Disney+

Being a parent just cost $8.99CDN more per month.  Disney is joining the streaming wars. Netflix used to be the only game in town. Now everybody is going over the top. AppleTV, HBO Max, NBC’s Peacock etc…How many streaming services do you need? I’m not sure if cutting the cord makes financial sense anymore. You end up spending $200/month to save $100/month.

Is going direct to consumer the right decision for Disney? I think so but this is a multi-year plan. We will know in five years. Disney+ signed 10 million users the first day. Some analysts estimated that it would have taken a year to get there. They aim for 90m in by 2024. Netflix has 150m users. By entering the streaming war, Disney is giving up on a lot of easy licensing money. Companies are paying the big bucks for content.  With 90m users, Disney+ will rack in ~$630m (90m*$7) a month, ~$7.5 billion a year.  I wonder what the margins are on that and the multiples the market would warrant.  By ending the studio’s output deal with Netflix, Disney forgone $150m annual income (easy licensing money). That deal was signed a long time ago and would have to be substantially renegotiated upward.

Disney is now they are entering the tech war arena. Amazon, Google, Apple spends a lot on capital expenditure (CAPEX). Disney spends around $5 billion annually on CAPEX. Compared to Amazon $15b, Google $25b, and Apple$10b. This year, Netflix content budget is expected to reach $15b.

This is a different game for Disney.  Disney spends large sums of money on studios and rides that last decades. By entering the streaming services war, it will require constant spending just to stay in the game. The Mandalorian reportedly costs $15 million per episode, while The Falcon and the Winter Soldier, WandaVision and Hawkeye could run as much as $25 million per episode. Disney is now on “technology treadmill”. Companies on the tech treadmill have to run harder and harder just to stay in place. It is a treadmill that is difficult to get off of. If new content helps gain subscribers, then logically cutting spending, and content, risks losing them too. There’s a saying in the investment business: “Never invest in anything that eats or needs repainting.” The question is does your potential investment have the margin structure to afford the yearly cost? Technology can provide a competitive advantage, but you have to have the right margin structure to maintain that advantage – to afford the food and paint.

I believe Disney is successfully transforming its business to deal with the ongoing evolution within the

media industry. I think Disney has the muscles to grind their way for market share but not everybody in the space is going to be a winner. They have terrific content, a great global brand, and technology with Disney streaming (ex BamTech).

While on the topic of subscription, how many is worth subscribing to? Everybody is switching to a subscription model. Everybody wants $5 from you. $5 is a good number. There’s no psychological pain is losing $5. Everybody has $5. Mario Kart Tour is $5 a month. Apple Arcade is $5 a month. Even Burger King has a $5 a month coffee service. If you are not careful eventually those things add up.

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