When Disney unveiled plans for its long-awaited streaming service last month, Disney +, investors liked what they heard, igniting a double-digit, one-day move in the company’s stock.
Much of the coverage in the wake of the announcement centered on Netflix, which may not have been the target of the new service but was certainly the impetus behind it. Its shares shed 6.5% in the days that followed, losses that were exasperated by a conservative first-quarter earnings announcement, with many observers predicting Disney + would siphon subscribers from the platform.
Though Disney + will undoubtedly make Netflix’s life more difficult, Netflix will be fine. Yes, it is burning through cash at an alarming rate and investors have no way of determining how many viewers watch each show. At the same time, despite rate hikes, it continues to add subscribers worldwide and produce quality, buzz-worthy content, including the recent documentary, “Fyre: The Greatest Party That Never Happened.”
Still, Disney +’s impact will be profound. For one, if it wasn’t clear already, it should be now: Cable/satellite television is cooked. Many of these businesses do better than the prevailing narrative would have you believe – DirecTV, for instance, still has nearly 19 million pay-TV customers. But even if this industry isn’t dead, it’s bleeding out.
Providers like Comcast and Spectrum know this, which is why they’ve taken steps to diversify and shifted their focus to providing high-speed internet, essentially giving away television for free. Dish and DirecTV don’t have that luxury and, thus, have no pathway forward.
The other fallout from Disney + is that it underscores just how crowded the streaming landscape has become. Multi-channel services such as DirecTV Now, Fubo TV and YouTubeTV have become more pervasive, while the likes of Netflix, Amazon Video and HBO Now are must-haves for many, thanks to the caliber of their original content. Throw in some sports-focused providers, including DAZN and ESPN +, and suddenly, cord cutting isn’t the money saver it once was.
And therein lies the streaming model’s biggest problem in a cluttered environment: In many instances, it takes less than a minute to cancel a subscription, a stark contrast to expensive, long-term cable contracts. While this difference is good for consumers, it’s not so good for businesses who are trying to establish stable, predictable revenues.
When there were only a handful of choices, this wasn’t as big a problem for streamers. But now as options proliferate, ‘cancellation risk’ is becoming a big challenge, ironic, because the very thing that made them so popular – no contracts – could end up being the reason why so many don’t make it.
Consider HBO Now, for example. What happens when “Game of Thrones” goes off the air later this month? The question is not whether users will cancel after the show’s finale. It’s how many.
At one time, many likely would have kept their subscriptions, because along with Netflix, it was one of the few services that could be trusted to produce quality content. That is changing, not only because HBO is churning out hits at a slower pace than it has in the past but also due to increased competition. As a result, consumers, especially highly mutable millennials, will not think twice about dropping HBO
Now, whether it’s in favor of something else or just to lower their rapidly escalating TV bills. This dynamic looms as a huge issue, not just for WarnerMedia’s business and by extension AT&T, which is already contending with DirecTV subscriber losses, but for every streamer.
Disney’s app, however, could be more immune to cancellation risk than others. For starters, much of their content has already been produced (and monetized), so the cost structure will be lower and margins higher. Secondly, as the release of “Avengers: Endgame” demonstrates, there’s a near unquenchable thirst for the titles in the Disney content library, with the potential audience spanning multiple demographics, from very young children to seasoned moviegoers who saw “Star Wars” in the theatres in May of 1977.
While many of the headlines last month focused on Netflix, the arrival of Disney + signals something more profound, hastening the culmination of one trend (the demise of cable) and likely leading to a massive shakeout in another, corresponding one (streaming).
Ross Gerber is CEO and president of Santa Monica, Calif-based Gerber Kawasaki Inc., a SEC-registered investment advisor with approximately $862 million in assets under management as of 5/01/19. Gerber Kawasaki clients, firm and employees own positions in Disney, Netflix, ATT and Comcast. Please seek guidance from an investment advisor before making any investment. All investments involve risk and may not be suitable for your situation. Follow us @gerberkawasaki on Twitter.