Here's what to make of the Disney-Netflix breakup (DIS, NFLX)

Box Office 2016 BII

This story was delivered to BI Intelligence "Digital Media Briefing" subscribers. To learn more and subscribe, please click here.

Disney has plans to launch two new standalone streaming video services over the next two years. The first, an ESPN-branded service with sports programming, is set to launch in early 2018. The second, scheduled to debut the following year, will be the exclusive home of movies and TV shows produced by Disney and Pixar.

As part of the announcement, Disney also upped its stake in direct-to-consumer streaming technology company BAMTech from 33% to 75%, an indication that the company is accelerating its focus on building its own platforms to house content. Disney will end its distribution agreement with Netflix for streaming of new releases in 2019.

Disney’s announcements hold significance for the following reasons:

It positions it to hedge against cord-cutting subscriber losses. ESPN had over 88 million subscribers in December 2016, down from over 100 million in February 2011. Additionally, Disney Channel and Freeform — two of Disney’s biggest brands reaching children — have lost roughly 4 million subscribers over the past three years. The launching of streaming services can help Disney address these declining audiences that are increasingly turning to digital platforms to consume content.
And a sizable portion of US viewers are interested in sports streaming services. Nearly a quarter of Americans would pay for a service allowing them to watch live sports on any device, according to Fluent CEO Jordan Cohen. This positions ESPN well to reverse revenue declines that prompted significant layoffs over the past two years. However, Disney faces increasing competition from other traditional media companies taking the same strategy — CBS also has plans to launch its own sports streaming service.
Going direct-to-consumer could be more lucrative for Disney than distributing content through intermediaries like Netflix. Disney is hoping that revenue from subscriptions can be more profitable than licensing deals. However, the downside is that Disney must build out its own streaming infrastructure, which can ultimately delay profitability. Its control of BAMTech’s existent streaming technology will likely expedite this development process.
Netflix’s original content push will likely soften the blow of Disney’s departure. Disney was named the world’s most powerful brand in 2016 by strategy consultancy Brand Finance. Losing the rights to Disney’s catalogs will undoubtedly result in family subscriber losses for Netflix — some may have signed up for the service purely to view Disney content. However, the departure of Disney will not leave Netflix completely vulnerable. It has increasingly invested into original content — it plans to create 1,000 hours of original content in 2017. And these Netflix originals may be enticing enough to help minimize losses associated with losing Disney content.

Robert Elder, research analyst for BI Intelligence, Business Insider's premium research service, has compiled a detailed report on the digital disruption of live sports that:

Assesses the evolving live sports landscape.
Examines how ESPN's business model is threatened by the decline of live sports.
Profiles the promising new players in the space.
Looks at what's next for legacy broadcasters.

To get the full report, subscribe to an ALL-ACCESS Membership with BI Intelligence and gain immediate access to this report AND more than 250 other expertly researched deep-dive reports, subscriptions to all of our daily newsletters, and much more. >> Learn More Now

You can also purchase and download the report from our research store.