On Feb. 11, the Walt Disney Co. (DIS, Financial) reported earnings for its first fiscal quarter of 2021. While analysts anticipated a loss of 41 cents per share for the quarter, Disney blew away expectations by posting a profit of 32 cents per share.
Of even greater surprise, however, was the astonishing growth in Disney's streaming business. Indeed, it appears that the House of Mouse may soon challenge Netflix Inc. (NFLX, Financial) for its position as the world's largest streaming platform.
Subscriber tsunami
When Disney+ launched in 2019 to much fanfare, Disney set its eyes on achieving between 60 million and 90 million subscribers by 2024. As it turns out, the company was far too modest with its projections as the service already boasts a whopping 94.9 million subscribers at the end of 2020, a year-over-year increase of 258%.
Disney's other streaming platforms also saw massive growth in 2020. Subscriptions to ESPN+ rose 83% from the previous year to 12.1 million. Hulu, meanwhile, saw total subscriber growth rise 30% to 39.4 million. Unsurprisingly, CEO Bob Chapek was quite ebullient about Disney's streaming prospects in the company's earnings press release:
"We believe the strategic actions we're taking to transform our Company will fuel our growth and enhance shareholder value...We're confident that, with our robust pipeline of exceptional, high-quality content and the upcoming launch of our new Star-branded international general entertainment offering, we are well-positioned to achieve even greater success going forward."
In the eyes of a growing number of observers, Disney's constellation of streaming offerings represents a direct challenge to Netflix's streaming domination. Netflix, which boasted 203.7 million global subscribers at the end of 2020, is still well ahead, but its lead has been shrunk considerably. Moreover, the incumbent streaming leader managed to grow its subscriber base only 22% in 2020. Over the same period, Disney's total paid subscriber count across all its platforms rose nearly 57%, 63.5 million to more than 146 million.
Churn and burn
While Disney+ experienced explosive subscriber growth when it launched, many analysts and commentators openly wondered whether it could retain subscribers after free trials and discounted rates expired. Indeed, fears about Disney's churn rate rate have been top of mind in most analyses of its streaming offerings.
Chief Financial Officer Christine McCarthy addressed the issue during the first-quarter earnings call on Feb. 11, telling analysts that the churn rates across Disney's streaming platforms have been highly encouraging:
"We are very pleased with what we've seen so far on the level of churn. And as our product offering matures and we put more content into the service and our subscriber base becomes more tenured, we expect to see our churn rates continue to decline. So in regard to the specific churn related to the anniversary of the Verizon launch promotion from last November 2020, we're really happy with the conversion numbers that we have seen there going from the promotion to become paid subscribers. We also have that price increase that consumers know about and they're expecting. But we're very comfortable with the price-value relationship that we're offering. So we think that the increase will be well received. And we believe that our current and future pricing offers attractive value to consumers."
Monthly revenue per Disney+ subscriber in the first quarter was $4.03, a 28% decline from the same period a year prior, a drop due in large part to the rollout of a low-cost option, Disney+ Hotstar, for the Indian and Indonesian markets. Monthly revenue per subscriber of ESPN+, meanwhile, rose 1% year over year to $4.48. Hulu, on the other hand, enjoyed impressive per-subscriber monthly revenue growth, especially for subscribers to both live television and subscription video on demand, which surged 26% year over year to $75.11.
My verdict
Disney's rapid penetration of the streaming market has furnished the company with a powerful new channel to leverage across its sprawling media empire, as analyst Ed Borgato explained on Feb. 11:
"In home, as a service, Disney+ will be more than streaming access to the library. It will be a portal to real life experiences. Families aren't customers, they are in a relationship. Munger once saidDIS was like drilling oil and then putting it back in the ground to take again."
There are already signs that Disney's streaming strategy is paying off, as overall direct-to-consumer revenue increased 73% to $3.5 billion in the first quarter, while its operating loss from the segment decreased 57% to $466 million.
In my assessment, if Disney can continue to see low churn as it raises prices, it should be able to turn its streaming business into a profit center rather than a loss leader. Moreover, if Disney can maintain its current subscriber growth rate through 2021, it may soon be in striking distance of surpassing Netflix.
Disclosure: No positions.
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