Will Disney’s $12.99 Bundle Work? What Should they do Next?
At first thought: definitely. And that seems to be what every financial columnist thinks right now, who may be prematurely giving Disney the streaming crown. I think they are likely right, but as the great Charlie Munger says, “Invert. Always invert.” And with CEO Bob Iger stating on the quarterly conference call that “Nothing is more important to us than getting this right,” investors in Disney should be asking themselves, how could Disney+ flop?
Before we get into that, let’s talk about what Disney’s digital strategy looks like and what content they will be offering (if you already know the details, skip to the next section).
Once November rolls around, Disney will have three direct-to-consumer (DTC) offerings: Disney+, ESPN+, and Hulu. Disney+ will cost $6.99, ESPN+ $4.99, and Hulu (ad-version) $5.99. Also, and this was the big news from the conference call you probably heard about, bundling all three together will only cost $12.99 a month. $12.99 is also the same price as the standard Netflix subscription.
What will be on Disney+? I’ll have Iger explain it to you:
“Disney+ will ultimately become the exclusive streaming service for our vast library of movies and series, National Geographic content, all upcoming Disney, Pixar, Marvel and Star Wars movies and a robust slate of high-quality original programming from the creative engines that drive our entire company.”
Essentially, all non-sports (saved for ESPN) and non-adult TV (saved for Hulu) content owned by Disney will eventually be available on the service.
So, What Does “Getting it Right” Look Like?
Quite frankly, I see a lot of potential for the Disney streaming bundle. But like anything, the potential doesn’t mean squat; performance is all that matters.
Here is what a successful DTC rollout would look like, explained with future news headlines:
“Disney+ has already reached 100 million subscribers, while Netflix is barely over 200” – Winter, 2022. (Might be a bit optimistic, but you get the picture)
“Consumers rave about Disney+’s breadth of content and ease-of-use” – Spring, 2020.
“The results are in: American families love the Disney bundle” – December 2020.
Investors underestimate the advantages of cash flows from Parks and Media Networks. Last quarter, both divisions combined for $13.3 billion in revenue with 29% operating margins. Why is this important for Disney’s DTC projects? Because it allows them to fund growth without debt or share dilution, two things they had to do for the Fox acquisition. Netflix has been addicted to debt because they have no profitable legacy businesses to rely on.
What Getting it Wrong Looks Like
I think there are three ways Disney’s DTC initiatives could flop: poor content, slow growth, and terrible user experience.
There is a 1% chance Disney doesn’t pull-up its weight in content. I mean, did you see the stuff going on Disney+? If 90% of families with children under-12 don’t subscribe, my preconception of the US consumer is entirely wrong.
As for the other two points, I think they have non-dismissable chances of materializing. If DTC is going to be profitable in five years for Disney, user growth needs to come out hot. Like 100 mph fastball hot. Shareholders of a legacy media company will not have the same patience as they do with Netflix and will want signs of profitability sooner rather than later.
User experience is what I personally am most concerned about. Disney and their subsidiaries have had trouble in the past with any internet-based initiatives, which makes me slightly skeptical they can pull this off smoothly. Everyone’s assuming the services will perform from a technical standpoint exactly like Netflix, an objectively overconfident belief. Why would a legacy business immediately be able to build the same frictionless product as the king of video streaming? Seems optimistic to me.
Disney Should Double-Down on Subscriptions
The “Conglomerate-of-Mouse,” which is what investors should start calling Disney, needs to start leveraging its scale and offer more comprehensive subscription services to its most loyal/high-paying customers (note: I got a lot of these ideas from Professor Scott Galloway, who does a way better job of explaining it here). It would be Prime-like, bring in TONS of recurring revenue (likely driving up Disney’s P/E ratio), and lock-in families as customers for the foreseeable future.
Think about what value a Prime subscription would be for consumers and Disney if they offered the DTC bundle, discounts/first-choice at parks, cruises, and hotels, ten free movie tickets a year, and a “Stitch-Fix” for toys/merch for $25/month or $250/year. Maybe I’m optimistic, but I think there would be a minimum of 2 million families in America that would sign-up, and likely a lot more. They already do this for theme park goers, so why not for the rest of the business?
An even better offer would be to make the entire subscription optimizable, allowing users to add and subtract to any combination of services they want. They should even allow people to sign-up for any two of their DTC services for $9 a month. I mean, why not make it an option? More options, at least in this scenario, seems like the better move.
I have high confidence Disney can crush it with their new “Plus” offerings, but also believe nothing is ever a sure thing. Keeping expectations tempered and being open to all possibilities is important when investing in individual companies.
Disclosure: the author is not a financial adviser, and may have an interest in the companies discussed.