Hulu casts a spell st Claire Enders When its acquisition of 21 Century Fox closes, Disney will +44 127 361 1140 [email protected] own 60% of Hulu. If it bought Comcast’s 30% stake (and WarnerMedia’s 10%), it could fully leverage the platform François Godard +39 3355 289127 for its US direct-to-consumer strategy [email protected] Tom Harrington Comcast’s Hulu stake has little strategic value to it. We +44 207 851 0918 [email protected] argue it should sell to Disney in exchange for long-term supply deals for ESPN, as well as for the upcoming Disney+ 7 December 2018 [2018-105] and Hulu, similar to its recent pacts with Amazon Prime and Netflix This could naturally be extended to Sky in Europe depending on whether Disney decides to launch all direct- to-consumer or sticks with pay-TV in certain markets The ramifications of media consolidation are starting to take shape, and the different paths that the relationship between Comcast and Disney could follow in the UK and Europe are now becoming visible. The eventual outcome will be shaped by how the long-term partners sort out their US equity and distribution arrangements. This note outlines Disney and Comcast’s agenda and desired trajectory, and considers the relative importance to both parties of Disney’s content licensing relationship with Sky. In the US, Disney must balance its overriding urge to go direct-to-consumer with the preservation of existing lucrative distribution over pay-TV, in particular with regard to Comcast, the biggest cable platform. Meanwhile, the frontier between SVOD and traditional pay-TV continues to further blur, as demonstrated by the recent Comcast carriage deals with Netflix and Amazon Prime. Disney may want to extricate its content from Sky when its current licensing deal concludes in 2020, but it will need a partnership of some form—a lack of presence exposes it to the threat of an even closer relationship between the biggest European pay platform and Netflix, HBO and possibly Amazon. Moreover it is no Related reports: accident that Sky is the chief pay-TV aggregator in Europe. Separately, the Comcast and Sky licensing deals are amongst Disney’s top five global licensing Disney, Fox, Sky and Comcast: future revenue generators. Together, these relationships are so important that Disney relationships [2018-091] and the other protagonists will work very hard to find solutions to the new What Sky means for Comcast [2018-088] challenges of the market. Hulu: Why Disney wants 21st Century Fox [2018-071] Sky values Disney’s content highly—and Comcast will be intent on securing continued exclusive access to it, along with HBO and Showtime—but its aversion The studio model: stay tuned! [2016-110] to over-paying for Disney’s films and children’s channels increases the likelihood of Disney going alone, and launching its SVOD Disney+ service in Europe. Disney’s agenda For several years, the Disney strategy has shifted towards a comprehensive view that the future is SVOD and the only way forward is direct-to-consumer. This is in great contrast to its previous history. Many content creators talk about being “platform agnostic” but Disney has lived it, forever licensing its films and television titles to a myriad of outlets, while simultaneously having its own (wholesale) channels; its base of IP, which it deftly exploits across lines of merchandise, theme parks, hotels and cruise lines, has only become even heftier with the acquisition of some of 21st Century Fox’s finest assets. Netflix, however, has shown a simpler, more direct vision; one in which most of its library can be accessed worldwide and partnerships with platforms can still be made but the presentation of content, and attribution reverts back to the streaming service. Disney must look at the world’s leading SVOD and feel that with its own wealth of content and IP, a similar journey to global domination of the streaming model can be, and indeed, must be, navigated. Some of Netflix’s success may well be due to its Disney content—the end of the licensing of which in 2019 will allow for the launch of Disney+—but there are a number of other factors that have enabled Netflix’s success and will be very difficult to replicate; proof being that no-one else has come remotely close. First- mover advantage, over ten years of accrued knowledge of streaming and what people want, technological innovation and luck in picking hits for its original production slate have combined with an acceptance by the market that such a ground-breaking product can be reliant upon the debt market as long as it displays growth. None of these will be easy for Disney to reproduce and, as a longstanding media concern it will be difficult to fund its online endeavours in the same way as Netflix has. Over 30 years, Sky has experienced similar financial and competitive benefit from first-mover position; the list of its doomed challengers is a very long one. Every one of these pretenders has been chiefly misled by estimates of consumer demand. Netflix benefits from first-mover advantages in Europe even more than in the USA. There are no better examples than the failure of most single market SVOD services. Sky’s NOW TV has launched in Switzerland and Spain where Sky has no prior pay-TV presence, and has only obtained a fraction of Netflix’s subscribers despite considerable marketing expenditure. In the UK and Europe, much will depend upon the success of the US launch of Disney+ in 2019. Indications from Disney point to a desire to launch Disney+ internationally as soon as possible. Disney+ as a proposition is on an entirely different level to past efforts. As a result of the current Sky deal, DisneyLife offered only a small part of Disney’s optimal content library, while in the US, initially, Disney+ will harness the company’s main family-oriented entertainment brands: Walt Disney Studios, Pixar, Marvel, Lucasfilm and the recently acquired National Geographic, consisting of both archival, new and original content. However, despite this being a compelling offering on paper, without the factors that have contributed to the success of the now entrenched Netflix, it is anyone’s guess whether the standalone service can 2 | 7 Hulu casts a spell [2018-105] 7 December 2018 generate the level of success to equal, and eventually surpass the easy revenues that the retained content would find across the channels and platforms that Disney could license to in the US and elsewhere. In the US, which has a higher propensity for additional SVOD services (see SVOD in the US and UK: a tale of three-player markets [2018-104]) and the opportunity to upsell existing subscribers of Hulu and ESPN+, there is promise. In a seemingly tighter market such as the UK (and positively even more so in continental Europe), and with the entrance of Apple imminent, the rationale for turning down Sky’s money from 2020 is less clear. DisneyLife has demonstrated that the Disney brand does not have the unwavering appeal to parents and kids as perhaps was expected, while the decision not to extend the current deal would likely cause mid-term damage to the Sky/Disney relationship. Even if Disney were to go it alone in the UK and other Sky European markets, it would be in the fledgling SVOD’s interest to have the service carried on Sky, along with other pay platforms. An icy relationship with the largest pay-TV platform in Europe is hardly beneficial for a service just starting out, especially when that company has recently embarked on a carriage, bundling and marketing agreement with perhaps your biggest competitor, Netflix. Along with the possibility of being frozen out of the TV sets of 10 million UK homes, future agreements for carriage of existing Disney channels—the values of which are diminishing due to declining viewership—would be a sobering experience for their owner. And, if it has taken Sky five long and expensive years to achieve two million NOW TV subscribers in the UK, how much longer will it take Disney? Or, for that matter HBO, if it went direct? And to what detriment the loss of visibility of these titans’ wonderful creations, characters and products within those homes with children? Comcast’s agenda Contrary to Disney, Sky’s new owner Comcast is at heart a direct-to-consumer operation as its cable systems account for 62% of revenues. In this infrastructure business Comcast enjoys market dominance, because in most areas its high bandwidth Xfinity offer is unmatched by the rival DSL-based provider. The main strategic challenge resides in slowing, or even reversing the decline in subscribers taking pay-TV—an historically high margin service now under strong competition from SVOD providers. Comcast’s content division NBCUniversal, unlike AT&T’s WarnerMedia, Viacom/CBS, or Disney, has no ambition of creating its own direct- to-consumer service, happy to stick to the classic Hollywood model of selling to third-party distributors and leveraging its sister cable division to extract the best deals. Comcast’s approach to the cord-cutting threat has been a relentless focus on user experience on Xfinity’s X1 set-top box (STB) in a bid to keep its status as gatekeeper to all the best content available. Comcast has been the pioneer in blurring the border between OTT and pay-TV with distribution deals with Netflix, Amazon Prime Video, YouTube and Pandora (the music service) that make their programming available through its interface and smooth the way for subscribers of these services to migrate from alternative devices (Chromecast, Apple TV, etc.) to the X1.