Breaking Wars in Streaming: The Market Guide – The Walt Disney Company (NYSE: DIS)


by Daniel Shvartsman

welcome to The market guide! This weekly newsletter features the authors of our Marketplace who are focusing on one of the topical topics of the week. The Marketplace is our platform for authors to organize services that provide research, advice and insights to investors, as well as lead investor communities. So we thought this newsletter would be a natural way to share some of these ideas and tips on specific topics. We will also highlight related articles and readings of our authors over the past week, as well as any development on the market as a whole.

One of the big stories this week was Disney's big announcement and its impact on the video streaming industry. Disney (DIS) announced Disney + last Thursday, making headlines with its competitive prices and ambitious growth targets. Netflix (NFLX) sold in the wake of the announcement and announced a profit on Tuesday, which provoked a mixed reaction. And AT & T (T) has again raised its head when its newly acquired channel, HBO, released the Game of Thrones premiere of the season, which would be a show of force, except for the last season of the successful series.

What to do with all this? We asked a group of Marketplace authors how they broke down the news. Our panel:

What is your biggest impact on the Disney + deployment last week?

Andres Cardenal, CFA: Disney makes a strong gesture with Disney +. The subscription price of $ 6.99 a month or $ 69.99 a year is very competitive, and Disney + will also include exceptional content quality. Most importantly, management has stated that Hulu is the fastest growing streaming service in the United States with 23 million paying members, while ESPN + has 2 million paid subscriptions, the double the number recorded five months ago. In summary, Hulu and ESPN + are growing fast and Disney + seems well placed to succeed.

Chris Lau: Disney has erased and rightly rebate markets imposed on shares after the Disney + announcement. He will monetize his huge library of valuable IP addresses on a streaming platform. But the biggest winner is Amazon (AMZN), which currently hosts Hulu and will host Disney +.

Check out this job offer posted on April 10th. It states: "The Polaris team, particularly our content engineering team, is looking to hire an associate software engineer in New York for Disney's streaming services."

Disney + will likely attract many subscribers because of its low price and attractive and reputable content offering.

Joe Albano: Disney has a difficult battle. There will be easy solutions, but marketing and pivoting in some areas, such as reducing licenses to other banners (which is accretive, generating higher margins) will be a multi-pronged financial battle. The market takes a little bit of advance on itself.

Sleuth Dividend: "Disney Plus" is a big name and an extension of their iconic brand. The move of Disney clarifies the race of horses that develops between the communication centers. Just as the United States had three major television networks for several decades, we may be moving to three or four mega-media. Potential mergers and acquisitions remain to be determined, but potential constellations will continue to grow. AT & T has absorbed DIRECTV and Time Warner to develop distribution and content generation, with the goal of increasing subscription and advertising revenues. Will Disney overwhelm Netflix or could it form a partnership? Or will Amazon buy Netflix to compete with AT & T and Disney? Will Alphabet Acquire Both CenturyLink (NYSE: CTL) and Lionsgate (NYSE: LGF.A) (NYSE: LGF.B)? There are innumerable variants of potential alliances.

Source: Engadget

Do you think the goal of subscribers for 2024 (60 million subscribers) is realistic? Too ambitious or sandbags?

Andres Cardenal, CFA: This type of goals always has a significant margin of error, but Disney has what it takes to reach and even exceed such a target. Content quality and brand recognition are key competitive strengths in the industry, and Disney + is quite unique in this area. The teams working on content for Disney + are for the most part the same teams that have created tremendous success for Disney, Pixar, Marvel and Lucasfilm over the years. The platform therefore seems very promising in terms of content creation.

Chris Lau: The strong brand recognition and strong demand for Disney Channel, Disney movies and Disney's beloved characters will attract subscribers. 60 million is only 12 million additions per year for the next five years. Netflix started with 23 million in the third quarter of 2011, but did not own any of Disney's document library. Therefore, this forecast is too conservative.

Joe Albano: This is probably fairly accurate, although the growth must be international since Netflix has only reached $ 60 million in the United States. It is therefore a realistic and overly ambitious goal, which plans to launch a worldwide deployment in 2021 – it only remains in reality for three years to take over. 20 million US subscribers by 2021 would be a difficult goal, but we would not be surprised to see it. With 7 million dollars a month and 20 million submarines, this will represent a little more than 2% of the contribution to the turnover in 2021 in the first quarter (18,51 billion dollars). The market takes a little bit of advance on itself.

Sleuth Dividend: The industry is increasingly moving towards individualized content based on each subscriber's preferences, a model developed by Netflix that demonstrates the potential of personalized ads. The 5G will facilitate this personalized movement, making the desired content available 24 hours a day, 7 days a week, on a variety of devices. All actors have a global vision and each company (or consortium) will compete for its share of the global audience. Disney's goal of 60 to 90 million subscribers seems realistic. The merger of the industry into partnerships and / or mergers is occurring at the perfect time to capture 5G deployment around the world. Hans Vestberg, CEO of Verizon (NYSE: VZ), regards 5G as the "fourth industrial revolution".

Netflix announced a profit this week and was initially sold, following a sale to Disney news. What do you think of his positioning as the competition warms up?

Andres Cardenal, CFA: To succeed, Disney does not necessarily need to kill Netflix, the streaming market is large enough to allow Disney, Netflix and others to succeed in the long run. The main losers of the streaming revolution will be traditional television players that adapt fairly quickly to the new paradigm of the industry.

Elazar Advisors, LLC: All new entrants have the line of sight on Netflix. If you noticed that Netflix has just announced gross margins that have deteriorated in the last two quarters. The cost of the content entails that. Disney, Apple, Amazon are all there to offer content, which increases the cost for Netflix to generate new content, which is the name of the game. So, while Netflix revenue and the number of subscribers were stellar with a lack of competition, the first competitive index appeared in these gross margin figures. Because of this, the earnings story seems about to take a negative turn, which can lead to significant cuts in large funds.

Chris Lau: Netflix will have to think twice before raising prices. Its pricing power is limited in emerging markets such as India. Now that Disney + earns less, subscribing to a Netflix subscription will slow down. Netflix customers may have both short-term subscriptions, but the long-term Netflix term is less clear.

Joe Albano: Its positioning is good, it has just experienced the highest subscriber growth ever recorded in a single quarter. The competition does not come mainly from other streamers, but from other sources of distraction and management has rightly called a non-broadcast competition like Fortnite, which is ubiquitous in Generation Z. Households can have multiple streaming subscriptions, I use them and I use them all. Let's not forget that everyone shares everyone's Netflix account. Amazon Prime is a bit harder to share because it means the whole Premium, not just streaming, so it's less likely to let friends open up to your shipping benefits in 2 days. Netflix has an advantage there. Expect Disney + to have the same advantage – or problem – depending on what you are thinking about.

Sleuth Dividend: This is just the first step of the race. Disney is now out of the door in a domain dominated by Netflix. An initial negative reaction to the great competition seems quite normal. Netflix could partner with someone (Amazon, Alphabet, Apple, etc.) to take on the Disney challenge. Or, Netflix could become part of the Disney family, anti-trust fears are damned.

Is Game of Thrones' final season a reminder of the strength or weakness of AT & T?

Andres Cardenal, CFA: Game of Thrones will draw positive attention to the AT & T stock, but the company has a considerable revenue base of nearly $ 170.8 billion a year. It is therefore not easy to change help in terms of total financial performance. Ultimately, in the telecommunications and entertainment sectors, AT & T operates in mature industries with significant risk of disruption, which significantly limits the upside potential of the AT & T stock.

Chris Lau: Game of Thrones is a positive catalyst that validates the acquisition of WarnerMedia by AT & T. Still, the markets are pioneering. My DIY Marketplace portfolio recommends AT & T stock, but I had already forecast a good season for HBO in 2019. AT & T's short-term priority is to reduce its debt levels.

Joe Albano: This is back in the spotlight for GoT – for the last time. AT & T is going to need another success like GoT because GoT is disappearing from the circle of friends conversation and hype. This is not reason enough to keep an HBO subscription, which is only a source of unique content, smaller than Netflix or Disney +. No factor here to help T, it's a weakness.

Sleuth Dividend: It reminds us that AT & T has joined the race. But it is a congested ground. Everyone is fighting for the best technology applications, for the benefit of the "first come" and for advertising and subscription revenues.

What do you look most during the rest of the year in this space?

Andres Cardenal, CFA: The focus will be primarily on players such as Netflix, Disney, Amazon and Apple (AAPL). However, Google (GOOG) (GOOGL) has a lot of potential in this market in the medium term. YouTube has more than 1.9 billion monthly users and over one billion hours of video are viewed on YouTube each day. Google is just starting to monetize YouTube. It is therefore a major player to watch.

Chris Lau: We are watching Viacom (VIAB), CBS (CBS), Comcast (CMCSA), AT & T and Netflix. It is unlikely that VIAB and CBS will maintain recent gains unless the family is willing to undertake mergers and acquisitions to consolidate operations.

Joe Albano: I will keep my ears open to chat in the circle of friends and family about Disney +. Until now, no real buzz. We will see, in November, how hot it is and if the temperature drops or if Disney sells it well. Netflix is ​​the leader, everyone is catching up. There are formidable competitors, but no one has changed the armor of Netflix yet.

Sleuth Dividend: I am looking for a relatively quick formation of alliances. It will be intense competition and it will be expensive. If everyone competed, the costs of content and infrastructure would be astronomical. Companies that make the smartest alliances at the right time will benefit quickly. Apple is in the catbird seat with its great payment capacity. Does he choose a partner or an acquisition target? Or does it leave the TV and buy Tesla?

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Podcast of the market round table

Our roundtable podcast includes 30- to 45-minute interviews with Marketplace writers on investment strategies, their investment backgrounds and developments, as well as current ideas or insights. interesting views of the market. We presented two podcasts this week:

Andres Cardenal, CFA (involved in our discussion on Disney above) joined Nathaniel E. Baker to explain why emerging markets could arise and, more generally, the strength of American and American technology.

J Mintzmyer, of Value Investor's Edge, discussed with Jonathan Liss about shipping and intrinsic value, how the sector plays a role in investment style and the shipping division in eight different sectors.

Thanks for reading and have a good weekend, whatever your vacation on your calendar!

Disclosure: I / we have / we have no position in the actions mentioned, and we do not intend to initiate a position within the next 72 hours. I have written this article myself and it expresses my own opinions. I do not get compensation for that. I do not have any business relationship with a company whose actions are mentioned in this article.

Additional disclosure: Andres Cardenal is long DIS, AMZN and GOOG. Elazar Advisors has no position in the shares mentioned and considers Netflix as neutral. Chris Lau has no positions on the mentioned actions. Joe Albano is long T. The compiler of this newsletter, Daniel Shvartsman, is long DIS.

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