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How Disney Is Adapting to a Streaming World

By Luis Sanchez CFA – Updated Apr 10, 2019 at 4:34PM

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Disney will soon have three video streaming services, but will Disney be able to keep up with streaming giant Netflix?

Video streaming has transformed the media landscape, with more than 5 million customers cutting the cord since 2014. Netflix (NFLX -1.78%) has created a business worth more than $150 billion despite operating outside of traditional distribution channels.

Although slow to react, Disney (DIS -3.20%) has recognized the strategic importance of building its own streaming platform. Disney is now building three streaming services and intends to compete directly against Netflix. Disney will soon have a majority ownership of Hulu and recently launched ESPN+. Disney+ will be the flagship streaming service and is slated to launch in the back half of 2019. Now that Disney is committed to streaming, investors want to know how much capital investment will be needed and how the services will stack up against the competition.

Disney World

Image source: Disney.

Disney is starting from a technology disadvantage

While Disney has a vast content library, it has a technology disadvantage compared to Netflix. Netflix has operated its streaming service for over 10 years and spent $1.2 billion last year on technology alone. Netflix's cumulative investment in its technology platform has made the platform extremely user friendly and resource efficient.

To address its infrastructure needs, Disney acquired a majority stake in BAMTech, which forms the technology backbone of Disney's streaming services. The BAMtech acquisition was a smart move because it would have been extremely difficult to build the technology infrastructure from scratch.

BAMtech is already running ESPN+, and it appears to be doing a great job. On its Q1 2019 earnings call, Disney noted that BAMtech was able to handle half a million customers signing up for ESPN+ in the same day. On that same call, CEO Bob Iger praised the platform's stability.

Disney CEO Bob Iger:

The BAMTech platform that we invested in when we bought BAM is an extremely robust platform, capable of handling not only scale in terms of live streaming simultaneously but a substantial number of transactions in a very short period of time. I mean, there were times before the UFC fight that BAMTech was taking in or making just under 15,000 transactions a minute, and the stability of the platform is critical in times like that... We also feel that the consumers had a good experience not just in terms of the ability to watch live events under high-quality circumstances on mobile devices.

Check out all our earnings call transcripts.

Disney racked up over $1 billion in losses last year tied to its streaming efforts. If Netflix is any guide, then we can expect Disney's streaming investments to accelerate as it ramps up technology investment in its three services. However, it could take Disney years to catch up with Netflix's technology head start.

The larger the content library, the better

Operating as a Hollywood studio for nearly 100 years, Disney already has an impressive content library. However, the more content Disney's services have, the more customers it will attract.

To help scale up its content library, Disney is acquiring rival TV and film studio Twenty-First Century Fox (FOX) (FOXA) for $70 billion. The deal is pending final approval from regulators but will boost Disney's streaming services. Fox will provide Disney with several TV stations, valuable IP (including Avatar, X-Men, and the Simpsons), and an additional 30% stake in Hulu.

It is worth noting that Disney will not be acquiring Fox News or Rupert Murdoch's newspaper assets. To get regulatory approval, Disney has agreed to sell Fox's 22 regional sports networks in the US and Fox's sports channel in Mexico and Brazil.

The combination of Disney and Fox will give Disney majority control of Hulu, enabling it to directly shape the platform's offering. Hulu spends an estimated $2.5 billion per year on content. Disney has committed to maintaining Hulu's level of content spend and will continue targeting the service to an adult audience.

Disney+ is the flagship family oriented streaming service that will be launched in late 2019. Upon launch, expect Disney+ to have a catalog of over 400 movies and 7,000 TV shows from the Disney/Fox library. Disney will also release content exclusive to the Disney+ service based on popular IP. For example, the service will house an exclusive Star Wars TV spin-off and a live-action Marvel series based on Loki. Exclusive content will provide consumers an extra incentive to subscribe.

As it currently stands, Disney and Fox each spend roughly $8 billion on content per year. Expect the combined Disney, Fox, and Hulu to continue spending at a similar level. Adding those content budgets to the incremental spend at Disney+ totals more than $18 billion in content spend for Disney as a whole. For comparison, Netflix spent in the neighborhood of $8 billion on content in 2018.

Although Disney will initially have a technology disadvantage, its deep content library is where it will shine. Disney isn't resting on its laurels. The company appears to be ramping up content spend in order to maintain its legacy audience while building a streaming subscriber base.

Is streaming competition zero-sum?

In all likelihood, there is enough room for both Disney and Netflix to thrive. Consider that the average cable TV package tops $100 a month. A consumer who cuts the cord can easily subscribe to Netflix for $15, Hulu for $5.99, and Disney+ (pricing hasn't been announced), while still paying well below the average cable bill.

Hulu is already successful in its own right. The service has roughly 25 million paying subscribers and has a fast-growing live TV skinny bundle. Hulu's draw is that it boasts more episodes of TV than any other streaming service. Investors should expect continued growth given Disney's pledge to continue investing in the service.

Disney launched ESPN+ in April 2018, and the service is tracking positively. The service already has 2 million paying subscribers. It will be interesting to see what Disney does with this platform.

We do not yet have numbers on Disney+, but investors should be optimistic based on the impressive amount of content that will be available from day 1. If anything, Disney has shown that it has deep pockets and will invest aggressively to ensure the Disney+ offering is attractive.

The real winner is the consumer. Disney, Netflix, and many other media players are stepping up their game by investing more money in high quality content than ever before. The significant spend on technology ensures that consumers will have a great user experience as well.

Luis Sanchez has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix and Walt Disney. The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Walt Disney Company Stock Quote
The Walt Disney Company
DIS
$94.33 (-3.20%) $-3.12
Netflix, Inc. Stock Quote
Netflix, Inc.
NFLX
$235.44 (-1.78%) $-4.27
Twenty-First Century Fox, Inc. Stock Quote
Twenty-First Century Fox, Inc.
FOX
Twenty-First Century Fox, Inc. Stock Quote
Twenty-First Century Fox, Inc.
FOXA

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