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Disney+ to Rake in 8M Subs 'Out of the Gate' – Analyst

Through a mix of aggressive promotions and discounts, service bundles and distribution partnerships, Disney+ is poised to snap up 8 million subscribers before the end of 2019, according to a revised forecast from MoffettNathanson.

After locking in those subs "out of the gate," Disney+, the over-the-top streaming service set for a November 12 launch at $6.99 per month, will rake in 18 million subscribers worldwide by the end of Disney's fiscal 2020, analyst Michael Nathanson forecasted in a report distributed Wednesday. Disney has already predicted that Disney+ will notch between 60 million and 90 million subs by fiscal 2024.

Driven by franchises and properties such as Pixar, Star Wars, Marvel and National Geographic, Disney+'s content will, of course, be a big draw. But Nathanson believes that Disney's promotional and marketing mix will also drive some big numbers. Among the examples: a discounted three-year pre-payment of $141 (or $3.92 per month); a three-year discount offer for Disney Parks guests (equating to $4.72 per month); a bundle also featuring Hulu (with ads) and ESPN+ for $12.99 per month; and the just-announced mobile/home broadband distribution deal with Verizon.

Disney's DTC business could have 163 million subs worldwide, led by 76 million for Disney+, according to a revised forecast from MoffettNathanson.
Disney's DTC business could have 163 million subs worldwide, led by 76 million for Disney+, according to a revised forecast from MoffettNathanson.

Verizon and Disney didn't disclose the financial terms of the deal, which provides a free year of Disney+ to all new and existing 4G LTE and 5G customers on unlimited wireless tiers, and to new Verizon Fios Home Internet and 5G Home Internet customers. But Nathanson assumes that Verizon is getting a volume discount off the annual rate card of $69.99.

Assuming that half of Verizon's 33.9 million consumer accounts are eligible for that offer, Nathanson sees 17.7 million as a "fair estimate of eligibility." And if half of that group opt in for the offer, Disney+ stands to gain nearly 9 million US subs in the first year from Verizon alone, Nathanson wrote.

"There are likely more of these promotions taking place ahead of the November 12 U.S. launch date given all the various Disney consumer touchpoints," the analyst added.

Nathanson believes his revised, initial subscriber estimates for Disney+ are still a bit conservative. That's because it's not clear what the churn rate will be after consumers get done binge-watching some of the service's original fare alongside a lack of details about future international launch dates.

Big DTC losses today, but not forever
But Disney's aggressive direct-to-consumer (DTC) moves with Disney+, Hulu and ESPN+, all designed to counter cord-cutting and the eroding traditional pay-TV market, are being made at a steep cost.

Nathanson expects Disney's DTC segment to lose $2.3 billion in fiscal 2019, with Hulu contributing almost half of that loss. He expects those losses to be whittled down to $600 million by fiscal 2023 and turn into a $1.6 billion profit by Disney's fiscal 2024.

"Rarely has a company willingly created this much financial disruption in strategically pivoting to a new business model" ahead of the Disney+ launch, Nathanson explained, likening Disney's complicated (and expensive) moves to a "double-breaking putt" in golf.

He cited a set of examples -- investing in DTC technologies ($2.58 billion for BAMTech, a division since renamed Disney Streaming Services) while also clawing back content previously licensed to Netflix and Starz among others; acquiring Fox's content production and libraries; and Disney's deals to gain full control of Hulu.

But those actions, which Nathanson describes as a "lifeboat" to fend off cord-cutting and decline of TV audiences, are, in Disney's case, also viewed as a "major long-term positive" as the company's stock has managed to rise even while its other numbers go down.

Nathanson is among those who like Disney's forward-thinking strategy, reiterating a "buy" rating and target price of $150 on the stock (Disney shares opened today at $132.40.).

With all OTT services rolled up, he expects Disney to have 32 million DTC subs this year, rising to 63 million in 2020, and rocketing to 162 million by 2024 -- that's roughly 25 million more than a previous forecast of 137 million DTC subs by 2024.

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— Jeff Baumgartner, Senior Editor, Light Reading

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