Disney’s New Streaming Model (DIS)

The streaming wars arguably entered a new phase when Disney (DIS) announced that its D+ service would branch out into a new advertiser-supported tier. This follows an earnings report in February that mentioned a better-than-expected jump in D+ subscribers: the company signed up 11.8 million users versus 7 million per Wall Street projections. It made everyone forget about the anemic just-over-2 million additions in the previous quarter. Disney now has 130 million subscribers compared to the 95 million statistic reported a year ago.

Interestingly, the company mentioned that this strategy should be considered a “building block” in the structure of its overall plan for generating between 230 million and 260 million D+ subscribers by the conclusion of the 2024 fiscal year. It makes one wonder if the introduction of an advertiser-based tier at this time was already in the cards, or if the company decided, on a more extemporaneous basis, to use commercial inventory as a needed catalyst to keep on track.

Either way, I believe a new tier will potentially allow the company to hit, or go beyond, the upper range of expected subscribers. It also offers a lot of opportunity… and it makes one contemplate the effect it will have on Reed Hastings over at Netflix (NFLX).

In this brief article, I am going to present several bullet points explaining why this news is a positive development.

Disney Already Knows Advertising

Disney, of course, is already in the advertising-platform business. ABC, Freeform, Disney Channel – they all feature content sponsored by commercial messages.

This means that the company doesn’t have to scale up a learning curve on the subject – something Netflix will likely have to do when it possibly starts an ad-tier in the future.

It also means the company can scale (going back to that word) its existing advertising platform even further, allowing it to offer more opportunities, and more efficient ROI results, for buyers of inventory.

There’s another key advantage: Disney can also promote itself on the service. The company certainly already does, but it can specifically create promos similar to the ones seen on broadcast/linear – besides paid ads from outside parties, Disney could run messages touting its latest films and programs on other platforms; it can also promote the D+/Hulu/E+ bundle.

All of this means Disney gets to practice its greatest strength: synergy. Within the advertising ecosystem, as well as the creative ecosystem, the company will be able to derive significant benefits, and it becomes a great complement to the Hulu platform, which already offers advertising and is getting ready to look at a post-Comcast (CMCSA) future.

Hedging The Premium Subscription Model

Netflix currently is all-in on the premium-subscription model. That could change sooner than expected given a recent comment by CFO Spencer Neumann, but for now, I will assume the streaming giant, which currently counts over 220 million global viewers, will continue to eschew ads.

The great thing about ad-support is that it allows for a streaming-content concern to hedge its bets. Advertising may not always be popular, but it remains a way of reaching those who don’t necessarily want to pay top dollar for programming; it also presumably helps to impact the overall rate of churn. It keeps a media company in the mix of an industry that has always been important in broadcasting, no matter how that broadcasting is accomplished.

Linear has always worked on a hybrid model of subscriber fees and commercials. The fees, of course, are one of the reasons why so many cut the proverbial cord: in the absence of a la carte optionality, consumers balked at the idea of being forced to subsidize channels that were being underutilized. Here, though, with D+, a viewer who proactively subscribes to the ad-tier has demonstrated a willingness to take sponsored messages along with a lower price for the company’s content… for advertisers, this would obviously represent a better environment.

But the hybrid model guaranteed income during periods of recession in the ad business; now, advertising sales will guarantee a hedge against slower subscriber growth. In essence, it may buy Disney some time as it transitions over from a low-volume-content strategy to a high-volume-content strategy. Former CEO Robert Iger famously mentioned that quality over quantity would be the order of the day; times, however, have changed, and under new leader Robert Chapek, the company has increased its slate to include many Star Wars and Marvel projects, along with direct-to-streaming films (e.g., some of the Pixar product). Some readers have commented in past articles that D+ needs more content, so even though the company is apparently already answering this call, I expect even more volume to come the service’s way… again, advertising revenue will help to justify the further investment.

How Disney Can Further Expose D+ To Advertising

Let me pivot over to the concept of exclusivity. Streaming services show all kinds of content, but let’s think about two specific categories: exclusive and non-exclusive content. Here’s how I think of these two concepts (my definitions may not exactly replicate industry meaning). Exclusive content can be originals that are, presumably, intended to stay on a service in perpetuity; an example would be Netflix’s Stranger Things. Non-exclusive would be content that perhaps is licensed from other companies and that premiered on other platforms; think of a property like Modern Family on Hulu. Or, non-exclusive could include a Marvel film that is also available on other networks, or for digital sale/physical purchase.

The heart of D+ is its original content… that’s the main marketing mechanism. Original content, however, ages; over some period of time, its value as a driver of new subscribers seemingly fades as newer programs materialize. I’ve been thinking a lot about new content and how it tends to push older content aside. Even though all content on a service is arguably of value to some segment of the viewership, there seems to be mutual agreement that new movies/episodic is what keeps churn down and first-time signups up.

The specific angle I keep thinking about is: how can original content be utilized properly after it ceases to be new to a platform? This brings me back to advertising, and how Disney has been in the advertising business for years through its multiple platforms. If Disney wants to create another revenue stream for D+, then it can, in addition to creating another tier, bring D+ originals to sister platforms.

After a time period defined by X, old seasons of Star Wars/Marvel shows could be ported over to ABC, Freeform, Disney Channel, etc. A debate would center around the value of X, and here is where I would probably be more aggressive than others: I’d say a period of between three and five years would be long enough to begin the process of promoting D+ on other Disney-owned platforms.

Exclusivity is obviously of some importance, and testing would have to be done to see exactly how long X should be, but a media ecosystem could look at its entire matrix as being exclusive…not just the streaming service itself. Netflix obviously has just its own platform (for now), so its decision not to sell Things to cable channels is understandable. Disney, however, is different, and its acquisitions over the years essentially represent a higher flexibility.

Taking A Cue From Comcast

There’s another consideration to be examined now that Disney has expanded the value parameters for D+. To understand it, we must look at Comcast and its own service.

Comcast runs Peacock, and it has three tiers…you can sign up for free with advertising support, but free does not get you the entire library of content available. There’s a paid version with commercials that does get you all of the content, with the last tier being the most expensive and with no commercial placement.

I don’t think Disney needs to go the free route (that essentially would be covered by the suggestion to place older content on other company-owned linear platforms), but the company could consider a cheaper version with a higher quantity of advertising inventory and a slightly smaller amount of content, or content that might be delayed. As an example, whatever the latest Wars series is, a viewer on this putative tier would see it premiere perhaps several months to a year later.

This probably would be the most controversial idea, but Disney should be open to experimentation because one thing is guaranteed in the streaming wars: change is inevitably always around the corner, and anything can disrupt an industry whose own disruption has gained acceptance in the marketplace and has by necessity become commonplace.

Extra tiers also allow for something else: an easier path to price increases. By presenting different prices to the consumer, the perception is that there is something for everyone, and if a tier becomes too expensive for a consumer at a certain point, then that consumer enjoys the option of retreating to a smaller price point. The ultimate goal is to give a potential subscriber no reason to say no to Disney streaming.

Conclusion

Disney is smart to get D+ into the advertising business, and it would be even wiser to explore an extra tier.

It’s also smart to stay ahead of the curve and choose advertising now as opposed to later. Then again, considering management doesn’t share specific, deep data insights with shareholders, perhaps the curve is coming faster than we expect. Streaming companies presumably are able to project churn trends and new-signups based on the collective amount of engagement; this current move makes me wonder if perhaps D+ engagement isn’t as high as the company wants it to be, thus necessitating a different strategy to keep overall growth of the service going. As intimated earlier in the article, there is a perception (right or wrong) that once a person gets through the Wars, Marvel and Pixar pictures, the need to keep going with the service is lessened. Therefore, an exploration of price elasticity is probably warranted.

Netflix will have to look at advertising at some point, that was always a given, but the Disney move will make this even more apparent to that company’s management team. I say this because let’s be honest: when D+ was announced, it was most likely assumed by Wall Street that Disney would hold the line on advertising for as long as possible, certainly until after the 2024 goal was reached. Pundits could argue that Hulu was already the company’s advertising investment for the streaming industry – why not keep D+ the premium brand, the one for which you had to pay up and on which you would never see sponsored pitches? After all, it was the home to iconic IP, content that would never need any sort of subsidy.

Again, times change; disruption moves fast through marketplaces. For Disney, which I continue to consider a long-term buy on pullbacks (and with all the volatility on Wall Street, I’d anticipate a drop below the 52-week low of $128 before a solid upswing takes hold), its streaming strategy is a big bet on the future of content, and it will need to be altered when necessary.