Disney+ vs Netflix: where next for the shares in streaming war?
Disney+ and Netflix are both growing as lockdown goes in their favour. But will there be a shake-out if competition intensifies and the economy remains fragile after the coronavirus pandemic is over?
Disney has revealed the steep cost of the coronavirus (Covid-19) pandemic. Lockdown measures mean it has had to close its cruise lines, theme parks and hotels, shutter its retail stores and stop filming and production of its array of content. It has fewer outlets for new content as cinemas are closed and it has also been hit by the lack of sports.
Disney+ hits over 54 million subscribers
The one area of success in Disney’s second quarter (Q2) results was its streaming services, bolstered by the launch of Disney+ that brings the Disney, Marvel, Star Wars, Pixar, and National Geographic brands under one service.
Disney+ was initially launched in the US, Canada and the Netherlands in November 2019. It was then introduced into Western Europe, including the UK, Spain, Italy, Germany and France, in March 2020, and then into India soon after.
The company revealed that it has secured over 54 million Disney+ subscribers as of 4 May – which Disney said ‘exceeded even our highest expectations’. The company originally said it would take four to five years to get 60 million to 90 million subscribers, but it now finds itself extremely close to reaching its goal less than six months after launching.
Notably, it took the market leader Netflix just over five years from launching in late 1999 to secure that number of subscribers, although it was a new concept and a very different market back then. Disney+ is off to a great start, but it still has a lot of catching up to do if it is to ever challenge Netflix’s 182 million global subscribers.
What does the coronavirus mean for Disney+ and Netflix?
However, the fact all of them are managing to grow subscribers suggests there is room for everyone in the market and that people are more than happy to subscribe to several services. Apple said revenue from digital services – including its TV service for original shows and movies – reached an all-time high in the three months to 28 March, and Amazon’s subscription services have also continued to grow.
The coronavirus means more people are stuck at home and yearning to be entertained, which has undoubtedly benefited streaming services. People will be more willing to subscribe to multiple streaming services whilst they are in lockdown as they will want to maximise their access to content. Plus, people are willing to spend more on stay-at-home services at a time when they cannot be out.
Forbes reported in March that a study conducted by digital services monetisation firm Vindicia suggested people were more than happy subscribing to multiple services. It said US households subscribe to 3.4 services on average and pay $29 per month.
The main thing driving the adoption is the number of people cutting the cord with their cable providers that are considerably more expensive and bogged down in long-term contracts. The coronavirus pandemic and lockdown measures will only accelerate this trend and provide a boost to subscriber numbers.
Disney+ will continue to grow at an impressive rate over the next two years because it is still being rolled out. It will launch in Japan in June, be introduced in more European countries in September and in Latin America toward the end of the year. Based on what it has achieved so far and the geographical scope it has yet to explore, there is no reason why Disney can’t rival Netflix in terms of subscribers.
Netflix is also likely to see an increase in subscribers, but investors will be closely watching the numbers. On 21 April, Netflix said global paid subscriber numbers were up 22.8% in Q1 2020 and that it expected that to accelerate to 25.6% - to 190.36 million – in Q2.
Can Disney and Netflix maintain momentum after the coronavirus crisis?
The challenge will come when lockdown measures begin to be eased and people start to return to normal everyday life. Spending less time at home will mean more people will reconsider their subscriptions and some will be less likely to keep paying for multiple services. Plus, if the economy is in bad shape, then people will be looking to cut down on luxuries and their no-hassle cancellation policies make streaming services vulnerable, especially if consumers subscribe to multiple services. Plus, as rivals like Amazon and Apple raise their game, there will still be more services competing for subscribers.
There will be a shake-out if people decide to choose what services to retain, and it is not clear how people will respond.
Many Netflix subscribers, having tasted what Disney or its other rivals have to offer, may decide to switch services over the long term. Or, Disney’s more limited catalogue of content could mean subscribers prefer Netflix’s larger library.
Right now, Netflix leans more to quantity while Disney is more about quality. Netflix spent a whopping $15 billion on content last year and its library is still by far the largest on the market. A large library like Netflix’s may be appealing now when people have so much time to kill, but they may be more inclined to choose a smaller but better quality service when life returns to normal.
Disney+ is also widening its appeal and has strong footholds in areas that Netflix doesn’t, such as sport, which could provide advantages over the long term. Disney+ sits alongside the company’s two other streaming platforms: sports service ESPN+ and Hulu, the latter of which it took full control of last year. It has already started to bundle these platforms together to appeal to a wider audience.
Disney is also undercutting Netflix on price. Average monthly revenue per subscriber was just $5.63 for Disney+, which is almost half of Netflix’s most recent figure. Plus, it has one of the world’s largest pool of customers to push its services upon, unlike Netflix which had to secure subscribers from scratch when it launched.
How to trade Disney and Netflix shares
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Where next for Disney and Netflix?
The problem for Disney is that no matter how successful its streaming services become, it simply won’t be enough to counter the catastrophic effects the coronavirus is having on the rest of the business as lockdown measures keeps the majority of the business shutdown.
That means progress in streaming won’t necessarily translate to a higher share price whilst the rest of the business recovers, which some analysts believe could take up to two years.
There is also an argument about the long-term potential of its business model considering many of Disney’s businesses are based around ‘shared experiences’ and social gatherings. It is highly likely that the true value of Disney+ and its other streaming services won’t be truly recognised for a long time, which could make the stock attractive to long-term investors looking for a bargain.
Disney shares have understandably slumped this year, but the company remains one of the largest and most widely recognised media groups in the world.
There is more pressure on Netflix. Although it will remain the largest streaming service for some time and benefit from the lockdown, it also means more of its customers will try out what rivals has to offer that could tempt them away in the future. The growth in subscriber numbers will be more closely watched than ever.
And, most importantly, investors will want to see proof that Netflix’s business model can be successful before competition gets too hot. Netflix has spent huge sums on content and expansion and although it is profitable it still burns through billions in cash each year.
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