Entertainment giant Walt Disney (DIS 1.15%) is about to put its fantastically successful Disney+ service to the test. Encouraged by skyrocketing growth in the first year of the video-streaming platform's existence, Disney is preparing to raise its subscription fees in 2021. Can Disney+ power through that challenge, simply generating more top-line sales for Disney without slowing down its incredible subscriber growth?
Disney's management revealed its price-boosting plan in Thursday's annual investor day event. Let's take a closer look at what executives said, and what it all means for us Disney investors.
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The story so far
First, Disney CEO Bob Chapek reminded everyone how rapidly Disney+ is growing today. The family-friendly video-streaming service sported 86.8 million subscribers on Dec. 2, up from $73.7 million on Oct. 3 and 10 million on the first day of operations, Nov. 12, 2019.
The company now expects Disney+ to reach at least 230 million subscribers by the end of fiscal year 2024. The whole bundle of services, including the more adult-oriented Hulu platform and the ESPN+ live sports service, adds up to 137 million users today. The 2024 goal for all of Disney's video-streaming services is more than 300 million subscribers.
Turning the prices up a notch
That's where CFO Christine McCarthy dropped the pricing bomb: "We clearly have an incredible opportunity to build a substantial global subscriber base," she said. "But we also believe we have the opportunity to increase Disney+ pricing given the additional value we will be adding to the service."
The monthly subscription fee for domestic customers will rise from $7 to $8 per month in March 2021. Prices will increase from 7 euros to 9 euros per month in continental Europe around the same time, followed by "similar adjustments" in other markets around the world. Disney wants to use the same idea when it launches Disney+ in places like Japan and South Korea later next year, which means starting out with a lower price and then boosting the fees fairly quickly. In many cases, international Disney+ launches in the future will include access to the new Star network, which offers Hulu-like content in the form of a premium channel inside the Disney+ service.
"These price increases reflect an increase in the underlying value of the Disney+ product offering as well as the inclusion of Star general entertainment content in many markets," McCarthy said.
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Learning from someone else's mistakes
We have already seen Netflix (NFLX 0.33%) prove its pricing power through several rounds of subscription-fee increases over the years. The latest Netflix boost in North America rolled out in November and its effects will be seen in the fourth-quarter report, slated for the end of January.
Netflix's price increases have generally gone over well with subscribers. The service was a bargain with prices starting at $8 per month and still a great deal at $11 per month, after three $1 increases in a four-year span. But even Netflix isn't immune to consumer backlash against its rising fees. The $2 jump in monthly subscription prices led to slower subscriber additions in the second quarter of 2019. Netflix investors hated the disappointing subscriber trend and share prices fell more than 33% in less than three months.
Netflix's slowdown in the summer of 2019 showed that its subscribers weren't happy with the largest price increase in the company's history. Smaller bumps like the single-dollar increases in 2014, 2015, and 2017 made no difference to your average Netflix subscriber's pocketbook, but the $2 rise in 2019 was a bridge too far.
Disney will learn valuable lessons here
One might think that the first price increase for Disney+ might be a dangerous experiment, having no frame of reference from earlier price boosts to indicate which way this event will go.
At the same time, I think Disney is smart when it tries a single-dollar jump in the domestic market but a larger increase in Europe. The patchwork of international markets also allows Disney to try out other tweaks on a case-by-case basis before implementing dramatic changes on a global level. Star bundles may or may not make a big difference to consumer interest, depending on the bundle's prices and varied tastes around the world.
Lessons learned here will help Disney make better pricing decisions later on.
Disney+ comes with a high-quality content library and the service is starting the price climb from a point far below Netflix's lowest monthly fees. The service should have headroom for a modest price boost or two before the increases start to affect the subscriber growth figures. At the same time, it's hard to say whether Disney is setting its subscriber goals for 2024 at the right level. This year's COVID-19 effects won't stick around forever, and nobody really knows exactly how the media market will evolve as the world inches back toward normalcy.
Image source: Getty Images.
Will the higher prices hurt Disney+ in 2021?
As a shareholder of both Disney and Netflix, I expect the video-streaming market to expand rapidly over the next several years -- with or without pandemics keeping people glued to their couches. It's hard to bet against the mighty House of Mouse when the company is throwing its entire weight behind a radical strategy shift, which is a good description of the newly found focus on streaming-media services.
After breaking out its streaming services from the DVD subscription business in 2011, Netflix waited three years before issuing its first price boost. Disney is either smart for taking that step much quicker or silly for testing the patience of price-sensitive viewers. Only time will tell exactly how it all works out in other markets, but the smaller American increase looks like a pretty safe bet.
Disney+ may indeed show slower subscriber growth next year, but only because we'll be comparing 2021 to the unique period of coronavirus lockdowns in 2020 -- a golden age for at-home services of every stripe.
