Walt Disney (DIS +0.01%) will launch an ad-supported tier for Disney+ in the U.S. later this year and internationally in 2023. Management described the plan as a "building block" toward its target of 230 million to 260 million subscribers by 2024.
Disney joins AT&T's HBO Max, Comcast's Peacock, and others in offering an ad-supported tier of their streaming services. With its existing ad sales teams and technology, Disney is well-positioned to offer an ad-supported tier for Disney+. What's more, the move should allow it to raise its average revenue per user and move toward its other long-term goal of breakeven profitability for Disney+ in 2024.
Image source: Walt Disney.
Building on a strong ad business
As a legacy media company with cable and broadcast networks like WarnerMedia and NBCUniversal, Disney has been selling advertisements for a long time.
When it acquired operational control of Hulu, it took full control of ad sales, giving it a dominant position in connected-TV advertising. It's expanded on that with the launch of ESPN+, which includes advertisements during the natural commercial breaks built into live sports.
Disney's success with advertising on Hulu is evident in its reported revenue per user. It generates about $13 per month per Hulu subscriber. Historically, it's been even higher, but a weak advertising market impacted Disney's results.
That $6-plus per month in ad revenue per user is better than what's suggested by AT&T or Comcast. AT&T said it's fairly indifferent between ad-supported and ad-free HBO Max subscribers, suggesting they bring in similar revenue. There's a $5 per month difference in its pricing. Likewise, Comcast has a $5 difference between ad-supported and premium Peacock subscribers. Management said it's approaching $10 per month in revenue per user, suggesting it earns less than $5 per month in advertising per viewer.
Considering Disney+ currently costs just $8 per month, if Disney can monetize the ad-supported tier at a similar level to Hulu or even its slightly less successful peers, it should be able to generate a significant increase in revenue per user. That will likely include a price increase in the premium tier, as Disney looks to create parity in its revenue between the two tiers. That should allow Disney to push closer to breakeven over the next three years.
NYSE: DIS
Key Data Points
Getting to 230 million-plus subscribers
Disney ended 2021 with nearly 130 million Disney+ subscribers, nearly 46 million of whom are Disney+ Hotstar subscribers. With a goal of 230 million to 260 million subscribers by 2024, Disney is looking to nearly double its subscribers over the next three years. It expects to maintain its current ratio of Hotstar and non-Host subscribers, too.
Disney has been able to attract a lot of sign-ups very quickly, in part due to having a lower price point than competitors. An ad-supported tier will keep it priced competitively, allowing it to continue scaling the user base.
Disney is still in the midst of its geographic expansion. It'll add over 50 countries and territories this summer, and it plans to reach 160 countries by 2023, up from 64 countries at the start of this year.
As Disney expands into territories with lower costs of living, an ad-supported tier can help more consumers afford the streaming service. Even in the United States, ad-supported subscription video on demand (SVOD) services have proven popular. Of Peacock's 24.5 million subscribers, 15.5 million are on the ad-supported tier. The vast majority of Hulu subscribers pay for the ad-supported tier.
If nothing else, the move should help improve subscriber retention for Disney+. Keeping subscriber churn low amid the strong competitive environment will be just as important as adding new customers for Disney to grow its subscriber count going forward. While doubling the user count in just a few short years sounds like a lofty goal, Disney still has a lot of growth levers to pull. An ad-supported tier is a key factor to supporting that growth, and it can execute it without sacrificing any potential revenue.
