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Disney streaming will be at the ‘top of the pyramid,’ analyst says

BofA Securities senior U.S. media and entertainment analyst Jessica Reif Ehrlich joins Yahoo Finance Live to discuss Disney+ streaming, subscriber growth, content creation, and the service's path to profitability.

Video Transcript

- Disney's bull case weakens perhaps just a bit after Bank of America cut its price target on the company, citing monetary pressures and a hit from Hurricane Ian. But content does remain king. And Disney comes through with a strong roster of its own properties and franchises. Joining us now to discuss media matters is Jessica Reif Ehrlich, B of A securities senior media and entertainment analyst.

Jessica, great to catch up with you. Thank you for being here. And I know that you're still positive overall on Disney. But I want to cut straight to one of the reasons behind your cut. And that is a lower number of subscribers to Disney Plus. You're saying you're lowering your projected Disney Plus net additions to 8 million. What's the main reason behind that?

JESSICA REIF EHRLICH: The company guided to core Disney Plus subs in the US are growing this quarter. So we have a modest growth of 1 million-plus. But really this is just a segue because the company gets its content paid in stride in the current quarter, which is fiscal Q1, the December quarter. So we expect subs to pick up pretty substantially. The goal is to have 100 original film and TV shows per year, or roughly 2 per week. And that really will drive Disney Plus subs going forward. It's just a lull period.

- Jessica, when does Disney Plus reach profitability?

JESSICA REIF EHRLICH: They've hit peak losses. And the company should reach profitability in fiscal '24. So we're technically in fiscal '23. So next year. But we expect in a full year basis it will be fiscal '25.

- And it seems that a lot of that might also be based on the entrance of this new ad-supported tier and what the demand looks like there. Where are you starting to see that actually come into play, given that Netflix has even pulled forward their own schedule for that ad-supported tier?

JESSICA REIF EHRLICH: We are super positive on the AVOD tier, or the ad-supported tier. So Disney just announced that they are raising prices for the subscription only, or SVOD, by 38% in the US. That's a pretty big increase for any service. But it's still only $10.99. They have a huge umbrella to raise prices because everybody else is so much higher. Their AVOD, or subscription plus advertising service, will be $7.99. So there's a $3 differential.

And we believe demand is so strong for the Disney Plus product that the ARPU, or the revenue they generate per month per user, will be higher on the AVOD tier ultimately than on SVOD. So we know that there's massive demand by advertisers. The advertising inventory will be limited. Let's say 5 minutes per hour versus 15 minutes plus on linear. But it will be targeted and addressable. And it expands the reach of the Disney Company from the linear networks to streaming. There's very little overlap between the two. So it's actually really exciting.

- I wonder, within the broader streaming options that are out there, we've continued to look at, of course, year over year the digital media trends survey that Deloitte puts out and the average number of different platforms that an individual or household might subscribe into. Are you expecting some of the average figures for the number of services that people are buying into to start to come down? And where would Disney sit within that mix?

JESSICA REIF EHRLICH: Disney will be at the top of the pyramid in our view. Disney has a very broad portfolio. If you look at their services, Hulu and ESPN Plus combined with Disney Plus, they have it all. They have news, sports, general entertainment, kids, adults, films, et cetera. So we expect them to be at the top. How many services people take ultimately is still an unknown.

Most consumers and most viewers watch five to seven channels. And the five to seven I watch are different than the five to seven my husband watches and different from what our kids watch. So it's just not clear how many services per home people will take. But we think that Netflix, Disney-- we'll see what happens when Warner Brothers Discovery comes out with their combined service next year, which will also be a very broad service, how that shakes out. But those would be Disney Plus we think-- or Disney overall will be at the top of the pyramid.

- Jessica, there has been some criticism, I guess, of some of the franchises that are out there. And Disney, of course, has really made a lot of its franchises and obviously spun off a lot of content from its franchises. You pushed back against that view in your recent note. You say franchises are basically where it's at.

JESSICA REIF EHRLICH: Look, this is content that consumers know. So Disney has done an amazing job with expanding the Marvel universe. And they've just-- so there's more characters. There's more stories. They just have a very deep IP to work with. And that's an advantage versus any of the FAANG companies. This is an advantage Warner Brothers Discovery has, all of the traditional media companies have. They have content that consumers know and love.

And they also have more platforms, whether it's linear and streaming, to advertise content over, but they have more assets, including theme parks. So Comcast, which owns NBC Universal, has Universal theme parks. And Disney, of course, has the Disney theme parks on a global basis. And they can use these franchises for content right across all of their assets, which is an incredible advantage.

- Jessica Reif Ehrlich, B of A security senior media and entertainment analyst joining us this morning. Thanks so much.