NEW YORK (Reuters Breakingviews) - Walt Disney Chief Executive Bob Iger rarely puts a foot wrong. In his 14 years in charge he has bought properties like Star Wars and the Avengers, and while he paid a high price in the auction of assets from Twenty-First Century Fox, at least he won. Expectations are therefore high for his next magic trick: creating a video-streaming product to rival Netflix. This feat may be beyond him.
An eye-popping 10 million people signed up for Disney+ on its first day out of the gate in November, a number that added $18 billion to Disney’s market capitalization within hours of disclosing it. Disney’s stock was in mid-December trading at 26 times 2020 forecast earnings, according to Refinitiv, having overtaken Apple and Google owner Alphabet’s multiple during 2019. Iger wants up to 90 million subscribers by September 2024 – by which time he says he will no longer be chief executive.
Is that growth feasible? It’s pretty much what Netflix did, times two. Reed Hastings’ streaming pioneer went from just under 10 million subscribers in 2008, which included by-mail DVD rental, to 44.3 million five years later. Apply that same rate of growth to Disney and it would be just halfway towards Iger’s upper target. And that’s already faster than Facebook’s growth in monthly active users between 2009 and 2014 for a product which, unlike Disney+ and Netflix, is free to use.
Granted, Disney has advantages its rivals didn’t, like name recognition and splashy content including Yoda and animated works from Pixar. And it’s cheap at $6.99 a month, about half the price of Netflix. That too, though, is a problem. Disney effectively hopes to grow at twice the speed of Netflix in its early days, but at half the revenue per user that Hastings’ service gets today. A slew of rival offerings from companies like Comcast’s NBC Universal and AT&T-owned HBO will make it tough to raise prices.
That suggests Disney investors are already living in “Fantasia.” Netflix, with an enterprise value of $136 billion in mid-December, is valued at around $860 per user. Take half that rate and apply it to 90 million subscribers, and Disney’s digital service ought to be worth around $40 billion five years from now. Yet the company’s market capitalization has increased roughly $50 billion since details of Disney+ started to emerge in April. The return to earth promises to be anything but magical.
This is a Breakingviews prediction for 2020. To see more of our predictions, click here: bit.ly/2Z4pobV
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