Apple and Major League Soccer

Yesterday, Apple and Major League Soccer (MLS) announced a deal that would make the Apple TV app the home of all MLS games globally in the next 10 years, starting in 2023. Fans will be able to stream all MLS games, with no blackout dates, through a subscription service only available on the Apple TV App. The League has not yet announced the details of said subscription, but are expected to do so in the coming months. Apple said the subscription would also feature highlights, replays, analyses and other original programming. Furthermore, the partnership will also seek to enhance coverage of MLS teams in Apple News and fans can watch highlights right from the News App.

Subscribers of Apple TV+, which is Apple’s own streaming service, can watch a few games at no additional cost. A limited number of games will be available for free, even to non-subscribers of Apple TV+. MLS season ticket holders will automatically receive a complimentary subscription to the MLS streaming service as an additional perk.

The two parties didn’t disclose the value of this deal, but folks familiar with the matter said that it’s worth at least $2.5 billion in its entirety, approximately $250 million a year. The current deal with ESPN+ is worth $90 million and will expire after this year. It was reported that MLS was hoping to make $300 million in annual revenue due to increasing viewership and popularity. Apart from this deal with Apple, MLS is also talking to a few cable companies over the rights to broadcast some games on linear TV.

Below is what each party had to say about this partnership:

For the first time in the history of sports, fans will be able to access everything from a major professional sports league in one place. It’s a dream come true for MLS fans, soccer fans, and anyone who loves sports. No fragmentation, no frustration — just the flexibility to sign up for one convenient service that gives you everything MLS, anywhere and anytime you want to watch. We can’t wait to make it easy for even more people to fall in love with MLS and root for their favorite club.”

Eddy Cue, Apple’s senior vice president of Services

Apple is the perfect partner to further accelerate the growth of MLS and deepen the connection between our clubs and their fans. Given Apple’s ability to create a best-in-class user experience and to reach fans everywhere, it’ll be incredibly easy to enjoy MLS matches anywhere, whether you’re a super fan or casual viewer.”

Don Garber, MLS’s commissioner

Why MLS picked Apple?

In my opinion, it’s about reach and accessibility. A unique part of this deal is that Apple secured the streaming rights globally, not just within the US; which is very different from the usual practice of rights being given over select geographical areas. Apple is one of, if not, the most global and recognizable brands in the world. Its Apple TV app is available on many types of devices, not just those that run on Apple operating systems. By working with Apple, MLS has a partner that can bring the game to the global audience instantly. There is no need for MLS to set up its streaming service. It’s not an easy task, especially for a global audience. With this deal, MLS is responsible for generating content and Apple will take care of the distribution. Moreover, the Apple TV app is native on Apple devices and doesn’t require any more installation. Fans can just head to the app and subscribe to the MLS service; which the Commissioner already alluded to in his remark.

The second reason is reach. Everything Apple does is widely covered and followed. This blog entry is one example. Apple can use its massive following and Marketing expertise to increase the awareness of MLS and help the League become more global. I have no doubt that we’ll see more ads from Apple about this deal, more mentions during events & earning calls, as well as more articles from news outlets, fans and bloggers. From the League perspective, instead of running Marketing campaigns in each part of the world, either by itself or partnering with an agency, I imagine that leveraging Apple is easier and more effective.

Why Apple partnered with MLS?

I find this comment from Don Garber, the Commissioner of MLS, very interesting

This is a minimum guarantee. It’s not a rights fee,” Garber said of the non-traditional deal. “…So if we exceed the minimum guarantee, then we share in the upside in that guarantee. If we’re able to sell our linear rights for what we hope and expect to sell them for, then we would even exceed our expectations.

Source: Tennessean

The new MLS subscription service is only available through the Apple TV app. Hence, Apple will be the one collecting the subscription dollars upfront and grow its Services revenue, at least on the surface. Based on the comment from the Commissioner, I figure no matter how much revenue the MLS streaming service brings in, Apple will pay the League at least $250 million a year. Past that figure, the tech giant will be able to take a share of the upside. It’s clear that this arrangement will do two things: 1/ Apple has something exclusive to sell to its customers; 2/ MLS will have a partner incentivized to promote the League globally as much as possible. With a lot of cash and 73% in Services’ gross margin, I think Apple can afford the $250 million figure promised to MLS.

If an MLS subscription costs $100/year or less than $10/month, Apple will need at least 2.5 million subscribers around the world for it to actually make any money from selling the service itself. Given the current awareness of MLS, especially to countries outside the US, is 2.5 million subscribers an attainable threshold? Unlikely in my opinion, but over a long term, who knows? The financial success of this partnership for Apple hinges on the future popularity of MLS. There are a couple of factors that may come in handy:

The first is that the World Cup 2026 will be hosted by Canada, the US and Mexico. As the world’s biggest soccer event, the World Cup will undoubtedly raise the awareness of soccer as a sport and of MLS. Currently having 28 teams, the League will add one more next year and plan to eventually feature 32 teams in the near future. The more local teams there are, the more interest such teams will generate among communities.

The second factor is the arrival of superstars who make their names in Europe and have massive global following. We already saw household names join the MLS in the past, including David Beckham, Thierry Henry, Zlatan Ibrahimovic, Wayne Rooney, Frank Lampard, Steven Gerrard and David Villa. Recently, Giorgio Chiellini, a popular Italian veteran, signed a deal with LAFC. But MLS would rise to a whole new level if it could acquire superstars such as Messi or Suarez. These players did it all in Europe and are already rumored to play in the US soon due to the media & business landscape as well as the Latino fanbase in the country. The arrival of legends such as Messi would be an instant boost to the MLS and its streaming service.

Apple wants to keep existing customers loyal and appeal to new ones. Sports are a great way to consumers’ heart and Apple seems to agree. Before the partnership with MLS, it struck a deal with Major League Baseball to broadcast games on Friday nights. There were reports that claimed Apple already secured rights to NFL games on Sunday nights. All this sports content will enrich the Apple digital ecosystem and help the company make more money. Two possibilities that I can think of:

  • Apple TV+ is natively available on Apple devices through the Apple TV app. Android users can also access the streaming service, but only through browsers. That’s inconvenient. Great sports content on Apple TV+ can give a nudge to on-the-fence Android users to switch to Apple devices. Whatever money the company lost on this front can be made up by higher margin services (Apple Care, Ads, iCloud, payments, etc..) and slightly more expensive devices
  • At $4.99/month, Apple TV+ is one of the cheapest options on the market. With more games in the library now, Apple can make a case to raise the subscription price. Even a $1 increase could lead to millions more in revenue

From my perspective, this is a good partnership for both parties, more so for MLS than Apple, given its current level of popularity globally. But Apple is known for its patience and long-term planning. The company must have a plan in mind and I am curious to learn more about it.

Netflix raised prices – Bullish or bearish?

If you live in the U.S and are planning to subscribe to Netflix, get ready to pay more. The company announced a few days ago that all plans for audience in the U.S would see a price bump with immediate effect. The basic plan will increase from $8 to $9 per month. The standard and the 4K package will cost new subscribers $15.5 and $20 per month respectively. The Verge has a handy table showing all the hike prices that Netflix rolled out so far:

Netflix's price hikes in the past
Figure 1 – Netflix’s price hikes in the past. Source: The Verge

After the news broke, I saw a lot of people on Twitter bullish about Netflix’s outlook. The rationale is simple: if your customers are sticking with you AFTER you raise prices, it means you have a great business. The key underlying assumption is that Netflix viewers won’t churn or, in other words, leave. To back up this assumption, these bulls provided a chart from Antenna which allegedly shows Netflix has the lowest churn among premium streamers.

Netflix's alleged churn rate against competitors'
Figure 2: Netflix’s alleged churn rate against competitors’. Source: Antenna

The problem is that when your entire thesis is based on a chart, you have to make sure the data is trustworthy. Unfortunately, I find Antenna’s data confusing and ambiguous for three reasons. The first reason is that there is no methodology or explanation of how they acquired this data. Take the churn chart above as an example. What does weighted average churn rate mean? What is churn weighted against? What does passive churn mean? Did they survey users or did they base this chart on credit card usage data? If it’s survey-based, how big is the survey pool and is it representative of the U.S? Plenty of questions with zero answer.

Furthermore, Antenna’s charts seem to contradict one another. While they indicate that Netflix has the most loyalty among streamers, somehow Netflix’s market share in terms of subscribers has been declining for the past few quarters. How does that happen? If Netflix’s churn was lower than that of its competitors, the company’s market share should stay the same at the very least or go up. Some may argue that Antenna may favor other streamers in a sense that if one person subscribes to both Netflix and another service, the other service will claim this subscription. Well, this argument brings us back to my first issue mentioned above: no methodology! How do we know if this argument is true?

The last issue I have with Antenna is the inconsistency of the reported data. In Q2 2021, Antenna claimed that Netflix has a market share of 29% (Figure 4). However, in their latest report for Q3 2021, Netflix’s share declined to 30% from 32% in Q2 2021 (Figure 5) . The two reports seemingly have the same methodology and feature the same number of streamers as well as the composition. My question is: what changed? How did Netflix’s Q2 2021 share go to 29% in one report to 32% in another?

These issues really call into question the assumption that Netflix’s churn is lower than its competitors.

But for the sake of argument, let’s assume that Antenna data is correct. That also means Netflix’s market share has been declining gradually. The 4-quarter rolling average net adds for US and Canada has gone down significantly since Q4 2020. Yes, Covid-19 pulled forward subscribers, but that also signals as many in the U.S are vaccinated, the macro environment is no longer favorable to Netflix as it was at the onset of the pandemic. When the number of new adds decreased despite all new releases in 2021, why does management think it’s a good idea to raise prices? Do they have any tricks up their sleeve? Or is the new price hike aimed at increasing revenue with the hope that subscribers will stay regardless?

I don’t know at this point whether this is a good strategic move for Netflix. I guess we’ll have more information this Thursday when they hold their earnings call. What I do know is that I don’t share the bullishness that many fans of Netflix stocks quickly showed after the price hike was announced. We just don’t have enough reliable information.

Netflix's 4-quarter rolling average net subscriber adds for U.S and Canada
Figure 3: Netflix’s 4-quarter rolling average net subscriber adds for U.S and Canada
Figure 4: U.S Premium SVOD Share of Subscriptions. Source: Antenna
Figure 4: U.S Premium SVOD Share of Subscriptions. Source: Antenna

A strong opening weekend for Black Widow highlighted Disney’s competitiveness

In a rare move, The Walt Disney Company disclosed some details around revenue and profit made from streaming. Per Variety:

Disney and Marvel’s superhero adventure “Black Widow” captured a massive $80 million in its first weekend, crushing the benchmark for the biggest box office debut since the pandemic. The film, starring Scarlett Johansson, is the first from the Marvel Cinematic Universe to open simultaneously in movie theaters and on Disney Plus, where subscribers can rent “Black Widow” for an extra $30. Disney reported that “Black Widow” generated more than $60 million “in Disney Plus Premier Access consumer spend globally,” marking the rare occasion in which a studio disclosed the profits made from streaming.

Directed by Cate Shortland, “Black Widow” collected an additional $78 million from 46 international territories, boosting its global box office haul to an impressive $158 million. Combined with Disney Plus numbers, the final weekend figure sits at $215 million. Curbing overall ticket sales, however, is the fact that “Black Widow” still doesn’t have a release date in China, which is an all-important moviegoing market for the Marvel franchise.

A few things that jumped out to me with this report. First, Disney continues to show the ability to tell appealing stories to a wide audience. Granted, not everybody will enjoy their stories, but the revenue numbers don’t like. They have crushed revenue expectations in the past when the majority of movies that crossed $1 billion in revenue came from the studio and Endgame is still the top two successful movie of all time. Netting $215 million in the first weekend without China when many markets are still dealing with Covid-19, especially the Delta variant, is a great sign in my book.

Second, Disney has a unique ability to be flexible with how they introduce their movies. All the series such as Loki, Wanda Vision or The Falcon & Winter Soldier are exclusive on Disney+ and that makes sense. For the movies, they can reach the audience in different ways. Movies can be exclusive on Disney+ for free to all subscribers or to Premier Access buyers first and to all subscribers after a few weeks. Disney can choose to release movies in theaters first and then on Disney+. Or they can release it in theaters and on Disney+ with Premier Access; which is exactly what they did with Black Widow. The flexibility allows the company to react to the changing environment caused by Covid. Plus, it’s a great tool to maximize revenue and profit. Movie theaters will bring in nice revenue, but whatever money Disney generates from Premier Access is pure profit.

This unique flexibility is a competitive advantage that none of Disney’s competitors can copy. To convince people to shell out another $30 after already paying a membership, a streamer needs a strong brand and IP. Disney has that. Does Netflix have any movie that could do the same? I don’t think so. Even if a streamer has the necessary IP, does it have all the other ingredients needed t o pull the feat off? Like, if the streamer has a big enough subscriber base to even move the needle? Or does it have the relationship with theaters to negotiate a deal like Disney did? I think other streamers will look at today’s announcement from Disney with interest and try to explore the possibility of copying the model. So I will look forward to see how they can pull it off.

In the last earnings call, Disney reported that they had about 104 million Disney+ subscribers with a third coming from Hotstar in India. Hotstar subscribers pay much less for a Disney+ plan, hence it drags the whole streamer ARPU down. What’s interesting in this case is that Disney+ Premier Access is not available in India. News outlets such as Yahoo reported that the feature was not available in India. My friend from India confirmed it too. Given that Premier Access costs more or less $30 in every available market, $60 million in revenue from the feature means that around 2 million subscribers or around 1-2% of Disney+ subscriber base paid for early access to Black Widow.

Netflix bulls will keep pounding on the big lead that Netflix has over other streamers and, as a result, the cost advantage. That’s true. But what Disney shows is that there is an alternative way to succeed. Disney doesn’t have yet the subscriber base like Netflix has. But it has other unique assets: 1/ A dedicated fanbase to its IPs; 2/ The flexibility to make money from other channels, not just its streaming service; 3/ Its theme park complements nicely its Direct-To-Consumer segment. When you generate more money per movie than your competitors, does it matter whether it comes from your subscribers? That’s not to say Disney can neglect the task of increasing its customer base. It’s important that Disney can catch up to Netflix on this front and please investors in the short term. But it’s even better to introduce Disney+ at a low price in many markets to attract audience while making money from theaters and Premier Access. So far, I haven’t seen another company with this model.

Disclosure: I have a position on Disney and Netflix.

Take-aways from the latest interview of Disney CEO

Bob Chapek, the CEO of Walt Disney, attended Credit Suisse 23rd Annual Communications Conference and had some interesting comments on the business. If you are interested in the company or its competitors, it’s really worth a read. Here are a few highlights.

In response to the interviewer’s question on the investments on the experience side in the next 5 years, Bob’s answer was, as follows:

Sure. Sure. Well, we’ve got ambitious plans to expand our business. I had just mentioned Avengers Campus a second ago, and we’re encouraged by the great response we have there, but we’re not stopping there because, as you know, we’ve been undergoing a massive transformation of our Epcot park at Walt Disney World in Orlando. And we’ve got a Ratatouille attraction that we’re bringing in that first premiered in France. We’ve got a new nighttime show Harmonious that will be on the water there at Epcot, and it will be a huge guest pleaser. And then we’ve got our Guardians of the Galaxy: Cosmic Rewind attraction or coaster that will give us our ability to bring that whole Marvel franchise into the park. Internationally, we’re thrilled to bring Zootopia into Shanghai Disney Resort. You mentioned Shanghai.

That’s obviously a property that did extraordinarily well in the box office when Zootopia came out. So that will be a big hit in Shanghai. We’ve got Frozen installations coming into Hong Kong Disneyland. At Disneyland Paris, we’ve got the [indiscernible] of its own Avengers Campus taking off from where Anaheim has. It just recently launched Avengers Campus, and we’ve also got the Art of Marvel Hotel that we’re putting in. We’re installing Tokyo Disney Resort. We’ve got the 8-themed port over at Tokyo DisneySea.

We’ve got 2 new hotels and attractions going in for Frozen, Tangled and Peter Pan. And then we’ve got 3 new ships and a second island destination. So we certainly have a plethora of new things coming, and that’s really mining all the work that we had done prior to the pandemic and kept working on during the pandemic so that we would not have any sort of glitch in our supply chain of new attractions and experiences for our guests, so we can keep that growth engine of parks going.

Source: Credit Suisse 23rd Annual Communications Conference

That’s an impressive pipeline of investments both in depth and breadth. The company has different types of physical attractions under different brands and themes ranging from hotels, resorts to cruise lines and theme parks, from Frozen, Peter Pan to Disney & Marvel. Despite being badly hit by the pandemic, Disney’s traditional cash cow, their Parks business, is likely going to make up for lost time & money, now that folks are increasingly vaccinated and restrictions are lifted. These assets are difficult to replicate. First of all, they are expensive. Any company that wants to emulate Disney needs to ready their check books for a huge sum of money for initial constructions and yearly maintenance. Second of all, Disney competitors need to also build up a library of themes & characters that relate to consumers and entice them to visit the physical attractions. Disney has spent decades of creating, marketing and distributing content. Their brand name is known and loved by generations of consumers. Even if a competitor has the required resources to invest in content, those resources cannot buy the timeless reputation and name that Disney has.

Netflix is trying to take a page from Disney’s book. It’s building Netflix Shop where merchandise related to their originals is sold. This is the first piece of the puzzle. Netflix is popular among viewers around the world and it has some great originals. Hence, it makes sense for the streaming service to start making inroads into the retail side. However, having an online shop is very different from building giant physical attractions that represent huge fixed costs. It will take a lot more from Netflix to build an empire like Disney’s, but everything has to start somewhere.

Second, when asked about how much IP is there to mine, Bob Chapek had this to say:

Well, I’ve always learned not to underestimate our creative teams, particularly our Marvel creative teams. We’ve got 8,000 characters that we have to mine. And you say, well, 8,000 characters, who knows what these 8,000 characters are. But remember that all of our Avengers, for example, our Avengers characters, when we made the acquisition, weren’t exactly household names. Take Loki, for example. Loki was the most watched season premier ever on Disney+ during its opening week. And no one knew who Loki was even when we got started on this journey on Marvel. No one knew who Iron Man was or Wanda or Vision or Falcon or the Winter Soldier. Black Widow, Shang-Chi, nobody knew who these characters were.

Source: Credit Suisse 23rd Annual Communications Conference

I didn’t grow up reading Marvel comics. Years ago, when characters like The Hulk, Iron Man, Thor or Captain America debuted, I barely knew them, yet they are now some of my favorite. I suspect that many casual viewers will first get to know the likes of Shang Chi and others among 8,000 characters from movies or series by Disney. The ability to build characters and tell engaging stories, especially interconnected ones, over a long period of time is a creative competitive advantage that is hard to match. The last 12 years from the first Iron Man movie to End Game is evidence of such an enduring output of creativity. Does it guarantee future success and repeat of the past? No. But it’s much more assuring than records of many competitors.

Next, when the interviewer asked whether Disney would add an ads-supported plan to Disney+, Bob ruled that possibility out at least in the near future.

Yes. We’re always reevaluating how we go to market across the world, but we’ve got no such plans now to do that. We’re happy with the models that we’ve got. But again, we won’t limit ourselves and say no to anything. But right now, we have no such plans for that.

I support this position by Disney. The flagship streamer, Disney+, is already on the cheap end among streamers with the latest reporting ARPU standing at $3.99. The addition of an ads-supported plan would like drive down ARPU even more. Plus, nobody likes to have their streaming experience tainted with ads. Netflix goes to great lengths and invests a lot of resources to make sure that their viewers have the best streaming experience possible on their platform. Disney is wise to do the same if it hopes to compete with its rival. If the company wants to make money from ads, it has its own media channels to do so.

On what “new content on Disney+ every week” means:

Yes. Our plan is to do — hit that cadence this year in terms of a new product every week. And what we mean by that is a new movie or a series, meaning, a new production or library add every week. And that’s not counting new episodes, if you will, but does count new seasons. So we count new seasons. We don’t count new episodes in that. And something new can be a new movie or a new piece of content or something new added to the library. So that’s how we’re defining that. And that’s the plan right now.

Because Disney+ subscriber base is sufficiently big now, it enables the company to spread the fixed content investments across more than 103 million viewers, giving Disney a cost advantage over other streamers, except Netflix. Additionally, new content helps the company acquire more subscribers who will, in turn, add to the economics advantage mentioned above. What I am unclear about is whether a new weekly content is purely originals or whether it includes licensed IP. If it’s the former, it will be great news for Disney stock bulls, a gift to subscribers and ominous signal to competitors.

Last but not least, Bob Chapek touched upon the impact of price increases on churn:

Yes. In terms of, I guess, an objective way to look at the price value relationship, the growth rate that we’ve experienced on Disney+ sort of stands out as the headline there. But you’re right, we did launch at a very attractive price value opening point. And the first price point — or our first price increase that you mentioned in the first 16 months happened recently, and we’ve seen no significantly higher churn as a result of that. In Europe, as a matter of fact, we took a price increase twice as high as we took domestically more or less. And we — that was with — commensurate with the integration of the Star brand as the sixth brand tile. But our churn actually improved, right? So we took an even higher price increase and our churn improved because we added more content. And I think that investment in the content at attractive price point gets you strong retention, and strong retention, obviously, is one of the key factors towards overall platform growth. And — but that doesn’t mean that in the future as we continue to add more and more great content that we wouldn’t necessarily reflect that in the value that we add and then price it accordingly.

While it’s encouraging to see the current price inelasticity of Disney+, it’s equally important to understand that we don’t have a lot of context here. Disney+ had a low price at launch and even a 3-year bundle at one point. Because the starting point was low and the increase here is not significant in absolute ($1 in the US.), even though customer reception towards the latest price increase was positive, it doesn’t guarantee the same outcome for the next raise. They could plow millions of dollars into content, raise prices yet get spurned by consumers. Furthermore, since we don’t have information on the previous churn, it’s tough to conclude whether the current churn is good. Yes, there was an improvement, but for all I know, it could be upgraded from “disastrous” to “concerning”.

In short, Disney has a lot of great assets and great things going on for them. As the world is gradually opening up with an increasing vaccination rate, it will turbocharge the recovery of a business whose cash cow was terribly affected. On the streaming side, the pandemic was a boost in what I consider largely a two-horse race between Disney and Netflix. Each company has its won advantages and strengths. It’ll be super interesting to see how the market will be in the near future.

First look at Disney Plus

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