Disney Bets Big On Digital Dollars As It Dismantles Lucrative Long-Time Distribution

Here's a deal: trade your lucrative distribution arrangements for TV syndication and post-theatrical film runs for a digital-streaming service that won't even have access to all your much admired content for years to come, and must compete with entrenched former partners for consumers' limited subscription dollars.That's basically the bet Disney is about to make when it stops selling its films and TV shows in late 2019 to syndicators, premium- and basic-cable and broadcast outlets, so it can use them to fill out its own streaming service, according to Ken Ziffren, one of Hollywood's consummate insiders.In a lengthy Hollywood Reporter op-ed analyzing the follow-on effects of Disney's shift from traditional entertainment wholesaler to direct-to-consumer digital purveyor, Ziffren suggested that Disney is "betting the ranch" on a "radical change" from the rest of Hollywood, change that may take years to pay off.Ziffren acknowledged he is making "educated guesses" about what Disney ultimately will roll out, but given his central position as a Hollywood dealmaker for five decades, he's definitely the guy who could make those guesses. And I think he's dead on in his evaluation of the challenges ahead for Disney, even if he's understandably generous regarding the long-term attractiveness of Disney's content and likely consumer interest.Ziffren, a top entertainment attorney, has represented corporate clients including the NFL, Starz, and DirecTV; helped settle the devastating writers strike a decade ago, and more recently was Los Angeles Mayor Eric Garcetti's "film czar," helping secure a major expansion of state tax incentives for film and TV production.In Disney's shift from selling to the highest bidder to channeling content onto its SVOD services (beyond next year's new service, it's also gaining control of Hulu through its $71 billion Fox acquisition, and already has launched ESPN+), the company faces a series of complicated challenges, affecting billions of dollars and long-time Hollywood relationships and partnerships:

"...a hit movie like Black Panther or Incredibles 2 probably generates more than $150 million from licensing to premium pay and ad-supported linear television over roughly nine years, commencing seven or eight months after its initial theatrical release," Ziffren wrote. "Disney will be giving that up in exchange for a hoped-for profit margin on subscription revenue that domestically will run around $6 to $8 per subscriber per month. This is betting the ranch!"

Making up those billions won't be simple, Ziffren wrote, even with all the public appetite for great content from Disney units such as Marvel, Pixar, LucasArts, the Disney Channel, ABC and Freeform. The challenges include:

• Disney would no longer be extracting additional revenue from outside distributors such as basic and premium cable operators and streaming services after its films and TV shows have their initial run. Direct-to-consumer represents a very different business, with a very different set of customer expectations (ask anyone who's run a customer-service operation).
• TV shows, which Disney and Fox studios create for both in-house and outside networks, presumably would focus on only in-house production, possibly costing them significant outside revenue. Once created, those shows wouldn't go into syndication after their initial run, but head to Disney streaming services, again a possible lost revenue opportunity. As much as $2 billion in TV revenue may be at some risk, Ziffren estimated. "Keep in mind that the essence of a successful streaming offering is that it is exclusive and worldwide," Ziffren wrote. "It will take several years before this is the case with Disney Play."
• Will a Disney app attract high retransmission or affiliate pricing as part of virtual pay-TV "skinny bundles" of channels? Maybe, but those bundles are bargain-priced for a reason. What would adding Disney do to the bundles' business models? Would other services get dumped to make room?
• First-run syndication would effectively disappear after a few years, Ziffren speculated. Will Disney offer a Hulu-like variety of pricing tiers, some of them ad-supported, as a way to generate more revenue for content that's less of a must-see?
• What does it mean for the profit participants, union guilds and others that get a share of revenues when their projects give up outside revenue opportunities? What will be the basis for the "imputed" rate cards that govern those payouts when a studio is self-dealing?
• What kind of revenue will the new service generate? Ziffren mentions $6 to $8 per month per subscriber coming in from the new service. But CEO Bob Iger already has cautioned investors that the company won't initially have enough programming volume to justify fees similar to what Netflix charges ($8 to $14 per month). And it's going to take quite a while for the new service to have anything like the 130 million subscribers that Netflix has in 192 countries (and whose subscription fees still don't cover all of Netflix's content spending).

Ziffren's piece is an illuminating reminder about the likely transformative impacts of Disney's streaming service on Hollywood's lucrative "ladder" of post-theatrical distribution windows. In this era, of course, it's not just giant Disney being forced to tear up the playbook that guided decades of Hollywood relationships and best practices.This revolution's bomb-throwers are many, not least among them Netflix. It typically pays creators an outsized upfront fee to acquire all global rights and any syndication opportunities. That eliminates risk for those creators but any upside too.And the Netflix approach of recent years may also be forced to change soon. It pulled out of the Cannes Film Festival in June after rule changes pushed by French exhibitors kept its films from being part of the competition.And the just-concluded Venice Film Festival, where Netflix's highly regarded projects from Oscar winners Alfonso Cuaron and the Coen Brothers won the top prize and the screenwriting prize, more complaints set in from Italian film-industry groups.The filmmakers themselves are said to be agitating for a change in the usual Netflix day-and-date release approach, where films are given a small theatrical release that begins the same day they're available online. The filmmakers want more noise made, with a traditional theatrical release before the online debut, to increase the awards chances for their projects.As Ziffren concluded, "Lots to ponder!"