Ever since Netflix (NFLX -0.70%) reported a net subscriber loss in its Q1 2022 report, all eyes have been on subscriber counts from other streaming services. So when Walt Disney (DIS -0.14%) came in with 7.9 million net additions in its recent quarter, which was better than the 5 million or so expected, the news initially looked like a big win for Disney.
Disney+ has been growing at a breakneck pace. But the company warns that the growth could ease in the coming years as the service becomes more mature. Here's why a slowdown in Disney+ subscriber growth isn't a big deal, and why investors shouldn't focus solely on subscriber numbers when evaluating Disney+.
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Shifting from growth to profitability
Even though subscriber growth in the first half of Disney's fiscal 2022 came in better than expected, the company still expects the second half of its fiscal year (which ends October 1) to have more net additions than the first half. After that, however, the subscriber growth rate for ad-free paid Disney+ subscribers is expected to slow.
Disney has been spending a lot of money to get new subscribers. In fact, its direct-to-consumer segment lost $1.48 billion in the first half of fiscal 2022. Disney plans to spend a staggering $32 billion on content in fiscal 2022, which is nearly double the $17 billion that Netflix spent on content in fiscal 2021.
The first phase of Disney+ was all about establishing the platform as a premier streaming service and gaining international traction. Disney knows that growth at any price is an unsustainable business model. So its next phase is centered around capitalizing on its content in any way that it can and driving profitability. One way is to first show films on the big screen before releasing them on Disney+ in order to hit multiple markets. A more controversial option is to release an ad-supported tier to Disney+.
Not all subscribers are created equal
If you follow Disney closely, you may know that its overall subscriber count is misleading. Disney finished Q2 of fiscal 2022 with 137.7 million paid subscribers. But 50.1 million of those subscribers are Disney+ Hotstar subscribers (a streaming service for its Southeast Asia audience). Last quarter, Disney only made $0.76 in revenue per month from the average Disney+ Hotstar subscribe vs. $6.33 per regular Disney+ subscriber.
Through Disney+ Hotstar, bundling options with Disney+, Hulu, and ESPN+, and its ad-supported tier, it's clear that Disney is applying a catch-all marketing strategy that focuses on quantity and total reach. Given its international audience, both through its films and its parks, it makes sense to attract as many consumers as possible onto the platform through whatever tier they want to use. Disney's brand should appeal to quality advertisers. Disney has hinted on past earnings calls that advertisers are champing at the bit to gain access to its customers.
Disney reaffirmed its ambitious goal to make Disney+ profitable by fiscal 2024 and reach 230 million to 260 million subscribers by then as well. Again, not all Disney+ subscribers are created equal as Disney makes less money from a Disney+ Hotstar subscriber than a normal Disney+ subscriber. And it's going to probably make less per ad-supported subscriber too.
Regarding the relationship between content spending and gaining subscribers, Chapek said on the latest conference call: "It's obviously a balancing act, but we believe that great content is going to drive our subs, and those subs then in scale will drive our profitability."
An excellent long-term business plan
Although Disney is oftentimes associated with family entertainment, the company noted on its Q2 fiscal 2022 conference call that over half of Disney+ subscribers are adults without kids, which is a good sign that the service is catering to various audiences.
Disney's wide reach, both domestically and internationally, across different types of consumers is a dream come true for advertisers. Although some subscribers will invariably downgrade to a lower-cost tier, the company's overall strategy seems in line with its long-term goal of becoming an internationally renowned vertically integrated media company.
Disney's ability to tell a story and use its characters to engage with audiences through different media forms -- whether through a movie, merchandise, or a theme park -- gives it a variety of ways to interact with its customers that is far more impactful than what other streaming services can do.
At its core, Disney provides experiences to customers of all ages -- in person, on the big screen, and at home. Therefore, if any company would succeed with an ad-supported tier, Disney would be the one to do it. Disney+ losses may look bad now. But Disney knows what it is doing. With the stock down 45% from its high, Disney looks like a great buy now.
