Most Important Story of the Week – 15 November 19: Disney+ “Sparks Joy” in Customers. What Are the Business Ramifications?

Is content is king?

After this week, how could anyone doubt it? Disney+ showed what having the biggest movies of the last few decades can do for a streaming launch.

But that’s not all! Apple landed one of the biggest free agent producers in former HBO chief Richard Plepler, for a deal whose terms aren’t disclosed. Nor even his role. But we can’t look past Disney can we? Nope. In fact, we’re giving a triple shot of Disney: first, the strategic implications; second, the competitive ramificaitons; third, the numbers.

[Programming note: Starting next week, I’ll be on paternity leave for the birth of my child. I have some articles mostly finished to keep posting, but the weekly column will be on hold until December.]

Most Important Story of the Week – Disney+ and Its Customer Value Proposition

When in doubt, we should default back to the “value creation” model for every business. Is a company capturing value or creating it? 

Disney+ Value Creation Model

I’m going to use my personal example to get at where I see the customer value proposition here. Specifically why me—and apparently 10 million other folks—rushed to sign-up or log-in on day one. Marie Kondo—the famed personal organizer—has a simple test for whether or not you keep something in your house. When you look at it, “Does it spark joy?”

That’s how I personally felt about Disney+.

For once, every Disney film my daughter loves was in one location. Every Marvel and Star Wars film I love was there too. Along with hidden joys like the Swiss Family Robinson or The Journey of Natty Gann. Or the X-Men Animated Series! And Gargoyles! Seeing those films brought visions of how I will binge TV for the next few weeks. 

As I was scrolling through the interface—I didn’t have any troubles—Kondo’s phrase hit me, “Spark joy”. 

It’s fairly incredible a streaming video service can evoke that level of emotion. But that’s the best way to describe the initial experience. Caveat galore that this is just my anecdote. But to judge by my texts and social feeds, the majority of the Disney conversation was celebrating all these films that were previously divvied up between FX, USA, TNT, Starz, Netflix and DVDs into one easy location. By a few reports, some folks even stayed home from work for the launch. That’s the type of devotion only major sporting events or, um, Marvel/Star Wars movies can evoke. 

(Yes, plenty of people gave it an “eh” online too.) 

To put this into the “value creation model”, if my price is $4 a month, the difference between the amount I would pay and $4 is the “consumer surplus”. Right now, I have to imagine that for hardcore fans like me, even an HBO level price would probably make sense, if the shows stay at the quality of The Mandalorian. 

Critically for this analysis, just because the price is so low now doesn’t mean it will stay that way. Disney—like Netflix, Hulu and likely every streamer—is definitely underwater from a pricing perspective. Lots of folks locked in at $4 a month, and to produce even the new content will likely be more expensive than that. The key for Disney is figuring out how quickly they can make the price exceed costs. (Yes, as my big series of the year goes on, “An IPB of the Streaming Wars”, I’ll try to quantify this more exactly.)

Then the question is: at profitability, is Disney capturing value (just pricing below costs) or truly creating it? Given that Disney boosted my WTP for a streaming service, I’m leaning towards the latter. Moreover, Disney+ as a platform may drive some value beyond the access to its incredibly popular films. In other words, the whole of Disney+ may be greater than the sum of its parts. And these are valuable parts. (The biggest driver of entertainment WTP is simply having hit shows and movies.) 

So let’s explore the upside theories for Disney+’s value-added future. Since I’m never satisfied, I have some concerns too about some of their strategy.

Upside Theory: The Simpler User Interface – Decluttered

Let’s stay on Marie Kondo idea for a moment. Mary McNamara wrote an article in the LA Times not too long ago making the case that Netflix needs a Marie Kondo-style clean up. She’s not wrong. The reason—as emphasized by AT&T in their recent inventor presentation—is that it takes customers 7 minutes to find a show to watch. (Using a DVR, conversely, takes about 30 seconds…) Netflix is filled with lots and lots of shows and films, many of them “sub-optimal” from a customer perspective. Which makes finding shows difficult.

Well, the Disney+ app is made for McNamara (assuming she likes Disney movies!). Disney+ has a fairly limited interface—reminiscent of the HBO Go application—organized by the various content families. Within each section are the cream of the crop movies at the top, with the rest down below. In other words, the service doesn’t overwhelm you, and what is left will will “spark joy”. This is the best case for Disney+.

Downside Theory: The Nostalgia Factor Wears Off

Credit for this one goes to a Twitter conversation about how quickly “nostalgia” will wear off from the devoted fans. My answer is that in some cases, it never will. Those are the hardcore fans who go to D23. They aren’t enough, though, to build a media business.

For the rest, this is the biggest risk. Sure, I’ve had joy sparked at launch. How long does that last? How much does my daughter actually use the application? (We actually don’t let her watch alone on the iPad.) Especially for the older TV shows. Do they need more TV series to drive adult viewership, as I speculated here? I may find it cool to watch Duck Tales (1980s version), but do I actually binge the entire thing? Nostalgia may get folks in the door but a compelling offering will need new content to keep folks engaged.

Upside Theory: I Was Wrong about The Vault (It’s All Here)

Disney proved my August theory about missing films completely wrong. In the 11th hour they went out and got them all. Which is probably pricey, but helped the value proposition. Since they have all these movies, Disney+ would has something like 20% of the box office demand of the last decade on its service. That’s incredible compared to rival services. I was wrong and they have the entire vault for the most part. Here’s the box office films from the last four years:

image-5-disney-last-five-years.png

But this isn’t all good news. They likely had to pay huge amounts to other distributors to facilitate bringing all these films over. Will this immediate launch help pay that off? Absolutely, but they are deficit spending to make it happen.

Downside Theory: Why Did Disney+ Launch with Avengers Endgame?

Strategy is as much about execution as design. With that said, Disney showed the power of their marketing platform at launch and the implicit draw of their content. But what comes next?

For instance, Avengers: Endgame is the biggest film of the year. Its arrival on the Disney+ platform is the type of marketing event Disney should have leaned into. And originally the plan was to hold it for early December. That plan made sense! 

Instead, they launched it with the 15 other Marvel films. In my mind, letting Captain Marvel be the “recent movie” for launch and then bringing Avengers: Endgame in 2-4 weeks would have provided a new marketing opportunity. As much as good strategy is making the big decisions, it’s also about the small ones too. (NBA analogy: signing LeBron James is like buying Marvel; pairing him with a lot of non-shooters is messing up the marketing launch.) 

Downside: Devaluing the “Signature Disney Films” Brand

As I was surfing Disney+, I noticed an interesting user experience phenomena. I’d be scrolling for classic Disney films—oh there’s Little Mermaid, there’s Tangled—and so on. Then, below that group would the Disney direct-to-video films. From The Return of Jaffar to the Little Mermaid 2. (I didn’t even know they made that one!)

Screen Shot 2019-11-15 at 10.16.48 AM

The worry is what this does to those signature films brand? In other words, now that the vault is gone—the vault being one the greatest marketing tactics to create demand—will the signature films still have the same perception of value? Or will their digital proximity to a lot more animated films of lesser quality damage the brand long term? I don’t know.

I could still make the case that “the vault” would serve the same purpose, even in a streaming world. So we’ll see. (Plus, they still should have called this whole enterprise Disney’s Vault.)

Most Important Story of the Week – Disney+ Launch Winners and Losers

Winner: AT&T

When looking ahead to the content landscape, the HBO Max launch has the potential to “spark joy” in the same way that Disney+ launch did. It won’t be as good. The Marvel run since 2008 combined with Pixar combined with Star Wars combined with Disney classic films is just too much to overcome.

But I think it will be very close. All the HBO fans will have the exact same shows. Plus more. Lots of really good TV series to binge in addition to all the series from The Big Bang Theory to Friends. Plus, folks can do the same “surf through tons of movies in one location and share it on social” journey. In the end, HBO Max may be “more satisfying” than Disney+ too. I have to think HBO Max execs are more confident in their plan with the Disney+ launch.

Tie: Apple TV+. 

My initial gut from discovering that Apple TV’s application was auto-loaded on my phone this week was that Apple TV really, really needs good content. Besides it’s iTunes Store (which I ranted on in yesterday’s long article), Apple TV is heavily pushing TV+ originals, HBO and Disney+, even as Disney+ isn’t integrated into their channels system. In other words, Apple sees tons of value in the Disney+ brand already. This is a scenario where both sides could win.

Loser: Netflix

I’ve heard the theory that Disney+ will just encourage more cord cutting. Which may be the case. As there are more options for cord cutters, there will be more folks cutting the cord and deciding that Netflix is part of their cord cutting lifestyle.

I tend to subscribe to the “churn” scenario model, though. As I’ll explore in the next section, if Disney+ gets to 10 million subscribers by the end of this week—they had 10 million signups on launch day—some percentage of those customers will have decided to trim their bills by cutting Netflix. The larger that percentage—which I can’t even speculate on—the more difficult it is for Netflix to sustain it’s 60 million subscribers every quarter in the United States.

Data of the Week – Disney+ Launch By the Numbers

Disney+ launched big, but also had some technical issues. Fortunately, through some data sleuthing we can triangulate just what these issues meant. And, we can draw some conclusions.

Disney+ Launched with 10 Million “Sign-Ups”

As TV’s Answerman pointed out, sign-ups are not subscribers. The question hinges on how many free trial sign-ups convert to paying. (Which is usually fairly high.) Or in this case, how many folks already locked themselves in. Some data from Hedgeye Research says that, based on his survey data, it is a lot:

If I had to guess, I’d wager 90% of those “sign-ups” converted to subscribers by the end of the week. Then other folks who didn’t sign up on launch day for whatever reason have likely boosted that number even further. So it’s hard to see this Disney+ number under 10 million at this point.

As I’ve speculated in the past, Disney’s goal is to get a total amount of subscribers that rivals Netflix in the US. With this strong launch, they’re on track to get there. Here’s my back of the envelope math for right now, with what I’d call “modest projections” to get to 60 million subscribers by next year:

Screen Shot 2019-11-15 at 9.58.50 AM

This is the new race in the streaming wars media coverage, in my opinion. How quickly will Disney+ match Netflix in total subscribers? With this launch, maybe sooner than we would have guessed. (Which is another downside scenario for Netflix.)

Did Disney+ have “technical issues”? 

Yes, obviously. The question is did they matter? Did they imply a good technology stack or one overwhelmed by interest? 

If you had asked mid-day Tuesday, I would have said this was a hopeless question to answer. But then we ended up getting a lot of data. At least for a technical launch like this. See, everyone was pointing to the website “Down Detector”, which had this look as of Tuesday evening:

Screen Shot 2019-11-15 at 10.01.18 AM

While this doesn’t capture every person with an issue, it at least captures a number over time. With some assumptions, assuming 1-10% of folks reported an issue on Down Detector, we have our “numerator” over time. The folks having issues. 

Then, since Disney gave us the “denominator” of 10 million sign ups, we can gauge the percentage of folks having issues. Assuming 2 million folks at any given time, roughly the error rate was 8% at peak. (That’s a 5% report rate.) By evening time, that had dropped to 2%. 

There were other triangulations and surveys, showing anywhere form 2550% of folks having issues. Anecdotally, lots of folks continue to not have problems, and my guess is that some issues may be tied to specific devices/operating systems as opposed to generalized problems. (For instance, iOS seems to be fine; Fire TV not so much.)

With all this data, was this a success or failure? Given the difficulties of sign-up for all industries (the payment funnel is the hardest part to walk customers through), the decline in issues over time, the difficulty of streaming period, and, most importantly, the orders of magnitude we’re dealing with, I’d say this launch speaks well fo Disney’s technical team at this time. 

Meanwhile, we’ll see how quickly Disney+ works to address the current issues. It reminds me of new iPhones. I specifically avoid downloading the new OS whenever it comes out because I expect bugs. I wait a few month and they’re fixed. Likely some folks are waiting for Disney to do that. The key value add for MLBAM, at this point, is to execute improvements quickly.

Was The Mandalorian Popular?

I have a thread on Twitter on this, but initial signs are that this series is indeed as popular as it seems. Here’s the key Google Image:

Screen Shot 2019-11-15 at 7.42.35 AM

In other words, Disney may have the fourth biggest genre hit of the year on their hands. (Game of Thrones, then Stranger Things, then Rick and Morty and it looks like The Mandalorian is pulling ahead of The Boys.)

Other Contenders for Most Important Story – Content Deals in Streaming Wars

Richard Plepler Joins Apple TV+ as a Producer

Meanwhile, Apple secured the services of Richard Plepler, former head of HBO and universally by the media beloved figure. My biggest caveat is that he is “just” a producer for them. While it’s still a big get and he will get tons of projects/talent to work with him, even a producer doesn’t have green light authority at a studio. That’s still the bosses at Apple TV+. Which means he’s valuable, but won’t determine success or failure. 

Nickelodeon Signs a Big Deal with Netflix

Netflix just can’t quit licensed content. As Bob Bakish repeatedly emphasized on his latest earnings call, this means renting content:

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