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Disney and rivals risk turning off subscribers to new TV world

The Financial Times logo The Financial Times 4 days ago Richard Waters

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Bundle, unbundle, rebundle.

That cycle repeats itself endlessly in the media world, as new technologies pick apart existing products and services, while giving an opening for newcomers to repackage material in ways that make it easier to buy and consume.

The only question during a period of transition is who the next dominant bundlers are, and how successfully others can navigate the churn.

If anyone can handle the cross currents, it should be Walt Disney. No other company has the range of entertainment brands to leverage, and the depth of experience and partnerships across the industry. So when Disney acts, it is not surprising that it sends reverberations across the landscape.

On the face of it, this week’s news that it is planning to launch two streaming services of its own in 2019 looks like a radical shift.

Taking its movies off Netflix, and making the ESPN sports network available beyond existing pay TV bundles, are direct-to-consumer plays that put Disney in opposition to both old aggregators (the cable TV companies) and new (Netflix).

But it is worth keeping things in perspective. This looks like a classic defensive hedge, positioning Disney in case of more rapid deterioration in one media bundle (pay TV subscriptions) and giving it an alternative to the next dominant aggregators.

Disney is treading carefully. Much of ESPN may be escaping the bounds of pay TV, but not its crown jewels in the U.S.: the NFL and NBA. And the streaming movie service it is planning will not include Marvel or Star Wars. Disney is quite capable of playing this game from both sides at once: Marvel’s successful co-production deal with Netflix shows both have much to gain from future co-operation.

Bob Iger (left) and George Lucas (right) flank the Darth Vader character at the Disney Hollywood Studios theme in Lake Buena Vista, Florida: Robert Iger, George Lucas, Darth Vader...FILE - In this May 20, 2011 file photo, Disney CEO Robert Iger, left, and Star Wars creator George Lucas, third from right, talk to the Star Wars movie character Darth Vader, center, onstage at the Disney Hollywood Studios theme park during the re-opening celebration of the Star Tours motion simulation ride in Lake Buena Vista, Fla. Disney announced on Oct. 30, 2012 that it would buy Lucasfilm for $4.05 billion and resume making “Star Wars” movies, starting with Episode 7 in 2015. For Star Wars fans, the announcement has generated a lot of speculation about what direction the series will take. (AP Photo/Phelan M. Ebenhack, File)© AP Robert Iger, George Lucas, Darth Vader...FILE - In this May 20, 2011 file photo, Disney CEO Robert Iger, left, and Star Wars creator George Lucas, third from right, talk to the Star Wars movie character Darth Vader, center, onstage at the Disney Hollywood Studios theme park during the re-opening celebration of the Star Tours motion simulation ride in Lake Buena Vista, Fla. Disney announced on Oct. 30, 2012 that it would buy Lucasfilm for $4.05 billion and resume making “Star Wars” movies, starting with Episode 7 in 2015. For Star Wars fans, the announcement has generated a lot of speculation about what direction the series will take. (AP Photo/Phelan M. Ebenhack, File)

All of this helps to explain why this week’s move, though seismic, has had only modest impact on Netflix’s stock price. It has navigated the first two stages of growth: first building a massive audience on the back of other companies’ content libraries, then becoming a successful producer in its own right.

The next challenge is to maintain its lead, at a time when many more subscription video bundles are on offer.

Though talk of “subscription fatigue” is common, it is important to distinguish between three types.

One stems from being required to pay a monthly subscription for something you once bought only once. This is the kind of fatigue many customers of the software industry are facing, as paying for a licence gives way to cloud services. Parents of young children will know the feeling: where they could once occupy their offspring cheaply by playing the same DVD of The Lion King many times over, they are one day likely to be paying for monthly access.

A second type of fatigue comes from the tendency of subscription businesses to keep raising the price. The formula, as perfected by cable TV companies: add more to the bundle to justify raising the price, until customers balk. Then offer a discount — before raising the price again.

The average monthly cable bill in the U.S. is now over $100, up from around $71 at the start of the decade. This is often listed as a source of customer anguish. But it is also a hugely positive sign for the industry, showing that people have been willing to allocate a larger share of their disposable income to entertainment.

The third type of fatigue is caused by managing too many different subscriptions. It is not just that paying a la carte risks costing customers more. The job of selecting the services to subscribe to, and switching each time more attractive shows appear, is a time-consuming headache

This is also a problem for the entertainment companies, forcing them into much higher spending on customer acquisition and creating churn. That, of course, is one of the main reasons why rebundling inevitably follows.

Deeper disruption may still come from elsewhere, of course. Outsiders with different business models play by different rules. They include Amazon, which bundles video with its Prime service to support ecommerce, and Facebook, which is about to experiment with a new short-form video service called Watch to capitalise on the largest audience of all.

But that is a different story. As long as couch potatoes remain happy to pay up for movies and TV shows, companies such as Netflix and Disney have much to gain from the combination of co-operation and rivalry that will shape the post-TV world.

richard.waters@ft.com

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