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Disney reported a 36% annual growth in revenue for the fiscal first quarter 2020 (ending December 28, 2019). Consolidation of the Twentieth Century Fox (TFCF) business has boosted growth figures across cable networks and broadcasting segments, offsetting declines in legacy operations, such as ESPN and ABC Studios. 

The Disney+ subscription service hit 26.5m subscribers by the end of the quarter and has since added a further net 2.1m subscribers, bringing the total number to 28.6m at the end of January 2020. Subscription numbers include subscribers to the Disney+, Hulu, ESPN+ bundle, as well as users of the Verizon bundle. Disney+ is currently available in the US, Canada, the Netherlands, Australia, New Zealand, and Puerto Rico. It will be launching in select Western European markets and India at the end of March, followed by additional international launches later in the year. 

The new service has nearly caught up to Hulu, reported at 27.2 million subscribers, representing ostensible 29% year-over-year growth. However, while Disney+ is enjoying an explosive subscriber increase, Hulu is by far the revenue leader among Disney’s direct-to-consumer (DTC) propositions. Combined subscription video on demand (SVOD) advertising and subscription revenue per Hulu subscriber hit $13.15, compared to $5.56 for Disney+. This is a 9% decline year-over-year for Hulu, reflecting increases in promotional offers, a shift in the mix of subscribers to the SVOD bundle, and the lower retail pricing introduced early in 2019.  


Our analysis

Disney+’s subscription proved a runaway success. The company was only targeting 20-30m US and 60-90m worldwide subscribers by the end of 2024, according to guidance given to investors ahead of the service launch in 2019. Only the top three market leaders, Netflix, Amazon Prime Video, and Hulu, have been able to reach this milestone in the US market. Hulu passed the 25m subscriber mark only last year. Granted, three out of those four services have grown significantly through partnerships: Netflix through the Netflix DVD subscriber transition, Amazon through the Prime bundle, and Disney+ through the Verizon partnership. 

Verizon offered free 12-month Disney+ access to its ~20m subscribers on unlimited data, 5G or Home Internet plans. About 20% of Disney+ subscribers came to the service via this route. Disney also noted that bundling with Hulu and ESPN services has been instrumental in reducing churn for its DTC offerings. 

Of course, the strength of the Disney brand, the depth of its content library, and the new extensions of its flagship franchises were instrumental to the explosive user growth. During the earnings call, Disney CEO Bob Iger revealed that the majority of service users access multiple content categories; 65% of the users who watched the original series The Mandalorian also watched over 10 other titles, and 50% of the user base is watching feature movies. 

The company nevertheless concedes that originals were likely the key element in the content mix propelling subscriber growth, and is thus expecting US subscriber growth to slow down and develop a cyclical pattern coinciding with its original content release schedule. Disney+’s hit original, The Mandalorian, released weekly from mid-November through December, which perfectly aligns with their fiscal Q1 results. Disney’s fiscal Q2 results will offer further insight into how cyclical subscription churn is now that there is less new-release original content to offer. 

With the cyclical slowdown in US subscriber acquisition, the company expects the growth momentum to shift to international markets. As in the US, bundling agreements with local cable or mobile operators will set them up for success. In France, Disney has inked an exclusive distribution deal with Canal+, potentially offering a bundled subscription to over 8m customers (the details on upcoming bundling have not yet been revealed). In India, Disney will be taking advantage of the recently acquired Hotstar, the leading OTT subscription service in the country. 

It is worth noting that Disney is incurring significant operating loss on its DTC propositions. Under previous guidance, the company was expecting its DTC business to hit profitability around 2024. And while the company is ahead of schedule in subscriber acquisition, they are not revising DTC profitability guidance at this point. Furthermore, like AT&T, which recently reported its 2019 results, Disney is taking some loss in pulling content from other platforms and prioritizing its new DTC services. The company has specifically attributed a decline in ABC Studio revenues to the loss in sales of “The Punisher” series to Netflix.