Analysis: DIS NFLX AMZN

On Thursday, April 11, after the market close, Disney (DIS) unveiled the long awaited, highly anticipated Disney+ direct-to-consumer (DTC) streaming service. That said, the most surprising thing in our view, is how well the stock is reacting today, not because there was anything disappointing that would have caused us to think shares should sell off but rather because we fully expected the event to be a success and are amazed that so many people actually had to "see it to believe!" This is Disney we're talking about, the content king of kings, but clearly expectations were too low. As we always tell members, expectations are if not the most important factor going into any major event, be it an earnings release or investor day.

Before digging into the various, product-specific announcements let's take a look at the opportunity overall. During the event, management shares several metrics that we believe speak volumes about why a dedicated streaming strategy is so important. First, global broadband connected households (wired and wireless) have been growing at 9% per year for the last decade (2010-2020) - seeing as an internet connection is the delivery mechanism for streaming content, growth in global connectivity is a key factor allowing for growth in the subscriber base. To this point, over that same time frame, global DTC paid video subscriptions have seen a compounded annual growth rate (CAGR) of 37%, with 810 million global subscribers expected by 2020 and those subscribers aren't just signing up in larger numbers, they're spending more and more time on the service, likely to the detriment of traditional Pay TV (another indicator of why a dedicated streaming strategy is more of a necessity than a luxury). While subscription rates may be growing at 37%, total hours per day on paid DTC subscriptions is increasing at a rate of 50% per year, with an expected 1.2 billion viewership hours per day expected to be spent on such services by 2020.

Jumping into the heart of the event, the day can be broken down into four key segments, covering each of Disney's streaming offerings including Disney+, ESPN+, Hulu, and Hotstar. We will attempt to break down the most important updates from each segment, however, for those interested, a replay of the webcast as well as presentation slides, can be found here.

Hulu

On the Hulu front, we heard from CEO, Randy Freer who called out that is the fastest growing streaming service in the U.S. and as of 2018, boasted 25 million subscribers, with 23 million of those being paid subscribers and as is the case with the overall streaming industry, engagement is growing at a rapid pace, with total engagement surging 75% in 2018 benefiting from 20% jump in viewing hours per subscriber. Additionally, while subscriber growth is one path to monetization, the Hulu platform also lends itself to ad sales. On this front, management called out that the ad market for digital video platforms such as Hulu is expected to exceed $50 billion by 2022, providing a significant opportunity for Disney, especially given that by dividing up its offerings, the company can focus on ad sales with Hulu, while keeping that premium ad-free feel on Disney+, a factor keeping in the realm of the Netflix/HBOs of the world.

ESPN & ESPN+

Jumping to ESPN, while there wasn't much in terms of platform-specific news. We were once again reminded of the impressive performance on this front as management called out the ESPN's 200 million person viewership base in the U.S. while adding that ESPN has been the number one rated cable network for men for an incredible 13 years in a row. Add to this an 18% annual unique visitor growth rate compounded by a 29% annual increase in total minutes spent on the platform, and we can really start to see just how sticky this top tier sports platform really is. Furthermore, the momentum stands to sustain as management plans to stream 24,000 live events on ESPN in 2019 alone! As for ESPN+, the growth has been just as impressive, with the platform signing up 1 million subscribers in the first five months and doubling that number by month ten! Additionally, given the nature of ESPN and ESPN+, with ad breaks often built into sporting events, the platforms both provided additional opportunities for the company to further increase its share of the digital ad market.

Hotstar

In order to truly understand Star India and Hotstar, Star's "rapidly growing direct-to-consumer business," we must understand the opportunity that is the Indian market. For starters, the country has a population of over 1.3 billion people with GDP that has been growing at a CAGR of 8%, making it not only an incredibly large country in terms of head count, but the fastest growing country in the world. Even better, roughly half of the country's gigantic population is under the age of 25, making this an even more attractive country for streaming opportunities as younger demographics are more open to new ways of consuming media. If that's not enough reason to get excited about the opportunity, we would also note that household earnings in India are on the rise, growing at an estimated 10% CAGR and serving to make luxuries such as streaming services more accessible than ever before. Adding to this growing accessibility, TV screens in the country are expected to hit 25 million by 2023, with video active smartphones expected to reach 750 million, and the only way to watch media on a smart phone is with a digital streaming platform).

As for consumption, Indians are increasing their consumption of data and media at an amazing rate, with per capita data usage per month growing at a 129% CAGR, with video content consumer per person per day expected to grow at 15% CAGR. And the money being made on this content both in terms of consumer payments and advertiser payments is on the rise as well, with consumer payments expected to grow as a 12% CAGR and advertiser payments excepted to grow at a 21% CAGR. Bottom line, the opportunity in India, which Disney was able to gain massive exposure to via the acquisition of Fox, is enormous.

As for Star specifically, the platform is nothing short of a powerhouse, commanding a 30% share of TV advertising, a 30% share of digital advertising and a 40% share of TV-affiliate revenues! Furthermore, President of Asia-Pacific Operations, Uday Shankar called out during the event that, "for every 4 hours of TV watched in India, 1 hour is on Star." Furthermore, Shankar noted, "Star broadcasts 250 days of live sports every year and has a 65% share of the sports viewership in India. Hotstar has just broken the mark of 300 million monthly active users, that makes it one of the largest video platforms in the world." When we consider the success of ESPN in the U.S., we can really start to understand the impact Star's significant sports exposure can have on the "stickiness" of the subscriber base. To this point, Shankar also noted, "Hotstar is home to over 100,000 hours of drama, movies, sports and news on a single platform, and several times its volume is available in our library. We have also localized our sports offering. Cricket has always been an obsession in India, but for decades its reach was limited because it was served largely in English. We took cricket deeper and made it more accessible in Indian languages. The success of our strategy is reflected in the improved performance of the IPL last season."

Increasing the "stickiness" are initiatives aimed at boosting engagement. During the event regarding the ability to increase market share and engagement, Shankar stated, "Our goal is to improve these shares further with the cross-screen advertising engine. In this enterprise, a key goal has been to enhance viewer engagement. Hotstar is arguably more advanced in engagement initiatives than any other service in India. These include gamification of content, a social experience around video and even allowing in-app transactions now. As a result, an active viewer spends 2.7x more time on video than a passive viewer. And we are pushing for even deeper engagement. We believe that now that the Indian market is ready for a subscription push, and that's why we are on the path to use Hotstar's massive scale as an AVOD platform to establish compelling SVOD service for the top end of our consumers." We view these as powerful initiatives that will increase engagement and as a result, subscriber growth.

Disney+

And now, for the pièce de résistance, Disney+, the company's direct response to the likes of Netflix (NFLX) , Amazon's (AMZN) Prime Video, and every other player looking to gain share in the content space. And while some may contend that Disney is simply entering an already competitive market, we would argue that while we agree that the space is highly competitive and only getting more so, the winners and losers will be chosen based on content and when it comes Disney, their content is the best in the business. Furthermore, while one could have potentially made the argument a year ago that Disney content was only the best around when it came to a younger audience (though between Marvel and Star Wars we would claim otherwise), the acquisition of Fox has provided the company with the adult content boost it needed to silence the naysayers.

While we could back and forth all day arguing who makes the best content and some will argue that we are bias simply because we own the name (though the reality is we own it because it is the best, it's not the best because we own it), the numbers do not lie. Disney is "the only studio in history to ever top $7 billion in total Box Office in a single year," doing it for the second time in 2018, with consumer buying over 900 million movie tickets 2018. While this is impressive in its own right, as Chairman of Direct-to-Consumer & International Business Segment, Kevin Mayer put it, "we believe that demand will translate to Disney+ because the service will be fueled by the same brands and many of the same creative teams." And for Disney, consistent performance is nothing new, since 2006 the company has released 44 films, generating over $37 billion in cumulative box office sales, or an average of $850 million per release.

Breaking the box office down one step further, since 2006, Disney/Pixar has released 22 films with an average box office of $690 million. The Marvel franchise has released 18 films since 2019 with average box office of $960 million (and by the way, of those over 900 million global ticket sales, 290 million can be attributed to Avengers Infinity War, providing just a taste of what is to come when the Avengers Endgame hits theaters later this month). As for the Star Wars franchise, since 2012, the company has released four films in the "Skywalker Saga" since 2012 with average box office sales of $1.2 billion, again providing but a taste of what we can expect when the saga finale hits theaters later this year with the release of Episode 9: The Rise of Skywalker.

Pricing

Finally, there is pricing, and this is where things really get interesting. Going into the event, investors had a pretty good idea of what would be discussed and as a result, the price action was largely muted throughout the event, however, right around 8:00 pm ET (the close of after hours trading), the company announced pricing for the Disney+ platform, coming in at $6.99/month or $69.99 annually, bringing the monthly cost to ~5.83/month (below the expectations of analysts at JP Morgan and Morgan Stanley, both of whom were expecting a price point of $7.99/month).

We believe this to be a key factor behind today's move as it serves to make the platform incredibly competitive on price, especially versus a Netflix subscription which starts at $8.99/month for Basic, $12.99/month for Standard and $15.99/month for Premium. In fact, the competitiveness of Disney's offer becomes even more apparent when we consider that the base package for Hulu prices at $5.99/month, with ESPN+ coming in at $4.99/month or $49.99 annually, resulting in an average monthly price of ~4.16/month. If one were to subscribe for Disney+ and ESPN+ annually, they would be looking at a monthly cost of $9.99, below the cost of a Standard Netflix package, and right on par with a premium package for those interested in tacking on a basic Hulu subscription.

However, with Kevin Mayer noting during the event, "we will likely bundle [Disney+, ESPN+ and Hulu] at a discounted price to create even more value for consumers," the deal subscribers can get on all three stands to become even more competitive versus the likes of Netflix, in the future, though, the timing on this remains unknown.

While we attempted to provide as much detail as possible on what we believe to be the most important metrics that truly demonstrate why we are so bullish on the future of Disney, this was a monstrous multi-hour event, with an associated slide deck consisting of over 200 slides, so we encourage all members to have a look for themselves via the link above, as we believe the opportunity becomes even more clear once one can see the truly unbelievable amount of premium content this company has its in portfolio!

Bottom line, when you account for the incredible potential of the company's streaming initiative and factor in that Disney is also opening up two Star Wars theme parks later this year (recall on average, this has been the company's highest grossing box office franchise in recent history) there is a lot to be excited about.

The last thing we will leave members with is this: when you invest in Disney, you are not simply investing in movies, or shows, or ESPN, or India, or theme parks, or merchandise sales, or video games (video games being something we expect to become a larger part of the narrative over time as Marvel Entertainment has previously entered into a "multi-year, multi-game" to develop Avengers based games, see here, and an iron Man virtual reality experience, here), what you are investing in, and we cannot stress this enough, is the flywheel. Now parents will no doubt understand this better than anyone, but it's something every Disney fan has seen in action.

You don't just bring your son or daughter to see Star Wars and that's it; once they see the movie, you're on the hook for action figures come the holidays, costumes come Halloween and trip to the Star Wars: Galaxy's Edge theme park come your next vacation. And once you've done all that, you'll be ready to go see the next movie because the other beautiful thing about Disney content is it's not about a single move, it's about franchises (like the monster franchises we called out above) that can be developed, rebooted and spun off at will! That is why you own Disney and that is why, despite today's solid gain, we will continue hold on to our shares, because while this stock is now breaking out to new highs, we believe it to be just the start.