When Walt Disney Co (NYSE:DIS) CEO Bob Iger recently suggested the company’s upcoming streaming service was going to “launch hot,” a handful of DIS stock owners cringed. It was a sign that the company’s brass wasn’t quite authentically plugged into today’s pop culture.
Indeed, when a 66 year old chief executive feels compelled to make the uncomfortable sales pitch two years before the product exists, eyebrows should be raised in suspicion.
To that end, with Disney’s streaming service on the way — for better or worse — it’s time to start thinking about what’s at stake and how the organization could fly or flounder by going head to head with the likes of Netflix, Inc (NASDAQ:NFLX).
Going Solo
A quick catch-up on the off chance anyone reading this doesn’t already know: Walt Disney will be launching its own subscription-based streaming service in 2019.
It remains to be seen exactly how much and which video content will be available to subscribers, but Disney has already informed partner Netflix that Marvel and Star Wars — both now owned by Disney — won’t be allowed to air its movies soon, something of a potential blow to Netflix’s appeal.
The motivation, of course, is money. Netflix has validated the premise of over-the-top television and even cultivated the market for it with plenty of help from Disney content — too much help in Disney’s eyes. Rather than let Netflix continue to reap what Disney has sewed in creating some amazing programs and movies, Iger is now aiming to extract all the potential revenue of its content for itself rather than effectively splitting it with Netflix.
The $64,000 question is, how much money is that exactly? Answer: Not as much money as you might think.
The Numbers Aren’t Compelling
For perspective, over the course of the past four quarters Netflix has generated $10.2 billion worth of revenue. Not that Disney wouldn’t like to add $10 billion to its top line, but relative to the $55 billion worth of revenue Disney has collected during the same time frame, DIS shareholders can’t be too terribly stoked about the potential to tap into what Netflix has been collecting.
See, while Walt Disney’s streaming service is certain to poach some Netflix customers, it won’t poach most of them. Not only does Netflix have a ridiculous array of non-Disney content available for viewing at any given time, it’s got plenty of Netflix-owned content that its subscribers love and are loyal to.
A recent look at Netflix subscriber viewing data reveals the BBC’s Sherlock and ’90s sitcom Friends were among the five most watched programs; none of the top five were a Disney show. Movies are a different matter, although it’s not like Disney is considerably stronger on that front either.
Netflix’s home-grown content like Narcos and House of Cards also rank in the top five most popular programs.
While it’s completely conceivable that Disney will steal some Netflix subscribers and convert other members into consumers with two or even three streaming services (and should certainly win over a fair amount of families with kids to boot), there’s not a game-changing, plausible amount of revenue at stake in Disney’s planned product that limits itself to Disney’s library. Some, yes. Game-changing, no.
DIS shareholders will counter by pointing out that it’s not just Netflix’s customers partially up for grabs. Hulu has a following of 47 million viewers who pay on average about $10 per month. That’s about $6 billion worth of annual revenue.
The same challenge exists though. That is, believe it or not, there’s a sizeable swath of consumers that don’t care to see the Death Star blow up again, nor care to see Iron Man dismantle another piece of military hardware. And they certainly aren’t interested in yet-another princess story. Again, some will want that content. Many won’t care though. Never even mind the fact that Disney is part-owner of Hulu and would in many regards be cannibalizing itself if it chose to lure Hulu’s viewers away.
It remains to be seen to what extent, if any, Disney would move its ABC video content from Hulu to another venue.
Bottom Line for DIS Stock
Don’t misread the message. Disney will find millions of subscribers for its branded streaming service come 2019; you can slap the Walt Disney label on anything and sell at least some of it. It’s also exciting news simply because it’s something different that consumers as well as investors have long been curious about.
As for any meaningful incremental revenue growth this initiative may redirect in Disney’s direction though, don’t look for this move to be a major boon for the value of DIS stock. It’s losing major ground on other fronts, with cord-cutting still taking a bite out of ESPN as well as its other television properties. Another 22 million U.S. consumers will cancel their cable television service this year, up 33% from last year’s nearly 17 million people who said goodbye to their traditional cable providers. They’re natural candidates for an over-the-top streaming service, but Disney’s platform will pale in comparison to something along the lines of SlingTV as a replacement for their cancelled cable service.
(And no, its stand-alone sports-programming package won’t solve the problem either. In fact, the planned ESPN streaming service will face headwinds similar to those to be faced by a Disney-branded service… some, but not enough, interest from paying subscribers who’d have to pay a small fortune to access it and make it worth Disney’s effort.)
A Disney streaming service is just a band-aid on a deep, gaping wound that needs stitches.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.
