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Disney's Streaming Service Won't Compete with Netflix

Disney (NYSE: DIS) CEO Bob Iger gave a few more details about Disney's forthcoming direct-to-consumer streaming service during the company's fourth quarter earnings call. The streaming service will include films from Disney, Pixar, Marvel, and Star Wars. The movie giant also plans to produce five original films per year exclusively for the streaming service, as well as a number of original series based on Disney's winning films.

Iger also said Disney will price the service "substantially below" Netflix's (NASDAQ: NFLX) pricing. He conceded that while the company owns a lot of high quality content, there will be substantially less volume on the new service compared to Netflix. Iger's goal is to attract as many fans to the service as possible.

He also practically denied that the new service would be a "Netflix killer." Even with Disney's attractive content library, Netflix has a budget and a brand that make it tough to overcome. The good news for Disney investors is that there's absolutely no need for Disney's direct-to-consumer offering to compete with Netflix.

Image source: The Walt Disney Company

Multi-streaming households

The number of households subscribing to multiple streaming services is growing. A Hub Entertainment Research survey found 38% of streaming households have more than one service, while a Leichtman Research Group survey put the number at 51%.

Netflix is often used as a complement to a traditional pay-TV subscription, similar to other premium cable networks. And when consumers cut the cord, it opens up a significant portion of their budget to subscribe to more streaming services. Disney could be a big beneficiary of cord-cutting if it provides a strong value. Considering the plans to offer the service at a price "substantially below" Netflix, that very well could be the case.

In fact, Disney's service could be a great complement to Netflix. Netflix has partnered with Disney's Marvel to produce several series since 2015. Netflix subscribers looking for more Marvel content could be inclined to subscribe to Disney's service for another $5 per month or so.

What does it mean for Disney?

The biggest drag on Disney's profits has been its Media Networks segment. Operating profits for the company's largest segment fell 11% year over year in fiscal 2017 as more consumers cut the cord. ESPN is the biggest culprit for declining operating income: Disney saw contractual rate increases for its licensed sports content, while total subscribers fell, taking ad revenue with them. ESPN holds several long-term contracts with sports leagues, which will continue to drag profits down as more people cut the cord.

The forthcoming direct-to-consumer service from Disney will provide a hedge against cord-cutting and cord-shaving. Additionally, Disney will launch an ESPN-branded streaming service to offer some ESPN content to non-cable subscribers.

Disney should be able to produce strong incremental profits from its streaming services. While the company will forego revenue from licensing its film catalog to Netflix, it will require minimal incremental content expenditures for both its Disney and ESPN streaming services. Additionally, its stake in BAMTech provides easy access to the streaming technology required for a direct-to-consumer streaming service. HBO and use the same technology.

Streaming ought to provide relatively high margin revenue that can help offset the decline in Disney's cable network business. As more people cut the cord and look to piece together their own entertainment bundle, Disney's compelling content (and potentially attractive pricing) should bring in plenty of subscribers.

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Adam Levy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix and Walt Disney. The Motley Fool has a disclosure policy.

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