No company has been more responsible for shaping the modern entertainment landscape than Walt Disney. In 1937, with Snow White and the Seven Dwarfs, its first feature film, Disney invented the family blockbuster. In 1954, with Disneyland, an anthology series hosted by Walt Disney himself, it became the first movie studio to strike out for the wild west of television. Since then, Disney’s dominance has only grown. Of the dozen films with the largest worldwide box-office take since 2010, Disney released eight.
Those successes, however, belie real danger on the horizon for Disney. In recent years, many of the company’s traditional strengths have slowly turned into weaknesses—like a fairy-tale castle gradually flooded by its own moat.
Take television. Disney has long prospered thanks to the cable bundle, which, like a private-sector tax system, levies a large annual fee on the vast majority of U.S. households. Disney’s most valuable network, the sports juggernaut ESPN, collects approximately $8 per cable-package subscriber a month. No other basic-cable channel makes more than $2.
But the cable business is floundering. Nearly half of adults ages 22 to 45 didn’t watch any broadcast or cable TV in 2017, according to a study by the marketing agency Hearts & Science, and the number of so-called cord cutters abandoning cable is growing by the year. This is troubling news for ESPN, whose daily viewership has declined more than 10 percent since 2011. It’s nearly as troubling for Disney, which makes more money from television than from its movies or amusement parks.
The U.S. film business, meanwhile, has arguably been in slow-motion decline since Dwight Eisenhower’s administration. The typical American bought more than 20 movie tickets a year in the early 1940s, a period in which Disney pumped out Fantasia, Pinocchio, Dumbo, and Bambi in three consecutive years. But ticket sales plunged after the rise of television in the ’50s, and they’re still falling: The typical American bought fewer movie tickets in 2017 than in any year during the previous two decades. Among the key demographic of 18-to-24-year-olds, North American movie-theater attendance has declined 17 percent since 2012, a sign of more bad news to come for Disney.
That is, if it sticks to its traditional ways of making money. Americans aren’t watching less video entertainment each year. They’re actually watching much, much more—on their smartphones, laptops, and internet-connected TVs—thanks to the rise of streaming, where Netflix, not Disney, reigns supreme. It might seem confounding that Netflix’s market value is about 90 percent of Disney’s, considering that Disney does many things profitably while Netflix has one specialty, internet video, and hardly makes a dime on it. But investors and young people agree: The future of entertainment will be streamed. And that means Netflix, with its nearly 120 million global video subscribers, has an early lead in the race to become the next generation’s showbiz colossus.
Economic history holds a rich archive of once-thriving firms that were overtaken by technological change. Far shorter is the list of companies that forestalled their demise by nimbly adapting to defeat new competition. It’s much too early, however, to count Disney out. The company is mobilizing, in two major ways, to outrun Netflix and remain the dominant player in American entertainment.
First, Disney has announced that it plans to acquire most of the assets of 21st Century Fox. If the Justice Department approves the $52 billion deal, Disney would gain possession of the 20th Century Fox film studio, including Fox Searchlight (which has produced Best Picture Oscar winners such as Slumdog Millionaire, Birdman, 12 Years a Slave, and The Shape of Water), the X-Men franchise, the FX and National Geographic cable channels, several regional sports networks, and the television production company that makes Modern Family and The Simpsons. The resulting conglomerate would own as much as 40 percent of the U.S. movie and television industries.
Second, and more important, Disney is building a streaming product to deliver its content, old and newly acquired, directly to consumers—let’s call it Disneyflix. When it launches, in 2019, it will include several exclusive series and every film in the Star Wars, Marvel Entertainment, Pixar Animation Studios, and Disney Animation universes.
Disney, in other words, is constructing what looks to be a worthy rival to Netflix. Will this be enough to inaugurate another century of dominance? Based on its public statements and on private conversations I’ve had with Disney executives, the company’s most likely path forward is to nurture Disneyflix gradually, in an effort to ease the decline of pay-TV and film—the equivalent of saving its flooding fortress by plugging each new leak as it springs. That may be a prudent way to maintain the status quo for a few more years. To save the kingdom, however, Disney may have to blow up the castle.
Black Panther, Disney’s latest box-office megahit, offers a perfect lens through which to see both the benefits of Disney’s traditional model and the virtues of a new path. The acclaimed film grossed more than $575 million at the domestic box office in its first month, showcasing Disney’s unique ability to create broadly appealing entertainment in a culture that often feels like an agglomeration of cult interests and niche tastes. But in film, as in television, Disney relies on middlemen to deliver its content—and middlemen always take a cut. To buy a ticket to see a Disney film in theaters, you pay an exhibitor that keeps about 40 percent of the ticket price.
What if Disney bypassed the middlemen and put a highly anticipated film like Black Panther on its streaming service the same day it opened in theaters—or made the film exclusive to subscribers? In the short term, sacrificing all those onetime ticket buyers might seem financially ruinous. But the lifetime value of subscriptions—which renew automatically until actively canceled—quickly becomes profound. If the film’s debut encouraged just over 4 million people to sign up for an annual subscription to a $10-a-month Disneyflix product—about the same number of subscribers that Netflix added the quarter it debuted its original series House of Cards—Disney would earn a net revenue of nearly $500 million in just the first year. Black Panther was a massive hit as a theatrical release; it could have been even bigger had it been used to transform onetime moviegoers into multiyear Disneyflix subscribers.
“If I were sitting in [Disney CEO] Bob Iger’s shoes, I would realize that the most important thing I can do is create original exclusive content for my streaming product that is unencumbered by any other platform,” Rich Greenfield, a media and technology analyst at the investment bank BTIG, told me recently. (One week later, he made the case explicit in a research report, one section of which was titled “Why Releasing All Disney Movies on Streaming Is Not Crazy.”) Among other benefits, he said, Disney would get valuable personal data on its biggest fans, which it could use to customize its video service and offer special discounts for merchandise and theme-park tickets.
The math might make this seem like an easy call for Disney, but let’s not underplay how radical this move would be, and how seismic the effects on the existing entertainment industry. In recent years, the theatrical-release business has been carried by blockbusters—and Disney has been perhaps the most reliable producer of those. From 2010 to 2017, films earning more than $100 million have grown from 48 percent to 64 percent of the domestic box office, according to the research firm MoffettNathanson—and Disney has made the year’s top-grossing film in six of the past seven years. If Disney moves its films, en masse, to a proprietary streaming platform, it would smash movie theaters’ precious window of exclusivity and leach away crucial revenue. Exhibitors such as AMC and Regal may find themselves on an accelerated path to bankruptcy or desperate consolidation.
This is a future, in other words, where the movie industry as we know it ceases to exist. “We’re entering a world where theatrical movie openings will be optional,” says Ben Fritz, an entertainment reporter at The Wall Street Journal and the author of a new book, The Big Picture: The Fight for the Future of Movies. “Fierce competition in streaming will put more pressure on Disney to put its best content first on [Disneyflix].” Diehards might still fork over $20 to see the new Star Wars film on a big screen surrounded by thunderous sound effects and fellow fans dressed up as Kylo Ren. But many families would begin to regard movie tickets the way today’s cable-TV subscribers regard tickets to a baseball game: an expensive way to communally experience an event already available at home at no additional cost.
The collateral damage to the TV business would be no less significant, and might give Disney executives even more pause. The House of Mouse faces converse challenges in film and television. Disney has an incentive to leverage its studio-film business to grow its streaming service. But the success of Disney’s streaming service could also cannibalize its lucrative TV enterprise.
Nobody benefits more from the modern cable-TV industry than Disney—or has more to lose from its erosion. In its latest fiscal year, Disney made about 40 percent of its total revenue, or about $24 billion, from its television networks, including ESPN, the Disney Channel, and ABC. But since 2010, viewership for traditional television has fallen 51 percent among Americans ages 12 to 24, according to Nielsen. This decay will accelerate as Disney’s streaming service gets off the ground and fewer people feel the need to pay for cable when they can subscribe instead to Netflix and Disneyflix (and Amazon Prime Video, and HBO Now)*. For young people in particular, a cable subscription may soon seem as antique as going to the opera.
Will Disney have the audacity to plunge headlong into streaming? The head of Disney’s direct-to-consumer business, Kevin Mayer, has said that the company is “all in” on its streaming business. For the moment, at least, a more accurate description might be all over the place. With its pending purchase of 20th Century Fox, the company seems to be betting equally on its future and its past—adding a formidable library of content from Fox for Disneyflix, but also buying regional sports networks for the cable bundle.
The sports bet could be a particularly shortsighted one. If Disneyflix accelerates the demise of cable, ESPN and other sports networks will feel the decline especially strongly. These channels remain profitable for the moment, but they carry burdensome contracts—ESPN pays nearly $2 billion a year for its NFL rights, for example—that will become crippling if millions more viewers cut the cord. This year, Disney is launching a new ESPN subscription sports-streaming service, but for now it’s considered a supplement to cable, without marquee games, and not a true hedge against further declines in cable viewership.
Caution is a predictable strategy for any publicly traded company, perhaps even more so at Disney. Bob Iger has enjoyed a celebrated run at the helm of the company, but many of his seemingly bold moves have actually been safe ones. He’s pleased shareholders by counting on the public’s bottomless appetite for nostalgia and lightly refurbished classics. He acquired Pixar, Marvel, and Lucasfilm—each already successful—and amped up their revenues through expanded TV and film franchises.
Streaming presents a different challenge than figuring out the latest excuse for heroes to team up. For inspiration, the company might look to its founder. In the 1950s, when Walt Disney launched Disneyland on TV and opened his eponymous theme park in Anaheim, California, he envisioned his business as an infinity loop of merchandising, in which filmed entertainment sold toys, toys sold filmed entertainment, and both sold park tickets. It’s not hard to imagine how a Disney streaming product could work the same way. Disneyflix wouldn’t carry advertisements for other brands, but it could function as a nonstop advertisement for Disney itself. With individual data on millions of viewers, Disney could customize coupons for toys and Disney-branded experiences for its biggest fans. Subscribers at premium membership levels could get special offers for Disney cruises and line-skipping passes at Disneyland and Disney World.
In this vision, Disneyflix wouldn’t just be Netflix with Star Wars movies—it would be Amazon for Star Wars pillowcases and Groupon for rides on Star Wars roller coasters and Kayak for the Star Wars suite at Disney hotels. That’s a product that could rival Netflix and create the kind of profits Disney has enjoyed during its unprecedented century of dominance. The company just has to destroy its own businesses—and the U.S. entertainment landscape—to build it.
*This article originally identified HBO Go as a subscription streaming service. HBO Go is a product for cable subscribers. HBO Now is the network's streaming service for cord-cutters. We regret the error.
This article appears in the May 2018 print edition with the headline “Will Disney Kill Off the Movie Theater?”