Disney+ Goes Live, Creates Promise For The Distributor But Risk For The Producer

Walt Disney Co DIS on Tuesday launched a highly anticipated and widely marketed Disney+. The new streaming service is poised to bolster Disney’s bottom line but challenge the growth of content creators.

The Rating

Bank of America analysts Jessica Reif Ehrlich and Bryan Goldberg maintained a Buy rating on Disney with a $168 price target.

The Thesis

Since its April analyst day, Disney has signed major distribution partners for Disney+, including Apple Inc. AAPL, Amazon.com, Inc. AMZN, Microsoft Corporation MSFT, Sony Corp SNE, Roku Inc. ROKU and Alphabet Inc GOOGL. It has also launched a promotion with Verizon Communications Inc. VZ to provide one free year of Disney+ to unlimited, 5G and Fios customers. These developments have been game changers.

“We are incrementally more bullish on DIS’ monetization prospects beyond the legacy Pay TV model,” Ehrlich and Goldberg wrote in a note.

Considering Netflix Inc's NFLX five-year subscription growth of 111 million on higher average revenue per user, the analysts raised their Disney+ subscription estimate for 2024 from 60 million to more than 90 million.

“Admittedly, the OTT market has grown more competitive and the trailing 5 year period offers the early initial NFLX benefit of a wider distribution footprint,” they wrote. “However, we believe DIS+ provides a significant value to a wide (four quadrant) range of consumers at $6.99 per month, further supported by various promotions.”

Disney may thrive in the broad competitive field, but not everyone in the film pipeline will. The evolution of streaming has disrupted the film distribution model and, consequently, the deals struck behind the scenes. In the new “goods and services” model, content producers are paid upfront to detach from their work and enable distributors like Disney to shift content across platforms without opening new negotiations.

“It’s still a meritocracy,” Howard Owens, co-CEO of Propagate Content, said on CNBC’s Squawk Box. “Those who have the best ideas, the freshest new approach are going to be rewarded, [but] the rewards are just a little different. More up front now, so you’re taking less risk, but there’s less long-term tail.”

Price Action

At time of publication, Disney shares traded up marginally around $138.20.

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Photo courtesy of Disney.