NBC News.

Disney has a long track record of acquiring content — including major entertainment brands Pixar, Marvel and Lucasfilm — and turning those into highly lucrative operations. But building a global technology service will challenge even Iger’s lengthy experience in the business.

Luis Cabral, a professor of media economics at New York University, said companies like Netflix that first focused on distribution have shown a knack for learning to make content. Content companies like Disney, however, haven’t fared as well in learning digital distribution.

“The Netflix example suggests that it’s easier for distributors to enter into content creation quickly than it is for content creators to get into distribution quickly,” Cabral said.

Disney is still making plenty of money from its TV and movie businesses, but conventional wisdom in the media industry is that cord-cutting combined with the advantages of the direct-to-consumer model — consistent and predictable subscription revenue and reams of customers data — is the future.

“In this regard, Netflix and Amazon are way ahead of the competition, Cabral said. “Disney, in turn, has great content, but is nowhere near Netflix in terms of consumer knowledge and consumer access. This is something they will have to figure out.”

But Disney can’t rush into the direct-to-consumer model. The company still makes billions of dollars — Disney reported on Tuesday that it generated $15.23 billion in revenue in the third quarter — through its traditional media business. If Disney pushes too quickly into a direct-to-consumer business, its current distributors will have less incentive to pay bigger carriage fees to Disney’s outsized bundle of channels.

Iger addressed those worries, noting that Disney’s partners realize that the industry is changing.

“Traditional distributors are very interested in distributing our DTC products,” Iger said. “We actually believe they can live side by side and not necessarily create issues. Reality has set in that the business is changing and consumer habits have changed."

Disney declined to comment for this article.

Technical difficulties

Disney has invested in technology companies for decades, but its track record with them is spotty.

In the late nineties under CEO Michael Eisner, Disney acquired a 43 percent stake in Infoseek for $70 million and then bought the rest of the company for $1.7 billion the following year, only to close it down after three years. One of the Infoseek engineers, Robin Li, went on to become a founder of the Chinese search engine Baidu, which made him one of the richest men in the world.

In 2006, Disney put a scare into the movie rental industry with MovieBeam, which was supposed to make it easy for people to order movies right into their homes. Disney and its partners put $100 million into it, but ended up selling the fledgling business for $10 million in 2007.

There have been a host of other false starts including Playdom, the social gaming developer, acquired in 2010 for $763 million. By 2014, Disney Interactive had laid off 700 people, mostly hailing from the Playdom unit.

Todd Klein, a partner at Revolution Growth, a venture capital firm that invests in media companies, said Disney’s tech and digital acquisitions have underperformed, but noted that the company has made a variety of bets on young companies.

“It’s clear that relative to the way they’ve executed on [content], those have not performed to the levels you would expect,” Klein said “Those were relatively nascent when they bought them.”

The magic kingdom

Disney has seen some success as an early adopter. The company was one of the first to sell its TV shows in Apple's iTunes store, a move it made without asking for permission from its station group partners. It was also arguably the first broadcast network to allow viewers to watch full shows online, via its ABC player. It also pushed into live streaming sports with its ESPN Watch app.

ESPN’s technology expertise is in the midst of being centralized at Disney under Kevin Mayer, the company’s chief deal maker who is now chairman of the company’s direct-to-consumer and international operations.

Disney has also assembled a variety of parts that together could make for a formidable digital offering.

Disney will soon be the majority owner of Hulu once its deal to buy Fox’s entertainment assets is finalized. Hulu had been started as a joint venture between Disney, Fox and NBC (AT&T is also a shareholder), growing to 20 million subscribers. It remains to be seen what Disney will do with Hulu, but the service provides Disney with a brand familiar to consumers that also has experience with the nuts and bolts of a subscription service, such as billing.

Disney also owns BAMTech, which became one of the industry leaders in streaming video after it was started by MLB Advanced Media to livestream baseball games. BAMTech now powers the ESPN+ service, a direct-to-consumer product that costs $4.99 per month.

But BAMTech has its own challenges, including whether to continue servicing outside clients such as WWE and other third parties or focus exclusively on Disney, according to three people familiar with the company who asked to remain anonymous for fear of jeopardizing business relationships. HBO has already parted ways with BAMTech.

ESPN+, which launched in April, represents one of Disney’s first homegrown efforts at a direct-to-consumer business. The service currently offers a variety of live sports, though not the company’s main cable channel with its marquee events such as Monday Night Football, since ESPN has been cautious to not cannibalize its existing subscriber base.

Iger said on Disney's earnings call on Tuesday that the company had "relatively modest expectations" for ESPN+ and that uptake of the service had been "encouraging" but declined to provide a specific number.

"We've added nicely to that product," he said.

Iger also said on the call that the company could package its “Disneyflix” service, Hulu and ESPN+ together for consumers, but that consumers wanted more freedom in choosing their video offerings and that he didn't want Disney to replicate the broad multichannel bundle.

Nor is Iger particularly eager to compete with Netflix in terms of just how much content the company plans to create.

"We're going to walk before we can run when it comes to volume of content,” Iger said.