Media innovator Tom Rogers says that Disney can’t begin to catch Netflix in terms of streaming subscribers, but they don’t need to. “No one can catch Netflix,” says Rogers. “I don’t think Disney can begin to catch Netflix, but they don’t need to catch Netflix here to create an asset value that really helps to deal with the issue of the core business decline.”
ESPN+ is Going From a Model Which is Impossible to Do Better Than
ESPN+ is going from a model which is impossible to do better than. They’re going from a model where ESPN is watched by 20 percent of the people but they get $7 a home across the entire cable and satellite universe including the 80 percent that barely watch it. To go to ESPN+ we’re the only way you derive value is selling it to somebody who’s going to use it. They’re going to do okay with that I have no doubt, but it can’t be as good as the existing model that they’re coming from which is in decline.
The real issue is how fast is that decline on the existing business relative to what they can make up here? They had some nice sub-adds, but just to make up for their Ultimate Fighting Championship deal of $300 million of which ESPN and ESPN+ split that, $150 million going there they probably need three million subs just to cover that one rights contract. So you really have got to look at how they have to cover rights cost against something where they can only get revenue from the people who are actually going to watch it.
Disney Can’t Begin to Catch Netflix, But They Don’t Need To
It’s complicated because it isn’t a streaming service, it’s three. It’s ESPN+, Disney+, and Hulu. You have question marks on all of them. With Hulu, you’ve got this huge issue that I don’t think anybody’s digging into which is 40 percent of their adult play is owned by their two biggest competitors, Comcast and AT&T. We really don’t know if they have any kind of decision-making or governance control and how that’s going to be unwound. It isn’t going to be, hey, we just walk away from that 40 percent interest. That’s going to be their major non-kids opportunity to chase Netflix with. I really think there are a lot of question marks here on all of them.
How many people are gonna use both ESPN and ESPN plus? That’s a huge question. My guess is there’s a decent overlap there but you have the equally big issue of all these skinny bundles where ESPN will make its way into some of them as people cut the cord and go to these packages of much smaller numbers of channels. But there’ll be plenty of people taking skinny bundles that have no sports in it at all because those are going to be the lower cost. That’s where they really take the hit because today they’re getting paid across all cable and satellite subs.
There’s no doubt that Disney is a studio powerhouse. They were before and with the acquisition of the Fox movie and TV studios, they are even more. Their production capability is huge, but the Netflix issue is one that they’ve got to get away from. No one can catch Netflix. I don’t think Disney can begin to catch Netflix, but they don’t need to catch Netflix here to create an asset value that really helps to deal with the issue of the core business decline.
They Watch Netflix for the Originals, Not Disney
The question is, how much are they really going to invest there? Nothing about this earnings report really gave us a clue about that. They’re going to have a major issue in terms of foregone opportunity on all the licensing that they’re no longer going to do. But that’s even a sub-point to some extent. What drove Hulu so far? It’s original Handmaid’s Tale. What drives Netflix? Disney’s Avengers Infinity Wars on Netflix.
People don’t talk about that as the reason they watch Netflix. They watch Netflix for the originals. That is a massive additional spend. We don’t really have a clue yet on what they’re prepared to do there. The issue of what valuation they get is all about how long are those losses going to last? How deep is that cash hit going to be? And ultimately, when do they turn profitable? If that’s 10 years out and you’re discounting that back today you’re going to get a very very different looking asset value than the $150 billion that Netflix let sees today.