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This Changes Everything for Disney

By Rick Munarriz – Aug 9, 2020 at 4:00PM

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Disney's digital gamble on a big-budget movie is smart, safe, and the future.

Hollywood isn't waiting for the local multiplex to fire up its projectors again. Walt Disney (DIS -3.20%) is the latest movie studio to turn to a big-ticket digital rental to help recoup the heavy production and marketing costs of a once highly anticipated theatrical release. And it's the right call. 

Disney's decision to release Mulan as a premium video-on-demand offering on Sept. 4 is huge -- and so is the price of digital admission. The media giant will ask Disney+ subscribers to shell out $29.99 for the live-action reboot of the 1998 animated feature, a bold but brilliant decision. Mulan raked up $200 million in production costs, celebrated as a glass ceiling-busting moment earlier this year as the most expensive film helmed by a female director. The premium stream will have a high hurdle to clear over the Labor Day holiday weekend, but don't bet against the House of Mouse.

A couple relaxing on the couch watching a mounted TV.

Image source: Getty Images.

Honor to us all

The head-turning moment for premium video on demand happened in the springtime, when Comcast (CMCSA -3.62%) put out Trolls World Tour as a $19.99 digital rental. It managed to clear 5 million rentals through its first three weeks of availability, roughly $100 million in rentals. Comcast collected $77 million of that haul after paying the platforms that made the streams possible. 

Will Disney clear 5 million Mulan rentals next month? Is 10 million the bar? Before jumping off the deep end of expectations, let's revisit Comcast's success with Trolls World Tour. Timing was everything in that particular case. We were a couple of weeks into the movie theater shutdown and shelter-in-place orders. Young families were a captive audiences for fresh entertainment, and Comcast delivered. There have been other nixed theatrical releases to go this route and fail to come anywhere close to Comcast's effort. 

But Mulan will do just fine. And Disney will be just fine. Disney+ has been a runaway smash since launching just nine months ago. The media behemoth revealed last week that it now has 60.5 million Disney+ subscribers, up from 54.5 million three months earlier. Limiting its big-ticket rentals to Disney+ is genius. It's home to a growing audience of Disney's biggest fans, and it also helps the media bellwether cut out the middlemen that nibble away at the rental revenue. 

If 10% of Disney+ accounts go for the rental, we're already looking at more than $180 million in revenue, nearly recovering the production costs. If 15% of the homes pay up, we're talking about $270 million -- and that will more than recoup the production costs as well as a marketing budget likely in the range of $50 million. 

You can argue that folks won't pay $29.99 for a streaming release, but that was also a common knock when Comcast announced its Trolls World Tour plans. If theaters were open, one would expect between 30% to 50% of Disney+ subscribers to see the film. Again, they are the media mogul's biggest fans, and even more than that have turned out for the live action makeovers for Beauty and the Beast and Aladdin.

Taking the entire family to the movies would probably cost a lot more than this rental, and the beauty in this beast for Disney is that it doesn't have to split the box office with theater owners. It controls the distribution. 

This is more than just the "one-off" that Disney is calling it. Mulan's premium digital rental is a trial balloon. If it clicks, and it should, Disney+ is no longer limited to $6.99 a month out of its subscribers. Disney+ becomes a marketplace on top of a subscription service, and the ceiling is so much higher. 

Disney is about to learn a lot about how dedicated its fan base is when presented with this pricey digital rental for what could've been a tentpole theatrical release in March, July, and finally August. If the news is encouraging, it will be investors who learn even more about Disney and its firm grasp on consumer discretionary income.  

Rick Munarriz owns shares of Walt Disney. The Motley Fool owns shares of and recommends Walt Disney. The Motley Fool recommends Comcast and recommends the following options: long January 2021 $60 calls on Walt Disney and short October 2020 $125 calls on Walt Disney. The Motley Fool has a disclosure policy.

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The Walt Disney Company Stock Quote
The Walt Disney Company
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