Why Disney's $13 Streaming Bundle May Be a Double-Edged Sword

Disney Bundle Biz Column
Rafa Alvarez

Offering Disney+, Hulu and ESPN+ together takes direct aim at Netflix's standard plan — but it also could hasten cord-cutting and "hurt" Disney as it negotiates new carriage fees for its (still very profitable) linear channels.

Disney's upcoming streaming service will "be treated as the most important product that the company has launched" during his 14-year tenure, crowed CEO Bob Iger during an Aug. 6 call with Wall Street analysts. It's a bold proclamation, and it comes with major repercussions. It's also the closest Iger has come to publicly declaring an all-out war with Netflix.

That same day, Iger said Disney+, set to launch Nov. 12, will be bundled with ESPN+ and Hulu, which Disney controls, for a mere $12.99, about what most Netflix subscribers pay for that singular service. Such a low price not only sets the stage for a battle with streamers but also with cable and satellite TV bundlers — a potentially awkward position given that Disney's Media Networks division, made up of ABC, Disney Channel, ESPN and others, is a primary contributor to its bottom line.

"The rollout will affect pay TV negotiations. How could it not?" says analyst Jimmy Schaeffler of the Carmel Group. "Nothing will be negotiated without the cloud of Disney+ hanging over meeting rooms."

Media Networks is Disney's largest business, but it is forecast to grow just 14 percent over the next five years as cord-cutting takes its toll, courtesy of streamers like the one Disney will launch, says Michael Morris of Guggenheim Securities. In the same five years, Disney's smallest segment, Direct-to-Consumer and International, is expected to surge 140 percent to $29.3 billion in 2024, nearly matching the $32.7 billion expected from Media Networks.

"The perverse outcome is that these competing services and bundles will encourage more cord-cutting," says Michael Pachter of Wedbush. "Fewer cable subscribers means lower retransmission rates."

At $5.99 a month with ads, Hulu has attracted 28 million subs, Disney CFO Christine McCarthy said Aug. 6, while ESPN+ at $4.99 monthly has 2.4 million. For an extra $2.01, consumers should flock to the upcoming bundle. "Subscriber growth at these services will be key to investor enthusiasm," says Morris, despite them being a loss-leader, for now. McCarthy said to expect the DTC segment to lose $900 million in the current quarter alone, while research firm eMarketer projects Disney+ to go from a less than 1 percent market share in the U.S. at the end of 2019 to more than 9 percent by 2024. 

"It definitely strikes me as a risk," adds Steven Birenberg of Northlake Capital Management. "The new bundle plus Hulu Live TV can encourage cord-cutting and hurt Disney while it negotiates."

Disney’s growth may come largely at the expense of Netflix and investors have been factoring that in: Between April 11, when Disney+ revealed its $6.99 price and Aug. 6 when it announced the $12.99 bundle, Disney shares advanced 22 percent while Netflix stock fell 16 percent — much of the decline coming after reporting July 17 it had suffered a quarterly loss of U.S. subscribers for the first time in its history.

“Will Disney+, ESPN+ and Hulu hurt Netflix and its ilk? Yes, it will — significantly,” says Schaeffler. “The folks at Netflix, and their shareholders, should be very worried. Their lives are about to change.”

Also on the horizon are services coming from NBCUniversal, WarnerMedia and Apple, and CBS acting CEO Joe Ianniello said Aug. 8 that CBS All Access will launch kids programming this year, further pressuring Netflix while also encroaching on Disney's domain. "It has nothing to do with Disney, at all; it has to do with the data and research," Ianniello told investors. "This is a natural progression for us."

Ianniello said CBS All Access and Showtime OTT will have 25 million subscribers by 2022, up from about 8 million now. Disney projects as many as 30 million Disney+ subs by 2024, which "will mostly come from Netflix's 60 million U.S. subs," says analyst Laura Martin of Needham. "We project Disney will win, and Netflix lose, the U.S. SVOD battle." Perhaps. But at what cost? 

This story first appeared in the Aug. 14 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.