What Disney+ Means for Disney

Another streaming video service has just debuted, but unlike all too many of its rivals, this one has some serious mass-market appeal. In this week's episode of Industry Focus: Tech, The Fool's Dylan Lewis and Dan Kline talk about the recent launch of Disney+, and what it could mean for Disney's (DIS -0.04%) future.

Tune in to learn who the target demographics are for this service, and why it will be so insanely sticky for them; why Disney is so uniquely good at managing its IP, from timing to spacing to acquisitions and more; how the new service could affect competitors like Netflix (NFLX -0.63%); what it means for Disney's big-picture IP strategy; and more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Nov. 22, 2019.

Dylan Lewis: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's Friday, Nov. 22, and we're talking Disney+. I'm your host, Dylan Lewis, and I've got fool.com's Dan Kline with me on Skype. Dan, what's going on, man?

Dan Kline: Hey there, Dylan! Exactly what we needed, another streaming service.

Lewis: [laughs] Yeah, I feel like the post-cable landscape is basically cable, just with more steps.

Kline: And more money. At least for me, it's eventually going to cost me more money.

Lewis: I was thrilled to have you on today, Dan, because you are kind of Mr. Streaming for fool.com purposes. You are also Mr. Disney. You know a ton about the House of Mouse. So, it only seemed natural to have you on for an episode where we're going to be talking about the streaming landscape, specifically the debut of Disney+.

Kline: Yeah. Look, I joke about not needing another streaming service, but this is, in my opinion, the last company that has enough intellectual property that I was pretty excited about this launch.

Lewis: Yeah, this is kind of that no-brainer streaming business that a lot of people have wanted for quite some time. I imagine parents and fans of in particular have really wanted this streaming service to come out. Unfortunately, I am not in either of those buckets. I am the person that Disney hates because I don't have kids and I am not super into Star Wars. But, you are a subscriber of the newly launched Disney+ service, right, Dan?

Kline: Yeah. It's a family service. My son's 15, so he's kind of aged out of Cars and Pixar and all the Disney animated movies. But when he was younger, we used to buy all the DVDs. You'd spend $19, $29, whatever it was, so your kid could watch Frozen over and over again, or Cars was a very big movie in my house for a long time. This replaces that. You spend your monthly fee, and you get almost everything Disney has ever produced. There are a few holdouts for rights reasons. In my case, I don't care about any of that stuff. But what I am into is, it has the new Star Wars show, The Mandalorian. It's only going to be 10 episodes, maybe only eight episodes, but it is a show set in the Star Wars universe with cinematic production values. They are going to slowly -- we'll talk a lot more about this later -- roll out new shows, both in the Disney universe, Star Wars, and of course in Marvel. I don't think you're a big Marvel fan, either, but that's where they'll start getting more adults as well.

Lewis: No, I just keep missing the boxes that Disney's trying to check, because I'm also not a superhero movie fan. I get a lot of flak for that one. But no, I haven't quite gotten into the Marvel Universe in the way that a lot of other folks have. For people that are looking for some details on the streaming service and have not caught any of them yet, no R-rated movies. Like you said, Dan, very family-oriented. The service is just under $7 a month, or just under $70 for the year. If you take the year package, it's just under $6 per month. There are some bundles available with ESPN+ and an ad-supported Hulu for about $13 a month, so you save a little bit of money there.

Kline: Yeah. I feel like it's always important, whenever we mention ESPN+, to point out that ESPN+ is not ESPN. You'll be getting a lot of added video, a lot of shows, a lot of highlights, but it's not a feed of ESPN. It's ESPN-shoulder programming.

Lewis: If you're someone who has all these things, you save a little bit of money. I think it's worth looking at how this stacks up to some of the other streaming services currently out there. Coming in at $7 is a pretty appealing price point.

Kline: Yeah, it is. For any parent, when you look at what you were spending on Disney content anyway -- if you have a kid between the ages of 2 and 12, there's an enormous amount of stuff. One of the launch shows was a High School Musical series. If you're a parent with a tween, High School Musical was probably very important to them. You're really getting a very good value. I think that bundle is a pretty good deal. Even though ESPN+ is not all that useful, it does have a lot of big fights. If you're a boxing or an MMA fan, you might get one or two things a year that you would have paid $60 on their own, to sit around with your friends and watch. And Hulu has a lot of next-day live TV. Especially if you've cut the cord, it's kind of like the cheap way to have access to a lot of programming.

Lewis: Yeah. In comparison, I think Netflix is about $13 a month for some of the more entry-level services. HBO Max is going to cost $15 a month, which is the same as HBO Go now. I remember when we first talked about this, I think back in January, giving a preview of Disney for the year, we speculated this would come in at a lower price point. I think there are a lot of different reasons for that. Some of it is how competitive and deep the content library is. I think some of it is also them wanting to very quickly get tons of subscribers, and coming in at a low price point allows them to do that.

Kline: Yeah, and no one's ever going to cancel. One of the things that hasn't been talked about here is, they're also giving it to you free at certain levels of Verizon. Basically, you have to have the unlimited plan or a higher level of their internet service. What happens with that is, you get it for free for a year, and then it automatically rolls over, and you start getting billed. It's going to be very hard to cancel this if your kids are watching this programming, or you've become invested in one of the Marvel shows, or one of the Star Wars shows, or even some of the National Geographic content. It's a very smart strategy. They hit 10 million people very quickly. A little bit of a soft number, because there's a seven-day free trial. We don't know who's actually going to become a paying customer. But the reality is, I think it's six months to a year to maybe 50 million to 100 million subscribers, because it's just that obvious a service.

Lewis: For context, Netflix closed Q3 with just under 159 million subscribers. There's a ways to go for Disney to catch up. But I think you're right, Dan. I think this is going to be something that very quickly establishes itself as a major player, similar to the way that Apple Music really caught on, even though it was well behind the release of Spotify.

Kline: Yeah. It's just one of those things where it doesn't feel like a lot of money because you were already giving Disney money. If Disney had created The Mandalorian and told me it was $7.99 an episode and I had to buy it, I've bought every Star Wars book ever written, I'm going to buy the brand-new live-action show. This is one of those things that's just absolutely a no-brainer. As a parent, you can make the investment. It's part babysitter, it's part entertainment. There's an affection for these movies, especially the Pixar movies, for my generation, even your generation. You don't have kids yet, but you might someday. And you saw Toy Story in the theaters, probably. You probably saw The Little Mermaid on video when you were a kid. There's really a built-in audience for it.

Lewis: 100%, Dan. While I am not a huge fan of a lot of these movies, I am not a robot. I did grow up on at some of the major Disney titles. And, yeah, certainly, if I have kids, I would want to make sure that they were exposed to that stuff, too,

One of the things that I thought was interesting with the launch was, it was a lot of IP that people were already very familiar with and grew up watching, but there wasn't a ton of new stuff that came with this debut.

Kline: No, and this is very intentional. I'm a big fan of theringer.com. It's a pop culture sports website. They pick shows and do very obsessive coverage about it. Leading up to The Mandalorian, they did a series called The Rewatchables, where they looked at all the Star Wars movies, all the Star Wars content, and broke it down. And they're covering every episode of The Mandalorian, and so are some other television sites, as if it's a major event. I'm talking five or six stories in a week, podcasts. That's something where Disney is being very smart. As one show ends, they'll bring in another. Maybe you'll get the WandaVision show, or The Falcon and The Winter Soldier, both set in the Avengers universe, and they'll be covered obsessively by a number of sites. It gives them an advantage that I think Netflix is squandering. The release of Stranger Things, or any new Netflix series that's popular, is a big deal for four or five days, and you lose that ability for each episode to be covered, to generate recurring publicity, to build as it goes -- I've talked about The Mandalorian to enough people, and I know some of them have gone out and said, "I'll go get Disney+ because of that." Disney has a very smart, public-relations-friendly content rollout plan.

Lewis: Yeah. Before the show, we were going back and forth, and I send you over a Google Trends look at search interest for Stranger Things as an example. What you see is, there's a massive spike for about a two or three-week period every time the new season comes out. And then it goes right back down to the level that it had before. And that's just a limitation of that release style. Netflix created binge culture. For them, it was something that was so innovative, and so disruptive. But it comes with its drawbacks, as well.

Kline: It does. Also, if I bump into you in the office, I can't say, "Hey, Dylan, what'd you think of this week's episode?" There's no time period for that when it's all dropped at once. So, you have this situation where the discussion about Stranger Things is like six months later, and by then, you don't remember the details, it's not as fresh. I do think that makes people less interested in the next season. There's something nice about a communal experience. Old TV was like that. Linear TV was, the "who shot JR?" episode of Dallas, which I am too young to have seen. I did not see that. But, that aired, and everyone talked about it the next day. When the Super Bowl is on, or the Grammys or the Oscars, you watch it somehow, and then the next day, it's a joint conversation. That's what The Mandalorian has been like. There's an internet conversation. I know who among my friends are Star Wars fans, and they know to say, "Hey, look, I haven't caught Friday's episode." I look at it as, watch on Friday, you can talk about it by Monday, but some people might let you know, you have to wait another day or two. That happens. I do think this is going to help Disney build hits, which is something streaming networks have struggled to do.

Lewis: Yeah, I'm actually bouncing this now against the way that HBO has worked with Game of Thrones. I think they found a good weekly release cadence that worked. You had this sustained interest, you had these people that were rabidly talking about it the next morning, and the expectation was that you watched it in that moment. I think the struggle that HBO experiences, when you have such a huge tentpole show, like Game of Thrones, well, what do you do once that season ends? You have to keep people around. It seems like Disney is very deliberately rolling out this content calendar so that there's always that hit coming.

Kline: The biggest challenge HBO has had is, they usually had two or three big hits. True Blood and Six Feet Under and The Sopranos and Sex and the City, and those shows were all in the same cycle. Over the course of the year, they had two or three tentpoles to really bring you in. At the moment, they don't have any of that. If you're not a big Bill Maher or Last Week Tonight fan, you might be thinking about pausing -- I am. Last Week Tonight is why I keep HBO. You might be thinking about pausing your HBO subscription.

What Disney is trying to do is line up its intellectual property so there is always something for kids, always something for teenagers, always something for adults, that's coming soon or in the midst of running. They own so much high-quality IP that they should be able to do that. I think it's three shows that are going to be set in the Star Wars universe, four or five just with the Avengers, not counting the couple of other shows that are set in Marvel. They own Indiana Jones, they own Pixar. There's so many things they could do. They'll do them all and space them out. They're using the advantage they have. The Mandalorian, which is shot like a movie, is not going to be a traditional 22-episode series. The episode lengths have been strange. 28 minutes, 32 minutes. They're just making the television they want without having to follow any of the rules, using a keep-them-wanting-more strategy.

Lewis: I think if there's anything that the last couple of years in pop culture -- maybe the last decade -- has proven, it's that people will consume spin-offs, they will consume origin stories. People that are really involved in a universe are into all of these kinds of tangents that creators are willing to go down to continue to explore that universe.

Kline: Yeah, and when you look at Marvel and Star Wars specifically, there's so much empty space. I love the Netflix Marvel Universe. Daredevil, Jessica Jones, Luke Cage. Not so much Iron Fist. That built out a world where you could acknowledge that there were superheroes, but they were operating more on a citywide basis, not a global-threat basis. In Star Wars, yes, there's this whole world with the Emperor and Darth Vader or wherever we are now with the First Order, but then there's also, the First Order is maybe a different factor in your neighborhood compared to what Luke Skywalker and Princess Leia are fighting. You can tell much smaller, much more intimate stories, or stories that can't be told in two hours in a movie.

Lewis: Yeah. Dan, we've focused a little bit on The Mandalorian and some of the content that is specifically coming out for this streaming service. I always think it's worth taking that step back when you talk Disney, and just talk about the strength of the IP library and the way that it really works as a flywheel for this business. There are some staggering numbers that really paint a picture of how successful the streaming service could continue to be for them based on how strong the box office has been for them so far in 2019. A couple numbers here. To date, the studio has done more than $8 billion at the global box office, breaking its own record for the highest-grossing year for a studio ever, which was set in 2016. It's had five billion-dollar films already in 2019, which is another record. Frozen 2 is set to come out this week, which is probably going to wind up adding a sixth to the list. Even with content that is not specifically designed for Disney+, but is part of this larger IP library, they are coming up aces across the board.

Kline: And the ninth Star Wars movie opens, I believe, Dec. 20. There's one more. I've written about this a lot. The film business is a casino for most companies. If you're making a movie, maybe you got The Rock, maybe it's an original, you're stacking the deck as much as you can, but you still don't know if people are going to show up. When you put out an Avengers movie -- even with a lesser Avenger, like, say, Ant-Man -- you know half a billion dollars is the floor for where you're going to be. Aside from the misstep with Solo, you know that with a well-told Star Wars story, you're going to do a billion dollars. There's a scenario where Disney has this ever-feeding thing. Once you see the end of the last Avengers movie, which is a wonderful film, you want to know what happens next. You might follow that into theme parks, into books, into commercial stuff. I've been getting bombarded with virtual reality. There's a Darth Vader story you can play on your Oculus. I just don't have the right Oculus to buy it. Really, one thing feeds another. There's Disney SpaghettiOs and breakfast cereals, using all these characters.

Lewis: Yeah. The strength of the flywheel is so incredible to me. You have the pipeline that IP goes through, where the movie is made, they have the merchandise, they have the theme park revenue, and now they have the streaming revenue. It used to be the DVD sales before that. But that's only one generation of that piece of IP. In the case of Frozen, you had the original Frozen, [which] came out six years ago, and we're seeing the second one now. And that's just an extension of that same series. It's going to go through the exact same pipeline, and it's going to print money for this business.

Kline: Disney has done a smart job of making its universes accessible. I'll give you an example. I went to the new Star Wars: Galaxy's Edge at Disney's Hollywood Studios. Before going, I, of course, read the two tie-in novels that tell you all about Batuu, the fictional place you're visiting. For me, it was a deeper experience, where I knew all the greetings, I knew the places, I knew what they were talking about, what the food was supposed to be. But, for my son, who could care less about any of that, and just wanted to ride the Millennium Falcon and maybe see Chewbacca, he still had a very rich experience. When the movie comes out, I would assume Batuu is a setting in the movie. There's some groundwork laid in some of the books and in the theme park that lets you believe that this is going to be a Rebel base. All of it ties in, and that's very exciting as a super fan. It's also very irrelevant to you if you go to see the movie with me having not even seen the last two movies. You'd probably still understand it. Disney understands, as deep and rich as Star Wars, Marvel, even the Pixar movies are, that you still want a new person to be able to come in. For a company that's built its reputation on kids and keeping them in the system, they've gotten very, very smart at doing that.

Lewis: Yeah. I think it's probably one of the best-run operations in entertainment. It's the reason why they are best in the business and why they're a brand that has endured as long as they have.

Kline: Yeah, absolutely. It all comes down to the characters. You go to Mickey Mouse, kids want to see Mickey Mouse. You go to Star Wars, adults want to know what happens next. Think about it -- we've seen such a small snippet of the Star Wars universe. In theory, there's 20 years of Darth Vader stories they could be telling you. What about all the things Yoda did? Is Yoda a couple thousand years old? He's very old. There's so much stuff that they could show you, and a built-in audience. And they know, if they're putting something out on an Oculus headset, that's for a hardcore fan. If it's in a comic book, hardcore fan. If it's in a movie, my mom is going to understand it when she sees that movie.

Lewis: This is all to say, Dan, that while the streaming service is a nice kicker for Disney, it is not going to be the thing that immediately makes them $20 billion. The reality is, with a company like this, all of these different efforts reinforce the strength of the IP library, which is really what's going to drive the business results for them.

Kline: Yeah, and this is a hedge against the death of cable. This is Disney, which doesn't own its own distribution, creating its own distribution for its content. It's not going to matter if cable gets smaller if Disney has a relationship with, let's say, 100 million people that it can say, "Hey, do you want the shows? We can keep these around. You want to pay a little more for this service? Alright. We'll give you Hulu, and Hulu is also going to have Deadpool. And oh, by the way, it doesn't really fit with Disney, but you've got every episode of The Simpsons on Disney+." As cable dies, I think you'll see more of ESPN, you'll see more of the Disney Channel content, merging into the service. There might be tiers, there might be different ways to monetize, but it's always going to feel like a pretty good value.

Lewis: I mentioned that we did a show back in January together. We were talking about Disney, and just an outlook for the year. When we had taped that show, I think over the past maybe three years prior, something like that, the stock really hadn't done all that much. It was a lost couple of years for Disney and Disney shareholders. Our consensus at that point was, 2019 is going to be the year where they lay a lot of the groundwork for success in 2020, 2021, etc. There may be some excitement around the stock because of the streaming launch, but in the grand scheme of things, this is not going to be something that immediately makes a ton of money for them. Well, you look at how the stock's performed so far over 2019, Dan. Since that show, shares are up 32%, and the S&P is up 18%. Nice to see that people are excited about this company, because it truly is a best-in-class company. It seems like the sleeping giant has been woken a little bit.

Kline: Yeah. I think you're seeing the reaping the rewards of these investments. Remember, even though they only spent $4 billion for Marvel, only spent $4 billion for Lucasfilm, I think was $7 billion for Pixar, those are still significant investments. That weighs down a stock. So, yes, they're investing in the streaming network. They're investing a billion dollars or something like that in the U.S. theme parks over the next few years. But the numbers aren't quite as huge. So, now, they're in a position where the capital investment will come down, and the balance sheet will look better. Plus, there's a lot of excitement around the brand.

Lewis: To put a couple numbers to that, over the last 12 months ended at the end of September, they added $10 billion to the top line over the previous year. But when you go down to their gross profit, it only manifested in an extra $800 million. Clearly, they are spending a lot to set themselves up for the future. I think that what winds up happening with Disney+ is they have another great tool in their toolkit to bring people in and further attach them to these characters they've spent so many decades building.

Kline: Yeah. And they own the content. Disney does not have to worry about going back to Pixar and licensing Toy Story in a few years. They own it forever. When there's 90 seasons of The Simpsons, or whatever it is, that will all be there. And this just becomes a better and better value.

Lewis: Dan, you are a Disney+ subscriber. I've seen some kerfuffle online -- there are people thinking, is Disney+ going to cause people to unsubscribe from some of the other streaming services? Was that even in your brain with this?

Kline: Because of what I do for a living, I feel like I have to have Netflix. I don't have Hulu at the moment, but I will probably upgrade to the bundle at some point. I have a lot of streaming services, and I probably would pause Netflix at the moment because there's nothing I'm really watching there. But, my wife watches a ton of things on Netflix, so she would be very angry. Plus, I get Netflix through T-Mobile, so I only pay whatever the price increase was, so like $2 a month, and T-Mobile pays the rest of it. So, no, I have not really thought about making any changes.

Lewis: That is one of the hidden trends of all of this splintering we're seeing within streaming. You can get a lot of really good stuff for free via either your cable or telecom provider.

Austin Morgan, our man behind the glass, are you a Disney subscriber?

Austin Morgan: I got the seven-day free trial. I think I might keep it on a monthly basis until -- Kara hasn't seen any of the Marvel movies, so I was like, we can watch 20-whatever movies, and then we'll pull the plug. But we're on a really bad pace. We watched half of Iron Man, she fell asleep, and she hasn't finished it. It's been six days. We're running up on the end of the free trial.

Lewis: The thing is, we're heading into prime binge-watching whether. It's only going to get colder. It's not going to be particularly nice out. It looks pretty nasty this weekend. You might be able to knock out some movies.

Morgan: That's true. Binge-watching, the thing with shows that come out weekly, I don't watch them until they're all out.

Lewis: Yeah, and then you can just mow right through them, right?

Morgan: I always forget that they come out like that. I watched the first episode like, "Oh, that was great," and then forget for four weeks, and then watch the next three.

Lewis: If I didn't already know that Disney+ was coming out, I would have been able to pick it up because around my house and my girlfriend's house, there has been a huge uptick in the number of Disney musicals being played and the amount of Disney musical singalongs that have been happening in the shower as I've been walking by, getting ready in the morning. I am not a subscriber, but I think Jess will be very soon, and I will have access that way.

Morgan: I'm curious how long subscribers last that don't have families. You can only be nostalgic about Disney movies for so long. And then it's just like ...

Kline: No, I think you're going to have to be someone who's interested in the new Marvel content, the new Star Wars content. You're not going to keep it for the archive.

Lewis: Yeah. And the consideration is totally different for parents. I was chatting with some Fools, we had our Foolsgiving Lunch this week and Disney+ came up. And one of my co-workers said that they watched the same animated Disney movie three times one Saturday because the kid wanted to watch it. That's one of the things you lose sight of as an adult. Kids are down to just hit repeat and do it again, especially the young kids. That makes it very hard to cancel, because you don't want to deal with a crying 3-year-old.

Kline: If you have a 3- to 12-year-old, you have this, and you'd pay twice as much, would be my guess.

Lewis: So, if it's not already something that a lot of parents listening have picked up, maybe it winds up in the holiday basket for people that are celebrating some of the winter holidays.

Dan, thanks for hopping on today's show and talking Disney+ with me!

Kline: Thanks for having me!

Lewis: And thanks for chiming in, Austin. I always love getting you on the mic. Listeners, that's going to do it for this episode of Industry Focus. If you have any questions or you want to reach out and say hey, shoot us an email over at [email protected], or you can tweet us @MFIndustryFocus. If you want more stuff, subscribe in iTunes, or you can catch some cool videos over on our YouTube channel. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. Thanks to Austin Morgan for all his work behind the glass today. For Dan Kline, I'm Dylan Lewis, thanks for listening and Fool on!