The Streaming Wars

The streaming wars are in ‘global thermal confusion’ mode.

This week Disney took FULL control of Hulu.

Luckily Ben Thompson and Peter Kafka broke it down for us. Here is Peter Kafka on the Hulu/Disney/Comcast Divorce.

Ben dives in to the subject:

As a general rule, any product that involves high-fixed costs but minimal marginal costs is more valuable the more customers it reaches; after all, more customers means more leverage on those fixed costs. At the same time, there are different types of products that fall into the category of “high-fixed cost low-marginal cost”; some are pure infrastructure, like telecom, and thus relatively commoditized. On the other extreme are things like movies, which must appeal to consumers, and doing so, may repel some subset of them. The most valuable companies in the world do both: they are effectively infrastructure, yet also are highly differentiated from a consumer perspective. Think Google, or Facebook, or even Apple and Amazon.

What is notable about Disney’s approach is that they have identified this bifurcation, and taken different approaches as appropriate. On the consumer side, there are three streaming services: Disney+, ESPN+, and Hulu. Each is very well defined: Disney+ is family-friendly and built around Disney’s best brands; ESPN+ is about sports; Hulu is about more adult-centric entertainment. Each is free to appeal to customers on their own, yet there are clearly plans to offer them as a bundle to customers that want all three. This all makes sense when it comes to balancing the need to leverage the fixed cost of content development with driving differentiation and pricing that appeal to consumers.

Meanwhile, the technology between the three doesn’t need any segmentation at all: streaming is streaming, account management is account management, etc. Now, because Disney fully controls all three, they can fully control the entire underlying stack for all of them. This is not only cost-effective, it also helps drive adoption across the consumer facing offerings: after all, if you already have an account, and Disney already has your billing information, adding a subscription (at a bundled rate!) is only a tap away.

As for me, the consumer AND Investor?

Indeed, part of this deal is that Comcast reserves to the right to place some shows on a soon-to-be-coming NBCUniversal streaming service, and pull them from Hulu entirely after three years. That is in addition to AT&T’s upcoming streaming service, Apple’s upcoming service, Amazon, CBS, etc. Frankly, it’s probably going to be pretty annoying for a while. Kafka notes:

It’s hard to see how any of this is good for consumers, as they’ll be asked to either pay for more services than they are paying for now or, at a minimum, to pay attention to multiple services and watch those services’ ads.

That customers are going to pay more, or at best the same, as they do now, has long been clear to me: the disruption of entertainment is not leading to lower prices but to a redistribution of profits. At the same time, I do expect customers to push back: Netflix will likely be a baseline, along with the cable bundle for sports fans, but the other services will wax and wane according to whatever content they have that breaks through (this will be good for resellers like Apple and Amazon).

This will in the long run drive a shakeout: I think that the vast majority of content companies are ill-suited to go direct-to-consumer. They have neither the expertise nor a sufficient library and content creation capability to actually hold onto hard-to-acquire customers in the long run; in other words, all of these streaming efforts are going to be a very expensive lesson in understanding comparative advantage.

In other words, the next five years are going to see an explosion in streaming offerings, and the five years after that a contraction. Disney has positioned itself well to be one of those left standing.

Since we are on the subject of streaming wars, I wanted to also link to a new interview with Jason Hirschhorn who lives to watch content and follow the streaming wars. In this podcast he covers how Netflix outsmarted everyone.

Have a great Sunday.

I am off to Nee York for the week.