Disney might be late to the ball, but many analysts believe its highly anticipated SVOD service, Disney+, is still likely to be the belle of it all.
To date, Netflix has been the standout star in subscription video on demand (SVOD). But general opinion suggests Disney+ will likely unseat her popularity, winning Prom Queen come November in its debut.
The market certainly seemed to think so. Disney’s stock enjoyed a 12% jump the day of the announcement, indicating its positive expectations for the forthcoming service. Netflix, meanwhile, had to stomach a 5% hit.
But becoming Prom Queen doesn’t happen overnight, and it certainly doesn’t come for free.
Netflix’s Achilles’ Heel―The Battle of the Libraries
Disney is a formidable competitor. And one that can strike Netflix right in its weakest spot. At its core, Disney is a content company. Historically, Netflix has been a platform company, with a reliance on licensed content. Not only does Disney have a distinctive content advantage in its Disney+ solution, but it is also positioning the service as part of a trifecta: a suite for the whole family―Hulu for Mom, ESPN+ for Dad, and Disney+ for family and/or kids.
But I wouldn’t count Netflix out just yet. Disney+’s library will include 7,000 TV series episodes and ~500 movies. Disney’s library is only estimated to be ~16% of the Netflix content library
And although historically Netflix’s library has been comprised primarily of licensed content, it is starting to ramp up its content spend on originals. Netflix has also been on a kick to produce more originals as was recently reported in The Information.
In 2017, Netflix’s licensed content accounted for ~80%. In 2018, that number was down to 70%. They also increased the content produced in-house by 2x, while licensed content increased by only 20%.
And Netflix is planning to spend a lot more on content creation in the future than Disney. One analyst expects Netflix content spend to increase to $17.8 billion in 2020. Even if we were to assumed 60-40% split between in-house and licensed content, that would allocate around ~$7 billion for original programming. Compare that to Disney’s expected spend of $1 billion on original programming in 2020, rising only to $2.5 billion by 2024.
A company can say whatever it wants, but spend allocation is the clearest reflection of strategy.
The Numbers
Let’s stay on the numbers and do some back-of-the-envelope math.
Here is a rough estimate of Disney’s associated costs for 2019:
- $150 million lost in licensing from Netflix
- $100 million in 1Q19
- $200 million in 2Q19
- Est. $200-300 million in 3Q19
- Est. $200-300 million in 4Q19
The estimated cost to for their direct-to-consumer Disney+ service just this year could cost them upwards of $1 billion. That’s a lot of zeros that the company will have to make up for in annual revenue. How reasonable is it to expect them to recoup this cost?
Disney expects Disney+ to reach 60-90 million subs globally in the next 5 years. About 33% of those are expected to be U.S. subscribers. So, let’s assume 20-30 million subs. Let’s also assume the price, which currently sits at $6.99, will stay constant over the next five years. That gets us to ~$140 million in revenue.
But let’s go back to that market share assumption. With an estimated 94 million households subscribing to at least one SVOD service by 2024, Disney is suggesting that it can capture ~30% of the market in the next five years. Compare that to Netflix, already with a first-mover advantage, which holds ~50% of market share.
Also, what is happening with Disney’s projected growth rate of SVOD subscribers here? It jumps from 1 million in 2019 to 25 million in 2024. That's almost a 100% CAGR. No.
Disney’s Existential Crisis
But Netflix’s biggest competitive advantage might lie outside of the numbers. Those who have worked closely with Reed Hastings believe he thinks ten years ahead, a true visionary. But the key to executing that vision is consistency, something which Netflix has done throughout its tenure as a company. Netflix has always known who they are.
Disney has been far less certain. For the past few years, the company was internally conflicted about what its SVOD strategy was, exactly. According to The Information, it seems Bob Iger and team couldn't quite decide how the company wanted to tackle streaming: continue to license to Netflix or go it alone?
There’s no question that Disney has quality content. But―and this is a really big but―while Disney has been busy deciding what to do about streaming, Netflix has been busy thinking bigger than that. It isn't trying to steal market share from other SVOD players, it's trying to expand the market by stealing share from gaming, sleep, and―how shall I say it―“intimacy.”
If Disney+ wants to win, I'd position it as just the thing to reignite that intimacy. While the kids are away, the parents play...
Follow Stephanie Denning on Twitter: @stephdenning
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