Disney (NYSE:DIS) is launching its new streaming service Disney+ next month, and it's already signed up quite a few subscribers. But Amazon (NASDAQ:AMZN) Fire TV owners hoping to stream all the new Marvel and Star Wars films and Disney's massive back catalog of films and television could be out of luck.
Disney and Amazon are having trouble coming to terms on the distribution rights for the highly anticipated streaming service. What's more, the disagreement could carry over to Disney's other streaming apps including Hulu, ESPN+, and its suite of TV Everywhere apps.
The core point of dispute, according to The Wall Street Journal, is the percentage of ad inventory Amazon would control in Disney's apps. Amazon's been flexing its muscle lately to obtain more video ad inventory on the Fire TV platform, and with great success. But it seems to have hit a roadblock with Disney.
There's a lot at stake in these negotiations. Here's what investors in these consumer stocks need to know.
Where each side is coming from
Both Disney and Amazon are bringing a lot to the table. Disney+ has already seen considerable interest from consumers before it even launched. Meanwhile, Hulu has 28 million U.S. subscribers and ESPN+ adds another 2 million.
On the other hand, Amazon has 37 million active accounts on its Fire TV platform. It accounted for approximately 29% of connected TV devices in the U.S. during the second quarter, according to Strategy Analytics. That trails only Roku (NASDAQ:ROKU).
Disney believes its services represent core streaming services that bring audiences to platforms like Fire TV. As such, it reportedly doesn't want to give up any of its ad inventory to Amazon.
Amazon, meanwhile, believes the scale provided by its platform is necessary for Disney's direct-to-consumer strategy to succeed, just as pay-TV distributors are a necessary part of its media networks business. As such, it wants at least a small percentage of its ad inventory. The two are reportedly discussing a 10% inventory share.
What exactly's at stake?
Ten percent might not sound like much, but giving that much to Amazon could be quite significant for Disney.
Hulu alone generated $1.5 billion in ad revenue last year. Add in ESPN+ and Disney's TV Everywhere apps, and digital video ad revenue at Disney is pushing well above $2 billion. What's more, Disney has the potential to accelerate ad revenue growth under a unified ad sales platform now that Hulu is under its operational control, and it could benefit from greater targeting abilities and ad inventory from bundling Disney+ with Hulu and ESPN+.
While Amazon only accounts for a portion of distribution for Disney's services, it's still significant. As I mentioned previously, Amazon has a 29% share of connected TV devices in the U.S. About 70% of streaming hours take place on connected TV devices, so Amazon may account for around 20% of view time for Disney's services.
So we're talking about Disney giving up around $50 million in potential annual ad revenue this year (and more in future years) just for distribution on Fire TV. That's revenue that would otherwise fall straight to Disney's bottom line because the incremental cost of selling the ad inventory is negligible. Still, $50 million isn't a huge amount for Disney, which generated $15.7 billion in operating profit last year.
The bigger risk is that sacrificing a portion of ad inventory to Amazon sets a precedent for other distributors like Roku, which could have a much bigger impact down the line. And as Disney's direct-to-consumer business becomes a bigger part of its overall operations, giving even 10% off the top of its ad inventory for distribution could curb its path to profitability.
In the long term, it might make more sense for Disney to stand pat with its position regarding sharing ad inventory with Amazon. Instead, it might offer certain subscribers -- like those taking its new streaming bundle -- a free Roku device, where it gets to keep more (if not all) of the ad inventory. While it could cost more upfront, it could create greater value in the long run by maintaining strength in its relationship with distributors.