By now we’re all familiar with the 3 big announcements Disney made yesterday: 1) a plan to launch its own entertainment-focused SVOD service, in turn sunsetting in 2019 its Netflix licensing deal for Disney/Pixar content, 2) a plan to launch an ESPN OTT service and 3) spending $1.58 billion to buy another 42% of BAMTech and take control of that business.

Focusing on Disney’s entertainment SVOD service it looks pretty clear now that by signing the original December, 2012 licensing deal with Netflix, Disney blew a big strategic opportunity to get in front of the trend toward direct-to-consumer online distribution.

In signing with Netflix, Disney instead held fast to the legacy business model of distributing its movies in the “pay 1” premium TV model, enticed by the above market fee Netflix was offering. While Netflix stock immediately popped 14% on deal’s announcement (and has kept running ever since), the deal did little more for Disney than create some incremental short-term revenue. Now Disney will have to start practically from scratch in building its own SVOD service while other competitors have raced ahead.

When the Disney-Netflix licensing deal was announced by the companies on December 4, 2012, Starz had an existing output deal with Disney, but said that it decided not renew and instead focus on creating more of its own originals. Even though the Disney-Netflix deal was announced in 2012, Disney’s high-profile slate wouldn’t start showing up on Netflix until 2016 when the Starz deal expired. Only smaller direct-to-video Disney titles began appearing on Netflix in 2013.

A very significant piece of context to know is that Starz itself had decided over a year earlier not to renew its own 2008 deal with Netflix, because Starz felt its content wasn’t getting distinct premium treatment. In the 2008 deal, Starz granted Netflix the ability to stream 2,500 Disney movies and TV shows over 4 years (along with Sony content Starz also had access to). The Starz-Netflix deal was highly controversial because it wasn’t entirely clear that Starz legally had the right to distribute through a third-party streaming service like Netflix.

Back in 2008 Netflix was still early in its expansion into streaming and its content was underwhelming. The Starz deal was a game-changer for Netflix as it greatly enhanced the value of Netflix streaming and started its huge subscriber acquisition binge. By 2014, Starz’s new CEO Chris Albrecht would call the 2008 deal “terrible” for the company.

In fact, the Starz deal was the first of countless other licensing deals Netflix would do over the years (and subsequently renew) where content providers were enticed by short term profit opportunities, while not fully understanding the longer-term strategic consequences. A perfect example of this is AMC licensing prior seasons of its hit show “The Walking Dead” to Netflix, thereby precluding the show’s catalog from being part of its new AMC Premiere SVOD service, in turn diminishing its appeal.

This is the mistake that Disney made as well. By late 2012 there were abundant signs that direct-to-consumer OTT was the future: Netflix already had nearly 24 million U.S. streaming subscribers, connected TV devices were taking off, the iPhone was a hit signaling the power of mobile, Hulu was getting traction, etc.

Yet Disney, aware of all this, and fully knowing how Netflix had already used Disney content once (via its Starz deal) to enhance its streaming service, entered into the new deal which would run until 2019. Did Disney executives not believe that all of the OTT trends would only magnify over the next 6-7 years? That Netflix was not likely to dramatically increase its subscriber base and direct engagement with subscribers? That broadband/devices would not lead to viewers changing their consumption patterns?  

If Disney executives did believe these things then maybe the 2012 Netflix deal is more understandable. But now flash forward to yesterday - little more than a year from when Disney’s movies actually began appearing on Netflix. Disney has dramatically shifted its strategy to go direct-to-consumer. I find myself wondering - at what point over the last 4 1/2 years did the lightbulb go on for Disney’s management? When did they realize they prematurely grabbed for short-term licensing profits instead of thinking more clearly about maintaining control over their own IP longer-term?

No question, public company CEOs have massive pressure to meet quarterly targets and keep their stock price up. But that kind of short-term thinking and over-reliance on legacy business approaches have significant downsides when technology changes are disrupting core markets.

Disney is now paying the price for that fateful 2012 deal. It’s essentially going back to square one as it attempts to launch its own SVOD service. But that service won’t even see the light of day until 2019 and who knows what the landscape will be then? In the meantime, competitors have been innovating fast to stake a claim to viewers’ wallets (e.g. HBO Now, CBS All Access, Hulu, Amazon Prime Video, etc.). Not least, Netflix has grown into an 800-pound gorilla, using its financial might to diversify into producing its own original content.

It’s true that Disney content is still the gold standard, but translating this into a successful SVOD service in 2019 is far from a layup. Disney investors are right to be concerned about the risks involved (not to mention the risks Disney is separately taking on with its forthcoming ESPN OTT service along with traditional ESPN subscriber declines). So it’s no surprise Disney stock is down around 5% today, wiping $8 billion from the company’s valuation.

On the earnings call yesterday, Disney chairman and CEO Bob Iger said that the company’s announcements amount to “an entirely new growth strategy for the company, one that takes advantage of the opportunities the changing media and technology industries provide us to leverage the strength of our great brands.”

All of that rings true, but something else Iger said seems even more meaningful. In answering an analyst’s question about whether the ESPN OTT service could disrupt the multichannel bundle, Iger said “Secondly, it gives us what we’d call optionality. It’s a word I’ve not used very much in my life, but it gives us the flexibility, really, to move our product to the consumer in many new ways…”

Over 6 years of optionality is exactly what Disney lost when it did the 2012 Netflix deal. In the face of a highly dynamic market, Disney should have remained flexible, ready to pounce on strategic opportunities vs. going for short-term gains. Instead it did the latter and is now playing catch-up. Whatever eventual success that Disney’s entertainment SVOD service may enjoy it will be long-overdue and likely not to be nearly as beneficial to Disney’s valuation as it would have been if started much earlier.

A lot has been written about how Netflix has seduced traditional content providers into licensing their crown jewels, by offering rich terms. Admittedly hindsight is 20-20, but the 2012 Disney deal now surely seems like a prime example of Netflix getting the better end of things.