Disney's CEO Robert Iger delivered earnings last Tuesday and the stock slumped about 4 percent in response the next day.
The biggest news to come out of the earnings was that Disney plans to launch two over-the-top streaming services in the next two years. One will be an ESPN sports service primarily made up of tier two sports like the NHL and MLS in 2018; and the other an entertainment service made up of Disney and Pixar movies as well as other Disney kids' content in 2019.
Disney also said it would no longer share new movies on Netflix starting in 2019, and will use BAMTech — of which it now has majority control — to power both planned and future streaming services.
Disney bears like Rich Greenfield of BTIG, who has a sell on the stock, immediately ripped into Iger's moves, saying Disney was too late to move into OTT, as it had already been enabling Netflix for years by licensing content to the streaming giant. Greenfield complained that Disney was passing up $350 million a year in "high margin" revenue for licensing its content to Netflix to opt for this risky new untested service.
I've also read other Disney bears wring their hands about Disney's prior failures with Movie Beam — a nascent streaming service that failed in 2003 — and DisneyLife — a U.K.-only streaming service sold by cable companies that failed in 2016.
I think the bears underestimate the power of Disney's content to boys and girls around the world. If you can only get "Frozen 2" or "Toy Story 4" on the Disney OTT service and you're a parent, what do you think the chances are that your household is going to subscribe? I would say pretty high.
I asked a Twitter poll last week of my followers whether they expected their households to subscribe to Disney's OTT service:
Twenty-eight percent said they would. I expect that actual number in 2019 will be higher once people see the service.
Now, most of my followers are in the U.S. (where presumably the service will launch) but perhaps the respondents over-index as tech-savvy. So, next I asked how many currently subscribe to Netflix:
This time, 77 percent of respondents said yes.
We know there are 126 million households in the U.S., where Netflix currently has about 50 million subs. Therefore, my survey respondents are about twice as likely to subscribe to Netflix as the general population.
If that holds true for my question about their likelihood of subscribing to the Disney OTT service, it implies that Disney can hit 18 million subscribers in 2019. That's a lot more than HBO Go or CBS All-Access.
Who knows how Disney will price it? Let's assume it's on the low-end at $5 a month (even though Disney typically prices at a premium). With 18 million subs at $5 a month, that's a $1 billion a year run rate — or roughly 3x the annual amount that Disney is getting from Netflix.
It's true that Netflix money is high margin but Disney has BAMTech. It will be able to make a lot of margin on $1 billion a year from this one service — certainly a lot more than it's getting from Netflix.
Even better, it won't be enabling a competitor.
Imagine if Disney hadn't launched its own Disney Channel in the '80s and just licensed its content to Nickelodeon. This is absolutely the right strategic move for the company to take — and it will make a lot more money from it over time.
Is it too late for Disney to catch up to Netflix? Disney doesn't have to be Netflix, just like HGTV doesn't have to be Showtime. They serve different audiences.
As a father of young kids, let me assure you, there will always be an audience for Disney's past and future content. Disney OTT will just be the modern-version of getting it to them.