UPDATED: Investors cheered Disney’s bold new foray into subscription streaming with Disney+, pushing shares up over 10% in morning trading Friday — while Netflix’s stock was down more than 3%.
Disney’s stock closed up 11.5% on Friday, to an all-time high of $130.06 per share. Netflix ended the day down 4.5%, to $351.14 per share.
Disney announced that its Disney+ SVOD service would cost $6.99 per month, nearly half the price of Netflix’s standard $13 monthly plan, at its 2019 Investor Day on Thursday.
Disney is investing heavily in Disney+’s launch, slated for Nov. 12 in the U.S., on content and operating costs. In fiscal 2020, the Mouse House will spend $1 billion in cash on original programming for Disney+, while it will have just under $1 billion in operating expenses, Disney CFO Christine McCarthy told analysts. Its spending on Disney+ originals is mapped out to rise to around $2.5 billion by 2024.
And Disney+ — entirely subscription-supported, with no advertising — is expected to sustain financial losses for its first four years of operation, before turning profitable by fiscal year 2024 (which starts in the calendar fourth quarter of 2023).
So Disney is playing a long game in battling for streaming subscribers, a strategy Wall Street for now is giving a clear thumbs up to.
“Disney is approaching streaming offerings with guns blazing, looking to take share and quickly ramp up subscriber growth,” said Patrice Cucinello, director of the technology, media and telecom group at credit-rating firm Fitch Ratings. “Disney+ will be loaded on Day One with attractive IP and franchises, and has set the price very affordably at $6.99 per month, well below other premium SVOD offerings.”
Disney’s projections for Disney+ — to reach 60 million-90 million subs by fiscal year 2024 — were far above Wall Street expectations. The breakeven point for the SVOD service of FY 2024 also is more aggressive than analysts predicted.
“We came away from Disney’s investor day with increased confidence in the outlook for Disney’s DTC pivot,” UBS’s John Hodulik, who maintains a “buy” rating on the stock, wrote in a note. For Disney+, Disney has acquired rights to key intellectual property that had previously been licensed to third parties, most notably Star Wars rights from AT&T’s WarnerMedia, Hodulik noted.
Disney execs didn’t provide specific guidance on licensing revenue it will lose out on — for example, with the end of its Netflix deal — although McCarthy said intercompany licensing content expenses for Disney+ will be less than $1.5 billion in FY 2020, rising to $2.5 billion in FY 2024. That said, “management has given enough detail to help investors model near-term earnings trajectory while showing confidence in the long term subscriber opportunity,” Hodulik wrote.
Disney will “likely” intro a discounted bundle of Disney+, ESPN+ and Hulu, Kevin Mayer, chairman of the company’s Direct-to-Consumer and International segment said Thursday — which will give the company additional levers to play with. In addition, Disney’s absorption of Fox’s entertainment assets provides “an unparalleled arsenal of IP to support its streaming services,” Fitch’s Cucinello said.
Out of the gate, Disney+ will be the exclusive U.S. SVOD streaming home for Disney, Marvel, Pixar, and Lucasfilm films starting with 2019 releases, which include “Captain Marvel,” “Avengers: Endgame,” “Aladdin,” “Toy Story 4,” “The Lion King,” “Frozen 2,” and “Star Wars: Episode IX.”
All told, Disney+ in the first year of launch will include 25 original series, including Jon Favreau’s Stars Wars-set “The Mandalorian” and a “High School Musical” series, along with 10 original films and specials. In addition, it will be stocked with 400 library films — including 18 Pixar titles, nearly all Marvel movies and, within the first year, all the movies in the Star Wars franchise — and 100 recent movie releases from the Disney portfolio. Also, it will feature 7,500 episodes of current a past TV shows; that includes 30 full seasons of “The Simpsons,” which are moving from FX’s Simpsons World app to the new service — one tangible result of Disney’s Fox takeover.
The announcement of the $6.99 monthly price point “generated a collective gasp in the room” at the Disney Investor Day event, MoffettNathanson principal analyst Michael Nathanson said in a note published Friday. The service “looks like a bargain compared to other entertainment options.” Nathanson reiterated a “buy” rating on Disney stock and boosted his target price to $141 per share (up $7).
Disney previously told investors content-licensing revenue in 2019 would drop $150 million because of programming it’s holding back for Disney+; most of that revenue drop will fall in the six months ending Sept. 30. BTIG Research has estimated Disney will lose out on $500 million in revenue per year by ending its Netflix deal. RBC Capital Markets has projected Disney will spend $500 million on Disney+ original programming in 2019.
This past January, Disney revealed it has already amassed more than $1 billion in losses related to direct-to-consumer streaming, including a loss of $469 million in its DTC segment for fiscal year 2018, driven mainly by BAMTech. Disney also said Hulu was the main driver of a separate $580 million equity investment loss for the 2018 fiscal year.