The Battle Of The Five Armies:The Streaming Wars Begins

In the Mid West summer has descended with a blistering force. With Americans facing soaring temperatures as well as a tsunami of humidity, many of us look towards the air conditioned sanctuary and reliability of a movie theater in order to find relief from the overbearing heat. I remember talking to a resident of New Orleans who shared with me that theaters did a brisk business in the summer, primarily because the inhabitants of that great city wanted to escape the heat that wraps it in its embrace every summer.

Relief is in sight with cooler temperatures in September, the hot summer theatrical box office will also start to cool down. I suspect that this fall, this air of change will be profoundly noticeable. There are forces at play and market dynamics whose result will be that the motion picture exhibition business is to be altered forever. The mandarins of Washington and Wall Street have positioned the studios and the media conglomerates who own them to face off, in what will be an epic battle and one that will have a profound impact on the fabric of our society.

With one stroke of the pen , Twentieth Century Fox,the movie studio which was founded in 1935 and brought to the screen a legacy of motion picture excellence is no more. Late last month, the Department of Justice granted approval of the $71.3 billion transaction of Disney acquiring Fox, The Disney-Fox merger waltzed through the hallways of the Department of Justice much liked the cups and dishes from “Beauty And The Beast”. The next several months will see unprecedented change in the movie industry as the number of studios shrink, from six to five and and soon in my estimation to 4 as behind the scene talks between Paramount and Sony take place.

The speedy Department of Justice approval paves the way for the creation of a Godzilla sized entertainment company, combining many of the best performing and stable movie brands. With Disney at 36.6% of the market and Fox with 12.8 % of the market, the combination now gives us one company which will control 50% of the domestic box office. By any economic measure, by any sound perception of a free market economy, this is very very bad.

Disney has been able to charge theater owners movie rental terms that are higher than industry norms on most of its titles. It has even gone so far to charge 50% movie rental for its library titles. Fox while having a couple of strong franchises are more apt to experiment with smaller movies. Under the new Disney regime, I imagine this would go away. Rental rates will rise and Disney will use it’s market size to extricate further box office monies from theater owners. There will also be fewer movies released, whereas Disney has released 8 and Fox 14 individually, this number is bound to shrink substantially.

One of the key goals for Disney on this transaction was to take control over the rights to two of the biggest catalogs in entertainment business, 20th Century Fox for movies, and 20th Century Fox Television for TV shows. The Disney’s acquisition of Fox gives the company full and total ownership of the Marvel characters that to date have been under the control of Fox, Deadpool, the Fantastic Four and the X-Men. The acquisition ends the sharing agreement for two additional Marvel characters: Quicksilver and Scarlet Witch, whose comic book origins lie in both the Avengers and X-Men series.

This means that X-Men will join the Marvel Cinematic Universe. The deal also gives Disney the one piece of the Star Wars puzzle that it didn’t acquire when it bought Lucasfilm. Fox’s original arrangement with George Lucas included the exclusive distribution rights to the first Star War film in perpetuity. That is no more. After the shareholder vote on July 27th, Disney will own Walt Disney Studios (Marvel, Lucasfilm, Pixar); Disney theme parks and hotels; ABC TV stations; A&E networks; Disney Channels; ESPN, Disney products and stores, music and publishing; Twentieth Century Fox studio; Fox’s TV production (“The Simpsons,” “Modern Family,” “This is Us”); cable networks FX, FXX, FXM and National Geographic channels; Star India; more than 350 international television channels; 39.1% of pay TV provider Sky; controlling ownership of Hulu; and other assets. Nice eh.

Disney’s main reason for acquiring Fox is to have additional branded content for online, direct-to-consumer content services. Let me restate a comment made by Bob Iger, Head Man At Disney, “We believe creating a direct-to-consumer relationship is vital to the future of our media businesses, and it’s our highest priority.” This statement is more than significant, it charts a path for the entirety of Disney’s vision of filmed entertainment.

Disney is clever. It sees the decline of traditional cable and network television. It knows that the days of network TV are done and cable may soon follow. In their mind the role and importance of the movie theater is also declining and declining rapidly. They know the sole battle is the LCD screens which reside in most American homes.

They have watched the rise of Netflix and they have gotten scared. Disney knows that if it does not do something then the assets within its portfolio which are tied to network television and cable, would have drag the whole company down. They had to quickly re-purpose their assets, and then add to them. As well Netflix was grabbing market share which Disney felt was rightfully theirs. To add insult to injury Netflix was using Disney’s own movies to overtake them.

In August of 2017, Disney told Netflix they were terminating their agreement. No more Disney product was going to be supplied to Netflix. Now this also applies to the Fox library.

Disney knows it is at war. A war with Netflix and others who might get in the way of their acquisition of subscribers. Netflix is aware of the target on its back, and in reaction is set to release over 1,000 original video titles in 2018. To Wall Street Netflix provided an estimated budget of $7.5 billion to $8 billion to acquire or produce new movies or series, but it is spending even more on a cash basis because of the upfront costs of producing original titles. It could spend as much as $13 billion in cash, according to The Economist. Another estimate from Barclays Bank put the number at $14 billion. Whatever the number is, it is greater than all the major studios combined.

Netflix will acquire or fund an unprecedented number of original productions and they will release the titles globally. They intend to own all rights . From Ireland to India, Netflix intends to dominate all filmed entertainment verticals. They will attempt to one up Disney and one up Amazon. These corporate behemoths will return the volley. The streaming wars will have commenced in earnest. It is about to get more than interesting.

Without deepening its content library, Disney knew it could not stand a chance at taking a run at Netflix. By buying Fox, the increased available content library has given them the tool sets to really challenge the Red Envelope Gang. Apple with its deep cash reserves is entering the marketplace, Amazon with its production of the five season long “The Lord Of the Rings” is preparing to up it’s ante. HBO will rise stronger and with a deeper commitment to obtain further subscribers. The mantra shall be re-occurring subscriber revenue. Network television is dead, cable is dying and movie theaters will be wounded by volleys of friendly fire.

So the major players entering the field of battle will be;

Disney
Netflix
Apple
HBO
Amazon

It will be like in The Hobbit, The Battle Of The Five Armies. It will be loud, tumultuous and like most wars a ton of collateral damage. The bottom line is all these players will be forced to put their best programming into their Video On Demand offering, there is no choice for them. No matter what the studios tell you, no matter how earnest they appear…at the end of the day they know if they do not give their home audiences spectacle and sizzle of the highest order, they will lose. Day and date is a foregone conclusion….what I am beginning to worry about is the studio denying theaters from their product offerings in their entirety.

Hulu, now owned in the majority by Disney will be used to erode market share in certain demographics and genres, and the main Disney offering will be focused on traditional tent-pole offerings.

Now for some reason today the Department of Justice has appealed the merger of AT&T and Time Warner, which might slow down HBO’s entry into this melee.

It will be a battle of the hearts, minds and remote controls of consumers. These companies will dedicate all their resources towards winning this battle. They all know full well that for a couple of them, Disney and Netflix, losing any battle in the upcoming war will mean a more than rocky future and they will have to suffer embarrassment in front of the wizards of Wall Street who are in fact their true masters.

So what say you about the future of movie going, well I say that if you cast your lot with Disney and the majors you will at some point become a bitter casualty of war. If you detach yourself from studio dependencies, you may just stand a chance. Think of embracing Esports, UFC, WWE, alternative content, more ethnic programming and as well regional productions. Start shifting your business model now.

I will ends this essay with another quote from Bob Iger

ROBERT IGER: One of the reasons that we’re doing this is because of the trends that we’re seeing. But another reason that we’re doing it is because of the strength of the brand and the opportunity that this technology and the consumer trends that the technology has created are providing. It’s not just a defensive move. It’s an offensive move.

I do not know if I agree with Bob, a lot of what I see is a reaction and a fear of Netflix, therefore defensive. We have entered some very interasting times,

At the end of the day though, Americans still like going to the movies and that is were I place my hope

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