Shares of Walt Disney (DIS +0.14%) are down over 30% in the last year. That performance is decoupled from Disney's actual results, where the performance of its theme park and streaming businesses has continued to improve. Disney reported revenue growth of 34% year over year last quarter and added 11.7 million subscribers for Disney+.
The company's latest announcement of a new ad-supported subscription plan launching later this year could be a game changer. Let's look at how Disney's competitors have fared since introducing an ad-supported subscription tier.
NYSE: DIS
Key Data Points
Results at HBO Max and Paramount+
Other streaming services have proven that offering a cheaper, ad-supported offering is very effective in reaching more customers.
AT&T's (T +0.07%) HBO Max launched an ad-supported subscription plan last year for $9.99 per month, which was $5 lower than the regular plan. In the fourth quarter, AT&T surpassed the high-end of its subscriber guidance. Subscribers across HBO and HBO Max increased by 4.4 million to reach a new high of 73.8 million.
Likewise, Paramount Global (PARA +0.00%) saw strong growth in Paramount+ subscribers after introducing an ad-supported plan last June. The company added a record 9.4 million streaming subscribers last quarter, driven primarily by Paramount+, which now has 32.8 million patrons. "That is significant growth, and it shows the validity of a free ad-supported service in the current marketplace," CEO Bob Bakish said at the recent Morgan Stanley Technology, Media, and Telecom Conference.
The Chairman of Disney's Media and Entertainment Distribution, Kareem Daniel, shared the same sentiment. "Expanding access to Disney+ to a broader audience at a lower price point is a win for everyone -- consumers, advertisers, and our storytellers," Daniel stated in a press release.
Image source: Getty Images.
A dream scenario for advertisers
Investors will want to watch Disney's average revenue per user (ARPU) once the new plan launches. It might seem that launching a lower-priced plan might cause Disney+'s relatively low domestic ARPU of $6.68 to fall further. The service is already under-monetized compared to HBO's superior domestic ARPU of $11.15, but ad-supported plans can have a positive effect on the bottom line from higher-margin ad revenue.
During AT&T's fourth-quarter earnings call, CEO John Stankey mentioned that ad-supported plans are no less profitable than premium subscriptions. "Frankly, maybe in some cases, it's a bit more accretive if [subscribers] go the ad-supported route," Stankey said.
Disney has previously guided for Disney+ to reach profitability by fiscal 2024, but that outlook doesn't seem to have included any advertising revenue. At Disney's investor day in 2020, executives said they had no intention to launch advertising on Disney+. It seems the success of other streaming services changed their mind, and one could argue that an ad-supported plan might even be more successful for Disney's valuable content library.
The direct-to-consumer segment posted an operating loss of $593 million on revenue of $4.7 billion in the fiscal first quarter ended Jan. 1. But the library at Disney's disposal should drive significant demand from advertisers and tighten up those purse strings.
The timing is perfect
Disney plans to release several new shows and movies through calendar 2022, headlined by a new rendition of Pinocchio starring Tom Hanks, and the highly anticipated Obi-Wan Kenobi, which premieres on May 25.
The combination of lower-priced subscription tiers and top content should be explosive for Disney+ over the next few years. U.S. subscribers are already paying a relatively affordable fee of $7.99 per month, but the new ad-supported plan could be especially attractive in international markets where many people may not be able to afford a streaming service.
The recent dip in the share price is a great buying opportunity if you're focused on the long term. Demand at Disney's theme parks is surging, and Disney+ has good momentum coming off a strong holiday quarter with major new releases on the way. The recent news around its digital future just made the stock a better buy at these prices.
