ECNM 657 – Group 3
March, 2020
Table of Contents
Executive Summary
Economic Concepts:
● Supply & Demand
● Porter’s 5 forces
● Elasticity
● Production & Optimization – Profitability
Conclusion
Citations
Executive Summary
The Disney Corporation recently launched its own original streaming service in
November of 2019. This service called “Disney +” provides its subscribers with ad free Disney
content that can only be accessed through this service. Disney + enables The Disney Corporation
to capture and create significant market share in the competitive online streaming marketplace.
With competitors like Netflix, Hulu, and Peacock (NBC), Disney + is the only streaming service
to instantly provide nostalgic content that spans decades. Disney + will be offered at a monthly
price of $6.99, which is $2 less than Netflix, the current market share leader. The aggressive
pricing strategy combined with the personal connections the viewers experience with Disney
content, will lead to short term subscriber growth and long term subscriber sustainability. The
world is demanding more and more online content than ever before. As the world demands more
content, the world’s largest entertainment creator is ready to capture the demand with Disney +.
Throughout the past few weeks the world is fighting a pandemic virus that has rippled across the
economy, Disney is no exception. However, with the closure of theme parks and theatres, there
is one bright spot in the Disney portfolio, Disney +. We expect significant subscriber growth in
the first have of 2020 due to the pandemic confining families to stay indoors increase content
consumption. The Disney Corporation is the world largest and most profitable entertainment and
media company in the world. Founded in 1923, Disney has a current market cap of ~$174 billion
dollars and annual revenue of ~$70 billion dollars. Disney + is the most recent addition to a
portfolio that almost touches every industry in the economy and this product will continue to
drive sustainable growth for Disney. We would recommend a buy rating for Disney stock.
Supply & Demand
Since Disney+’s launch date of November 12, 2019, there have been over 28 million
subscribers to Disney’s streaming service. In 2020, Wall Street analysts estimated very high
growth in Disney+ and recommended that people buy Disney stock. There are even some
analysts that say that the growth of Disney+ have caused less people to subscribe to other video
streaming services such as Netflix.
The demand curve is the graphical representation of the relationship between price and
the quantity demanded of a product or service. It is represented as a downward sloping curve
because of the law of demand that states that consumers purchase more of a good as the price
goes down and that consumers purchase less of a good as the price increases.
With a product like Disney+, one reason for the extremely high demand is because of its
low price. Disney+ only costs $6.99/month or $69.99/year. It is much cheaper than competitor
video streaming services such as Netflix, Amazon Prime and HBO Now. According to the law of
demand, there will be higher demand for Disney+ than for other video streaming services
because of the lower price. Furthermore, many consumers may view all video streaming services
as substitutes, which would decrease the demand for the other video streaming services.
Consumers may not want to purchase Disney+ and Netflix and Amazon Prime because they
would feel like one of them could take the place of another. Especially in the case of a family
with children, parents may purchase a video streaming subscription for their children’s
entertainment. For example, Netflix has many different shows and movies that cater specifically
to children and if their child(ren) prefers Disney+ instead, parents would be more likely to cancel
their Netflix subscription and subscribe to Disney+.
There are many determinants of demand such as income, consumer preference, number
of buyers, price of related goods and future expectations. For Disney, including its many parks,
resorts, Disney+ streaming service and cruise line, consumers purchase more Disney
products/services when their income goes up and less Disney products/services when their
income goes down. Disney’s overall revenue would depend on how much the typical family
household income is and what percentage of the household income the average family chooses to
spend on vacation. Consumer preference is very high for Disney because Disney is known for its
world class customer service experience. Disney aims to make each customer feel special and as
a result of all of that effort, Disney is able to retain long-term customers. Disney has a very high
number of buyers due to its wonderful customer service and low-priced products. While there is
only one Disney, there are many related goods, such as other video streaming services, other
amusement parks, cruise companies, etc. However, even when the other related goods take away
some demand from Disney, Disney’s demand remains very high and is increasing. The future
expectations of Disney are optimistic. Investors recommend buying Disney stock because of
positive events that are likely to lead to positive returns in the future. One of the positive events
is that Disney has a growing consumer base which is an indicator of a company that is doing
well.
While changes in price cause movement along the demand curve, other changes such
consumer income, consumer preference and price of related goods cause a shift of the demand
curve. In this case, Disney would greatly benefit from a shift of the demand curve because that
would mean that Disney can sell more units (quantity) at a certain price than before. This would
increase Disney’s overall profitability because of the increase in demand that is not caused solely
by a decrease in price. In early 2016, Disney introduced a new ticket cost structure called
demand-based pricing. This new cost structure meant that the price of the ticket would depend on
the day that consumer choose to go to Disney. For example, if a consumer chooses to go to
Disney on holidays and weekends, the price of their ticket would cost up to 20% more than off-
peak times. While Disney may have experienced some consumers waiting until the off-peak
times to go to Disney, the new demand-based pricing still resulted in higher profits for Disney.
This goes to show that even when ticket prices increase, people are still willing to pay whatever
price they need to in order to go to Disney.
The supply curve is the graphical representation of the relationship between the price
and the quantity of a good or service supplied. It is an upward sloping curve because the law of
supply states that the higher the price, the higher the quantity supplied and the lower the price,
the lower the quantity supplied.
In the case of Disney, not only does it have demand-based pricing on one-day park
tickets, they are also increasing their annual pass prices. Depending on if the consumer is
purchasing a Florida resident pass or non-Florida resident pass and also depending on the type of
pass (Platinum Plus, Platinum, Gold, Silver, etc), consumers will experience anywhere between a
7%-25% increase in prices. According to the law of supply, businesses will supply more
(quantity) when there is an increase in price, which indicates that more and more people are
buying their product or service. When there is too much demand for a product and not enough
supply, that causes the price to go up. As a business, it would make sense for Disney to raise
their prices for their one-day tickets and annual passes if there is enough demand out there to
make it so that Disney’s revenues from the increased pricing are higher overall than before. A
consequence of this increased pricing is that there is a potential to price out many families who
want to take a Disney vacation. This is because not everyone will be able to afford the price
increase in Disney tickets and thus not be able to take their family to Disney. Although this can
be unfortunate to the families who can no longer afford a Disney vacation, it will not cause too
much of a detriment to Disney. This is because of that fact that Disney will not raise its prices to
the point where they have a decrease in revenue. Disney is simply raising its prices so that only
consumers who can afford Disney will be able to go to Disney. There are still many consumers
who are able to afford Disney tickets and who go to Disney regularly that Disney is able to weed
out anyone who cannot afford the tickets. Since Disney is still able to sell enough tickets at the
higher price, its profitability will increase.
The determinants of supply are production costs (input prices), technology, number of
sellers and expectations. These determinants will cause a shift in the supply curve. For Disney,
production costs have increased from year to year as a result of an increase in demand (more
