Things could not have gone better for Walt Disney (DIS 2.07%) when it peeled back the curtain on its new streaming service shortly after Thursday's market close. Disney stock shot sharply higher on Friday, blowing through the all-time high it set four summers ago. Netflix (NFLX 2.08%) shares moved lower.
Fears that Disney+ is a Netflix killer seem overblown. This has never been a "winner take all" niche, and the success of a shiny new platform doesn't have to come at the expense of the runaway market leader. Let's go over a few of the reasons why Netflix will be just fine after Disney introduces its new platform in seven months.
1. Disney at $6.99 a month is bold but not fatal
There were plenty of surprises at Disney's Investor Day presentation, but the biggest head-turning moment -- no offense, Homer Simpson -- was the aggressively low price point. Disney+ will be available as an ad-free service for just $6.99 a month (discounted to $69.99 if paid annually). Netflix recently raised its price to $12.99 a month for its most popular plan, so Disney wasn't messing around when it said more than a year ago that it would price its upcoming digital service aggressively.
If this is what scares the market on Netflix, let's whack the pricing pinata until colorful candy spews out. Netflix hasn't competed on price beyond just the value proposition of cutting the cord with your cable or satellite television provider. Netflix was at $7.99 a month five years ago, but after four price hikes, it's now 63% more expensive.
Four substantial hikes in five years may seem like the kind of stuff that would scare away existing and potential subscribers. Amazon.com's Prime Video is available to more than 100 million Amazon Prime members at no additional cost. Hulu recently cut prices. This hasn't slowed Netflix, as its worldwide subscriber base has ballooned from 57 million to 139 million over the past five years.
2. No one is spending more on content than Netflix
There's power in scalability. Folks keep flocking to Netflix because one thing growing faster than its prices is the amount that it spends on content. Netflix may cost 63% more than it did five years ago but has gone from spending $3 billion in content to $12 billion in that time. Analysts see Netflix's cash tab ballooning to $15 billion this year. A 63% increase doesn't seem so bad when Netflix is rewarding your business with a fivefold increase in its content budget.
Disney may seem to be making a big bet here, and by fiscal 2024 it expects to be spending $2 billion a year on content. It won't be anywhere close to Netflix.
3. There are two sides to every projection
Disney expects to have between 60 million and 90 million subscribers for Disney+ in five years, and given the media giant's existing catalog of top-shelf content and surprisingly low pricing, it wouldn't be a surprise if it's actually being conservative. However, don't make the mistake of comparing 60 million or 90 million to the 139.26 million streaming accounts that Netflix was servicing at the end of last year.
Netflix should have a much larger audience by the time fiscal 2024 rolls around. Its own guidance earlier this year was calling for it to top 148 million streaming subscribers at the start of this month. Netflix is just starting to scratch the surface in key international markets. Disney will be relevant, but Netflix will have more than 200 million subs and probably generate six to eight times the revenue that Disney+ is making in five years.
Disney+ will be very popular when it launches later this year and may very well eat into some of Netflix's current subscribers. However, a lot of the Disney+ traffic will come from young families freeing themselves of pricey cable television bundles now that they are no longer being held ransom to triple-digit bills, just to get the Disney Channel.
A lot of that money will be spread around existing services, Netflix included. If you don't think Netflix will be more popular a year from now despite the arrival of strong new services, you're just not paying attention to the trend.