Disney+: What’s it really worth?
The big question: What is Disney+’s true value to Disney as a company?
The stock market reacted very positively and since April 11th, the stock has rocketed from $116 to $140 as of writing. I would guess a majority of this increase was due to positive sentiment of Disney+, the new streaming service that will be available at $6.99 a month.
I’m personally not as bullish in the short term (1–3 years) but I am very bullish in the long term (3–6 years) and I’ll tell you why.
- I believe Disney+ is underpriced at $6.99 to attract consumers. Disney will raise the price sooner rather than later.
- I don’t believe Disney+ will drive meaningful merchandise and park/resort sales.
- I believe margins from Disney+ price increases will be greater than margins from parks
- I believe Disney+ will scale better than theme parks
Let’s first walk through some math, which are largely based on assumptions.
Let’s assume after 3 years, Disney+ will have 50 million subscribers. Netflix currently has 139 million. Netflix started streaming in 2007, but I’ll give Disney+ an edge since it has a lot of high quality content by default.
Through looking at some rough 2018 attendance numbers, we can estimate about 127.2 million people went to a Disney park in 2018. We know that Disney theme parks have about a 22% profit margin according to Disney’s fiscal report. With that same report, if we take total revenue for 2018 ($20.296 billion) and divide it by 127.2 million people, we get an average spend of about $159.56 per person. I would say my estimate is on the low end so we’ll just bump it up to $200.
Let’s assume that Disney+ converts 10 million (20% of Disney+ subscriber base) into new park goers, with an average annual visit of once per year. This means Disney will get about $2 billion in annual revenue, with about $440 million in profit.
Let’s also assume $6.99 is the break even rate for Disney+. If Disney increases this price to $8.99, it will effectively make $2 per user in profit.
Scenario 1: Let’s assume Disney+ does not lose any customers due to $2 price increase. This means Disney will make an annual profit of $1.2 billion. (50 million users * $2 profit * 12 months).
Scenario 2: Let’s assume Disney+ loses half of its customer base due to price increase. This means Disney will make an annual profit of $600 million. (25 million users * $2 profit * 12 months)
Note: I believe a park conversion rate of 20% is VERY high since most people who subscribe are already familiar with Disney and Disney theme parks. I also believe the 22% park margin rate will increase with more visitors, since the park is the main fixed cost. I also believe that Disney+ will not lose very many customers with a price increase, as evidenced by Netflix price increases.
Now for my opinion.
I believe Disney+ is not actually an “ecosystem” play of driving consumers into parks and getting users to buy merchandise as some analysts and articles would have you believe. I strongly believe it’s a content distribution play. I don’t think Disney wants to indirectly make money off of Disney+ by funneling users into parks, I think Disney wants to directly make money off of Disney+ by taking profits.
I firmly believe $6.99 will be an “introductory” price to undercut competitor streaming services and Disney is almost guaranteed to raise their monthly price.
Let’s face it: Disney theme parks are for wealthy people. It costs a lot of money to buy a ticket, food, and accommodations when you visit a Disney park. The problem with wealthy people is there aren’t a lot of them. So to effectively grow, you need to make money off of the average Joe and parks aren’t the right answer.
Disney’s original answer to this was cable networks and movies but with the rise of differentiated content distribution, specifically streaming, Disney’s main source of revenue from the average person was declining. Less people are cable subscribers and movie goers everyday and are opting for products like Sling TV and Netflix.
Disney needed an answer for making money off of content distribution and Disney+ is that answer.
I also believe people who find the most value from Disney+ are probably already Disney theme park goers, which makes a 20% Disney+ to theme park conversion rate very high. Most of the announced content are for the fans who like to dive into universes, such as the Marvel spin-off series’ and Star Wars Mandalorian series. This leads me to believe that Disney+ will attract majority users who already go to Disney theme parks often.
With that being said, do I believe Disney+ will keep users in the Disney ecosystem? Hell ya. Do I think it will attract some new Disney theme park visitors? Hell ya. Do I think it will be successful? Hell ya.
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Some sources:
Average spend per person: $159.56
2018~ish attendance numbers 127.202 https://www.themeparkinsider.com/flume/201805/6107/
2018 revenue numbers: https://www.thewaltdisneycompany.com/the-walt-disney-company-reports-fourth-quarter-and-full-year-earnings-for-fiscal-2018/
22% profit margin on parks according to https://www.thewaltdisneycompany.com/the-walt-disney-company-reports-fourth-quarter-and-full-year-earnings-for-fiscal-2018/
