Disney Plans to Cannibalize Itself

As the video entertainment market shifts to over-the-top distribution methods, content providers will face a problem telcos are well aware of, namely revenue issues caused by product substitution.

Much of the cost to Disney of launching its new streaming services will come from increased operating costs, as it will have to market itself, instead of relying on its distribution partners to do that. UBS has estimated that cost at about $806 million annually.

That is not even the biggest cost, though. As many legacy product providers often find, new products often simply cannibalize existing products.

When an internet service provider using digital subscriber line shifts to newer platforms such as fiber to the home, it loses a DSL account for every existing customer it converts to a fiber access. So net gains are the issue, as a telco trades lost DSL accounts for new fiber accounts.

That problem is obscured a bit by the fact that few telcos in the U.S. market have completely replaced their copper access lines. So, in some areas, there is not an opportunity to even swap fiber lines for copper lines.

That is akin to the problem Disney will face in “going direct” to consumers with its content.

Unlike third-party distributors, Disney does not have a “cost of goods” line item, as it owns its own content. That is a huge plus.

On the other hand, Disney will have a huge “lost revenue” problem, as it loses licensing revenue presently earned by supplying third parties with Disney content. That is very much like the “fiber for DSL” problems faced by telcos. Creating the new platform necessarily causes losses on the old platform.

UBS estimates that Disney’s film TV licensing alone could suffer a $2.1 billion a year loss, and that its streaming licensing through services like Netflix might all $500 million in additional current revenues.  

source: UBS

So before the Disney streaming services can hope to achieve breakeven, they start with a potential loss of up to $2.6 billion in annual lost current revenues from licensees who will not be able to buy that content from Disney. It is a high hurdle.

UBS estimates Disney must find  32 million customer accounts, at a $9 a month subscription fee, to reach breakeven on an operating basis. Though Netflix has 100 million accounts globally, Netflix is unusual. Most of the network-specific streaming services have single-digit million accounts, at least so far.

HBO Go has perhaps 3.5 million subs, while all the CBS streaming accounts might number about four million.

So the biggest single business problem for Disney is the lost revenue it will incur when it stops licensing its content to other distributors.