Will Disney Reach its 5-Year Streaming Goal?

On April 11, 2019, Disney provided guidance of 60 to 90 million Disney+ subscribers for fiscal 2024. Some analysts argued that the total addressable market and opportunity may be larger than what management projected. Others were more cautionary, given the heated competition emerging in the video streaming space.

Disney's forecast anticipates Netflix-like growth for Disney+ over its first five years. (Netflix had 83 million subscribers within five years of separating its streaming subscription service from its DVD offering.)

What is the likelihood that Disney+ will reach 90 million subscribers for fiscal 2024?

In order to address this question, we used critical event extraction (CEE), which automatically identifies information from text documents that will impact a predicted outcome.

We established criteria for what would constitute critical events impacting the growth of Disney+. We then extracted information from 394 video streaming articles relating to these criteria published during September/October 2019. Here a sample of the results estimating how probability is changing over time.

Events impacting probability (p) of Disney+ reaching 90 million subscribers by 2024:

1) April 11, 2019. (Initial p =.5) -- Disney announces strategy for Disney+, including aggressive pricing of $6.99/month. Anticipated launch slate on November 12 will be lighter on originals (only 10) than other streaming services. The Mandalorian is the only high-budget tentpole. Over time, Disney expects to introduce 50 original offerings a year.

2) September 10, 2019. (p = .47) -- Apple will give one-year free subscription to Apple TV+ for customers who purchase new iPhones, other Apple devices.

3) October 16, 2019 (p=.48) -- Disney executives stress that Disney+ is not a niche play. "We are designing the product to appeal to a four-quadrant audience -- young, old, male, female..."

4) October 22, 2019. (p = .58) -- Verizon will provide free one-year Disney+ subscription to customers on its unlimited data plans as well as new Fios residential internet and 5G home internet customers.

5) October 25, 2019. (p=.62) -- Analysts at UBS poll 1,000 consumers in mid-October and find 86 percent had heard of Disney Plus. About 44 percent say they were likely to subscribe. UBS analyst John Hodulik argues the links to Verizon "de-risks" the subscriber dynamic for Disney+ over the next 12 months. MoffettNathanson analyst writes that with the Verizon ties and other promotional offers, Disney+ will have about 8 million subscribers worldwide by year-end and 18 million by the close of its parent’s fiscal 2020. (This compares with original projections of 2 million and 10 million for the respective periods.)

6) October 28, 2019. (p=.64) -- New York Times runs story entitled "Disney Is New to Streaming, but Its Marketing Is Unmatched." The piece highlights how Disney is using all its consumer touch points (from pitches on Dancing with the Stars to ads plastered on Disney World's massive fleet of buses) in promoting Disney+.

7) November 1, 2019. Current probability estimate for Disney+ reaching 90 million subscribers for fiscal 2024 = .64.

That's where we are now at. We will continue to refine the critical event extraction process as well as the algorithms used in estimating this "closing event" probability.

Streaming Video: A Seismic Shakeout

Compete. Launching. Rival. Tough.

These four words are closest to the set of words consisting of (Disney+, Apple TV+, Amazon Prime, Netflix, Hulu, YouTube, WarnerMedia, and Peacock) in a word2vec analysis we performed on 300 business articles published in September. All articles contained the phrase streaming services. Word2vec processes raw text and positions words in a high dimensional vector space where semantically similar words are placed at nearby points.

Competing streaming services such as Disney+ and Apple TV+ launch next month, and other rival services such as WarnerMedia’s HBO Max and Comcast’s Peacock are prepping on the launch pad for early next year. We’re about to witness one of the toughest competitive battles in corporate history.

Here are the formal results of the word2vec analysis (scores are very close to 1 indicating these words are highly proximate to our target list of industry players):

('compete', 0.960),
('launching', 0.942),
('rival', 0.941),
('tough', 0.939)

Tough indeed!

In Strategies for Surviving a Shakeout, a classic piece written some 20 years ago, George Day of Wharton described initial boom times and subsequent seismic-shift shakeouts that strike a previously stable industry.

The origin of the boom is a competency predator that develops a new business model, often mastering a technology utilized to enter the market and expand regionally. This predator is able “to come out of nowhere and grab large shares in markets that welcome the new level of service or sharply reduced costs.”

Netflix.

Day continues: “For industry incumbents, removal of their isolating mechanism feels like the disruptive movements of the earth’s crust when the tectonic plates shift…. High levels of profitability or promises of huge capital gains draw new competitors like magnets. It is axiomatic in economics that every opportunity bears the seed of its own reversal. A glut of competitors is especially likely when contagious enthusiasm sweeps through an industry.”

A subsequent bust is triggered by factors such as:

• A price war that squeezes out weaker participants
• Overly optimistic forecasts
• Resource shortages
• Risk capital that runs short

In assessing shakeout survival, a company must develop scenarios addressing questions such as:

• How many competitors can the market ultimately support?
• Which competitors have staying power, and which do not?
• Can my company benefit by hastening the arrival of a shakeout?

What makes the streaming market so fascinating is the important role that video streaming plays in selling significant ancillary products and services. For example,

* Amazon:  e-commerce & cloud services
* Apple:  hardware
* Disney: merchandise & theme parks
* Netflix: ???

Netflix??? Despite buoyancy in its share price immediately after announcing its latest Q3 results, Netflix appears naked compared to other players -- from an ancillary market perspective. And this nudity raises doubts about its staying power.

Forecasts by analysts who honor Netflix with high target valuations typically assume the company will be able to raise subscription prices. Netflix competitors have put a damper on this degree of freedom.

In addition, the price paid to attract top creative talent continues to escalate. Any pullback in talent acquisition will threaten Netflix’s historically favorable value/price ratio.

Netflix must address the rhino in the room poised to gore its valuation – free cash flow. Although the company reports positive net income, it suffers from sizable negative free cash flow that results from its current business model.

Although Netflix vehemently denies any future move to embrace advertising, the cash flow spigot from this ancillary service will need to be turned on to stop the rhino from puncturing share value.

Disney+: a TON of media takes

Since the announcement of Disney+ on April 11, a ton of articles have been written about the forthcoming video streaming service. The word Disney+ has appeared in 2183 pieces on Dow Jones/Factiva, a global news resource.

In a previous posting -- see  https://streamingvectors.blogspot.com/2019/05/apple-disney-synergy.html -- we used Word2Vec to study 854 articles that appeared on Factiva between April 11 and May 18 in which Disney+ appeared. (Word2vec processes raw text and positions words in a high dimensional vector space where semantically similar words are placed at nearby points.) At that time, some words/bigrams closest to Disney+ were:

('launch_november', 0.946),
('apple_tv+', 0.801),
('netflix', 0.774),
('india', 0.719),
('amazon_prime', 0.642),
(‘warnermedia’, 0.615
('mandalorian', 0.589)

Now we have more information to analyze as media stories regarding Disney+ proliferate. Between August 1 and 27 alone, 666 such articles were published, the highest run rate of any month to date.

Let’s compare more recent articles about Disney+ with our earlier findings. After analyzing 1329 articles appearing between June 1 and August 27, here is a new set of words/bigrams that nestle up to Disney+ (a score nearer 1 indicates a word is closer):

('november_12', 0.939),
('hulu_espn', 0.835),
('hbo_max', 0.814),
('australia', 0.795),
('apple_tvplus', 0.792),
('nbcuniversal', 0.776),
('bundle', 0.767),
('canada', 0.730),
('mandalorian', 0.668),
('national_geographic', 0.657),
('star_wars', 0.641),
('pixar', 0.640),
('falcon_winter', 0.639),
('lady_tramp', 0.622),
('netflix', 0.573),
('amazon_prime', 0.570),
('simpsons', 0.550),
('wandavision', 0.537),
('uk', 0.531),
('marvel', 0.523)

Some things have stayed the same:

• Anticipation of the November 12 launch date remains at the top of associations with Disney+.
• The relationship of Disney+ to AppleTV+ continues to be a focal point – see https://streamingvectors.blogspot.com/2019/05/apple-disney-synergy.html for our take on possible connections between these two streaming services.
• Although Disney's library (from Star Wars, Pixar, Simpsons,,,) will be unmatched, original programming on Disney+ is gaining interest. Witness the strong association of Mandalorian, The Falcon and the Winter Soldier, Lady and the Tramp remake, and Wanda Vision.

Some things have changed in the Disney+ Word2vec space:

• Although Netflix and Amazon Prime are still in the space, they have become less proximate to Disney+. More attention is now on the relationship of Disney+ to other forthcoming streaming media services, including HBO Max and NBCUniversal’s offering. Netflix is becoming so yesterday!
• Prominence is being given to National Geographic programming as a major brand builder for the Disney+ family-friendly offering.
• The Hulu/ESPN+/Disney+ bundle at $12.99/month is commanding attention as a major stake in the ground for pricing in the video streaming market. All other players are considering this benchmark.
• Disney+'s international rollout is of heightened interest. The service will be launching in Canada and The Netherlands along with the US on November 12. Australia will soon follow on November 19. Disney has not yet announced when the service will be launched in the UK, although this date is of intense interest.

Video streaming is the most important initiative for Disney in decades. Ever-changing word embeddings provide a unique substrate in understanding what's happening over time in this fascinating space. Keep your lap bar pulled down.

Netflix: 6 HOT Words for Q3

By now, everyone knows that Netflix reported a disappointing second quarter last week with its first decline in domestic subscribers since the Qwikster miscarriage of 2011. As a result, last Thursday and Friday, Netflix lost some $20 billion in market cap.

In the four days since the announcement (from July 17 to 20), we identified six hot words related to Netflix whose frequency has ratcheted up in the media.

But first in order to get a baseline, we used Word2Vec to process 2311 articles that appeared on Dow Jones/Factiva during the six months prior to the release of Netflix's Q2 results. Each article selected mentioned Netflix at least five times and was classified by Factiva as a "Corporate/Industrial News" piece.

(Word2vec processes raw text and positions words in a high dimensional vector space where semantically similar words are placed at nearby points. Factiva is a global news resource with over 32,000 publications.)

Here are words closest to Netflix during the six month period. A score nearer 1 means the word is closer to Netflix:

('exclusive', 0.530),

('streamer', 0.513),

('original', 0.484),

('crown', 0.478),

('licensed', 0.473),

('uk', 0.464),

('india', 0.438),

('disneyplus', 0.418),

('hotstar', 0.400),

('rival', 0.396),

('competition', 0.393),

('hulu', 0.381),
('britbox', 0.354)

Note that over these six months media attention highlighted: 1) the importance of Netflix's exclusive originals (such as The Crown); 2) competition -- in India (Hotstar), in the UK (BritBox), and Disney's moves with Disney+ and Hulu.

But in the four days after the Q2 announcement, six words became particularly hot. We examined the uptick in these words by calculating their relative frequency compared to the six month baseline. The six words are: debt, cash, mobile, price, competitor, and advertising. Here are the results.

What this means, for example, is that the word debt was used 3.1 times as often on a relative daily basis during the July 17-20 period as it was during the prior six month baseline. The word advertising was used even more frequently (11.4x).

Here are some takeaways derived from our hot word analysis:

• Netflix's debt level, cash, and cash burn are receiving more attention. (As of June 30, 2019, Netflix has $12.6 billion in long-term debt, $5 billion in cash, and was burning through cash at a $3 billion/year clip.)
• Mobile is in the spotlight. (During Q3, Netflix hopes to reinvigorate growth in India by rolling out a lower-priced mobile-only screen plan. Mobile-only is likely to emerge as a hot area of competition not only in India, but around the globe.
• Pricing in the face of competitors massing at Netflix's borders is now a hot topic. We can no longer assume that Netflix can steadily increase its price. Pricing power is in serious doubt.
• Media attention is centered on Netflix's reiteration that it will remain an advertising-free environment: "We, like HBO, are advertising free. That remains a deep part of our brand proposition; when you read speculation that we are moving into selling advertising, be confident that this is false." Yet, industry experts argue that Netflix will not survive without playing more aggressively in advertising -- see, for example, Jeff Cole's insightful analysis here. Note that Netflix continues to experiment with product placement ads, including an effort by Coca-Cola to revive interest in New Coke with prominent placement in the third season of Stranger Things.

The remainder of Q3 may be more upbeat for Netflix as the company launches highly popular content such as Stranger Things, Orange is the New Black,  and The Crown.

But then Netflix better get ready for winter.

Video Streaming Coverage Race: June Results

In June, the pace of media coverage slowed down in the video streaming race. It's the beginning of a summer lull before a certain fall/winter gallop that will be triggered by the launching of new services.

We analyzed the press coverage that seven horses in this race (Amazon Prime, Apple TV+, Disney+, Hulu, Netflix, WarnerMedia, and YouTube) received during the month of June. To do so, we considered the 549 articles on Dow Jones/Factiva during June in which the words video and streaming appeared adjacent to each other. (Factiva is a global news resource with over 32,000 publications.)

Here's what we found:

Total mentions of these seven "horses" slowed to 1101 in June from 1930 in May. Netflix continued to outpace the field with 469 mentions, followed by YouTube with 328. Other horses limped along.

Here's what the mention market share looked like in June.

Will be exciting to watch the dramatic changes in these graphics over the next several months as the video streaming race heats up.

HBO: Chipping the Crown Jewel?

Time Warner consisted of three divisions before being acquired by AT&T last year: HBO, Turner Broadcasting and Warner Bros. Entertainment. HBO was widely regarded as the crown jewel of the company.

Would this jewel be polished and preserved in the hands of AT&T? Or would it be damaged and diminished?

In Managing Acquisitions, a classic M&A reference, Haspeslagh and Jemison identified four styles of integration, one of which was preservation. Preservation should prevail when the target’s culture must remain intact lest a “buy and crush” dynamic destroy key organizational elements that made the target attractive. Warren Buffett’s Berkshire Hathaway is renowned for preserving (and then nurturing) acquisitions.

Even in markets with tight controls demanded by customers (such as defense contracting) sometimes preservation is the right move. As a practice Honeywell Aerospace quickly absorbed the people, assets, and systems of companies it acquired into the corporate parent. But when it discovered a superb center of excellence in an acquisition, Honeywell realized that it would be a mistake to dismantle its creative talent and distinctive technology. Rightly so, Honeywell not only preserved the unit, but nurtured and spread its capabilities throughout the entire company.

HBO has been an artisanal brewer of entertainment. For example, Game of Thrones was reportedly cultivated for four years before launching.

After AT&T completed its acquisition of Time Warner last year, Jeff Cole argued that HBO is a special asset that should be left alone to create. See here. (Cole, a former UCLA colleague, is a media expert highly adept at providing perspective that informs future market directions. He is now founder and director of USC’s Center for the Digital Future.)

Last September, AT&T CEO Randal Stephenson provided some hope for crown jewel preservation by characterizing HBO as “the Tiffany of media and entertainment.”

But communications about HBO’s future were mixed, as John Stankey (now head of WarnerMedia) told Richard Plepler (then head of HBO) at an employee meeting: “I want more hours of engagement.” Although Stankey also implied additional resources would be made available, the image of an HBO sweatshop was conjured up in the minds of employees.

With this backdrop, let’s examine a critical dimension that has characterized HBO in the media over the past few months.

We used Word2Vec to process 1206 articles that appeared on Dow Jones/Factiva between March 1 and June 15, 2019, in which the word HBO appeared at least twice. (Word2vec processes raw text and positions words in a high dimensional vector space where semantically similar words are placed at nearby points. Factiva is a global news resource with over 32,000 premium publications.)

Here are some words/bigrams appearing closest to HBO (a score nearer 1 indicates a word is closer to HBO):

('bob_greenblatt', 0.701),

('david_levy', 0.696),

('kevin_reilly', 0.694),

('resignation', 0.686),

('longtime', 0.684),

('exit', 0.681),

('richard_plepler', 0.677),

('reorganization', 0.675),

('overhaul', 0.651),

('spadaccini', 0.648),

('kevin_tsujihara', 0.627),

('veteran', 0.620),

('stankey', 0.616),

('leave', 0.610),

('departure', 0.607)

The press has been featuring a two-way turnstyle at HBO.

For example, Richard Plepler, the veteran head of HBO has exited as has David Levy, a longtime Turner executive. Stankey, an AT&T lifer, and Bob Greenblatt, an HBO outsider, have entered to run the show. Kevin Reilly is the new head of content strategy for the streaming service WarnerMedia plans to launch next year.

Resignation, departure, leave, exit, reorganization and overhaul are all huddled close to HBO in our vector space.

Not a picture of preservation.

Although final design of WarnerMedia’s streaming offering is in flux, Greenblatt has stated that the service will consist of some 10,000 hours of curated content, blending classic movies such as Gone with the Wind, the libraries of Warner Bros Television. original programming, and all of the “great” HBO programming.

Pricing is a conundrum. WarnedMedia has preliminarily rationalized a target price of some $17/month, boxed in between Netflix ($13) and a combined Disney+ and Hulu pricing (7+12= $19).

Apparently there’s not much pricing power in the new combined offering, given that HBO currently costs $15/month.

Under Time Warner, HBO enjoyed autonomy as it hit revenue and EBITDA targets and garnered Emmy after Emmy. Under AT&T, the company is now under pressure to move in the direction of a Netflix-like content firehose.

And Randell Stephenson has dogmatically stated to investors: “Our discretionary cash flow is going to go to one place. It’s going to be paying down debt.” (Reduction of some $165B in debt is a challenge. In April, AT&T sold the Warner-Media headquarters for $2.2B as well as its stake in Hulu for $1.4B.)

The extent to which HBO will receive a substantial increase in resources to feed its new firehose is questionable.

To its credit, AT&T intensely studied the shortcomings of the AOL/Time Warner 2000 merger, widely regarded as the worst deal in corporate history, to avoid mistakes of the past. Not wanting to repeat AOL’s fiefdom frustrations as it tried to get divisional silos to cooperate, AT&T reorganized Time Warner’s media properties.

But in reacting to the AOL debacle, the pendulum has swung too far. With the departure of Plepler and others, AT&T must now deal not only with executive exodus, but also the psychological leakage of the talent that remains.

Although restructuring might have been the right move for other Time Warner units, the crown jewel should not have been disturbed so quickly. Far better to have preserved HBO for the time being and only move to amalgamation after a deeper layer of trust was built.

Given the major challenges of business model clarity and psychological leakage, most bets are currently against WarnerMedia getting anywhere near the iron throne of streaming. WarnerMedia needs some new dragons to suddenly appear.

Hulu: Escaping the JV Torture Chamber

Joint ventures can be an exquisite form of corporate torture. A JV “chamber” can feel like it’s rivaling a Game of Thrones torture scene, especially when JV partners are competitors.

Until recently, Hulu was a complicated joint venture. Too complicated. Almost tortuous. Not anymore.

We used Word2Vec to process the 1072 articles that appeared on Dow Jones/Factiva in April and May, in which the word Hulu appeared at least twice. (Word2vec processes raw text and positions words in a high dimensional vector space where semantically similar words are placed at nearby points. Factiva is a global news resource with over 32,000 premium publications.)

We next used t-SNE, a prize-winning technique for visualizing high-dimension spaces, to reduce our Hulu vector space from 64 dimensions to 2. Here’s the resultant concept space, with key words closest to Hulu placed on the two-dimensional grid generated by t-SNE.

t-SNE does an amazingly good job in reducing the 1072 articles on Hulu to a meaningful 2-D concept space. To understand these data points (most are bolded below), note that:

1)      At the start of 2019, Disney, Fox, and Comcast each owned 30% of Hulu joint venture, and AT&T owned 10% as result of its acquisition of Time Warner. In March, Disney completed its purchase of Fox, giving it majority (60%) control. In April, Hulu acquired AT&T’s ~10% for $1.43B. And in May, continuing its Hulu deal spree. Disney assumed full operational control of Hulu by agreeing to purchase what was the now 33% share that Comcast held after the AT&T deal.

2)      Disney entered into a put/call option agreement that valued Hulu at a minimum of $27.5 billion as early as January 2024 and extended the Hulu license of Comcast/NBCUniversal content until late 2024. The put/call arrangement means Disney can require Comcast to sell and Comcast can require Disney to buy its 33.3% ownership interest in Hulu for assessed fair market value at that time (with a floor of $27.5 billion).

While the deal is quite good for Comcast (another story), our focus is on Disney’s Houdini-like escape from the Hulu JV stricture.

With full operational control of Hulu, Disney now has the ability to:

·        bundle Hulu with other Disney DTC offerings (such as Disney+ and/or ESPN+);

·        deploy BAMTech’s impressive technology (majority ownership acquired from MLBAM in 2017) across all of its streaming platforms. BAMTech, located in a Manhattan factory once occupied by the National Biscuit company, has successfully delivered tens of millions of simultaneous live streams. BAMtech is so good that it very well could sell its services to other media companies moving into streaming;

·        gain access to valuable data used in the direct-to-consumer sale of everything from Disney-branded toys to theme park tickets;

·        expand its scope in generating advertising revenue; currently about 70% of Hulu’s viewers are on its ad-supported plan;

·        roll out Hulu internationally without having to deal with potentially stifling partner conflict. (Comcast’s $39 billion purchase of Sky, a European pay TV giant that offers the Now TV streaming service could have certainly triggered Hulu expansion headaches.)

Disney will enjoy a high-class problem if it turns out that Hulu is appraised at a high value when it comes time to buy out Comcast. A healthy valuation will imply that Hulu will have made significant progress in competing with Netflix.

If so, torture will have been transformed into treasure.