When Walt Disney (DIS 0.85%) launched Disney+ in November 2019, it could have never anticipated the surge in subscriber growth largely due to the COVID-19 pandemic. To keep customers happy, Disney cranked out a ton of content -- to a fault.
Disney+ went from a growth story to a money pit. And Disney has been backpedaling ever since to reduce costs at Disney+ and make it profitable.
One way to boost profitability is the company's ad-supported tier, which debuted in the U.S. in December 2022. On Aug. 9, Disney announced that the ad-supported tier will be offered in Canada and several countries in Europe beginning Nov. 1.
Another big announcement on Aug. 9 was that Disney is raising the price of the ad-free version of Disney+ from $10.99 per month or $109.99 per year to $13.99 per month or $139.99 per year -- a steep 27% increase for both the monthly rate and the yearly rate. It's also raising prices on ad-free options for Hulu, ESPN+, and its bundle options. But Disney is keeping the ad-supported options for Disney+ and Hulu the same at $7.99 per month each.
Let's discuss the price increase and management's comments on Disney's Q3 fiscal 2023 earnings call to see if this is a good long-term move for Disney and what it could mean for the media stock.
Image source: Getty Images.
Playing the long game
On its Q3 fiscal 2023 earnings call, Disney noted that 40% of new Disney+ subscribers are going with the ad-supported product. As with most decisions, the choice to keep the ad-supported tier pricing flat while implementing a substantial increase in non-ad offerings was purposeful. CEO Bob Iger said the following in response to an analyst question about churn and the reasoning for the price hike:
We took a pretty significant price increase at Disney+ sometime late in calendar '22. And we really didn't see significant churn or loss of subs because of that ... It's important to note, though, that the price increase that we've just announced is a price increase for the premium product or the non-advertiser-supported product. We're actually keeping the advertiser-supported product flat in terms of prices. That's being done for a reason ... the advertising marketplace for streaming is picking up. It's more healthy than the advertising marketplace for linear television. We believe in the future of advertising on our streaming platforms, both Disney+ and Hulu. And we're obviously trying with our pricing strategy to migrate more subs to the advertiser-supported tier.
The win-win scenario for Disney would be that the majority of folks decide to accept the price hike and those who don't simply pivot to the ad-supported tier. The more users on the ad-supported tier, the more valuable the platform becomes to advertisers.
There's a lot of inherent value in Disney+ due to its classic films and treasure trove of intellectual property. In the old days, Disney would sell its movies on VHS tapes and DVDs for home video offerings. Now folks can access all of that and new content (with ads) for just $7.99 a month. It's a compelling and affordable offering. And it opens the door to recurring revenue from advertising instead of one-off sales as in the past.
A successful ad-supported tier may be the best way to gain new subscribers as well, especially in Canada and Europe. All told, Disney is giving companies that don't want to advertise through traditional media another option. And that could end up paying off more over time than Disney makes from its ad-free tier.
NYSE: DIS
Key Data Points
A massive win for Disney's bottom line
Disney will make an extra $3 a month for every subscriber who stays on Disney+ after the price hike. But for every subscriber who leaves the non-ad tier to go to the ad-supported tier, Disney loses $3 a month on the subscription while boosting the platform's value to advertisers.
Easy math suggests that Disney's price hike will be a win as long as fewer than 27% of premium subscribers leave Disney+ entirely. And for every subscriber who leaves the non-ad tier to go to the ad-supported tier, which is what Disney expects a lot of subscribers to do, Disney isn't losing that much money on subscriptions.
The bundles make the math a bit more complex. But even here, we're seeing a compelling ad offering that could drive a lot more engagement across the company's streaming platforms. For example, at $13.99 per month, Disney+ without ads is just one dollar less than Disney+, ESPN+, and Hulu with ads. Similarly, Disney+ and Hulu without ads is $19.99 per month, but with ads, it's half the cost.
All told, it's extremely likely that Disney's direct-to-consumer revenue is going to surge from this price hike and the new ad-supported customers it gains from Europe and Canada. It's an excellent long-term move and differentiates Disney's offering to advertisers, which puts the company in the driver's seat in case cord-cutting accelerates.
It's also worth mentioning that the price hike goes into effect on Oct. 12, 2023. This is probably not an accident, as Disney's fiscal 2024 year runs from Oct. 1, 2023, to Sept. 28, 2024.
If the strategy works, Disney+ stands a real shot of being profitable by the end of fiscal 2024, which would be a huge boost for the company and could be a turning point for the stock as well.
A pivotal time
The next five quarters are extremely important for Disney. If the company can prove the value of Disney+ to investors, it could reduce pressure at the box office. And if Disney+ becomes a preferred option for advertisers, it's going to take pressure off of Disney's traditional networks.
Now is the time for Disney+ to change its image on Wall Street from a drag on the business to a catalyst for profit generation.
