Why Disney Plus Holds an Edge Over Other Streamers

In recent times, streaming services have flooded viewer TV screens with new programming to attract new subscribers. But those subscribers are not sticking around, according to a new study from Antenna, a market intelligence company. It found that viewers who join a service to watch a new show also leave within a few months, "significantly faster" than the average streaming customer.

However, the firm's conclusions about customer habits might be good news for The Walt Disney Company (DIS), which has a deep reserve of hit content that will increase customer stickiness to Disney Plus, its streaming platform.

The Race for New Content

New content brings in new subscribers for streaming platforms, Antenna stated. For example, Disney Plus witnessed a bump in its subscription numbers around the time it released Broadway smash Hamilton. About half of those subscribers cancelled their subscriptions within six months of signing up.

Other streaming services have witnessed similar subscription trajectories, according to the study. Given the study's findings, it might be possible for streaming services to keep adding new subscribers to their platform with enough content volume.

But producing new content is an expensive hit-or-miss affair. Production budgets for shows have trended upward after the entry of streaming services and their swollen content budgets. In 2017, Variety reported that the typical production budget range for high-end dramas on cable and streaming services was $5 million to $7 million an hour. By 2019, when tech conglomerate Apple Inc. (AAPL) launched its Apple TV, producers were spending as much as $15 million per episode on high-end shows. 

That figure will rise even higher in the future as streaming providers mark their territories in an increasingly crowded landscape. "The cost to build, the cost to market and the cost to retain customers will all be going up in a competitive market," Michael Nathanson, an analyst with Moffett-Nathanson told The Wall Street Journal.

The ratcheting up of budgets to provide an endless spigot of entertainment, however, does not come with profit guarantees. For every smash hit like The Squid Game, Netflix, Inc. (NFLX) has had several duds, such as its losses on The Dave Chappelle Show last year. That the service's criteria for measuring the success of its shows are kept under wraps or are unclear also means that it is difficult to measure the contribution of new content to profits beyond the addition of new subscribers. At the same time, it might crimp operating profits if successful shows do not attract enough new subscribers to offset production costs.

Why Disney Has the Upper Hand

A backlog of evergreen content, with TV shows that are critically acclaimed or proven hits, ensures that new viewers are entertained until a new show comes along. With its extensive library of content that goes back several decades, Disney is well positioned to keep viewers in its ecosystem. The service had the second-lowest viewer churn numbers among streaming services at the end of 2020. The reservoir of content should also provide ample breathing space for the company to time its releases without affecting profits.

Disney is aware of the magic formula. "We always say that library titles tend to increase engagement and minimize churn. But new titles, new content, whether they are movies or series, actually add new [subscribers]," Disney CEO Bob Chapek told analysts last November.