Disney Joins The Tough-Love Club For Streaming Viewers
(Bloomberg Opinion) -- Walt Disney Co.’s streaming strategy appears to be shifting ever so subtly away from subscriber growth toward profits, dealing another blow to customers who have become accustomed to low-price, ad-free viewing.
While Wall Street showed its delight with the 14.4 million new Disney+ subscribers that the company reported on Wednesday for the quarter ended July 2, the growth wasn’t as good as it could have been. In the North American market, for instance, Disney+ added just 100,000 subscribers compared with the previous quarter, to 44.5 million from 44.4 million as of April 2. So the growth came almost entirely from overseas, partly from India, where average revenue per subscriber is a fraction of what it is for Disney+ elsewhere. Overseas growth was also fueled by the launch of 50 new markets, which muddies the waters.
Disney Chief Financial Officer Christine McCarthy suggested that domestic growth would accelerate a little in the current quarter thanks to releases of new shows. While that’s better than the reverse, any acceleration is likely to be short-lived thanks to Disney’s decision to raise the price of the existing ad-free version of Disney+ in the U.S. by 38% to $10.99 on Dec. 8 and to introduce a version with ads at the old $7.99 price.
Chief Executive Officer Bob Chapek assured analysts he doesn’t expect the price increase to have “any meaningful long-term impact on our churn.” That makes sense. Disney+ fans can trade down to the ad-supported version at the same price if the new ad-free price is too high for them, as McCarthy acknowledged.
But the price increase won’t do anything for growth. Anyone who isn’t interested in Disney+ at $7.99 a month without ads is unlikely to be more excited in trying it at that price with ads.
No, what this is all about is stemming the service’s losses. Disney reported that the operating loss at its direct-to-consumer division — the term it uses for streaming — was $1.06 billion in the quarter, compared with $293 million a year earlier. McCarthy told analysts that this is the peak year for Disney+ losses, which means Disney has to show a path toward break-even next fiscal year.
That should be feasible. What isn’t clear is how much of the impact of the price increase will be cannibalized by people shifting down to the ad-supported version. McCarthy noted that the ad-supported version of Disney’s Hulu service is more popular than Hulu’s ad-free version. Still, even assuming Disney’s subscriber numbers in North America don’t grow much, international markets should continue to expand. And the ad tier will bolster revenue.
The same profits-over-growth thinking drove Disney’s recent decision to give up IPL cricket streaming rights for its Disney+ service in India, which also carries the Hotstar brand. Without IPL, Disney appears to expect Hotstar’s growth to be weaker, based on new medium-term subscriber growth projections for the service issued on Wednesday. The subscriber target for Hotstar might change further: McCarthy noted that other cricket rights held by Hotstar in India are coming up for renewal. She added that those would be evaluated with the “same discipline” Disney used in considering the IPL rights. Disney is taking the right tack there. India doesn't generate enough subscription revenue to justify high costs for sports programming.
The good news for Disney as it takes a more cost-conscious approach to streaming is that its top rivals, Netflix and Warner Bros. Discovery, are taking similar steps, to varying degrees. That limits the competitive damage that could arise if Disney were raising prices and others weren’t. The only real losers are consumers, for whom the happy days of low-cost, ad-free streaming will soon be a thing of the past.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Martin Peers is a Bloomberg Opinion columnist covering tech and media. Previously, he was deputy editor of the Wall Street Journal's Heard on the Street column and managing editor of the Information.
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