The competition for our eyeballs has been heating up over the past couple of years. Although Netflix (NFLX 0.19%) remains firmly in first place, a bevy of new services have come to market.
Among them is Walt Disney's (DIS -0.56%) Disney+. Launched in Nov. 2019, it has now amassed an incredible 130 million subscribers worldwide. The odds of this number rising substantially in the future just got a boost, now that Disney+ plans to introduce a cheaper, ad-supported plan in the U.S. later this year and internationally in 2023.
This was a surprise move by the management team. From an investing perspective, however, it shows just how powerful Roku (ROKU 2.55%) is in the streaming landscape.
Image source: Getty Images.
Disney+ is launching an ad-supported tier
Right now, consumers in the U.S. pay $8 a month (or $80 for an annual plan) for access to Disney+ without any advertisements. Even with the incredible intellectual property that Disney owns, including Pixar, Marvel, and Star Wars, this price is lower than Netflix's Basic plan, which costs $10 per month.
The announcement on March 4 to add a cheaper offering makes sense from Disney's perspective. Not only will a lower-cost option help Disney+ achieve its fiscal-2024 target of reaching 230 million to 260 million global subscribers, but an ad-supported tier should boost average revenue per user (ARPU), as well.
In the most recent quarter, Disney+ ARPU was $4.41. The company's other direct-to-consumer service, Hulu, generates $13 in monthly ARPU. What's noteworthy is that the majority of Hulu's subscribers pay $7 a month for the ad-supported plan. Therefore, it's easy to see the boost advertisements can bring to Disney+ from a purely financial perspective.
Disney's former CEO Bob Iger and current CFO Christine McCarthy each previously said that they had no intention of including ads on the Disney+ service. Perhaps the management team had doubts about being able to hit its ambitious membership target, especially in the increasingly crowded streaming industry that we're seeing today.
What does this mean for Roku?
A major strategic pivot like this by Disney points to a strong competitive position for Roku. At a high level, Roku makes money from ads that are displayed on its streaming platform.
Let's say that a consumer is watching on the Disney+ new ad-supported tier using Roku TV. Roku's agreements with streamers are set up in such a way that it gets 30% of the ad inventory to sell itself (and keeps 100% of the revenue). Disney will get to offer up the other 70% of ad inventory.
It's not difficult to understand how content publishers introducing ads is actually a benefit for Roku. It increases the monetization capability. In December, streaming accounted for 28% of all TV time in the U.S. As this number inevitably rises over time, ad spending will move from linear TV to connected TV, and Roku's business will gain.
Netflix, the perennial leader among streaming services with 222 million subscribers today, doesn't offer consumers an ad-supported version. And its management team doesn't see this happening. Therefore, Roku really has no way to make money from its relationship with Netflix today (unless a customer first signs up for Netflix on Roku's platform).
But Netflix is currently experiencing a post-pandemic lull when it comes to member acquisition. Do we know for sure that Reed Hastings and his team won't change course, similar to what Disney's management did, and eventually offer a lower-cost, ad-supported plan in order to drive subscriber growth? I don't think so.
It might not happen for many years, if at all, but I believe that it's still fully on the table. In fact, Netflix CFO Spence Neumann replied with "Never say never" when discussing the possibility of introducing ads onto the platform during the recent Morgan Stanley Technology, Media, and Telecom Conference. This will be interesting to watch.
This scenario immediately places Roku in the most powerful position in the entire streaming ecosystem. Instead of trying to figure out which of the numerous streaming stocks will end up with the most subscribers, investors can play the secular shift away from traditional cable TV (and toward streaming) by buying shares of Roku today.
