Disney (NYSE: DIS) hit a home run with Disney+. It's proven much more popular than anyone anticipated, leading management to raise its subscriber outlook not just for its flagship streaming service, but its entire portfolio of direct-to-consumer products. It now expects to reach as many as 350 million total subscribers across its streaming services by 2024.
Some have pointed to Disney's low price point as a big reason for those monstrous subscriber numbers. But Disney should see its U.S. revenue from direct-to-consumer streaming services reach levels comparable to, if not surpassing, Netflix (NASDAQ: NFLX) as soon as 2022.
A still from The Mandalorian Season 2. Image source: Walt Disney.
Investing for additional growth
While Disney came out of the gate hot with Disney+, there was concern that it couldn't build on the strong foundation of early adopters it managed to sign up soon after its launch. Disney did an excellent job branding the service and making sure consumers understood what Disney+ has to offer. As such, many people knew whether it was something that appealed to them before the product even launched. And with 10 million sign-ups on day one, it had very broad appeal.
While Netflix is proving it's still possible to grow a subscriber base even when its product is practically synonymous with subscription video on demand, its growth has slowed considerably over the last few years.
But Disney decided to double down on its early success by investing more in content. It laid out over 100 new films and series that will be heading toward its streaming service at its investor day earlier this month. CFO Christine McCarthy says the company now plans to spend twice as much on content for Disney+ as it originally expected in April of 2019, with the goal of expanding the appeal of the service.
The big investment in content should lead to greater penetration of the market for Disney. What's more, the bigger content library should support regular price increases, the first of which will come in March next year. It certainly won't be the last price increase either, as Disney follows in the successful footsteps of Netflix. Netflix has raised prices five times in six and a half years.
The price increases combined with the broader user base will translate into about $1 billion in additional revenue in 2021, according to analysts at eMarketer. That number will grow by another $1.4 billion in 2022, reaching a total of $4.2 billion in annual revenue that year.
That still pales in comparison to Netflix's $11 billion-plus in revenue from its United States & Canada region over the last 12 months. And that number continues to grow, especially after Netflix just raised its pricing again in both countries. Disney, however, also has two other successful streaming services in the U.S.
Hulu and ESPN+ are a big deal
Disney also thinks there's a lot of growth left for Hulu and ESPN+, both of which are exclusive to the United States. By 2024, Disney thinks Hulu will have between 50 million and 60 million subscribers, while ESPN+ will count another 20 million to 30 million subscribers.
Much of ESPN+'s growth will stem from the growing appeal of the bundled package Disney offers, which includes Disney+, Hulu, and ESPN+ for $5 less per month than subscribing to all of them separately. While that might result in lower revenue per subscriber, it still produces greater customer lifetime value. The bundle increases subscriber retention while providing additional ad inventory and pay-per-view upsell opportunities for sports fans.
Meanwhile, Hulu's hybrid subscription and ad-supported model ought to continue to see improvements in revenue per subscriber without the need for price increases for the on-demand service. Indeed, Hulu should see increased ad prices for its premium ad inventory, and it can fully control ad load to maximize revenue. It could also see a boost from Hulu + Live TV as more consumers shift to virtual pay-TV providers.
All told, the two services should add another $8.1 billion in revenue in 2022. That's up from the $3.5 billion the two services generated for Disney in 2019, according to eMarketer. Combined with Disney+, that's $12.3 billion total. While that's still less than eMarketer's expectations for Netflix, $12.95 billion, it's a remarkable feat for the media company.
eMarketer's analysis suggests Disney's monstrous subscriber outlook and expectations for profitability starting in 2023 or 2024 may still be conservative. McCarthy said investors should expect Disney to spend between $14 billion and $16 billion on content in 2024. While there are additional operating expenses to consider, if Disney's generating $12 billion in the U.S. alone by 2022, it could turn a profit on streaming much sooner.
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