Even though countless articles have been written about Disney+’s jaw-dropping success and the valuation of over $100 billion that it is estimated to have amassed thus far for its streaming services, I believe that most articles still miss what success really looks like for Disney’s foray into the streaming wars.
And, despite all the murmurings about what many see as a surprisingly-low price for Disney+, I also believe that the best move for Disney would be to offer the service for free. Not just free-for-Verizon-customers free, but free-for-everybody free.
Most importantly, I believe that the reasons behind Disney’s true motivations in streaming and the reasons why it should be free hold lessons for every industry.
Why Disney+: Getting to the Real Reason
On its surface, the move to establish Disney+ is misunderstood by most to simply be a just-in-time embrace of the streaming video paradigm. Most observers remarked that it was better to take the profit hit now and aggressively move to the way money will be made moving forward, rather than to be caught in an innovators dilemma and hold on to the hundreds of millions from Netflix and the like until it was too late. In other words, Disney+ was the way to avoid getting so punch drunk on the iTunes-esque mailbox money of licensing fees that you wait as long as Apple did to embrace the new streaming paradigm.
While these surface-level observations are all true to a point, they misunderstand the business that Disney is truly in.
More than 60 years ago, Walt Disney himself sketched the above map of the company’s business model ecosystem. It remains one of the most powerful business plans that I’ve ever seen, and the underlying principles of the sketch continue to (ahem) animate Disney’s true revenue potential to this day.
However, for all of these years, there has been a major issue with the Disney ecosystem: the arrows that connect each aspect of the business have been little more than a series of cloudy intended outcomes. To date, Disney has never really known the degree to which (for example) the films they release drive attendance to a theme park. Disney could only guess as to who in a given movie theater was most passionate about what they were watching (and most likely to buy merchandise). Disney had no way of knowing if my daughter has listened to the Frozen soundtrack 5 or 500 times and what that could mean for their business (confession: it’s well more than 500).
The Disney business ecosystem all made great conceptual sense, but there was no way to truly understand the efficacy of these crucial interconnecting arrows… and definitely no way to truly understand which consumers were being moved across the ecosystem or how to use data to make their business model ecosystem work more effectively.
In an interview in the run-up to the Disney+ launch, Bob Iger himself spoke to the challenges the company faced in not knowing what was truly happening in these arrows that are the lifeblood of his business model.
“if you look at this company over the years, where we’re distributing movies through movie theaters, and the movie theater has the relationship with the customer. Even though it’s our product that is touching the hearts and basically, becoming part of a deep and happy memory. The cable — channels or the satellite — the channels are distributed through satellite providers and cable providers. The customer relationship is theirs. The consumer products are usually sold by big box retailers. The customer is theirs. Or by Amazon, I could go on and on. We have a customer relationship with all these folks through third parties. And other than our theme parks, where we have a direct relationship, we don’t know who these customers are.”
Why Disney+ Should Be Free
If you think that Disney is in the video streaming business, you’d likely lament that they chose to value their extremely unique and differentiated library at a price point that is near the low end of the entrants into the streaming space.
But, as Walt Disney’s drawing above exemplifies, Disney is not in the streaming video business, just like they have never been in the theme park/merchandise/movie studio business. Disney has always been in the ecosystem business, and that changes everything.
If you think about streaming video as the end point of Disney+, you’d calculate top-end annual ARPU at ~$84 (though the average will actually be far lower due to discounts, Verizon deals, etc.). But if you think about Disney+ as the means by which you get the customer data that enables you to far more effectively cross-sell fans across every facet of the entire Disney ecosystem, that $84 quickly becomes a speedbump that represents less revenue than a single ticket to a theme park or a single trip to Target to sate a Frozen II focused family (trust a parent on this one).
In many ways, streaming video for Disney is the same as streaming music for artists: it is now advertising for the places where money is really made. And, as such, limiting the audience for your advertising with a short-sided fee doesn’t make a lot of sense.
The $6.99 monthly charge is an economic rent that Disney can deservedly capture because of its unbelievably powerful content library. Indeed, as many have speculated, I wouldn’t be surprised if they took price up pretty quickly. After all, there’s only one (enter Disney title here), and you can charge a lot for that (again, as any parent will attest).
The monthly charge is also a way for Disney to avert a short-sided revolt at their next shareholder’s meeting, and to avert a similar revolt amongst their community of creators who would see a free offering as an affront to the value of their work (see also: Taylor and most every musical artist).
But it’s a pretty powerful thought experiment to imagine how Disney could transform their true bottom line by offering Disney+ for free (and immediately owning the customer experience and data of hundreds of millions of customers). It’d be like, you know, if Google offered search for free.
The Far-Reaching Implications of Disney+
While the lessons learned from the Disney+ launch may seem sequestered to the streaming or media space, I believe that the underlying implications are important for every industry. These are the three key shifts that are illuminated by Disney+, and are necessary for every leader to embrace to thrive in today’s landscape.
- Keep the Cannibals in the Family. One of the strongest forces that keep companies from making strategic leaps is the fear of cannibalizing their revenue. But, the words of the memorable metaphor given to me by Professor Dipak Jain back in my days at Kellogg, you always want to keep the cannibals in the family: that is, losing a customer to your competitor hurts far more than losing a customer to yourself. In Disney’s case, the shift to Disney+ cannibalized hundreds of millions of dollars in licensing revenue… but as the revenue (and then some) stayed in the Disney “family,” and it is a far less painful of a transition than it would have been.
- Horseback Riding, Not Saddles. While asking “what business are you really in?” risks becoming a bit of a repeated refrain for me, it’s because it continues to be the question I see most often answered incorrectly by brands and businesses. So many brands become so subsumed by the things they think they make that they lose sight of the human benefit that they enable… and, as such, the real business that they are in. When you look at everything through the eyes of your customers, and you identify the true end benefit, you’ll almost always end up changing your definition of your business and your competition. You’ll look past the things you make, and you’ll see the human and economic potential of the entire ecosystem of the business you’re really in.
- Ecosystem LTV, Not Ingredient ARPU. The economic corollary to understanding what business you’re truly in is shifting away from a focus on the short term revenue of the ingredients of your business, and focusing instead on the lifetime value that your entire business ecosystem can create. I recognize how difficult this shift is to implement as it requires companies to both eliminate the silos of their business units and focus on the long term instead of next quarter’s earnings call. But, when the success of every brand is increasingly going to be determined by their ability to foster fanbases instead of their ability to corner consumers, you must embrace the mandate to develop a strategy to compete in the ecosystem economy that you live in… or you will see your competitors leap past you to do just this.
When Disney takes a victory lap during their Q1 earnings call for announcing that they have amassed what is likely to be 25 million subscribers, ask yourself what enterprise value could have been created if that subscriber number was two… or four… times that big. And then challenge yourself to think about what could happen if you lifted any similar short-sided strictures from your business.