Profitability not seen till 2024

There will be a lot of expensive content on The Walt Disney Co.’s new Disney+ streaming service, but the company decided to keep the price to main street consumers at a low $6.99 a month, despite worries on Wall Street about lower profits.

“We just feel that Disney is loved by so many millions of people around the world. This is our first serious foray into [the direct to consumer subscription business] and we wanted to reach as many people as we can,” said Disney CEO Bob Iger.

At an investor day on Thursday, Iger and other company executives laid out Disney’s direct to consumer strategy and showed off what the Disney+ product will look like when it launches on Nov. 12.

They also may an aggressive projection that the service would be capturing between 60 to 90 million subscribers by the end of fiscal 2024, with one third of those subscribers in the U.S. and two-thirds in international markets.

Netflix, the leading subscription service whose success helped push Disney into the streaming business, has 139 million subscribers worldwide and counting.

But between spending billions on original programming and foregoing billions more by not selling content to Netflix and others, Disney+ and Disney’s other streaming services--ESPN+ and Hulu--will lose big money in the near term.

Disney CFO Christine McCarthy said the company projected that Disney+ could achieve profitability by fiscal year 2024.

Disney+ would have cash spending on original content of $1 billion in 2020, which will increase to the mid $2 billion range by 2024, McCarthy said. Amortization of content would be $500 million in fiscal 2020, growing to about $2 billion for fiscal 2024.

Disney+’s operating costs--marketing, technology, customer service--will be a little less than $1 billion for fiscal 2020. “We expect these expenses to ramp as the subscriber base grows, albeit at a rate that is lower than the rate of revenue growth,” she said.

Disney expects Hulu to grow from 25 million subscribers last year to between 40 million and 60 million subscribers by 2024. Operating losses for Hulu will be about $1.5 billion in fiscal 2019. Losses will narrow slightly in 2020 and the service could turn a domestic profit in 2023 or 2024, she said.

McCarthy also said that ESPN+, launched last year, would lose $650 million in 2019 and 2020. Losses would narrow after than and ESPN+ could turn profitable in 2023.

“This is an aggressive strategy,” Iger said. ”We feel the strategy is extremely important and we’ve got to be all in on it.”

Ironically, Iger could be gone by then. Iger extended his contract to 2021 in order to get Rupert Murdoch to agree to sell 21st Century Fox to Disney.

Asked by analysts if he intended to continue to oversee Disney’s streaming strategy, Iger said “I’m expecting my contract to expire by at the end of 2021. This time I mean it, but I’ve said that before,”

Iger said the the Disney board is engaged in succession planning and that they expect to identify a successor “so this company has a smooth transition.

One analyst gave the presentation a positive reaction.

Daniel Salmon of BMO Capital Markets, said in a research note “we believe the price of $6.99/month (or $69.99/year) will have ample opportunity to be raised over time as the volume of content grows.”

Salmon said the guidance to 60-90 million global subscriber was better than expectations. He was also positive surprised by the subscriber outlook for ESPN and he thought Hulu’s figures could end up being conservative.

CFO McCarthy gave a healthy amount of detail on content costs and projected losses, most notably that Disney+ losses should peak somewhere between F2020 and F2022, and then reach profitability by F2024,” he said. “We think investment in DTC will be cheered by Bulls and our conversations afterwards supported this view and the "all-in" strategy championed by CEO Iger.”