Yesterday started with a truly remarkable piece of TV broadcasting: Tiger Woods capped an incredible comeback from personal (self-inflicted) turmoil and physical injury with his first major championship win in twelve years at The Masters:
The moment was incredible on its own; that the CBS announcers saw fit to stay silent for two minutes and forty seconds and let the pictures and sounds from Augusta National’s 18th green tell the story spoke not only to their judgment but also to the unmatched drama that makes television the most valuable medium there is.
A few hours later the season premiere of the final season of Game of Thrones brought drama of a different type: scripted, and expensive. The episode is expected to draw around 14 million viewers (and many millions more in pirated streams), and is already a cultural phenomenon.
The greatest drama of all in the television world, though, was on the surface far more banal: on Thursday Disney webcast its Investors Day 2019, where it not only gave details on its upcoming Disney+ streaming service specifically, but also clarified the future of TV generally. And, like any great drama, what is happening it not only a compelling story in its own right, but a lens with which to understand far more than the subject matter at hand.
A Brief History of TV
In 2013, I posited that TV did multiple jobs for people: it informed, it educated, it provided a live view on sports and other breaking events, it told stories, and it offered an escape, from boredom if nothing else.
All of these jobs had the same business model: advertising. Consumers tuned in to watch programming, and native ads — that is, ads in the same format as the content they accompanied — were interspersed. Everything was aligned: consumers liked TV, they got it for free over the air, and advertisers wanted to reach as many people as possible with the most persuasive of mediums.
The picture began to change in the 1970s: communities across the country, particularly those whose remoteness or geography made it difficult for households to get a reliable broadcast signal, had for a couple of decades banded together to build a single large antenna to capture broadcast signals and then ran cable from that antenna to homes. It turned out, though, that those cables had both extra bandwidth and, even more importantly, no requirement for spectrum licenses, and first community access TV (i.e. TV that could only be accessed by the community attached to the community antenna network) and later, cable-only channels that leveraged satellite transmission to reach those community cable networks began to proliferate.
Then, with new technology and a new means of distribution came a new business model: affiliate fees. Now cable company were not simply collecting money from customers for access to ad-supported broadcast channels, but were also collecting money on behalf of cable channels themselves. This shift was led by ESPN, which introduced the concept of affiliate fees in 1982, made them nationwide by leveraging Sunday Night Football in 1987, and inspired countless imitators and transformed the TV industry along the way. I explained in 2015’s The Changing — and Unchanging — Structure of TV:
I just mentioned, though, the elephant in the room: broadband Internet service. (...)
Disney+ and the Disney Universe
The best way to understand Disney+, meanwhile, starts with the name: this is a service that is not really about television, at least not directly, but rather about Disney itself. This famous chart created by Walt Disney himself remains as pertinent as ever:
I first posted that chart on Stratechery when Disney first announced it was starting a streaming service in 2017, and said at the time:
By controlling distribution of its content and going direct-to-consumer, Disney can deepen its already strong connections with customers in a way that benefits all parts of the business: movies can beget original content on Disney+ which begets new attractions at theme parks which begets merchandising opportunities which begets new movies, all building on each other like a cinematic universe in real life. Indeed, it is a testament to just how lucrative the traditional TV model is that it took so long for Disney to shift to this approach: it is a far better fit for their business in the long run than simply spreading content around to the highest bidder.
This is also why Disney is comfortable being so aggressive in price: the company could have easily tried charging $9.99/month or Netflix’s $13.99/month — the road to profitability for Disney+ would have surely been shorter. The outcome for Disney as a whole, though, would be worse: a higher price means fewer customers, and given the multitude of ways that Disney has to monetize customers throughout their entire lives that would have been a poor trade-off to make.
The moment was incredible on its own; that the CBS announcers saw fit to stay silent for two minutes and forty seconds and let the pictures and sounds from Augusta National’s 18th green tell the story spoke not only to their judgment but also to the unmatched drama that makes television the most valuable medium there is.
A few hours later the season premiere of the final season of Game of Thrones brought drama of a different type: scripted, and expensive. The episode is expected to draw around 14 million viewers (and many millions more in pirated streams), and is already a cultural phenomenon.
The greatest drama of all in the television world, though, was on the surface far more banal: on Thursday Disney webcast its Investors Day 2019, where it not only gave details on its upcoming Disney+ streaming service specifically, but also clarified the future of TV generally. And, like any great drama, what is happening it not only a compelling story in its own right, but a lens with which to understand far more than the subject matter at hand.
A Brief History of TV
In 2013, I posited that TV did multiple jobs for people: it informed, it educated, it provided a live view on sports and other breaking events, it told stories, and it offered an escape, from boredom if nothing else.
All of these jobs had the same business model: advertising. Consumers tuned in to watch programming, and native ads — that is, ads in the same format as the content they accompanied — were interspersed. Everything was aligned: consumers liked TV, they got it for free over the air, and advertisers wanted to reach as many people as possible with the most persuasive of mediums.
The picture began to change in the 1970s: communities across the country, particularly those whose remoteness or geography made it difficult for households to get a reliable broadcast signal, had for a couple of decades banded together to build a single large antenna to capture broadcast signals and then ran cable from that antenna to homes. It turned out, though, that those cables had both extra bandwidth and, even more importantly, no requirement for spectrum licenses, and first community access TV (i.e. TV that could only be accessed by the community attached to the community antenna network) and later, cable-only channels that leveraged satellite transmission to reach those community cable networks began to proliferate.
Then, with new technology and a new means of distribution came a new business model: affiliate fees. Now cable company were not simply collecting money from customers for access to ad-supported broadcast channels, but were also collecting money on behalf of cable channels themselves. This shift was led by ESPN, which introduced the concept of affiliate fees in 1982, made them nationwide by leveraging Sunday Night Football in 1987, and inspired countless imitators and transformed the TV industry along the way. I explained in 2015’s The Changing — and Unchanging — Structure of TV:
Over the ensuing years content companies realized that the reason consumers paid cable companies was because they wanted access to the creator’s content (like the aforementioned NFL deal); that meant content companies could make the cable companies pay them ever increasing affiliate fees for that content. Even better, if multiple channels banded together, the resultant conglomerates — Viacom, NBCUniversal, Disney, etc. — could compel the cable companies to pay affiliate fees for all their channels, popular or not. And best of all, it was the cable companies who had to deal with consumers angry that their (TV-only) cable bills were rising from around $22 in 1995 to $54 in 2010.It’s difficult to overstate how lucrative this model was for everyone involved: content companies had guaranteed revenue and a dial to increase profits that seemed as if it could be turned endlessly; cable companies had natural monopolies that they soon augmented with broadband Internet service; and while consumers griped about their cable bill the truth is that bundles are a great deal.
I just mentioned, though, the elephant in the room: broadband Internet service. (...)
Disney+ and the Disney Universe
The best way to understand Disney+, meanwhile, starts with the name: this is a service that is not really about television, at least not directly, but rather about Disney itself. This famous chart created by Walt Disney himself remains as pertinent as ever:
I first posted that chart on Stratechery when Disney first announced it was starting a streaming service in 2017, and said at the time:
At the center, of course, are the Disney Studios, and rightly so. Not only does differentiated content drive movie theater revenue, it creates the universes and characters that earn TV licensing revenue, music recording revenue, and merchandise sales.
What has always made Disney unique, though, is Disneyland: there the differentiated content comes to life, and, given the lack of an arrow, I suspect not even Walt Disney himself appreciated the extent to which theme parks and the connection with the customer they engendered drive the rest of the business. “Disney” is just as much of a brand as it Mickey Mouse or Buzz Lightyear, with stores, a cable channel, and a reason to watch a movie even if you know nothing about it.This is the only appropriate context in which to think about Disney+. While obviously Disney+ will compete with Netflix for consumer attention, the goals of the two services are very different: for Netflix, streaming is its entire business, the sole driver of revenue and profit. Disney, meanwhile, obviously plans for Disney+ to be profitable — the company projects that the service will achieve profitability in 2024, and that includes transfer payments to Disney’s studios — but the larger project is Disney itself.
By controlling distribution of its content and going direct-to-consumer, Disney can deepen its already strong connections with customers in a way that benefits all parts of the business: movies can beget original content on Disney+ which begets new attractions at theme parks which begets merchandising opportunities which begets new movies, all building on each other like a cinematic universe in real life. Indeed, it is a testament to just how lucrative the traditional TV model is that it took so long for Disney to shift to this approach: it is a far better fit for their business in the long run than simply spreading content around to the highest bidder.
This is also why Disney is comfortable being so aggressive in price: the company could have easily tried charging $9.99/month or Netflix’s $13.99/month — the road to profitability for Disney+ would have surely been shorter. The outcome for Disney as a whole, though, would be worse: a higher price means fewer customers, and given the multitude of ways that Disney has to monetize customers throughout their entire lives that would have been a poor trade-off to make.
by Ben Thompson, Stratechery | Read more:
Image: Stratechery
