by Peter Jones, CFA
Vice President, Equity Research
In April, Disney held an investor event outlining the strategy for their direct-to-consumer streaming service, Disney+. The service not only includes classic Disney films, but also the full library of Star Wars, Marvel and National Geographic. Disney indicated that the service would be priced at $6.99 per month, and projected global subscribers in a range of 60-to-90 million by 2024.
For reference, Netflix has over 150 million subscribers and costs $12.99 per month. The announcement generated incredible enthusiasm and Disney’s market value increased by $25,000,000,000 in a single day. Last week, Disney+ became available to consumers in the United States and Canada. Expectations were for Disney to attract about 15 million subscribers in the first year. Disney blew out even the highest projections and announced they had 10 million sign ups the very first day. As a result, Disney’s market value has increased by another $20,000,000,000 since launch. Disney’s brand strength and appeal to all “four quadrants,” i.e., males, females, above-and-below 25-years-olds, is overwhelmingly clear.
Disney is not alone in their aspiration to tap into the market that Netflix and Amazon’s Prime Video have dominated for years. In addition, NBCUniversal, owned by Comcast, will be launching their own service called Peacock in January. Time Warner Media, owned by AT&T, will be launching HBO Max in April. And of course, Apple TV+ is entering the fray. The competitive landscape is only going to become more intense in the coming months … or will it?
Traditionally, video content is consumed through “linear” distribution. Consumers subscribe to a video service, such as Comcast, and have hundreds of channels with 24 hours of programming for about $100 per month. You can pay extra to watch movies on-demand, but otherwise can’t select exactly when and what to watch. With direct-to-consumer streaming services, subscribers gain the ability to select content from a vast library whenever they choose and on any device they choose. Essentially, streaming has expanded consumer choice at a very low cost.
With Netflix, Prime, Disney+, Hulu, Peacock, Apple TV+ and HBO Max, consumers will have access to all the mainstream content. Even more, the cost of these services is very low. You could subscribe to all the services listed below for less than a traditional video package from Comcast or DirecTV. Of course, cable providers will raise the price on broadband and consumers lose out on live news and sports, but that is a tradeoff many are willing to accept. Bottom line, the decision between streaming services is not about which one, but rather how many? Consumers aren’t cancelling their Netflix subscription in favor or Disney+ … they are subscribing to both. New services are expanding the addressable market for streaming and accelerating the decline in traditional video consumption.
Low prices, mass brand appeal and premier content will clearly allow these services to coexist and continue to grow. However, it is much less clear when these services will generate positive cash flows. As an example, Netflix, the most mature offering, will plow through $3 billion of cash this year. Disney has indicated that they will lose money on their new service until at least 2022. These companies are squarely focused on growing their subscriber base instead of maximizing profits. For the time being, investors are accepting this strategy and willing to look through massive cash burn. It is truly an era of profitless prosperity for direct-to-consumer streaming. Although it is difficult to say when, eventually profits will matter.
Week in Review and Our Takeaways
After six consecutive weeks of gain, the S&P 500 declined about 0.5 percent on the week
Manufacturing and consumer sentiment data across the globe improved this week
Streaming is not a winner-takes-all or zero-sum game. New products continue to expand consumer choice
While investors are riding the wave of massive subscriber growth, streaming services will eventually have to turn a profit