Disney is ready to lose billions to compete with Netflix – The Fool Motley

Walt Disney (NYSE: DIS) revealed the details of its highly anticipated Disney + streaming service during its investor day. After outlining some of the details of the growth of Hulu and ESPN +, its other streaming services, Disney introduced all of the great content on offer at Disney +.

However, the important thing for investors is Disney's finances, which are moving towards direct streaming to the consumer. The company plans to spend about $ 2 billion in content next year, spending about $ 500 million more in cash. And that's only for Disney +. The company is also spending a lot of money on licensing and content development for Hulu and ESPN +, two unprofitable products.

But Disney is clearly looking to adapt its services as quickly as possible. This is evident in its price for Disney +, at only $ 6.99 a month. The company expects to reach 60 million to 90 million subscribers by the end of the 2024 fiscal year. It also plans to move Hulu to 40 million to 60 million. subscribers and ESPN + to 8 million to 12 million subscribers over the same period.

If Disney can achieve these goals, it will not only have a profitable business generating significant cash flow in five years, but will also be isolated from the downtrend that continues to threaten its core network business. media.

Disney + logo

Source of the image: Disney

Losing billions in the short term

Disney told investors that ESPN + would lose about $ 650 million in operating losses this year and next year, and Hulu would lose about $ 1.5 billion. It did not give any estimate of Disney +'s operating losses, but it should be quite massive for the first few years of service.

Disney + is designed to evolve as Netflix (NASDAQ: NFLX). The company plans to continually expand its range of original content while retaking broadcast rights to some of its best Netflix movies over the next few years. Disney's children's movies and series are among the most searchable content available. Even the head of Netflix content, Ted Sarandos, has already praised Disney movies. "Disney is a brand only differentiated between movie studios.They have key franchises with consumers," he said at an investor conference in 2015.

The wide appeal of Disney's content library means that Disney + can reach tens of millions of subscribers. If Disney did not do everything in its power to reach as wide an audience as possible, it would leave money on the table and not serve investors. In the short term, however, this requires massive spending on content and marketing before you can rely on a large user base.

Looking at all the company

When calling Disney's first quarter results, McCarthy provided details on Disney +'s impact on other segments. It added that the loss of license revenues would result in a $ 150 million decrease in operating profit this year in its film studios and media networks. This number will increase as more and more Disney content emerges from Netflix, but Disney + will pay license fees there.

Disney expects to spend about $ 1.5 billion in license fees next year and about $ 2 billion in 2024. These are real costs for Disney + service, but because of the internal nature of the transaction, have the money to pay these licensing expenses. Disney is simply adjusting some great books to indicate a credit for movie studios and media networks and a debit for its direct sales businesses to consumers.

It's a much stronger position than Netflix, which has always leveraged the debt market to develop its services. Last year, the company spent $ 3 billion in cash, investing in thousands of hours of original content. The good news for Netflix investors is that the company expects to have reached the peak of cash consumption.

Disney will always spend a lot of money on original content and marketing to launch and resize Disney +, but the ability to license content from itself gives it a significant advantage over Netflix. This gives Disney a very convincing product at launch, allowing it to adapt quickly and efficiently. It should be able to cover marketing costs and original content much sooner than 2024, which would reduce the pressure on cash flow.

Disney +, which will have between 60 and 90 million subscribers, is expected to be profitable by 2024, despite spending of about $ 4.5 billion. Subscribers beyond this level should produce very high incremental increments.

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