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Here's Why Disney's New Streaming Bundle Makes Sense

By Daniel Sparks – Updated Aug 7, 2019 at 12:20PM

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Could this be a way for Disney to get more eyes on its advertising?

On Tuesday afternoon, Walt Disney (DIS -2.60%) dropped some surprising news alongside its fiscal third-quarter results. It will offer its upcoming Disney+ streaming service as part of a bundle with Hulu and ESPN+.

It's a smart move. Pricing the bundle aggressively, the value proposition can help Disney attract subscribers to its streaming services. But there's another reason investors should like this bundle: It's a workaround to bring ads to Disney+ subscribers, boosting the service's monetization.

Disney+ logo

Image source: Walt Disney.

Disney's $12.99 streaming bundle

When Disney+ launches on Nov. 12, consumers will be able to subscribe to the service for a compelling price of $6.99 a month, or $69.99 for 12 months. But customers will also be able to get access to the service through a $12.99-per-month bundle including Disney+, ESPN+, and Hulu, Walt Disney CEO Bob Iger said during the company's third-quarter earnings call.

"[T]he $12.99 bundle, where you can buy all three, offers consumers tremendous volume, tremendous quality and tremendous variety for a good price," explained Iger. Indeed, this trio is priced in line with Netflix's (NFLX -4.49%) and Amazon's HD streaming services.

Further, the variety offered through this bundle truly is significant. Disney+ will include family oriented series like The Simpsons and The Sound of Music, as well as movies from Pixar, Marvel, Star Wars, Disney, and more; Hulu, now fully owned by Disney, features more general entertainment; and ESPN+ is a sports-themed streaming service with access to ESPN+ originals and a wide selection of live sports.

It's about advertising

While the impressive value of Disney's streaming bundle may help drive subscription revenue for the company, another advantage this model will likely give Disney is greater viewership for its ads on Hulu and ESPN+. The Hulu subscription tier that Disney is going to bundle into its new $12.99 plan is a subscription-advertising breed, which normally costs just $5.99 a month but includes ads. In addition, ESPN+'s subscription costs $4.99 a month and includes limited ads.

Since some consumers who sign up for Disney+ through the bundle may be new to Hulu and ESPN+, the bundle could ultimately prove to be a catalyst for Hulu and ESPN+'s viewership. This, of course, means marketers' ads on Hulu and ESPN+ will have a larger audience, prompting more ad spend on the services. In addition, incremental revenue from ads will give Disney more reason to invest in more content on Hulu and ESPN+, ultimately boosting advertising inventory.

Disney is no stranger to ads. The company's ad-supported ESPN network has been a key driver of operating profits for years. And even in the digital age, the company has been betting on connected-TV advertising by including limited ads on ESPN+ and lowering the price of the ad-supported Hulu subscription earlier this year (a move that suggests Hulu is happy with the performance of its connected-TV ads). 

Since Netflix seems dead set on keeping its model ad-free, Disney's workaround to boosting its streaming services' monetization with ads on Hulu and ESPN+ as part of the bundle could give the House of Mouse an advantage when it comes to funding the service's ongoing expansion. This is a smart move, considering Netflix already has a massive head start, boasting about 159 million paid subscribers. 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Netflix, and Walt Disney. The Motley Fool has the following options: long January 2021 $60 calls on Walt Disney and short October 2019 $125 calls on Walt Disney. The Motley Fool has a disclosure policy.

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