After initially touting its ad-supported offerings as a lower-cost option to bring in subscribers, Disney+ is now focusing on maximizing profitability.
When Disney+’s ad tier launches in December, it will cost US customers $7.99 per month, the current price of the service’s ad-free tier. The price of the ad-free version will be increased to $10.99. The increased focus on results raises questions about how Netflix will price its upcoming ad-based tier and how major rivals might respond with their own price increases.
The Bob Chapek-run Hollywood giant unveiled the new prices on August 10, just as Disney reported strong third-quarter earnings. The company showed solid momentum and spending in its domestic parks, as well as a growing subscriber base, overtaking Netflix for the first time with 221 million subscriptions in its bundle. Both factors show resilience among consumers, even in the face of inflation concerns, according to Disney executives. That, coupled with the media giant’s investment in content, helped pave the way for a higher price point for the ad-supported tier. Additionally, analysts say the platform has been overpriced from the get-go, both in terms of content and compared to competitors.
“We thought this was the perfect time to go ahead and bring that price-value equation to the fore so we can more accurately reflect the value a guest, consumer or viewer gets with Disney+,” Chapek said on CNBC on Aug. 11 .
Notably, the higher prices come a few months after Kareem Daniel, president of Disney Media and Entertainment Distribution, announced the level’s launch in March: “Expanding access to Disney+ to a wider audience at a lower price is a win for everyone.”
But now there are concerns about profitability. With the boost in pricing for the ad tier, which Chapek said has also seen “strong demand from advertisers,” adding to the bottom line, as well as the price hike for its ad-free tier, Disney reaffirmed its guidance for profitability for its streaming segment in 2024. This is offset by the company’s plan to keep content spend for all of its platforms at approximately $30 billion over the next few years and its measured overhaul of subscriber goals. “It now appears that Disney+ is moving towards tightened and truncated sub-guidelines, while the ad-supported tier + price increases + content rationalization = a much better long-term earnings outlook,” Wells Fargo analyst Steven Cahall wrote in a note of 11 August. .
Disney’s focus aligns with thinking on Wall Street, where some see subscriber count as a temporary statistic before streamers become profitable, says Bank of America analyst Jessica Reif Ehrlich. Subscriber numbers were already a problematic metric, she adds, because they are “looking backwards” and also volatile due to the level of subscriber churn. “Ever since Netflix stumbled in Q1 and Q2, valuations have changed,” notes Reif Ehrlich.
Warner Bros. Discovery also helped shift focus in the streaming landscape, with CEO David Zaslav focusing on cost-cutting measures at the media conglomerate and pledging not to spend too much on content. “It’s not our job to pick up every submarine. We want to make sure we get paid,” he joked during an Aug. 4 profit call.
The focus on profitability raises questions about Netflix’s approach to its ad tier, which is next to launch in early 2023. When asked whether Disney’s pricing will have any impact on Netflix’s plans, a company spokesperson said there have been no updates since its second-quarter results in July.
Executives at Netflix didn’t set a price at the time, but Greg Peters, Netflix’s chief operating officer, spoke of “a lower consumer-facing price to attract a wider group of members,” echoing Disney’s initial comments. Still, he noted that given the expected ad revenue at that level, monetization would likely be “equal or perhaps even better” than at the ad-free level.
Netflix’s offerings are already priced higher than Disney’s, limiting the company’s potential upside in an inflationary environment. Warner Bros. Discovery has also announced plans to launch an ad-supported tier after it combines HBO Max and Discovery+ streaming platforms, with a price to be determined. “Disney had options that others probably don’t because they were too expensive,” says Reif Ehrlich.
While the price hikes may cause users to opt out, Disney executives have promised to launch the ad tier with a “thoughtful approach,” which includes a lower ad tax when the platform first debuts and offers bundled packages from Disney+, ESPN+. and Hulu. Executives have also noticed a lack of subscriber churn with ESPN+, even with a $3 increase in monthly price from August.
This, in addition to the eventual arrival of theatrical releases such as: Avatar: The way of the water to the platform, in addition to the company’s normal content rollout, is expected to help the streamer retain subscribers. As Goldman Sachs analyst Brett Feldman wrote in a post-earnings take, “While we see some risk that subs may chug instead of watching ads or paying more, we believe that aligning this pricing with a material expansion of new original content should minimize this potential headwind.”
This story appeared in the August 17 issue of The Hollywood Reporter magazine. Click here to subscribe.