If you've been paying any attention at all to Netflix and the ever-expanding group of competitors hoping to steal its streaming-video crown, you will already be well aware that next month, it will face its toughest challenges yet. Disney (NYSE:DIS) and Apple are both going live in November with streaming platforms, and both are expected to attract tens of millions of subscribers within a couple of quarters.
Now, there are some industry-watchers and analysts who say that Disney and the others don't pose a threat to Netflix's subscriber base. That could be true, but new net-subscriber growth might be hard to come by.
And Disney's newly unveiled arrangement with Verizon (NYSE:VZ) is one more reason why.
What Verizon is doing
Verizon will be offering free Disney+ for a year to all of its unlimited wireless data customers, as well as to new subscribers to its Fios Home and 5G Home Internet service. The streaming service a la carte will only cost $6.99 a month (or $69.99 a year for those who pay in advance), so this isn't the biggest perk around; mobile carriers frequently offer higher-value incentives like buy-one-get-one deals on new phones.
But add-ons like this one have become common in recent years among telecoms as they vie for subscribers -- and try to prevent their customers from jumping ship. T-Mobile, for example, has run a deal for a few years under which they pay their customers' Netflix bills.
For Verizon, the Disney+ perk could induce some subscribers to upgrade to unlimited data plans. America's largest mobile network has about 100 million retail post-paid connections, about half of which have Verizon Unlimited. Its home internet business is far smaller, with only about 6 million households, but the prospect of free streaming access to the vast library of Disney, Marvel, Star Wars, and Pixar content might be enough to make customers of rival internet service providers consider switching.
What Disney gets
While the deal will benefit Verizon, Disney could be the bigger winner here. Getting access to some 50 million subscribers who won't have to pay (at least not directly) for a year could be rocket fuel for the Disney+ audience metric right out the gate. For perspective, Netflix has just over 60 million subscribers in the U.S. It's unlikely that all Verizon customers will sign up for the freebie, but the arrangement could help Disney+ go from zero to tens of millions of subscribers quickly.
That speed will be important. Subscription businesses' profits depend on scale, given that such a large portion of their costs are fixed. Disney's Hulu streaming platform reportedly has about 30 million paying subscribers, and it still isn't quite profitable yet.
Once that hurdle is cleared, though, adding more subscribers boosts the bottom line rapidly. This could especially be the case for Disney+. And while Netflix is solely concerned with its streaming platform, and must pay for its content almost entirely out of its monthly subscription revenues, Disney+ is simply an added-value generator for its vertically integrated entertainment empire. Disney already makes money off of its productions at the box office, via merchandising, and through its theme parks. A recurring revenue stream from streaming is just one more lever it can pull to generate new profits.
Put simply, Verizon might be on the hook for a bunch of new internet TV accounts, but that could help it hold on to wireless and internet customers and pick up a few more. For Disney, though, this Verizon deal could help put it in contention for U.S. streaming supremacy sooner rather than later.