Shares of Disney (DIS) are surging 11% to new all-time highs after the company unveiled its direct-to-consumer (DTC) strategy for its core Disney content at its Investor Day last night.
The unveiling of direct-to-consumer offering Disney+ was highly anticipated. Wall Street was decidedly bullish on this endeavor heading into the event and Chief Executive Bob Iger did not disappoint.
Disney's intellectual property is so strong that the sound strategy conveyed last night combined with crisp execution going forward essentially guarantees success with this massive strategic pivot.
Disney+ is set to launch in the US on November 12 at $6.99/month, or $69.99/year. This undercuts Netflix (NFLX) and AT&T's (T) HBO over-the-top (OTT) offerings on price. Disney is phasing out licensing its content to both. Disney's coveted content helped fuel the unprecedented rise of Netflix, so that stock is falling 4% on competitive concerns today. The aggressive price point aims to maximize subscriptions as pricing power is a given over the long term.
The DTC service targets all ages with content from iconic entertainment brands including Disney, Pixar, Marvel, Star Wars, The Simpsons, 20th Century Fox and National Geographic. It will be available on connected TV and mobile devices. Disney+ is essentially a no brainer for a fan of any of those properties, which accounts for pretty much every family and even most adults. Bob Iger deserves a ton of credit for acquiring all of the unrivaled intellectual property other than core Disney over the years.
The streaming endeavor will be costly near term. Disney said operating losses for Disney+ will peak in the coming years and that the service will become profitable by fiscal 2024. Disney will be spending billions on content for the service while also forgoing high-margin licensing revenue.
That strategy is expected to result in 60-90 million subscriptions by FY24. What's more, the company guided for 8-12 million ESPN+ subscriptions and 40-60 million Hulu subscriptions for the same time span.
Disney owns a controlling stake in Hulu (60% after acquiring Fox's 30% stake) and launched a DTC offering for the Worldwide Leader in Sports ESPN last year. That means Disney has tons of optionality for expanding these services and bundling content gong forward.
Importantly, Disney+ will serve to drive Disney's complementary businesses. What's more, investors will pay a higher multiple for recurring revenue, as evidenced by today's surge in the stock, given the immense long-term potential of Disney-as-a-service.
As we previewed on Monday afternoon, Disney's stock traded in a fairly narrow range between $90-120 over the last four years despite record-breaking box office results as cord-cutting resulted in linear television subscriber losses and poor investor sentiment.
Disney+ was the catalyst for Disney to go on the offensive, dramatically flip sentiment and improve the investment thesis.