The highest court in UK ruled that Uber drivers have to be classified as employees. Uber cannot appeal further in the UK; as a result, unless it wishes to exit the UK market, especially London, operating expenses will likely increase from now on. Another interesting detail from the ruling is that workers should get paid whenever they are logged into Uber’s system and poised to accept rides. On the other hand, Uber argued that the ruling would only apply to Uber’s Mobility, not Uber’s Delivery. I don’t know if that’s factually true, but I don’t like their chances.
Jacquard by Google. The product category may be interesting, but I am not sure that folks are ready for it. It’s bad enough that we carry around our phone with us every single waking moment in this digital life. Whether consumers agree to carry another device, no matter how small, remains to be seen, especially when the device comes from a company like Google, which is notorious for tracking users.
A new species of whales was discovered in Mexico. I kinda had mixed feelings after reading this. On one hand, I was glad we made this discovery. On the other, there may be some ignorant and greedy people trying to hunt them down for food or just an ego booster.
On its 2020 Investor Day, Disney showed everybody that it was going to be a force to be seriously reckoned with in the streaming business in the years to come. The four hour presentation was packed with announcements on upcoming titles, business updates and impressive revised projections. Netflix fans always point to the fact that the streamer won the streaming war by having a much bigger subscriber base than any other competitors. The big subscriber base allows Netflix to operate at a much lower cost advantage. For the same investment of $1 billion in content, a base of 100 million subscribers will lead to a cost of $10 per subscriber while a base of 10 million will result in a cost of $100/user. As each user brings in monthly revenue, a lower cost structure enables a higher profitability which, in turn, enables more money in content creation which, in turn, leads to more appeal to consumers.
Netflix, with 195 million subscribers, enjoys a cost advantage to other competitors. It already got over the peak operating losses and has seen positive free cash flow for the past three quarters, despite spending a massive amount of money on content. I believe none of the other streamers achieved that feat yet. In short, Netflix has an invaluable head start.
Enter Disney Plus. Last year, Disney forecast to have around 60 to 90 million subscribers by the end of FY 2024. They just announced that the number of Disney+ subscribers was 86.8 million as of December 2, 2020. Critics say that Disney reached this number due to a huge subsidy in the Indian market which constitutes 30% of the base now. Well, that’s true, but it’s hard to reach the mass market in a short period of time and keep the price high. You have to take a multi-step approach. Expand the base first, add more value and increase the price.
That’s what Disney is doing now. With more than 86 million subscribers in the pocket, the company is planning 100+ titles per year for the next few years, coming from established brands such as Marvel, Disney, Pixar, Star Wars and National Geographic. At the same time, Disney is addressing the Average Revenue Per User (ARPU) issue with a price hike of $1/subscriber/month in the US and €2/subscriber/month in EU starting March 2021 and with a Premier Access model. The Premier Access model lets subscribers gain first access to select titles before everyone else for an additional fee. A few months ago, Mulan cost Disney+ subscribers an additional fee of $30 in exchange for first exclusive access.
As a result, Disney expects to have around 230-260 million Disney+ subscribers by the end of FY2024. Within one year, they revised the forecast from 60-90 to 230-260 million subscribers for the same time frame. There must have been some sandbagging, but I believe that even the folks at Disney didn’t expect to have such a big leap. The new figure should put Disney+ in the same conversation as Netflix by the end of FY2024 and well ahead of the other streamers. The profitability expectation remains at the end of FY2024, unchanged from the Investor Day last year, even though the legendary company expects to at least double its content cost by FY2024. The same upgrade in expectation is similar for ESPN+ and Hulu
Those are impressive revisions, particularly given Disney’s distinct advantages. First, streaming services aren’t the only way they generate revenue and profits. Their Media and Parks segments generate considerable revenue and profit as well, especially Parks. Parks has been hit particularly hard by the pandemic, but once we go back to normal and vaccine is delivered to the public, Disney should have no problem attracting guests back to their hotels, parks and resorts. Even though the other segments don’t directly subsidize the streaming services, having them around definitely helps the company as a whole in terms of profits, revenue and cash flow. Netflix, rightfully worth every accolade for their laser focus, has only one line of business. As long as that line of business thrives, they will enjoy the full benefits of not having to spread resources like Disney. However, on the other hand, a crisis would hit them harder than Disney without any cushion.
Moreover, Disney has so many ways to appeal to consumers. First, they have an extraordinary library of content and brands, ranging from series, films, documentaries and sports. Second, they can always create value out of a bundle such as what they are doing now with a bundle of Disney+, Hulu (ads and no ads) and ESPN+. Another model that can be deployed is Premier Access as I describe above or a theatrical release in which a movie will be available first in theaters and then on Disney+. An example is Black Widow. This takes me to another strength that Disney has. A portfolio of household brands that need no introduction. When somebody mentions Avengers characters or Star Wars, there is little introduction needed. That kind of brand power helps draw viewers regardless of the medium. When Disney releases Black Widow in theaters first, they likely won’t need to persuade Marvel fans to pay to watch. What they may need to persuade them on is whether it’s worth getting into theaters when the pandemic may still be around. This brand power isn’t just limited to consumers with kids. On the 2020 Investor Day, Disney CFO revealed that more families without kids are subscribers than families with kids; which is a very interesting revelation since it was assumed that Disney would appeal parents through content for kids.
In short, I believe the future is bright for Disney’s streamers and the company as a whole. That doesn’t mean that I think Netflix is doomed. The sizeof the market and the consumer behavior should allow these two behemoths to co-exist. As long as other streamers have the financial ammunition to compete, they should have a seat at the table, but this should be a two-race non-zero-sum market. The winners should be consumers who will get more choices and talents, including actors, directors, creators, storytellers and so on, who will be sought after as streamers strive to create quality content.
Adobe’s extraordinary story continues
Adobe may not be as popular as some of its products. It’s the creator of Photoshop, Illustrator, InDesign and PDF. It also owns Behance, the LinkedIn of creative folks. Its less known products include Marketing Solutions, such as Email Marketing, eCommerce and Customer Analytics, and Document Solutions such as eSignatures or Document Intelligence Services. Besides its famous products, Adobe is also known for being the trailblazer in transitioning to a Software-as-a-Service model. The transformation started in about 2011 or 2012, and it has been the case study as well as the envy of established software makers all over. Adobe’s revenue grew at a CAGR of 18% from 2013 to 2020, reaching almost $13 billion in 2020. More impressively, its FY 2020 Operating Income was even higher than its revenue in FY 2014. Additionally, its Operating Margin in FY 2020 was 32%, the highest in the last 6 years.
The transformation was best reflected in Adobe’s subscription. In 2013, only 28% of the company’s top line came from subscriptions which have higher margin and stickiness. In FY 2020, the figure stood at 90%. In terms of CAGR of subscriptions’ absolute dollars, it is an extraordinary 39%.
Among the main business segments, Digital Media is the biggest and certainly the driver of growth at Adobe. Since 2013, Digital Media’s revenue grew by almost 300%. Within Digital Media, Creative and Document Cloud Annual Recurring Revenue more or less doubled in the last 4 years.
While Digital Experience, which includes B2B solutions, faces stiff competition from the likes of Salesforce, Adobe is clearly the market leader with their Digital Media offerings. How many designers or creators in the world don’t have an Adobe product? Which document format can replace the de factor PDF when it comes to official documents? Their Digital Media products, whether it’s Creative Cloud or Document Cloud, are popular among subscribers. According to Adobe’s 2020 Investor Day
75% individual subscribers in 2020 were completely new to Creative Cloud
Individual subscribers made up more than half of the Creative Cloud’s revenue
2 billion mobile + desktop devices were installed with Acrobat Reader
75%+ individual subscribers in 2020 were new to Acrobat
Mobile IDs were more than 300 million in total as of Q4 FY 2020, with more than 175 million created
More than 60% of Creative Cloud ARR is based on All Apps subscribers. An All-App subscription costs $53/month, much more expensive than individual app subscriptions.
All these data points show how much customers love Adobe products. As more and more people use Adobe products, it helps the company establish an invaluable network effect. If you are a designer collaborating with other designers and businesses that are used to working with Illustrator and Photoshop, it’s difficult not to use those applications. That’s perhaps the strongest moat Adobe has. There may be better alternatives than their products on the market, but those products don’t have the brand names, the popularity, the established sales channel and the network effect that Adobe has. Once a company can establish this kind of relationship and network effect, its priority should be to continue add values to subscriptions to keep the churn low. In other words, as long as the existing subscriber base doesn’t shrink, Adobe’s revenue will only grow. Any new subscribers acquired will only add to their fortune.
Disclaimer: I own both Disney and Adobe in my personal portfolio.
In Q3 2020, Disney reported a drop in revenue of more than 8$ billion, down 42% YoY due to the negative impacts from the Coronavirus. Most of the revenue loss came from Parks, which is historically a reliable source of revenue and profit for Disney. In the most recent quarter, Parks brought in a little less than $1 billion in revenue, compared to $6.6 billion in the same quarter last year. As a consequence, Parks recorded a loss of approximately $2 billion, compared to $1.8 billion in profit in Q3 2019. Despite the challenges that Covid-19 brought onto Disney’s operations, the company actually had a small profit from its operations, if you exclude the $5 billion in impairments.
Disney reported that as of 27th June 2020, there were more than 100 million paid subscribers on their platforms, including 8.5 million for ESPN+ (up from 2.4 million from a year ago), 35.5 million for Hulu (up from 27.9 million from a year ago) and 57.5 million for Disney+. On the earnings call on 4th August 2020, Disney’s CEO revealed that the subscriber base for Disney+ rose from 57.5 million 5 weeks ago to 60.5 million. The updated figure means that Disney already surpassed its lower target for 2024, a full four years ahead of schedule. While it’s definitely a good sign, it can be argued that Disney is usually conservative in its forecast and that Covid-19 has been an unexpected boost to its streaming service. It’s also worth pointing out that Disney+ Hotstar, launched in India only up to Q3 2020, made up 25% of Disney+ subscriber base at the end of the quarter.
A major announcement regarding content for Disney+ is the upcoming rollout of Mulan. Disney will make the movie available to Disney+ subscribers at an additional price of $30, meaning that you first have to have an active subscription and pay another $30 on top of it as a one-time fee to see the movie.
This one-off strategy is an interesting move in my opinion. Due to the impacts of Covid-19, Mulan’s schedule premiere has been postponed a couple of times. As the US is still struggling to handle this pandemic, folks won’t visit cinemas any time soon. Hence, Disney either would have to keep delaying the movie’s debut or put it on its streaming service. If the latter is the better option, what is the reason for the additional charge?
Bob Chapek, the CEO of Disney, labeled this move as a test and I tend to agree with him. There are three likely reasons behind Disney’s decision:
The company wants to see how much a movie like Mulan can attract new subscribers or entice existing ones to pay more. Making it free on Disney+ is an easy and straightforward decision. Why not using this as a test and getting more revenue, given the situation that we’re in right now?
A subscription can be shared with 5-6 people and as we still stay at home most of the time, it’s likely that a movie that charges $30 will be watched by more than one person. Disney is probably testing to see how the $30 price point is accepted by consumers. I mean, if 4 people watch the movie with a new subscription, that’s roughly $10 for each person, almost a movie ticket and they can still have access to Disney’s library for a month. Another point is that consumers are likely to react more positively to a price drop than to a price hike. If $30 is too high and Disney wants to repeat this test in the future at $20, it will likely be better than increasing the test price from $20 to $30.
One can argue that Disney is angling for a future permanent one-off strategy as in the one-time charge will give subscribers exclusive early access to blockbusters. However, there are a couple of challenges with that. The first is that Disney has to convince subscribers to pay extra for every blockbuster. A movie such as Endgame may have the drawing appeal, but not every movie will be like that. The second challenge is how Disney would work with theaters once Covid-19 blows over. If Disney’s finest could only be found exclusively on Disney+, what would draw in moviegoers? Movie distribution brings in a significant sum of revenue for Disney. Hence, the company may likely have to deal with this question mark if it decides to pursue a one-off strategy.
In the near future, Disney will be one of the companies wishing for things to go back to normal as quickly as possible. Their streaming service should be fine. They have a lot of geographical footprint to grow into, boosted by a formidable library content, legendary marketing prowess and a household brand name. What they really want to add is feet inside theaters and the walls of their branded parks, hotels or resorts. That’s why they opened up parks in the US to some extent despite the Covid-19 warnings; which I fervently disagreed with. Given how the situation has progressed for the past few weeks, I won’t be surprised that it will take them at least a couple of quarters to regain the Parks business. Nonetheless, the business has shown resilience and I think the bull case for them is stronger than a bear case.
For the past few weeks, I have seen people claim that Disney is doomed because it reported millions of loss due to the closure of its parks and resorts which, in normal times, bring a lot of revenue and margin to the table. In the same vein, airlines are called a horrible business since there are a lot of costs involved and it’s capital intensive, making it extraordinarily vulnerable in the face of a pandemic like the one we are going through.
They have a point.
However, it’s also important to remember that the current liabilities are what make barriers to entry in their industries so high. Restaurants have low barriers to entry, so it’s not unusual to see a new restaurant in town every day. How often do you see a new airline come up? Because the barriers to entry are so high, airlines at least don’t have to worry too much about a new competitor enter the fray often. Similarly, operating a park like Disneyland is no joke. It requires employing hundreds of employees and a tremendous fixed cost as well as maintenance expenses. How many parks at the same scale as Disneyland enter the market every week/month?
This crisis will blow over. It has to. It’s unfathomable to think that we will be in this self-quarantine forever. Once we get back to normal, whatever it may be, people will fly and go to Disneyland again. Although I don’t deny that what reduces new competition for those businesses now becomes sort of liabilities, it’s worth remembering that nothing good comes easy. The same logic applies to business
Plenty of discussion online has been about how people will adjust their working style post-Covid19. Even in my company, talk has been going around on how folks will continue to work remotely for a while and how preparation should be looked into to accommodate that need. Personally, I think there will be a mixed working style moving forward. Indeed, working remotely saves everyone time from having to dress up and driving to work. Nonetheless, there is also value in face-to-face and human interaction. There is a reason why companies design common areas, hoping that folks will randomly bump into each other and creativity will spark. Plus, speaking from personal experience, I am sick of sitting at my desk, staring at the screen for hours and putting more time into work. I miss my workplace, my coworkers and casual conversations at work. So, even though folks will prefer working remotely 100% in the short term, in the long run, I expect it to be a mix.
Disney+, the biggest initiative and priority in the near future of the iconic company, went live today in the US and Canada. I have been using it for 2-3 hours and below is the summary of my experience so far.
The sign-up is pretty standard and smooth. Nothing major. Even though there was some reported difficulty in finding the app on Apple Store
Fairly expectedly, the app encountered some technical issues which users widely reported here. I have had my fair share as well
That led to Disney+ Help twitter page issued the statement below
In addition to the technical mishaps, I was a bit frustrated by the User Interface. While you can download episodes from the mobile app, I couldn’t find the feature on the browser version. I am not sure if that was intended to limit the downloads, but I was under impression that it was possible.
At the end of a movie, you are presented with a suggestion like the screenshot below, but there is no way to get back to the homepage or the category page
There is an “Extras” tab under the main banner of a movie/episode. They can be never-seen-before clips that viewers will appreciate. However, they could have made the tab more visible or added it to the end, in my opinion
There are some Extras clips on the mobile app that are not available on disneyplus.com.
At the bottom of the website, there is a tab called “Interest-based ads”. On that page, you can choose to opt out of behavioral targeting by ads companies on disneyplus.com
In terms of content, I am excited about National Geographic and Marvel. But to succeed, I do think Disney Plus has quite a long way to go and much to improve if they want to augment user experience
Disclaimer: I own Disney stocks in my personal portfolio