The Great OTT Battle of Content vs. Distribution.

Key takeaways from Disney Investor Day 2020.

The Walt Disney Company hosted it’s Annual Investor Day on 10th Dec 2020 and the event was focused on company's direct-to-consumer streaming services comprising of Disney+, ESPN+, and Hulu.

It gave plenty of insights into the current business, traction, and future plans. This will certainly stir up the debate again on what does it take to win in the global OTT battle? Is it Content or Distribution or a combination of both? If one were to go by the reaction of the DIS stock price which hit a record high on Friday closing, it seems that Content-led-Distribution strategy is in pole position for now.

Some of the key takeaways from the Investor Day presentation include:

1 = Massive Upgrade in Guidance for Paid Subscribers

# of paid subscribers across platforms (mn)

Compared to the FY24 guidance that was given in April 2019 (barely 21 months ago), Disney has already beaten most of the paid subscriber numbers in Dec 2020. This has meant that there has been a massive upgrade to the FY24 guidance, and by as much as 3.3x in case of Disney+ and about 2.4x overall for all platforms. Essentially, company believes that the momentum will continue well beyond the pandemic and adoption will continue to rise in existing and new markets driven by some of the factors that I highlight below.

2 = Growth Across Entertainment, Live TV and Sports Platforms

Disney+: Disney+ had managed to garner 10mn+ subscribers on the very first day of its launch in major markets (primarily US, Canada, Australia, UK). Some of the drivers of growth include partnerships with Amazon Firetv, Google, Roku and telecom providers like Verizon, Deutsche Telecom and Jio here in India.

A large part of the growth in India is also attributable to Indian Premier League (IPL) being available on the Disney+ app and content localization strategy by bundling Star TV. From the learning in India, the Star+ content is now going to be bundled across a number of other markets over the next few quarters.

Disney+ will launch in markets including Eastern Europe, South Korea, and Hong Kong in FY21.

Hulu: Hulu, the most premium offering from Disney platform has also seen almost a 3x growth in the last 3 years. Hulu+Live TV (no ads) packages are priced at US$70.99/month, but entry level packages start for as low as US$5.99/month.

Hulu+Live TV has 4mn+ subscribers and is now amongst the Top 5 pay TV providers. On the flip side, it also has 92mn ad-supported viewers on a monthly basis!

ESPN+: Per Disney, ESPN+ is now the #1 sports direct-to-consumer service and boasts of coverage of 10,000+ events. It has also seen a 3x subscriber growth and claims to cover 92 of the Top 100 most-watched telecasts.

3 = Pricing Trends and Outlook

average monthly revenue per paid subscriber (US$) as of Q4 FY20

The Q4 earnings release of Disney gives a sense of average pricing across all the offerings. Disney+ has the most competitive pricing at scale while realizations of Hulu hover at around US$20/month. However, the company has indicated that it will move US pricing for Disney+ to US$7.99/month by Mar 21 and Continental Europe to Euro 8.99/month, both of which will be a significant uptick for the business.

India pricing continues to remain very aggressive at US$0.4–1.7/month, which has resulted in Disney+Hotstar contributing 30% (~26mn) of the overall subscriber base while pulling down the average pricing for the company. Netflix, on the other hand, is estimated to have 4.6 million paid subscribers in India, according to research firm Media Partners Asia.

At the current pricing and subscriber numbers, Disney platforms are already tracking an annual subscription revenue run-rate of US$15bn in literally no time. To put that in perspective, Netflix’s TTM revenue is about US$24bn from 195mn paid subscribers. It is pertinent to note that Netflix’s average revenue per user is at about US$10/month, placing it much higher than Disney+.

4 = Outlook on Content Strategy and Expenses

One of the largest expense items for all OTT providers is for producing or acquiring high, quality proprietary content. In Apr 2019, Disney+ had guided a yearly content spend of US$4bn by FY24, but has now more than doubled that to US$8–9bn. At the same time, the company’s overall content expense guidance is now at US$14–16bn in FY24.

Interestingly, Disney+ will soon become home to 10 Marvel series, 10 Star Wars series, 15 Disney live-action, Disney Animation, and Pixar series and 15 Disney live action, Disney Animation, and Pixar films. That’s a massive investment into the direct channel and giving it priority over channels.

Disney will also use 20th Century Studios and Searchlight to create original movies exclusively for Hulu that will further augment the offering vs pay TV.

Lastly, ESPN+ has signed a deal with SEC to add the Southeastern Conference (college football and basketball games) from the 2024 season on its platform.

Disney has four distinct launch strategies for its proprietary content i.e. Theatrical 1st, Simultaneous (same day release), Direct to Consumer (free), Direct to Consumer (Premiere Access). This is different compared to Warner Bros (with 12.6mn paid subscribers) who had announced that it will release the 2021 movies simultaneously on it’s OTT platform and theaters.

5 = Path to Profitability

The financial outlook w.r.t profitability of each of these platforms has also been pre-poned slightly now. Disney+ is expected to be profitable by FY24 and will have peak losses by FY21 (vs. FY22 projected earlier) and Hulu/ESPN+ are expected to be profitable by FY23 with Hulu’s guidance advanced by a year.

So while the pandemic hit the Parks and Studio Entertainment business of Disney hard, the Direct-to-Consumer business has certainly pulled it enough on the positive side. The full stack strategy of Disney that is led by high quality content-first and followed by distribution-through-partnerships is definitely working. It also allows Disney to monetize content costs across multiple products and channels, thereby giving it tremendous operating leverage.

Disney’s fightback against Netflix in the OTT space reminds me of a highly acclaimed quote from the Avengers series:

“This is the fight of our lives. We are going to win. Whatever it takes.”- Captain America

And looks like they are certainly on the path to winning for now.

For those interested in the full video and presentation from the Disney Investor Day 2020, please click here.

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Nothing lasts forever, so live it up, drink it down, laugh it off, avoid the BS, take chances, and never have regrets!

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Vishal Katkoria

Vishal Katkoria

Nothing lasts forever, so live it up, drink it down, laugh it off, avoid the BS, take chances, and never have regrets!

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