Member Mailing: Why Two New Disney+ Discount Deals Reflect Advantages Over Netflix
After yesterday’s surprisingly disappointing Netflix Q1 2022 earnings call, it is worth revisiting my favorite line in the IAC letter to shareholders about its investment in MGM Resorts:
Similar to Disney’s advantages over pure-play streaming companies with an iconic brand and multiple avenues to monetize the same intellectual property between streaming, theatrical releases, merchandise, and theme parks, we believe MGM also is an aspirational brand, which could be delivered with daily accessibility and offer gaming consumers (including the 34 million M-life Rewards members) a wider range of services, both physical and digital, than any competitor.
Netflix’s letter to shareholders outlined its challenges with revenue growth and its proposed solutions. Notably, none of them looked or sounded like what Disney CEO Bob Chapek outlined last year to the JP Morgan Global Technology, Media and Communications Conference:
…for the very first time, we've got the opportunity to take our original direct-to-consumer business, which is our park business, and use it for our newest direct-to-consumer business. And we've got [a] tremendous amount of information on our consumers from our parks business and what would happen if we married that and actually mine that data to help people subscribe to Disney+ knowing what we know.
Two of those opportunities emerged from Disney in the past two weeks:
Disney+ subscribers can save up to 25% on their visits to Disney World theme parks most nights between July 8 through September 30, 2022; and,
A new National Geographic Premium with Disney+ subscription bundle
Both appear to be early examples of Disney’s advantages over a pure-play streaming service like Netflix. But, given Netflix’s recent moves into gaming and charging for password sharing, are they truly advantages?
Surprisingly, the National Geographic Premium bundle offers the better answer than the Theme Parks bundle to why these are indeed advantages for Disney over Netflix.
The Disney World Bundle
The objective or business logic of the Disney World bundle seems obvious and objectively compelling: Disney+ families paying $6.99 per month as of the visit to a theme park will save on a visit that has a baseline cost of around $6,000. Savings on that price can total up to $1,500. For families dealing with rising inflation, 25% discounts make a difference even if the savings are dampened by inflation.
The offer has a number of carve-outs, a few of which are worth noting:
The number of rooms allocated for this offer is limited.
Theme park admission separately priced.
Length-of-stay requirements may apply.
This offer is only available to Disney+ subscribers. Proof of Disney+ subscription required. Must be 18+ to subscribe to Disney+.
The Disney+ subscriber must stay in the room.
Additional per-adult charges may apply for more than two adults per room at Disney Value, Moderate and Deluxe Resorts and Studios at Disney Deluxe Villa Resorts.
Meaning this is not a “premium” offer, but many - if not most - of the buyer’s benefits are contingent on an existing Disney+ membership.
The timing of the deal is optimal for Disney’s earnings, too. It lasts for the entirety of Disney’s fiscal Q4 2022: Effectively, Disney is leveraging this deal to drive growth and minimize churn, and it is doing so by offering maximum value for smaller families with a Disney+ membership.
Notably, the offer seems to target and reward Disney+ families who have yet to visit Disney World Parks and Resorts. In turn, the new visitors will offer Disney the opportunity to build a data set around a whole new generation of Parks visitors. Disney will also be able to tailor experiences based on those visitors' viewing history.
What looks like a simple set of travel perks can go a long way for Disney's business model, as Chapek had promised investors.
National Geographic Premium Bundle
Subscribers who opt for an annual ($109) or two-year ($190) term of the new National Geographic Premium with Disney+ subscription bundle will also receive 10 print issues of Nat Geo Kids magazine (its combined June/July and Dec/Jan issues are excluded), a weekly newsletter featuring Nat Geo’s best stories, and Nat Geo’s annual “Year in Pictures” special print edition – plus access to natgeo.com, the Nat Geo app, and the brand’s full online archive.
It is worth noting that it would seem that this bundle may not be built from data from the Parks business. However, National Geographic falls under Disney Publishing Worldwide, which in turn is the publishing subsidiary of Disney Parks, Experiences and Products. So this is a market initiative related to marrying and mining Parks data to help people subscribe to Disney+.
Because there are likely around 2.2MM National Geographic subscribers acquired via its Fox acquisition (the last published circulation estimate), this data set is sub-scale relative to the rest of the Parks data on hundreds of millions of visitors.
But, outside its tiny magazine subscriber base, National Geographic has two enormous audiences at enormous scale:
Disney+ (129.8MM subscribers), and
Instagram (217MM followers on Instagram).
So, Disney has proprietary data on subscribers who engage with and watch National Geographic content on the Disney+ app, and it also has third-party data on how Instagram users engage with National Geographic content.
The Bundle & Operating Income
With this data, the National Geographic Premium bundle seems to accomplish at least three key business objectives:
It increases the Average Revenue Per User (ARPU) of the cohort of Disney+ subscribers who actively engage with National Geographic content in the app;
Its bundle offering retains those users as Disney+ subscribers for one to two years, making that revenue effectively more guaranteed than a monthly Disney+ subscription; and,
If it converts 1% of 217MM Instagram followers of National Geographic to this bundle, that’s an additional two million Disney+ subscribers locked in for one to two years (~$182MM in annual Disney+ revenues, alone, and $236MM across Disney+ and Parks). [1]
But, perhaps most importantly, the bundle drives more marginal revenues to both its Direct-to-Consumer (DTC) and Parks divisions. This has the nominal appeal of revenue growth but it also has the practical appeal of higher operating income.
The DTC subdivision delivered an operating loss of $1.7B in 2021, while Parks delivered $471MM of operating income to Disney in 2022 (4% higher than 2020 but still low due to closures from the pandemic). Parks revenues are more important to operating income than DTC revenues (notably, linear networks revenues drive 100% of the positive operating income for pandemic era Disney, and Parks revenues 6%).
Even if they are currently a fraction of operating income to Disney annually, marginal Parks revenues boost cash flow for Disney.
Is *this* Disney’s advantage over Netflix ARPU?
These two scenarios reflect exactly what IAC meant by “Disney’s advantages over pure-play streaming companies."
A 25% discount at theme parks is an obvious example. Disney is testing incentives for getting a Disney+ subscriber into the Theme Parks conversion funnel where they are likely to spend nearly 60x more than they would on a Disney+ subscription annually. That spend is more likely to turn into operating income than DTC spend, and so it’s effectively a bet on juicing cash flow.
But, the National Geographic Premium bundle is worth highlighting for how it leverages and improves the value proposition of Disney+, in particular:
If the National Geographic tile on the Disney+ home screen is real estate, the bundle is adding value to that real estate.
It also combines the value propositions of streaming (Disney+) and Instagram for hundreds of millions of consumers and then super-charges it for ~$30/year more with a membership experience across both channels.
Last, and perhaps most importantly, it takes what may be the weakest brand in Disney’s portfolio of IP and deepens the brand experience by leveraging Disney+ as the anchor for all National Geographic experiences.
The National Geographic brand now has enormous global exposure across streaming and social media. This exposure is creating new “conversion funnels” with an entirely new generation of audiences who consume National Geographic photo content on Instagram (Awareness, Consideration) or currently watch National Geographic content on Disney+ (Purchase, Retention, Advocacy).
Unlike Netflix, Disney does not need to build anything new (e.g. games) for this new generation of consumers. Rather, it can simply bundle existing value propositions in the middle to longer tail of its product offerings and create marginal revenues.
Netflix can’t do *this*
In yesterday’s earnings call, Netflix management highlighted the growing importance of average revenue per member and engagement as better metrics than total subscriber households. In other words, membership as a metric now matters more than total subscribers.
But, for Netflix, membership includes streaming, DVDs, interactive video and mobile gaming. That's it, and one of those (gaming) is still in the early stages of being built out.
But, within Disney, a National Geographic viewer has the opportunity to become a “premium member”, spend 30% more per year, and get enormous value from the brand. Even something as transactional and cookie cutter as this offer may drive more value for a Disney+ subscriber than a mobile game will drive for a Netflix member.
It is worth noting that nature documentaries have been part of Netflix's unscripted genre, including some with legendary nature documentary filmmaker Sir David Attenborough. But it does not own any publications or social media accounts like a National Geographic to complement those series for subscribers.
It is also worth noting that Netflix recently launched a series of Bridgerton-themed Queen's Balls across North America, and Bridgerton merchandise. So, Netflix has the pieces in place for something like a Bridgerton membership with a Netflix subscription. But unlike a National Geographic magazine or Theme Parks, they have no proven track record in this new vertical.
So for the foreseeable future, a Disney+ subscriber can reap more value from their subscription than from a Netflix subscription simply Disney has more assets to offer them. And no initiatives that Netflix is currently pursuing is likely to change that.
Conclusion
The most important takeaway here is best summed up in something I wrote back about Chapek’s quote, above, in MGM Resorts M life "Convergence" vs. "Metaverse" Convergence:
The business objectives are concrete, and they make the complex exercise of marrying theme parks data with streaming data seem less abstract, seamless, and feasible.
I think Netflix's Q1 2022 earnings call reinforced the contrast between Disney’s approach of “concrete” business objectives across its business divisions, and the more abstract and risky growth strategies Netflix has been pursuing with games, a password-sharing clampdown and now the promise of a cheaper, ad-supported model.
Even if solving for password sharing could generate up to $216MM in marginal revenues per year in the US, alone (as I estimated in footnote #2 in Comparing Netflix & HBO Max Conversion Funnels), it reads more speculative than convincing existing fans of National Geographic who are Disney+ subscribers to spend more. Or, convincing non-Disney+ subscribers who love National Geographic on Instagram that they can get even more content with a National Geographic Premium with Disney+ subscription bundle.
Effectively solving for password sharing is Netflix pursuing a punitive measure while Disney pursues value propositions that create great experiences for National Geographic fans. This may be a key strength of Disney’s in streaming that few have yet to appreciate because National Geographic is not a mass media brand like Marvel or Pixar. But on the Internet, it is a mass media brand that is under-monetized, and Disney+ now seems integral to that .
Footnotes
[1] 1% conversion rate is my rule-of-thumb estimate for a marketing campaign’s success in converting a target audience into subscribers. It could be higher, which would be great for Disney, or it could be lower, which would still be fine as an outcome given that it is monetizing a target audience or cohort by 1.3X.