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Disney’s surprise announcement of a new streaming entertainment service — anchored by Disney, Disney Animation and Pixar films as well as new original content and TV shows from the Disney Channel, Disney Junior and Disney XD — could have vast implications for the way movies are distributed. Not only is this decision a major strategic shift for Disney, it’s not inconceivable that a movie like Toy Story 4, Frozen 2 or the live-action The Lion King might be released in theaters and on the Disney streaming service on the same day.
Beginning in 2019, Disney and Pixar films (the jury is still out on Marvel and Lucasfilm movies) will be available to watch only on the yet-to-launch Disney service in the so-called “pay 1 window,” the period in which rights are available to such premium cable networks as Starz and HBO and subscription streamers like Netflix, which currently has exclusive rights to Disney films. By letting the Netflix deal lapse, Disney will walk away from an estimated $200 million to $300 million a year in licensing revenue that is likely pure profit for Disney because the marketing and distribution costs have already been incurred during the theatrical release. No studio reaps more benefits from the economics of home video distribution than Disney.
Therefore, it says a lot about Disney’s view of the future of home entertainment that it is willing to upend the favorable economics of the existing structure in order to seed its own branded service with film product, rather than perpetuate its lucrative licensing model.
To replace the up-to $300 million that will disappear when the Netflix deal ends, Disney would need to attract 8 million subscribers, paying $10 a month, assuming a 25 percent operating margin. With the proliferation of competition in the streaming market, it will be difficult for Disney to sustain this level of scale with 9-month-old films and library content. But what could be a more efficient customer acquisition and retention tool for the new Disney service than Elsa, Lightning McQueen or Dory, brought to your fingertips on opening night?
On a broader level, day-and-date theatrical releases, supported by on-demand digital accessibility, will help Disney forge stronger emotional bonds with its most important customers: children. The current Disney model of windowing content through a Byzantine distribution strategy denies kids ubiquitous access to Disney and Pixar films. By making its movies available everywhere, on-demand, for all kids, Disney films will deliver more moments of comfort, hope, laughter and inspiration. Access will make the heart grow fonder.
Some may doubt that Disney will go day-and-date because the studio has been one of the fiercest proponents of the theatrical window — and one of the lone holdouts against the PVOD model. But times change. Disney can more fully participate in the economics of this shift toward subscription streaming on-demand by cultivating a robust branded service, loaded with high-value product.
New big-budget theatrical films would be the holy grail — making the Disney service a must-have. Also working in Disney’s favor is the growing leverage the franchise-rich studio possesses against theater owners. Exhibitors have become completely dependent on Disney films because they drive massive attendance. If the studio went day-and-date, the theater chains are not in a position to refuse to book its movies.
If the theatrical experience is as differentiated and special as exhibitors and Disney claim, staying home will not be a viable substitute; but for consumers who cannot make it to a theater because it is too expensive or too inconvenient, day-and-date will allow them to see a film in the comfort of their homes. Overall, more people will see Disney films, and its movie business will grow.
Ben Weiss is chief investment officer at 8th & Jackson Capital Management.
A version of this story first appeared in the Aug. 16 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.
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