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Morningstar | Disney Strikes Back With $6.99 Price for Disney+; Impressive Content Quality and Depth on Display

Disney came out swinging at its investor day with an aggressive price point for Disney+, which will launch Nov. 12 for $6.99 per month or $69.99 annually. Unlike the disappointing reveal for Apple TV+, Disney not only provided a firm launch date and price but also showed and outlined the amount and quality of content that will be available at launch. Management surprisingly offered guidance of 60 million-90 million subscribers by the end of fiscal 2024. We think the wide range reflects the uncertainty around the timing of launches in international markets, which are expected to account for two thirds of subscribers. We are maintaining our wide moat rating and $130 fair value estimate.

While the investor day touched on all the firm’s direct-to-consumer services, the focus was on Disney+. Management is pursuing a very aggressive strategy, as it does not expect Disney+ to achieve operating income profitability until fiscal 2024, nearly five years after launch. Cash content spending on Disney+ originals will hit $2.5 billion in fiscal 2024 with licensed content spending, internally sourced from Disney’s studios, hitting a similar level. While this number is well below $12 billion in cash spending at Netflix in 2018, Disney+ is essentially buying the pay-one window for Disney movies after they’ve shown in theaters, so the cost borne by Disney+ is much lower than the actual production cost.

At launch, we expect that the Disney+ service will be very attractive to many consumers, given the low price point and deep content library. The service will cost just over 50% of the $12.99 monthly price of Netflix, while the annual price is only 45%. Disney+ will launch with 18 of the 21 released Pixar movies, over 35 Disney Animation movies, four Marvel films including Captain Marvel , eight of the 10 released Star Wars films, The Simpsons , and numerous TV episodes from Disney Channel and National Geographic. All content will be downloadable, a boon to parents.

Since management has consistently tried to lower expectations about the amount of content Disney+ will offer versus Netflix, we were pleasantly surprised by the content levels outlined at the investor day. Within the first year of service, Disney+ will feature over 25 original series and more than 10 original movies. We think the larger draw will be the more than 7,500 TV episodes, 100 recent movies, and 400 library titles. By year five, management expects to offer over 50 original series and more than 10 original movies, with over 10,000 TV episodes, 120 recent movies, and 500 library titles. While it is smaller than Netflix, we think the Disney+ library will be deeper in terms of quality.

Disney+ will launch first in the United States on Nov. 12 (the first fiscal quarter of 2020), with Western Europe launching within six months of that date. Asia-Pacific will be rolled on a country-by-country basis over fiscal 2020 and 2021. Latin America will launch in the first quarter of fiscal 2021 and Eastern Europe will launch throughout fiscal 2021. We believe the timing of the launches reflects the different content license deals that the firm has signed for specific types of content as well as the demand in each market. Management did not provide any details on market-specific pricing, but we expect that Disney will follow a similar lower-price model for each market.

Despite the focus on Disney+, management did spend time on the other three direct-to-consumer platforms. In the U.S., Disney will offer three DTC services: Disney+, ESPN+, and Hulu. While the firm will offer a discounted bundle, no details were provided on potential pricing. For Hulu, management projects that subscribers will expand from 25 million to 40 million-60 million by the end of fiscal 2024. We note that the upper end of the range is just above the number of paid subscribers that Netflix had at the end of 2018. Management said the firm is still evaluating the international opportunities for Hulu. We think Disney is trying to wait out its minority partners, AT&T and Comcast, and may not make any announcements about international expansion until the situation is clarified. Under the current plans, Hulu will be profitable in fiscal 2023 or 2024. Management expects to continue to invest in more original content for the streaming platform but did not address whether Hulu will continue to have access to shows from its current minority owners if their stakes were purchased by Disney.

ESPN+ has already signed up 2 million subscribers, and management projects that the service will hit 8 million-12 million subscribers by the end of fiscal 2024. Part of this growth will come from Latin America, where the firm expects to expand the service in the next few years. We continue to view the service as an add-on for sports fanatics and not a replacement for the linear ESPN networks. We expect the firm will continue to support the television bundle over the near to medium term, given the importance of affiliate fees and the potential to garner audiences for ESPN.