Disney Squeezes Its Way Into the Skinny Bundle

Image source: Walt Disney.

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During Walt Disney's (NYSE: DIS) second-quarter earnings call, CEO Bob Iger said the company secured a spot for its premier cable networks -- ESPN and Disney Channel -- as well as other of its networks, in each subscription tier of AT&T'supcoming DIRECTV Now over-the-top streaming service. AT&T will offer multiple paid tiers for its streaming service as well as a free tier.

Hulu, of which Disney owns around 30%, is also planning a television streaming service, and it's expected to include ESPN and Disney as well. Time Warner (NYSE: TWX) just bought a 10% stake in Hulu as part of an agreement to include its top networks in the streaming package.

Disney has been focused on getting its networks into more "skinny bundles" since it reported its fourth-quarter earnings results last year, and disclosed that ESPN had lost 7 million subscribers over the previous two years. Whether it transmits its channels via traditional distributors or new digital distributors like Sony's (NYSE: SNE) PlayStation Vue makes little difference to Disney. In fact, it might prefer the new digital platforms. Here's why.

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Distributors need ESPN

There's clearly a demand for network bundles without ESPN, but digital distributors will find it hard to break through without an option for ESPN. That seemed to be the case with the early launch of PlayStation Vue before it struck a deal with Disney. As Iger said in the conference call, Sony saw subscriptions "go up substantially" when it added ESPN to its package. DISH Network (NASDAQ: DISH) used its agreement with Disney to include ESPN in its initial service offering before offering a separate package without it.

Disney is able to use that fact to its advantage, and it's getting on these digital multichannel video programming distributor (MVPD) platforms "at prices that make sense to us," Iger said. That makes it agnostic when it comes to viewers potentially switching from traditional pay-TV providers to new digital platforms.

It also enables Disney to squeeze more channels into these new packages. If a distributor wants ESPN, they'll have to take the rest of Disney's core channels. "The new service will take 100% of our core channels," Bob Iger told analysts. "Not 100% of our channels, but of our core channels."

There's a major drop off in affiliate fees after ABC and the ESPN and Disney families of networks. Disney could retain nearly all of its affiliate fee revenue with the new services despite dropping several channels. On the other hand, it will stymie Disney's ability to grow the affiliate fees of those networks.

Digital offers more than affiliate fee opportunities

One of the benefits of digital platforms over traditional distributors is the advertising opportunity. Digital platforms offer the potential for better targeting and dynamic ad insertion.

Although traditional platforms are working on catching up to digital, it would be near impossible for the capabilities to surpass what's available online. Online traffic flows on a two-way street, so its possible to collect data from viewers. Cable runs one-way only.

Iger told analysts "there are opportunities that ... will be new to us on the OTT platforms because some of the technology platforms will offer dynamic ad insertion. We think that that has got some real potential for the Company, and that is a component of the DIRECTV Now relationship."

Hulu, meanwhile, has been collecting ad feedback for several years on its free and paid on-demand platform. It likely has better viewer profiles based on what people are watching than most traditional distributors. With the ability to dynamically insert ads instead of showing everyone the same commercials, ESPN can generate more ad revenue from these platforms.

Iger also sees these new digital MVPD platforms as having better user interfaces compared to traditional cable networks. "These platforms will provide great user interface and functionality," Iger noted on the conference call. "And the better the user interface, the better it is for us because we think the customer is going to be more engaged and is likely to consume at higher levels." That means potentially higher ratings, so it could charge higher ad rates or show more targeted advertisements.

Digital-first platforms could also increase mobile or viewing on non-television devices. ESPN already allows pay-TV subscribers (on any platform including Sling TV) to use its WatchESPN website and apps to watch on any device. Disney has similar sites and apps for its other core networks. But it's more likely that digital MVPD consumers will watch Disney's networks on those devices since that's the primary way of consuming all the channels on the platform. That could provide yet another boost to view time.

So, not only is Disney coming out relatively even on its affiliate fees with digital distributors, it has the potential to improve the advertising side of its media networks segment on top of that.

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