Walt Disney (NYSE:DIS) is taking a long view when it comes to streaming content. Disney+ will cost the company money, potentially billions of dollars, over multiple years when the company doesn't license its content elsewhere. The new service may ultimately be bundled with other Disney products -- Hulu and ESPN+ at first and maybe ESPN down the line. To consumers, this part of streaming is starting to look a lot like cable and to become a pricey proposition.
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This video was recorded on April 16, 2019.
Dylan Lewis: If we're putting some numbers to what this might look like for Disney, you mentioned that 60 to 90 [million] subscribers by the end of 2024. I think the company estimates that about a third of that is going to be the United States. If you have, we'll say the midpoint here, 70 million or 75 million people paying what would right now be $70 per year, it'll probably be higher down the road, that's just about $5 billion in revenue on an annual basis, which would be an 8% lift on 2018 sales. But, it's coming in 2024.
Dan Kline: That may not cover expenses.
Lewis: Yeah, that's just gross. We're just looking purely gross at this.
Kline: I think realistically, if Netflix is spending $6 to 8 billion on content, Disney doesn't have to spend that much because it's producing content in other formats that can go to this platform.
Lewis: That's their huge competitive advantage, right? Everything immediately can be ported over.
Kline: Yeah, it's why Netflix should buy CBS or something like that. I'll throw it out there, I actually think that's going to happen at some point.
Lewis: So, this is great news for Disney investors, mostly because we're starting to see some enthusiasm around the stock, and it has languished for quite some time. Is there anything else in the reporting that you've seen on this story that you think needs to be thrown out?
Kline: I'm not a Disney shareholder, but I really believe in Disney. As a Disney aficionado, I think what's really important is, this is them controlling their own destiny. The easy money is licensing your content. That's the safe play. Disney has been famous for the safe play. If you look at the theme parks, they did not invest until Universal started investing in the Harry Potter properties and really stepping that up. This is Disney saying, "We're going to spend a lot of money over a long period of time and eventually come out of it with something that adds to our bottom line." The reality is, this is about Hulu and the pivot away from cable as much as it is anything else. They control ABC, they own a bunch of cable networks, there is a bundle they can give you where you cut the cord, and Disney makes more money rather than less.
Lewis: Is there a future where you see Disney+ being incorporated with some of the other properties that people are pretty interested in getting from Disney, namely ESPN?
Kline: Yeah. Well, ESPN+ and ESPN are different. ESPN has cable contracts that preclude it from being sold as a one-off. I expect, as numbers start to fall in cable -- and they've been dropping at an increasing rate -- Disney is going to start asking out of those deals, or asking for exceptions, sort of like the Sling deal, where they can sell a certain amount of stand-alone ESPN through Sling and now through other services. They've never said what the cap is, but there is a cap on how many ESPN subscriptions can be sold that way. So, yeah, I think they're going to figure out how to make the most money out of everything. The cable company at half the size -- wherever cable bottoms out, there'll be some market for cable, they're not going to have the leverage to say to Disney, "We're 98% of your business. We're paying you $8 for ESPN." And cable in return is going to get ESPN-free cable bundles, which is something they're not allowed to offer now.
Lewis: Yeah. My big takeaway is, good thing for Disney here. As the consumer looking out at all this, streaming is going to start to look a lot more like cable. It is its version of a la carte, but you're still paying for all these different things.
Kline: You might pay more. We've talked about this before, you're going to have less choice. There are going to be channels that go away. Disney owns Freeform. Freeform produces some really interesting content. That content could be just part of this service. I'm not sure you need to pay for all the ancillary programming it takes to fill out a 14-hour-day cable schedule just because you have a handful of good shows on Freeform. Those can probably just stream on Disney+.
Lewis: That's the way things go, Dan.
Kline: Works for me!
Lewis: Thanks for hopping on today's show!
Kline: I don't want to run into Chuck E. Cheese in a back alley.
Lewis: We'll try to avoid that happening.