DIS­NEY TAKES AIM AT NET­FLIX

Can Net­flix Slay the Mouse?

Fast Company - - Contents - By Ni­cole La­porte

The stu­dio’s push to cre­ate its own stream­ing plat­form has re­drawn in­dus­try bat­tle lines.

In Au­gust, Dis­ney sent a mis­sile into the me­dia strato­sphere when it abruptly an­nounced that it was cre­at­ing a pair of dig­i­tal stream­ing ser­vices: one built around ESPN sports pro­gram­ming that will launch in 2018, and one de­voted to Dis­ney en­ter­tain­ment, to de­but in 2019. This alone wasn’t shock­ing—dis­ney has long dis­cussed cre­at­ing its own stream­ing apps. But then CEO Bob Iger dropped an­other cru­cial de­tail: Dis­ney will end its lu­cra­tive li­cens­ing deal with Net­flix in 2019 and trans­fer Dis­ney An­i­ma­tion and Pixar films, as well as TV shows from the Dis­ney li­brary, to its own ser­vice. Sud­denly, the tar­get be­came clear. Dis­ney was go­ing to war with Net­flix. Five days later, Net­flix re­tal­i­ated by an­nounc­ing a mul­ti­year pro­duc­tion deal with Shonda Rhimes,

whose Shon­da­land dra­mas (Scan­dal, Grey’s Anatomy) have been a cen­ter­piece for Dis­ney-owned ABC for the past decade. Dis­ney’s re­join­der came in Septem­ber, when Iger an­nounced that the com­pany would also pull Marvel and Lu­cas­film (i.e., Star Wars) con­tent from Net­flix to put on its en­ter­tain­ment app.

The bat­tle lines within the en­ter­tain­ment world are quickly be­ing re­drawn. Just a few years ago, Net­flix was still re­garded as an on­line video up­start, and its con­tent chief, Ted Saran­dos, was pre­oc­cu­pied with try­ing to “be­come HBO faster than HBO can be­come us,” as he said in 2013. To­day, with more than 100 mil­lion world­wide users, 91 Emmy nom­i­na­tions for orig­i­nal shows this year, in­clud­ing Stranger Things and The Crown, and a $7 bil­lion con­tent bud­get for 2018 (nearly three times that of HBO), Net­flix has eclipsed its one­time ri­val in many ways. It’s now rac­ing to trans­form into some­thing even big­ger: a one-stop en­ter­tain­ment em­pire that not only launches new shows and movies seem­ingly ev­ery day, but also cre­ates zeit­geist-rat­tling brands that ex­tend be­yond the liv­ing room and into phys­i­cal prod­ucts. In other words, Net­flix wants to be­come Dis­ney—be­fore Dis­ney can be­come Net­flix. It’s a dy­namic be­ing re­peated across in­dus­tries, from fi­nance to hos­pi­tal­ity, as tech­no­log­i­cal in­no­va­tions pro­lif­er­ate: The dig­i­tal dis­rupter and the legacy player are com­ing into di­rect com­pe­ti­tion.

The stakes are high for both Net­flix and Dis­ney. With con­tent and dis­tri­bu­tion pipe­lines fus­ing across the en­ter­tain­ment in­dus­try, Net­flix needs to prove that it isn’t de­pen­dent on li­cens­ing other com­pa­nies’ shows and can be­come a creative pow­er­house in its own right. (Dis­ney will surely not be the last stu­dio to pull its con­tent from the ser­vice, although Piper Jaffray an­a­lyst Michael Ol­son es­ti­mates that Net­flix will have 150 mil­lion sub­scribers by 2020, with or with­out Frozen.) Dis­ney, mean­while, needs a stream­ing arm to build pow­er­ful, di­rect re­la­tion­ships with view­ers, which will be in­creas­ingly im­por­tant to sus­tain­ing its many other di­vi­sions, from toys to theme parks, in a world of grow­ing en­ter­tain­ment op­tions. That means Dis­ney must build a dig­i­tal pres­ence that has, so far, eluded the com­pany.

Dis­ney’s big­gest stream­ing ex­per­i­ment to date, Dis­neylife, launched in the U.K. in late 2015, of­fer­ing Dis­ney and Pixar movies and Dis­ney Chan­nel TV shows. It failed to take off, crip­pled by a $15-a-month price tag, nearly twice that of Net­flix. “Dis­ney has tra­di­tion­ally been a pre­mium prod­uct,” says Eric Jack­son, founder and pres­i­dent of the me­dia hedge fund EMJ Cap­i­tal. “But in stream­ing, Dis­ney is start­ing from be­ing com­pared to Net­flix.” Some an­a­lysts sug­gest that Dis­ney may have to price its new en­ter­tain­ment app as low as $5 a month to woo cur­rent Net­flix sub­scribers into sign­ing up for an­other ser­vice. An­other chal­lenge will be keep­ing peo­ple en­gaged, month af­ter month. The task is sim­i­lar to Dis­ney’s ef­forts to get peo­ple to “drag their kids to Dis­ney­land to see Mickey and Min­nie once a year,” says Blair West­lake, the for­mer chair­man of Uni­ver­sal Tele­vi­sion and for­mer head of me­dia and en­ter­tain­ment for Mi­crosoft, “only on a more fre­quent ba­sis and in a much more crowded mar­ket.”

Dis­ney will also have to cre­ate the kind of seam­less, user-friendly in­ter­face that com­pa­nies such as Net­flix and Hulu have per­fected over the years. Although Dis­ney in­vested $2.5 bil­lion to be­come the ma­jor­ity owner of BAMTECH, which is build­ing the back end of its apps, it still needs to at­tract and em­power tech tal­ent to de­velop its new ser­vices. “Who comes out of MIT and Stan­ford and goes, ‘I want to work at the Walt Dis­ney Com­pany. I want to work at Time Warner. I want to work at Vi­a­com’?” says BTIG an­a­lyst (and re­lent­less Dis­ney bear) Rich Green­field. “They don’t want to work for me­dia com­pa­nies’ stock. There isn’t the up­side po­ten­tial, and there isn’t the work en­vi­ron­ment that there is in Sil­i­con Val­ley. If you spend a day at the Google cam­pus and spend a day at the Dis­ney cam­pus, they’re to­tally dif­fer­ent ex­pe­ri­ences.”

Dis­ney’s strength, of course, is the in­ti­mate hold that it has on con­sumers around the world—and the myr­iad mech­a­nisms it has to re­in­force that em­brace. Dis­ney love seems to ma­te­ri­al­ize sim­ply from breath­ing air, such that a 3-year-old who has never seen The Lit­tle Mer­maid will still proudly wear an Ariel T-shirt, lis­ten to the sound­track, and read Lit­tle Mer­maid books from the li­brary—all with lit­tle en­cour­age­ment from her par­ents. This depth of en­gage­ment will help the com­pany mo­bi­lize its new dig­i­tal of­fer­ings. In­ter­net en­tre­pre­neur Ja­son Cala­ca­nis has posited that Dis­ney could of­fer a free trial of its stream­ing ser­vices to all of its theme-park guests and in­stantly amass mil­lions of sub­scribers.

In con­trast, Net­flix has been ob­ses­sively fo­cused on do­ing one thing bet­ter than any­one else: stream­ing. Its orig­i­nal con­tent gar­ners crit­i­cal ac­claim and buzz, but

NET­FLIX WANTS TO BE­COME DIS­NEY— BE­FORE DIS­NEY CAN BE­COME NET­FLIX.

not yet the kind of mar­ket­place mo­men­tum that drives rev­enue in other ar­eas, such as cloth­ing and books. For Net­flix to com­pete with Dis­ney, it will need to build brands that res­onate be­yond a night on the couch—and then mar­ket the be­je­sus out of them. “Net­flix needs to do a lot of off­line mar­ket­ing,” says one dig­i­tal in­sider. “Out­side of the House of Cards bill­boards on Sun­set [Boule­vard], they haven’t had to do that yet on a global ba­sis.”

Dis­ney, mean­while, cre­ates months- and even years-long movie cam­paigns that seem to touch con­sumers from all an­gles. Its ap­proach in­cludes teas­ing view­ers with ex­clu­sive shorts, flood­ing Comic-con with tal­ent, and pre­mier­ing trail­ers on Dis­ney-owned plat­forms, such as Jimmy Kim­mel Live! Net­flix is start­ing to demon­strate a sim­i­lar acu­men—it pre­miered a trailer for the new sea­son of Stranger Things dur­ing the Su­per Bowl and streamed the first eight min­utes of the show’s first episode on Twitch. But its pri­mary weapon re­mains money, as was ev­i­dent dur­ing this year’s Emmy cam­paign, when the com­pany rented out a lav­ish space in Bev­erly Hills and hosted non­stop cock­tail par­ties to pro­mote its shows.

Signs of Net­flix’s broader strat­egy are start­ing to emerge from its new foray into phys­i­cal prod­ucts. Late last year, it launched a line of mer­chan­dise based on Stranger Things. Sold through the re­tailer Hot Topic, it’s ru­mored to be head­ing to Tar­get. Net­flix also poached a VP from en­ter­tain­ment agency WME to be­come a li­cens­ing man­ager, charged with find­ing “cu­rated ways to in­ter­act with our most pop­u­lar con­tent,” ac­cord­ing to the job post­ing. This push is still in its in­fancy, but it co­in­cides with Net­flix’s de­sire to own more of its orig­i­nal con­tent. The com­pany has tra­di­tion­ally li­censed even its orig­i­nal shows, such as Or­ange Is the New Black and House of Cards, from pro­duc­tion com­pa­nies. But it wholly owns Stranger Things and ti­tles from Mil­lar­world, the comic-book com­pany that it ac­quired this year—al­low­ing it to reap profits from any an­cil­lary prod­ucts. Ever­green items like T-shirts and posters would also al­low Net­flix to drive aware­ness for its con­tent, which is re­leased all at once on­line and de­prived of the drawn-out buzz of sea­son-long roll­outs for net­work and cable shows.

This mar­ket­ing buffer could help as Net­flix looks to fill a “gap­ing hole,” as one source put it, in its kids’ pro­gram­ming. With­out Dis­ney, Net­flix’s big­gest sup­plier of chil­dren’s con­tent is Dreamworks An­i­ma­tion, which li­censes movies such as Mada­gas­car and Trolls and cre­ates orig­i­nal shows for the ser­vice. But it’s hard to put Dawn of the Croods in the same league as Dis­ney’s Sofia the First. Net­flix’s own ef­forts have yielded clever kids’ shows such as Bot­ter­snikes and Gum­bles, though noth­ing that’s bro­ken through. As EMJ Cap­i­tal’s Jack­son says, “They’re go­ing to have to show that they have the same chops on the chil­dren’s spec­trum that they’ve shown in the dra­matic area.”

As Dis­ney and Net­flix duke it out, other em­bold­ened play­ers are en­ter­ing the field. Ap­ple will re­port­edly in­vest $1 bil­lion in orig­i­nal con­tent in 2018—and that’s just in its first year of pro­gram­ming. Face­book is also said to be pil­ing $1 bil­lion into get­ting peo­ple to watch orig­i­nal videos cre­ated ex­pressly for its plat­form. And Ama­zon, which is nip­ping at Net­flix’s heels in both sub­scribers and spend­ing, is putting $4.5 bil­lion into con­tent in 2017, a fig­ure that could rise next year. “This is shift­ing on a daily, weekly ba­sis,” says Peter Csathy, chair­man of Creatv Me­dia, a tech- and me­dia-fo­cused ad­vi­sory firm. “It’s one big race to reach our hearts and minds and eye­balls.” And when the tech­nol­ogy inevitably changes, it’ll start all over again.

Illustration by Corey Brick­ley

Net­flix’s Ted Saran­dos, left, is pour­ing money into orig­i­nal con­tent, while Dis­ney CEO Bob Iger, right, pushes his com­pany into stream­ing.

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