How the old guard are fighting back – Disney

Disruption is increasingly a harsh reality for many once‑dominant incumbent, or legacy, companies. Netflix and other streaming content services have upended cable TV. Amazon and other online vendors have challenged brick‑and‑mortar retailers. Tesla has pushed automakers to innovate with its electric vehicles and the promise of self‑driving ones. But these days, some of the legacy companies have recognized how this is playing out and are fighting back aggressively. In a series of three articles,  we look at established “old guard” firms that have shifted their strategy to fight back. 

Disney breaks with the “Linear Television Ecosystem"

Traditional cable and broadcast TV are dying — and, along with it, the business models of Disney and other incumbent creators of movies and television shows.

TV viewing is down with all age groups, except those age 65 years and older; it’s fallen more than 60% for viewers ages 12 to 24 since 2010, according to Nielsen ratings. As ratings fall, so does ad revenue. And cord cutting means the cable subscriber fees paid to content creators are shrinking.

Disney — and other content creators like Warner Brothers, CBS, and Viacom — traditionally sold their products to such distributors as Comcast or Dish in what’s termed the “linear television ecosystem.” This provided content companies with great leverage as content creators didn’t have to build relations with individual consumers and could stuff some channels with syndicated reruns.

But then came Netflix, offering high quality content globally, with no ads, on demand, and at an affordable price — demonstrating that “TV’s future is direct to consumer,”. With currently about 150 million global subscribers, Netflix can invest huge sums in creating content — it came out with more than 50 new shows in August 2019 alone.

To counter, Disney has taken the radical step of pulling back its content from distributors and launching an online, direct to consumer service, Disney+. It also will offer a separate bundle that includes Disney’s majority owned Hulu and a spinoff of its ESPN subsidiary, ESPN+. 

From now on, Star Wars, Marvel, Pixar, and other Disney movie franchises — which collectively accounted for about half of this summer’s US box office receipts — will go to theatres first and then right to Disney+, skipping premium cable channels and DVD sales.

By offering a limited number of blockbuster movies every year, Disney+ will be more event driven and likely function well alongside the ongoing vast selection offered by Netflix.

Disney of course is not alone. Many other content creators are taking similar steps, but few — save perhaps Amazon — have the brand and resources to compete with Netflix for general entertainment.

It’s hard to find legacy media companies that are going to be successful at this. This is a great narrative right now, but let’s check back in five years. 

What we're watching next

Among the key questions facing incumbent firms shifting their strategies in the face of disruption from technological innovators is how much their losses in these transitions may total before potential gains from their new business models kick in. For example, Disney is likely to endure headwinds from forgone licensing revenue as it pulls its content away from legacy distribution channels.

The specific securities identified and described are for informational purposes only and do not represent recommendations.


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