Why $0 Is a Magic Number for Disney+, Apple TV+ and HBO Max

Streaming HBO Max Disney+ Apple TV - H - 2019

All the major new streaming entrants are leaning on giveaways in order to bulk up quickly and avoid churn.

For new entrants to the streaming wars, a clear plan has emerged in the fight to take on Netflix and its 158?million subscribers worldwide (including 60 million in the U.S.). The strategy? Go free.

On Oct.?22, Verizon unveiled a deal to give Disney+ (priced at $6.99) for free to unlimited wireless customers. Apple will offer a year of Apple TV+ ($4.99) gratis to buyers of its devices. “It creates loyalty,” Verizon CEO Hans Vestberg says of the Disney deal. WarnerMedia will give HBO Max, launching in May 2020, at no extra cost to millions of AT&T and DirecTV subscribers.

“It is about scale, trying to make a big splash quickly and get into the market with as many users as you can to start with, ideally without having to pay to acquire them,” says Jon Giegengack, principal at Hub Entertainment Research.

In a world where every service is starting from zero, these offers give new streaming services instant access to millions of potential homes. That is reflected in the subscriber estimates from Disney (60 million to 90 million Disney+ users by 2025) and WarnerMedia (50 million HBO Max subscribers by 2025).

UBS analyst John Hodulik says that the Verizon deal “de-risks the Disney+ subscriber story over the next 12 months while creating a more challenging environment for other DTC players.” Indeed, Disney CEO Bob Iger, in a CNBC interview, said that the move will “have a significant effect” in jump-starting subscriptions.

But the offers aren’t all about scale. There’s also the problem of churn: the ease with which consumers can cancel and switch to a competitor. Extended free subscriptions alleviate that pressure, providing time to work out kinks and expand thin libraries.

“It will give them a sizable base of users to operate from, and create a real lasting engagement with those people,” Giegengack says. “I think it will make it more of a stable environment, and avoid the situation where people hop in for one show, leave and then you have to pay to re-acquire them all over again.”

Of course, these offers come with notable financial downsides. Companies that launch with free offers are effectively forgoing millions in potential subscription revenue. When you consider the billions of dollars spent on launching these services, that is no small matter.

Also, even when the companies are being paid, the unit economics are not as favorable. Verizon is paying Disney for its Disney+ subscribers, but as both Vestberg and Iger noted last week, the telecom giant is paying a wholesale rate well below Disney+’s $69.99 per year rack rate.

In the case of AT&T and Apple, where the free service will depend on what the customers are already paying for, the offers will likely cut into their existing margins.

And while Verizon and AT&T’s offers for Disney+ and HBO Max could impact tens of millions of people, Apple’s funnel for Apple TV+ may be even more powerful. Bernstein’s Toni Sacconaghi wrote in a research note that Apple TV+ will “potentially reach 200?million-plus Apple customers in its first year of existence.”

That would be a lot of Morning Show viewers.