The Walt Disney Co. could break the cable bundle completely. Instead, Disney is going to collect some of the money that runs through its channels while building streaming ammunition in case a war with the bundlers ever happens.
That is why the recent launch of the ESPN+ streaming service in a new ESPN app are important in the continuing transformation of how video content is consumed. It is the first step in Disney’s DIS, -0.67% role in supporting and helping solidify a new normal for how we will interact with our televisions: Taking the additional targeted “tiers” and other goodies that cable companies have traditionally offered and selling them directly to consumers in separate apps.
In the traditional cable system, companies like Comcast Corp. CMCSA, -5.56% would sell consumers a base collection of channels, then offer smaller bundles aimed at specific interests, such as sports, for additional monthly fees. The content providers who produced the channels were paid, which made Disney—and especially ESPN, with more than a half-dozen channels that could be the base of additional sports tiers—a monster money machine.
As consumers have moved away from the bundle and toward ad-free streaming services like Netflix Inc. NFLX, +0.19% , ESPN has lost subscribers just as the price of live sports content has skyrocketed because fans will watch games live and stomach the commercials that come with it. That squeeze from both sides—lower revenue, higher costs—has damaged Disney’s stock price, but not enough for Disney to go nuclear with a streaming ESPN option that would forego the billions it collects from cable companies.
Instead, we have reached a middle ground. Cable companies and other providers are offering “skinny bundles,” mobile-friendly packages that offer fewer channels at a lower price. While many of those offer the same additional tiers as their larger predecessors, consumers are instead supplementing with Netflix or other streaming services, most of which are not the traditional content providers like Disney.
Disney has decided that a system of smaller bundles and outside additions is the future, buying a majority stake in streaming-technology company BamTech to deliver its own on-demand services. The first offspring of that marriage is ESPN+, which will be followed next year by a Disney offering that includes popular content that will eventually be removed from Netflix.
While the ESPN+ that Disney announced ahead of launch mostly comprised sports and content that subscribers already had access to, it is rapidly growing with the addition of niche sports and targeted studio shows. The plan feels similar both to ESPN’s beginning as a cable network in the early 1980s—when sports like lacrosse and low-budget studio shows were the norm—and the approach on its website, which parcels out the wonkiest content for hard-core fans into a subscription plan called ESPN Insider.
At a media event in Oakland, Calif., just after the launch last month, ESPN executives stressed that ESPN+ was a work in progress, with plenty of plans for studio shows and new deals aimed at these niche fans. They especially played up deals for boxing, American soccer leagues and cricket, and discussed potential additions of more content.
ESPN proved executives weren’t blowing smoke Tuesday morning with the biggest addition to ESPN+ yet. The company landed a five-year deal with UFC, the mixed martial-arts league that has devoted followers, for 15 fights and an assortment of series and studio shows to be aired on ESPN+. Most important, it will include the rights to sell pay-per-view fights, an additional avenue for ESPN to collect viewers’ money.
Disney Chief Executive Robert Iger had previously hinted that ESPN+ could move into pay-per-view for specific events, but UFC will be the first test. That is Disney taking yet another moneymaker that has typically been the domain of cable companies for itself, cutting out a middleman and helping to make up for the lost ESPN subscription fees while setting ESPN+ to eventually become something much more than it is now.
“Our goal here is to create a sports marketplace on ESPN+, and that will include a number of sports that we’ve already licensed and sports that we are in the process of licensing, including the deal that we announced today, as well as the sum of the sports that we would be acquiring as part of the 21st Century Fox FOX, -0.08% acquisition and then there are opportunities to license beyond what we’ve already done,” Iger said in a conference call Tuesday after Disney reported second-quarter earnings.
Disney could try a similar approach with its other streaming service, which will include premium content from Marvel, “Star Wars” studio Lucasfilm, Pixar and its own Disney-branded material. For instance, it could sell or rent its movies not long after they leave movie theaters, or even while they are still in theaters, avoiding any of the typical “windows” for such content that offers middlemen exclusive time periods to rent or sell such content. Many consumers are currently renting or buying digital movies through Apple Inc. AAPL, +0.48% or Alphabet Inc.’s GOOGL, -0.08% GOOG, -0.08% Google services, and Disney could aim to cut them out just as it has Netflix.
“In order for [the Disney streaming service] to be successful longer term, it has to become the destination to watch Disney, Marvel, ‘Star Wars,’ and Pixar product,” Iger said Tuesday. “And that means ultimately weaning ourselves of product being available any other place except for the current linear channels that are in the marketplace.”
The key for Disney is to be in control of its own future, so it is not caught flat-footed if the video ecosystem continues to undergo seismic change. In a few years, it could theoretically bundle all its assets into a direct-to-consumer offering that completely bypasses the bundle, or just continue on the path of picking off easy money from others to make up for lost fees from cable subscribers. Either way, it has power in negotiations with cable companies desperate to stay in consumers’ lives.
For those consumers, the approach means the dream of full a-la-carte television purchasing is not in sight, and the current version is not always easy to use. The new ESPN app, for example, requires a user to sign in with an ESPN account for ESPN+, and a cable login for access to streams of content airing on linear networks. ESPN has a deal with Major League Baseball, which created BamTech, to stream its MLB.TV package of games on the platform, but launched without the ability for current MLB subscribers to access that content due to technical issues involving all the different authentications.
The result so far is a reorganized bundle spread across different apps with separate billing—a more confusing system that at least has more on-demand options and choice, and works on a multitude of devices. If that system is where the future of television lies, thank (or blame) Disney.
Disney shares declined about 1% in late trading Tuesday after the company reported earnings. The stock has declined 8.6% in the past year, as the Dow Jones Industrial Average DJIA, +0.01% , which counts Disney as a component, has gained 16%.