In this week's episode, Patrick and Peter tear down the pricing of streaming OG Netflix and entertainment OG Disney. Should Netflix be scared by this monolith's recent foray into the subscription market? Tune in to find out.Read More
PTH B-Side: The Disney Octopus
Patrick Campbell Jan 21 2021
Octopuses are fascinating creatures. Three hearts for multi-system management, eight limbs for multi-axis movement, and four defense mechanisms make a good recipe for being around for millions of years. I find companies that deploy octopus-business strategies even more fascinating though.
An octopus business is essentially one that centers their entire success and survival around a core competency and then deploy that core competency along many axes (or tentacles) for distribution or monetization (gathering food?). Like an octopus they shift and evolve quickly with that core competency in different environments, sometimes cutting off limbs or adjusting their internal systems to keep the core competency (and therefore the company) strong.
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One of the most notorious octopus businesses out there is Disney. Everything they do is centered around the core competency of being phenomenal at story telling. They then have many "tentacles" to sell and distribute those stories. Yet just like the octopus they've evolved to protect this competency in reaction to shifting markets. We rarely see a reaction like what Disney has done in the last 12 months, especially from an older, public company:
- Took their Disney+ streaming service from a tentacle they were experimenting with for distribution to the core of where new stories would come from first. They even changed the structure of their executive team to elevate the Disney+ team.
- Paused their stock dividend in order to get through the costly transition to a subscription orientated company.
- Started skipping (and planning to skip more) theatrical releases for instead a premium one time purchase on the Disney+ streaming product (meaning you pay $7.99 per month for the platform, but then also need to pay $30 more for certain films if you want to see them when they're released).
Most journalists who contacted me about Disney's decisions either lamented the short-term lost revenue or heralded the shift as similar to Apple's, which would mean a future trillion-dollar market cap. While both are true, they just scratch the surface. The power of Disney's move here is in the retention of compounding growth and that's where the lessons for all of us exist. Let's dig deeper.
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How you deploy your core competency matters
The first lesson here comes down to how you deploy your core competency. In the old world, Disney would create the best stories (or buy the companies that would rival them in storytelling—Pixar, Lucas Studios, Marvel, etc) and then send them to multiple tentacles for distribution. Movie theaters, retail, global syndication partners, etc., are all obvious, but they also deployed these stories in theme parks, merchandise, cruises, and other physical experiences.
Like an octopus they used these tentacles to go out and gather food (cash from customers) to build energy to go start the cycle again (more stories).
Disney ran this strategy better than anyone—thinking about ROI for content in ten-year terms. The first tranche of revenue comes from domestic and international box office returns. The next tranche is from home entertainment (digital sales and rentals, PPV, DVDs, etc). Then comes TV viewing through cable, which is followed by TV viewing on free networks. All of these tranches are also underpinned by merchandising and licensing.
It's important to keep in mind that the success of each preceding tranche impacted the value of the following tranches. Put another way, if the box office is a dud, you're likely not going to see a lot of home entertainment sales, let alone merchandise sales. Small percentage drops in box office results can mean the loss of hundreds of millions of dollars. This is also why Friends—a mediocre sitcom (yes, I said it)—was able to command $100M from Netflix for distribution over a decade after it was on the air.
The world changed dramatically though. Entertainment became commoditized.
You used to be able to actually count the number of shows or movies coming out, and there just wasn't as much out there. In fact in 1979, there were 89 television shows and the lowest rated one, Rob Lowe's A New Kind of Family, pulled in 19 million weekly viewers. Today the highest rated TV show (NCIS) pulls in 15M weekly worldwide and there are so many shows we've essentially stopped counting them.
Disney competed in this new world through going "upmarket" in quality, but this strategy only lasted so long. Consumer tastes and consumption started spreading out like butter on bread. We were inundated with more quality content than we could watch. Throw in advertising costs skyrocketing and you have a recipe for ROI dropping like a brick.
By placing their Disney+ streaming service at their core, Disney aligned their core competency and their distribution strategy nearly perfectly. Instead of needing to go to the customers, the customers are already there. This cuts out costs, middlemen, and ultimately puts power back in Disney's hands, because customer re-engagement or retention become easier. It's like an octopus that gets food that lands right in it's beak without any work (yea they also have beaks, which is kind of terrifying).
How could this manifest itself for your business? Well, the basic idea is whomever gets closest to the customer wins. With Disney+ Disney is basically getting as close as humanly possible, cutting out the physical distance of needing to leave your home or needing to buy Disney content on a one-off basis. They've reduced decision time by going direct.
We're all trying to get closer to the customer and this seems obvious, so where's the new thought? Well, I'd tactically modify this to: whomever gets closest to and makes it easiest for the customer to say yes, wins. Disney is already bundling new releases like Mulan for an extra charge. I'm sure early access or exclusive merchandise, physical park experiences, or even fan memberships are just around the corner.
3 ways to do this
For your business, I see three core ways to do this, assuming most of you reading this are already subscription companies:
- Implement some sort of freemium offering: Freemium is vastly misunderstood. It's not part of your pricing strategy; it's an acquisition model. Think about it as an opportunity to "own the right to nurture leads." You need to provide a ton of value though—most of the time you need to be better than the paid competition. This gets you close to the customer and makes it easy for customers to start paying you based on trust. I wrote a book on freemium here to dig deeper.
- Add-ons. For the love of God, add-ons: Add-ons are the most under-utilized aspects of revenue growth for all companies. Lifetime value for customers with one or more add-ons is typically 18-54% higher, not only because they're paying you more, but also because they're sucked more into your world. Disney doesn't sell merchandise or park access out of the goodness of their heart. They get fans hooked on their stories and mainline more avenues for them to explore those worlds. We all love to tweet the whole "it's easier to keep an existing customer than get a new one," but we should actually act on this missive. You've got the customer; they're presumably happy—sell them more things.
- Run a parasite product strategy (I don't have a better name). Stop trying to be the "source of truth." This is a bit counter intuitive given what we've been talking about, but I think most products out there want to be the source of truth, but they don't have a chance in doing so. Instead, think about how you can permeate whatever you do into every other product your customer uses or their daily life. This'll likely be through integrations, but could also be just in modifying your product to get in their workflow. From day one at ProfitWell, we knew for our free subscription financial metrics product, we didn't have a chance in hell of winning if we relied on people coming to their ProfitWell account every day, so we focused on really good email and mobile alerting, as well as integrations to push our data out.
Everything serves the core and lock customers into the core (respectfully)
Going a bit deeper, the implications from Disney's recent moves also stem from serving the core more efficiently and locking more customers in long term.
When Disney put Mulan on Disney+ for an extra $30 for early access, it brought in an estimated $33.5M over its opening weekend. People fixated on this number and I think it's the most boring one to think about. Instead, fixate on the fact that Disney+ downloads increased 68%—bringing in likely over 500k new users. All of these new subscribers paid to cover part or all of their CAC and the production of the movie.
Disney can easily run this playbook over and over again, keeping some blockbusters in theaters, releasing others for a premium one-time purchase as a part of Disney+, or simultaneously releasing these as a premium purchase in the home and in theaters.
The implication for you here is: what value are you giving up monetizing or minimally monetizing to bring in more customers?
We typically think of growth too much like a single move game—do a thing and get money. It's multi-move. We already spoke about freemium, but there are content, brand, product, and other moves you can be making to get leverage and bring customers into your sphere of influence.
As channels become more and more dense, we're going to need to get more creative in how we acquire customers. I don't have all the answers here, but we're experimenting at ProfitWell by studying media and hype retail companies. Sure, we're going after 43-year-old VPs with 2.3 kids and an SUV versus 22-year-old Tik Tokers, but many lessons are to be learned by the best distributors in the world.
One last big lesson from Disney is that they're creating a lock-in effect that's subtle and oh-so beautiful. Typically lock-in effects exist when your product has something that your customer can't lose, so no matter how bad your product is they stay. This could be data, file storage, wiki articles, etc.
For Disney, let's imagine a world where I'm only able to access my purchased copy of Mulan if I have a Disney+ subscription, do you think many people are going to cancel under those circumstances? Sure, Disney has now released Mulan for general Disney+ subscribers. Yet, I'd bet most of my stake in ProfitWell that the retention rate for those customers who purchased Mulan will be 20% better than those who didn't over the next few months. Buy-in creates lock-in.
Disney is also notorious for differentiating the same movies in different ways. They add bonuses and special editions with never before released scenes. They put certain titles "back in the vault" and come out with platinum editions. I see a future where this is applied to these one-off purchases or even is spurred by purchasing other items and merchandise. Imagine where only people who bought premium Mulan can purchase limited edition merchandise? Double, triple, quadruple dipping—and lifetime value just continues to expand all the way to the bank.
Lessons for your business
- Product distribution that compounds multiple levels of growth: I've belabored the conversation on freemium, but you should also think through the where you can double or triple dip when it comes to growth. At the very least think through the pools of growth you can create (freemium, SEO, content, brand, etc), rather than rivers-ads, events, etc.—that we all learned can be turned off in an instant in 2020.
- Cause a mild amount of pain to leave your product: If you have a subscription product where cancelling doesn't cause any pain, you're setting things up incorrectly. To be clear, you shouldn't hijack your customer from being able to cancel. I'm referring more to what you can do with your product to cause the customer to rethink the decision. A customer should lose their history, the storage of their data or content, their personalization, or just something. You're not here to extort your customers, but you're here to make sure it's clear there are tradeoffs.
I trust this was helpful. I bet we're going to see more octopus businesses in the future, mainly because we're not going to have a choice. The market's getting denser and rather than resetting our growth expectations, we're going to remember the good ol' days of 2004 and seek those multiples, which'll only come through evolving.
I suppose that's the ultimate octopus lesson here though—evolution within your environment is the only constant. Your core competency will remain the same, but everything else you need to have the guts to throw out the window. Disney is definitely aggravating their traditional partners, but it's because they're adapting to the new world.
I find a lot of execs and founders holding on to some outdated vision document or trying to force a square product into a round world—it's just not going to work.
I leave you with one of my favorite excerpts of all time from Mike Troiano:
The octopus is whatever it needs to be to win: invisible or ominous, strong or liquid, ugly or beautiful. It is smarter than its enemies, but feels with the strength of three hearts. It uses ink to conceal, and jets to escape. It has the resolve to detach its own limbs when attacked, and the inventiveness to light its own way in the darkness. The way of the bull comes naturally to me. But I try every day to be more like the octopus.
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This is a ProfitWell Recur production—the first media network dedicated entirely to the SaaS and subscription space.
By Patrick Campbell
Founder & CEO of ProfitWell, the software for helping subscription companies with their monetization and retention strategies, as well as providing free turnkey subscription financial metrics for over 20,000 companies. Prior to ProfitWell Patrick led Strategic Initiatives for Boston-based Gemvara and was an Economist at Google and the US Intelligence community.