Disney (DIS 1.34%) fans around the globe have quickly taken to Disney+, which has attracted over 60 million subscribers worldwide in less than a year since its initial launch. Part of the attraction is its relatively low price point around $7 per month (or $70 per year), making it one of the best deals in home entertainment.
But the price won't stay that low forever. As Disney invests more in content, CFO Christine McCarthy says it'll raise prices. The strategy echoes the successful price increases of Netflix (NFLX 0.73%) over the years, and it could be a big boost to Disney's direct-to-consumer business.
Unlocking pricing power
In an interview for a recent investors conference, McCarthy said, "It's clear that we priced Disney+ at a very accessible price point initially. There is pricing power, we believe, but that will come as we put more original content into the services."
Image source: Disney.
Disney has been adding content to Disney+ but at a very irregular cadence. Due to the COVID-19 pandemic, it's had to halt production on several series and films intended for the service. In the meantime, it's released several films originally slated for theatrical release on the service, including Hamilton and The One and Only Ivan. It also experimented with a premium video on demand release for Mulan, which will become available to all subscribers in about three months.
But McCarthy said the company plans to increase its content investment in Disney+ above its original plans from last year. The statement echoes comments she made during its third-quarter earnings call last month. She said investors will get an updated outlook on Disney's content investment plans at its investors' day next month.
Disney ought to have more cash to invest in Disney+ content going forward given its subscriber base growth dramatically outpaced its expectations. Reinvesting that revenue into more content for subscribers ought to improve subscriber retention and attract new subscribers. And most importantly, it'll allow Disney to increase prices and repeat the cycle.
Investors have seen this playbook before
Netflix has made several successful price hikes over the last seven years, managing to increase its average revenue per subscriber while continuing to add millions of new subscribers every year.
In its 2019 third-quarter earnings call, product chief Greg Peters explained Netflix's pricing power comes from increasing the value of the service through new content investments. "And if we do that and we are successful in making those investments smartly, we'll be able to continue to deliver more value to our members," he said. "And that really will enable us to from time to time, ask for more revenue, so that we can continue that virtuous cycle going."
It sounds like McCarthy wants to produce a similar virtuous cycle with Disney+. And if it can follow the path of Netflix over the last six years or so, it could see a significant rise in revenue per user while continuing to grow its user base.
Since Netflix's first price increase in the second quarter of 2014, it's grown its subscriber base from 48 million to 193 million and its revenue from around $5.5 billion to an expected $25 billion this year. It got there by investing heavily in original content.
Disney+ already has significant scale and it continues to grow. Increasing the price of the service by just $1 per month would provide more than $700 million in additional annual revenue to reinvest in more content for subscribers or prop up the bottom line.
But considering Disney wasn't planning to break even on Disney+ for about five years after its launch, the company may be able to invest more in content before it starts raising prices thanks to its substantial subscriber base. Delaying price increases will only improve the long-term trajectory of the direct-to-consumer business as it's able to attract more subscribers early on. Investors should look for some updated expectations at the media company's investors day on Oct. 7.
