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  • For Disney’s New OTT Service, Success is All About the Price

    Though it won’t launch until late 2019, anticipation for Disney’s entertainment-focused OTT service further increased last week when CEO Bob Iger said at the Bank of America investor conference that the Marvel and Star Wars films would be a part of the service. Whether they too would move over from Netflix was a key unanswered question when Disney initially announced the OTT plan last month.

    Iger also detailed everything that’s intended to be included in the service: the entire output of the Disney studio plus Pixar and Marvel, 4-5 original live-action movies exclusively for OTT, a library of 400-500 films, 4-5 original Disney-branded TV series and 3-4 TV movies per year, 7,000 episodes of Disney branded TV, including recent seasons of Disney Channel programming (though not in-season episodes) and thousands of shorts.

    Iger correctly characterized all of this as a “very, very rich treasure trove of high-quality branded content,” which could position the Disney OTT service really well as a must-have for families around the globe. But one question Iger would not answer last week is how much the OTT service will cost. In fact, as compelling as the content is, how the service is priced will be a major factor in its ultimate success.

    Determining the appropriate price is no easy feat, with multiple conflicting variables. Should Disney price it on the low side to achieve maximum penetration (as Netflix has done) or on the high side to skim market demand (as HBO Now has done)? How sensitive should Disney be about minimizing the OTT service’s disruptive potential to its existing pay-TV partners? How attendant should Disney be to Wall Street’s demand that the service quickly compensate for lost revenue from Netflix and other incumbent sources? These are just a few of the questions Disney and Iger will have to consider.

    Regardless of what its preferences may be, Disney also has to respect the market’s norms and consumers’ expectations. These factors will push Disney toward a lower price to be competitive. Netflix’s ever-expanding library of content is accessible starting at just $8/month. Amazon includes all of its content for Prime members at no extra cost. CBS All Access, with its 9,000 episodes, live stream and NFL football is just $6/month or $10/month without ads. These services and many others have set consumers’ expectations for how much to pay for a high-quality SVOD service.

    Conversely, services like HBO Now, which has remained stubbornly stuck at $15/month since its launch, seem expensive by comparison, and as a result have had relatively modest success so far.

    Further complicating Disney’s pricing decision it that by the time its service launches, at least 2 years from now, the world will look very different. For instance, both Facebook and Apple are reportedly planning to spend a billion dollars per year on high-quality content. Amazon reportedly intends to shift focus to “Game of Thrones” style blockbusters. Skinny bundles are proliferating. Tons of investment is going into kids’ programming by multiple providers. And the list goes on.

    No doubt there will be Disney executives who will push to price its service as a super-premium offering, possibly north of HBO Now, in the $20 or $25 per month range. And there will be others who will argue that to make it a big success, a low price of around $10 or so per month will be a must. And for sure there will be McKinsey-type consultants providing all kinds of regression analyses to help understand the correlation between price and expected success.

    For Disney, the stakes could not be higher for its OTT service. It is coming into the SVOD market extremely late, having blown a big opportunity by licensing to Netflix in the first place. The company is putting its crown jewels into the new OTT service, representing billions of dollars of production. It’s foregoing hundreds of millions of dollars of guaranteed annual licensing fees to pursue the OTT strategy. It has invested over $2.5 billion acquiring BAMTech to power its OTT services. And it’s doing all of this at a time when its TV networks, especially ESPN, are under huge pressure.

    If ever there was a pricing decision that was both critical and ambiguous, it’s the one confronting Disney. What it decides will have massive implications for the company.

     
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