Disney+ is here, and it’s already beating expectations. Analysts projected it would take the rest of 2019 – about seven weeks – for the new streaming service to reach 8 million subscribers.
It hit 10 million in one day.
The huge launch for Disney+ reaffirms what we’ve been saying for the past three years. Disney’s unparalleled collection of IP, unique brand, and superior content monetization capabilities give it a significant competitive advantage over Netflix (NFLX) and every other content company. The Walt Disney Company (DIS) is this week’s Long Idea.
In total, 495 scripted TV shows aired in 2018. The average consumer can’t watch that much TV or even attempt to sort through it to figure out what’s best. Anyone who has Netflix or any other streaming service knows the terrible feeling of scrolling through a seemingly endless list of shows and not being sure what to watch.
Research shows that when viewers are faced with so many options, they tend to retreat to the programs with which they’re most familiar. That’s why The Office and Friends consistently rank as the most-watched shows on Netflix, and why the loss of those shows is such a huge blow to the streaming service.
Disney stands to benefit as consumers become more overwhelmed by the amount of content and gravitate toward familiar characters and franchises. No other company can boast the familiarity or the same level of franchise IP. Figure 1 shows that Disney has produced[1] 11 billion dollar films over the past three years, more than double every other studio combined.
Figure 1: Number of Films With $1 Billion+ Worldwide Gross
Sources: New Constructs, LLC and company filings.
Disney’s 2019 box office dominance should increase after the early success of Frozen 2 and Star Wars: The Rise of Skywalker, which will be released before the end of the year.
These huge franchises give Disney a key advantage as it launches Disney+. Most of the promotion of the streaming service has tied into these franchises – whether it’s the new Star Wars show The Mandalorian, the promise of future tie-ins to the Marvel Cinematic Universe, or just the company’s vast library of classic films.
These tentpole franchises don’t just help Disney attract new subscribers, their extraordinary popularity lowers subscriber acquisition costs, too. On the other hand, Netflix’s more niche-focused content is getting increasingly expensive as the company produces 700-plus projects a year. We think Disney+ subscriber growth will be plenty strong with just 45 movies and shows in its first year.
CEO Bob Iger forecasted 60 original projects per year over the long term because he knows content quality is more important than content volume. Disney can offer fewer shows because the excellent reputation of its past content means that shows like The Mandalorian have a large, guaranteed audience. As a result, it can invest in fewer, higher-quality programs and offer its streaming service at a much lower price. More importantly, Disney+ might actually generate positive cash flow, a feat Netflix has never achieved.
In addition to Disney’s tentpole franchises, the company has the unique advantage of having its own distinct and popular brand, something no other content company can really claim.
Everyone knows what a Disney movie is (or a Pixar movie, for that matter). Even when the company tells a totally new story, people are interested because of Disney’s excellent track record for high-quality content. This brand advantage allows the company to continually create new stories and worlds that become their own valuable franchises (like Frozen).
On the other hand, when you see a TV show labelled “Netflix Original,” you’re not as sure about the kind of show you’ll see. The same goes for other movie studios such as Universal (CMCSA) or Warner Bros (T). None of these companies have built as strong a brand for consistent high-quality content as Disney. Other brands have to spend a lot more to sell audiences on original stories.
A superior brand also creates a marketing advantage for Disney+. If you’re a parent of a young child, you know that Disney+ has a vast library of high-quality, family-friendly entertainment.
No other content firm monetizes content better than Disney. Iger referenced this advantage on the company’s most recent earnings call, telling analysts:
“So as we look at these businesses (Marvel and Star Wars), they're film business and they're TV businesses, they are still big Consumer products drivers and more and more they have a greater presence in Parks and Resorts.”
When Disney develops successful content, it can extract value across a wide array of businesses. A hit franchise like Star Wars doesn’t just make billions at the box office, it also sells toys and merchandise, creates the potential for spin-off TV shows, forms the basis for attractions at theme parks, and now – with Disney+ – contributes to the library of a streaming service.
These multiple monetization channels give Disney a key advantage over Netflix. Disney+ represents just another link in the chain for Disney, one more way to extract value from IP that can also be monetized in several different ways. Netflix, on the other hand, has only one monetization channel: Streaming subscription revenue.
As a result, Disney+ can price well below Netflix. Disney+ can even be a loss leader to get more customers into its other monetization channels. Disney does not have to rely solely relying on streaming income to earn an adequate return on invested capital (ROIC) in IP. By offering higher-quality content at a cheaper price, Disney+ should continue to grow rapidly and take subscribers away from Netflix.
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