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Is Disney Spending Enough on Disney+ Original Content?

By Adam Levy – Apr 18, 2019 at 6:00PM

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One analyst thinks the entertainment giant's plan will fall short of its subscriber goal.

Disney (DIS -3.20%) outlined its big plans for Disney+ and its entire direct-to-consumer business at its investor day earlier this month. It believes it can reach 60 million to 90 million subscribers for the $6.99-per-month streaming service by 2024.

In order to help it get there, it's going to spend a lot of money on original content. Disney started this year with about $1 billion in original content spend and it expects that number to climb to about $2.5 billion by 2024.

Still, not everyone's sold that that'll be enough. BTIG analyst Rich Greenfield thinks the company will have to spend a lot more on originals to compete with Netflix (NFLX -1.78%). "We suspect Disney will realize within the first year or two after launch that Disney+ original programming spend needs to be multiple times higher than what they are currently forecasting," he wrote.

Let's put Disney's subscriber outlook and content spending plans in context to see whether Greenfield's suspicions make sense.

Disney+ logo on blue backgound

Image source: Disney.

Two of the leaders in original content

When someone says "original series" the first thing that probably springs to mind is Netflix. With the amount the company spends on original content, it's no surprise it's practically become synonymous with the word.

Netflix's cash spending on content this year is expected to reach around $15 billion. That's up from about $12 billion last year. And content chief Ted Sarandos says about 85% of all new spending is on original content, so Netflix is adding about $2.5 billion in incremental cash spend for original content this year alone. That's Disney's entire 2024 budget.

Netflix's budget wasn't always so massive, however. It reached 90 million subscribers at the end of 2016, split nearly evenly between U.S. and international members. That year, it spent about $6 billion in cash on content, likely less than half of which went to originals. It's also worth noting that Netflix only completed its global expansion at the start of that year; Disney plans to offer the Disney+ service in most of its target markets by 2021.

The other media company associated with "original series" is HBO, which is now a subsidiary of AT&T. The network's slogan used to be "So Original." Between HBO and Cinemax, the company had 54 million subscribers in the U.S. alone as of the end of 2017. That includes over-the-top HBO Now subscribers. Importantly, HBO's entire programming budget totaled just $2.26 billion that year, only about half of which went to originals and sports.

All this is to say, a relatively small original programming budget can go a long way toward attracting and retaining subscribers.

Disney's added advantage

Another important thing to note is Disney isn't exactly starting the service from scratch. It has some of the strongest brands in movies and television and it's going to put a massive marketing budget to work in order to ensure consumers know where to find its content. As Netflix's management will point out, it's not very useful to have great content if nobody knows about it. Disney set a goal of 95% awareness of Disney+ among its target audience by launch later this year.

Disney's brands extend to all demographics. Its kids' programming will be a highlight of the service, making it extremely attractive to families. Star Wars and Marvel fans will be interested in the service as well -- not just for the back catalog of content, but for new original series based on the intellectual property. And anyone that just wants to feel a little nostalgia can subscribe to watch the Disney Renaissance films whenever the mood strikes.

Disney's content catalog is remarkably rewatchable. It's my understanding that some people under a certain age could watch Frozen on an endless loop. That's why Netflix was willing to spend top dollar to secure Disney's film output while it let other licensed content deals expire.

Disney isn't just filling in its content library with whatever licensed content it could find; it has access to the best second-window content available. Just as many people, if not more, will subscribe to Disney+ for access to its back catalog as they will for original content.

An extra $2 billion or so per year spent to produce high-quality originals based on extremely popular intellectual property ought to be enough to help Disney reach its goal of 60 million to 90 million subscribers in five years.

Adam Levy 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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