After seeing The Walt Disney Co.'s investor day presentation, analysts nearly choked on their popcorn after seeing all the content coming to Disney Plus and the rest of the company's direct-to-consumer services.
Instead of the aggressive numbers for increased subscribers, it was the 100 movies and TV series per year that Disney Plus would be providing customers that fueled analysts enthusiasm that not only would Disney’s pivot to streaming succeed financially, but that it could create a viable competitor to Netflix.
In morning trading Friday, Disney shares were up 14%, while Netflix was down slightly.
“Disney’s second DTC investor day delivered on all fronts,” said Kutgun Maral of RBC Capital Markets.
“The breadth and quality of Disney’s upcoming slate of original series across its services appear incredibly compelling, and we believe will be able to satiate consumer demand (and investor expectations) for years to come,” Maral said.
The midpoint of Disney’s new, more aggressive targets for subscriber growth is above the consensus Wall Street estimate for how many subscribers Netflix will have in 2024, Maral noted.
In a report entitled “Fast Path to #1 in Internet TV, analyst Vijay Jayant of Evercore ISI said. “With the DTC Businesses (Disney Plus, Hulu, ESPN Plus) counting 137 million subscribers as of the beginning of December (roughly a year after launch) and eyeing up to 350 million by fiscal year 2024, the company is positioned not just as a major competitor to Netflix, but as the potential market leader a few years down the road.”
“How will DIS achieve all of this growth? Well, the majority of the investor day was not the guidance or the pesky sell side Q&A, but rather the showcase of what DIS does best - content,” noted Steven Cahall of Wells Fargo.
Maral called the slate of Disney’s DTC content compelling.
“We were impressed with the breadth and quality of Disney Plus’s upcoming slate of original series and films, and believe that the service will be able to satiate consumer demand (and investor expectations) for years to come,” Maral said.
That content is compelling enough for Disney to increase prices, raising the cost of a subscription by $1 to $7.99 a month, he noted.
There seemed to be little concern about the big increase Disney planned to make in spending on content.
Disney CFO Christine McCarthy said that, including the addition of its Star international service, content expenses are expected to be $8 billion and $9 billion for Disney Plus and between $14 billion and $16 billion for its whole DTC operation.
“Given the value of growing our subscriber base as you've seen today we plan to reinvest revenue generated from our better-than-expected subscriber growth back into content investment. Thus we continue to expect Disney plus to achieve profitability and fiscal 2024,” she said during the presentation.
“As viewing habits and trends evolve further over the coming years, we will calibrate and adapt our content creation distribution and pricing, all while maintaining a strong value proposition for our consumers," McCarthy said. “It is clear that our strategy has already firmly positioned us as a leading Global streaming service provider and that is within just one year of launching Disney Plus. Looking forward we have the utmost confidence in the trajectory of our direct-to-consumer businesses, and in our ability to continue to create significant shareholder value with that.”
Analyst Todd Juenger of Sanford C. Bernstein offered a few notes on Disney’s script and questions about whether going DTC will have a happy ending.
Juenger noted that while Disney says DTC will break even in 2024, free cash flow won’t for several more years. “That’s something like 6-7 years of negative cash outflows, as opposed to Netflix which is free cash flow positive now,” Juenger said.
"In calculating the value of Disney’s DTC business, one also needs to apply a risk factor. Disney may exceed its guidance, but it also may fall short of its guidance. A lot can happen in seven years,” he said.
Juenger also noted that Disney made no mention of how a successful Disney Plus would benefit other parts of the company, including the theme parks and consumer products.
“Bulls can hold onto this as another leg yet-to-come in the potential holistic value of Disney Plus,” he said. “Somewhat akin to Amazon Prime, the theory (obviously) is that the value, stickiness, price point of being a Disney Plus member could be greatly enhanced by including either discounts or preferential treatment, exclusive access, or other perks reserved only for Disney Plus members.”
But he added “the downside risk, of course, would be giving discounts to your best customers, who would have otherwise happily paid a higher price. That risk can be easily mitigated by management of the offers. Focus on exclusive benefits, (even the exclusive right to ‘spend’ money on special things), as opposed to discounts.”
At the end of the day, being in the company of Netflix and Amazon, as opposed to legacy media companies, has to be a good thing.
Jon has been business editor of Broadcasting+Cable since 2010. He focuses on revenue-generating activities, including advertising and distribution, as well as executive intrigue and merger and acquisition activity. Just about any story is fair game, if a dollar sign can make its way into the article. Before B+C, Jon covered the industry for TVWeek, Cable World, Electronic Media, Advertising Age and The New York Post. A native New Yorker, Jon is hiding in plain sight in the suburbs of Chicago.
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