Disney is Treating Streaming as a Loss Leader
At a media event on April 11th, 2019, investors finally got some information on the highly-anticipated Disney+ streaming service. It is going live on November 12th, will cost only $6.99 a month (nice), and will be kids and family focused. Wall Street apparently loved the announcement, with Disney shares up over 10% during intraday trading.
The beautiful thing about streaming for Disney, at least from an investors perspective, is that they can treat it as a loss leader. The entertainment conglomerate generates around a billion in free cash flow every quarter, giving them a ton of wiggle-room to focus solely on user growth with their streaming initiatives
Disney+ is Not a Netflix Competitor
With Marvel, Star Wars, Pixar, and kids content, it looks like they want Disney+ to appeal to families and kids. This is an area where Netflix lacks in content, and where Disney already has decades-worth to monetize.
Another reason Disney doesn’t want this to look like a direct competitor to Netflix (at least not yet) is they are very behind in the digital game. Netflix already has 140 million subscribers globally, giving them a huge scale advantage to the competition. Disney+, at $6.99 a month, is being priced at a huge discount for a reason, because Disney wants 90 million users by 2024. Low prices will help the service appeal to as many people as possible.
The Three Pillared Strategy
Another thing analysts may be underrating is the multiple streaming services Disney is going to offer. They basically own Hulu, and ESPN+ has been growing users steadily over the past year. With Hulu (ad-version) costing $5.99, ESPN+ costing $4.99, and Disney+ costing $6.99 a month, all of Disney’s offerings fall well below what most streaming services cost.
There’s no doubt Disney will also start offering value bundles by combining all three streaming services into one subscription. A Hulu, ESPN+, and Disney+ bundle could cost as low as $15, which is right on par with Netflix but with a wider variety of content offerings. They also could bundle Disney+ with Hulu Live TV for $50 a month, which would appeal to families who haven’t cut the cord yet.
If we want to do some quick sales estimates (because as investors that’s what really matters) let’s say by 2025 Disney has 250 million total subscribers to Hulu, ESPN+, or Disney+ (subscribers to all three would count as three). If people are paying on average $6.00 a month, that would be $18 billion in annual recurring revenue. 250 million is no doubt a large number, but with the greatest content library on earth, if anyone can reach that number, it’s Disney.
Note: The new Star Wars trailer came out today and literally broke Twitter. Disney owns them too. And you can still get shares of this stock for less than 20-times forward earnings, just putting that out there.
Disclosure: The author is not a financial adviser, and may have an interest in the companies discussed.