The Walt Disney Company (DIS) is reportedly considering whether three upcoming films, all potential blockbusters, should go straight to the Disney+ video streaming service rather than premiering in movie theaters. If so, this might provide an added growth spurt to the Disney+ service while delivering another severe blow to the already embattled movie theater business, including major chains such as AMC Entertainment Holdings, Inc. (AMC) and Cinemark Holdings, Inc. (CNK). 

  • Three big new Disney films may premiere on Disney+, not theaters.
  • Many theaters remain closed or are operating far below capacity.
  • Theaters thus are a diminished option for film distribution.
  • Meanwhile, Disney+ is enjoying meteoric subscriber growth.

Significance for Investors

The three upcoming films reportedly under consideration for direct-to-Disney+ releases are "Cruella," "Peter Pan and Wendy," and "Pinocchio," all live-action remakes of classic Disney animated features. "Cruella" is based on the 1961 animated film "One Hundred and One Dalmatians" and the 1996 live-action "101 Dalmatians." 

A related issue reportedly under debate at Disney is, should these films premiere on Disney+, whether they are included with the basic service at no extra charge or whether they will be Premier Access features at an extra charge, as Disney+ did with "Mulan." The former option may help to deliver faster subscriber growth in the short term, while the latter may deliver a bigger immediate revenue boost, helping to recoup the production costs of these features sooner. 

In any case, the idea that Disney might consider bypassing theaters in this fashion points to a key fallout of the COVID-19 crisis for the entertainment industry. The movie theater business is in peril and perhaps damaged permanently as a distribution outlet for film studios.

Theater Closures

British-based Cineworld Group PLC (CNNWF), whose 536-location Regal cinema chain is the second largest in the United States and which has 127 Cineworld and Picturehouse locations in the United Kingdom, shuttered all these venues indefinitely in October, following a limited reopening that started in August. Meanwhile, a variety of film industry figures and groups have signed a letter to U.S. lawmakers warning that about 70% of small and medium-sized theaters in the United States will close permanently should the status quo continue.

Cineworld CEO Mooky Greidinger indicated that his company was losing more cash after reopening than while closed, as lingering health concerns and delays in new releases left his venues even more sparsely attended than social distancing guidelines allowed. Similarly, Frederick Rast, owner of a 99-year-old independent movie house in New Jersey, recently shut his doors forever, explaining, "We were open for a month, and it was disastrous."

Rapid Growth for Disney+

The Disney+ streaming service has enjoyed extremely rapid growth in its first year of operation, reaching 73.7 million subscribers by Sept. 30, 2020, the date on which Disney's fiscal year 2020 ended. In August 2020, just eight months after its debut, Disney+ had 60.5 million subscribers, close to internal projections of where it would be after five years. However, Disney+ is not projected to turn a profit before Disney's fiscal year 2024.

Other streaming properties owned by Disney are also signing on new users at a fast clip. The ESPN+ sports-oriented service nearly tripled its subscriber base during the fiscal year ending Sept. 30, 2020, hitting 10.3 million users. Hulu's on-demand service and its Hulu + Live TV package had a combined 36.6 million subscribers as of the same date, up by 28% during the fiscal year. Consumers are able to get all three services, Disney+, ESPN+, and Hulu, together in a discounted bundle for $13 per month, an offer that has helped to fuel these growth rates.

Looking Ahead

Disney+ is in the midst of a phased introduction across the world, with availability in Latin America just being rolled out. In India, Disney+ is being offered through Hotstar, a distributor that Disney acquired through its purchase of 21st Century Fox. Meanwhile, in some other regions such as the Middle East and North Africa, Disney+ is not yet live, though the company has been licensing its content to local pay-TV partners.

The upshot is that Disney+ has the potential to sustain brisk subscriber growth for some time into the future. Its growth rate may be even higher if Disney decides to make it the outlet for new films that otherwise would have gotten traditional theatrical releases.