Why all the fuss about Disney+?

Disney CEO Bob Iger has said on several occasions that the launch of Disney+, the company's new direct-to-consumer subscription VoD service, represents the biggest event in his tenure. Furthermore, the acquisition of the entertainment assets of 21st Century Fox, for $71.3 billion – Disney's biggest deal ever – was stated to be in support of the launch of Disney+.

However, by Disney's own projections, the revenues expected from this product offer, while significant, do not at all support the importance of the offering as stated above. Even using the high end of its projections, Disney+, in 2024, will produce less revenue than ESPN probably does today, and will likely be less than 10% of Disney's total revenues for that year.

It's a new business model
So, what gives? I believe there is something much more basic than a product launch going on. The answer lies in the category itself: direct-to-consumer. This is all about Disney shifting its entire business, over time, from essentially an indirect model (where Disney's directly served customers are only known in aggregate, or at best case with limited and piecemeal individual knowledge) while other customers are served primarily by distribution partners. The new DTC paradigm is a model where Disney knows exactly who each customer is, and more importantly, what he or she wants.

I believe that by making this shift to acquiring intimate and comprehensive knowledge of each customer's wants and needs, Disney not only succeeds in the streaming business but also, and more importantly, supercharges the rest of its business – from parks to studios to various products. This overarching strategy presents an opportunity to tailor the experience for each and every customer Disney has, generating significant incremental revenue, while also increasing customer satisfaction in the entire Disney ecosystem.

An increasingly common playbook
There are a number of companies already using this approach by tapping into deep learning and enormous user scale. Their phenomenal success has probably been what has made this approach attractive to Disney.

Using a technique I have coined Persistent Contextual Hyper Personalization (PCHP), these companies develop an extremely deep understanding of the wants and needs of each and every one of their customers, and use it to deliver a superior and, in many cases, unmatchable offer. Since deep learning needs data to "learn," the bigger the user base, the better the offering. Alphabet (Google's parent company), Amazon, Apple and Facebook all use this technique to power themselves to be among the biggest businesses on Earth. Facebook, the smallest of these (based on market capitalization), has been a public company for a mere seven years, yet has a market cap that's more than double Disney's! This is the business model Disney is transforming itself to adopt.

Expect Disney to do everything it can to grow its DTC subscriber base as rapidly as possible. This is why the price point for the service seemed so shockingly low when announced, and why Disney is discounting even further to lock customers into multi-year deals.

The drive behind the low price, in my view, is not to strike a blow to Netflix, as many have concluded, but rather to maximize user growth to fuel the shift towards a PCHP-based business structure. Netflix, with no business of value other than streaming, and hence nothing to supercharge, becomes an incidental casualty here if price points stay at current levels.

Disney's fiscal Q1 2020 results last week highlighted the launch of Disney+, noting that the service had already "exceeded even our greatest expectations." This was despite some technical issues at launch. [Ed note: Disney+ launched on November 12, 2019, and now has about 28.6 million subscribers.]

During the analyst call, Iger highlighted Disney+ as one of three major successes, along with the phenomenal results at Studio Entertainment and a successful launch of the Star Wars expansion at Parks.

The price is (still) right
Consistent with the premise of subscriber growth as the preeminent goal, one of the most interesting reveals of the call was the rapid subscriber growth to 26.5 million paid subscribers to Disney+ with an ARPU of $5.56. Half of these subscribers were acquired directly, 20% through Verizon's giveaway to unlimited wireless subs (and new home broadband subs) and the remaining 30% through distribution partners such as Roku and Apple. Despite this extremely strong subscriber launch, there was no indication of any planned adjustment to their long-term view of 60 to 90 million subs worldwide by 2024 and initial profitability that year. Disney also stated on its call that, at least for now, it was "not focused on price at all" for its new subscription streaming service.

One of the future growth areas highlighted was in India, with Disney piggybacking on its acquired Hotstar VIP service and Hotstar's rights to professional cricket matches. It's worth noting that in the digital music space, Amazon and Apple, which sell their service in the US for $9.95 per month, are both charging less than a dollar a month in India and yet are struggling to compete with local provider Gaana, whose basic, ad-free service costs $0.35 per month, with a one-year commitment. (Gaana also offers a free, ad-based version of the service.) Highlighting this market lends credence, in my view, to the importance of subscriber volume over streaming profitability. With two thirds of Disney+'s sub base predicted to come from international markets, long-term ARPU levels may be quite low.

The launch of Disney+ is the catalyst and enabler of a fundamental shift across the many Disney business units to use direct customer knowledge to produce a highly personalized and valuable offering. This is the true reason why such a fuss is being made about Disney+.

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— Paul Connolly, Owner, Connolly Network Insight

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