Last summer, Walt Disney (DIS 1.54%) raised the price of ESPN+ by $1 per month. This year, it's charging subscribers $3 more per month. The sports-centered (see what I did there?) streaming service will become Disney's most expensive at $9.99 per month, joining Hulu and Disney+, which start at $6.99 and $7.99 per month, respectively.
The price hike reflects the reality of growing content expenses for both ESPN and the rest of Disney's streaming efforts. Meanwhile, the slowdown in Netflix's (NFLX 4.13%) subscriber growth has many investors across the media industry scared that the direct-to-consumer market may not be as big as we thought just a couple of years ago. As such, investors and consumers should expect Disney to raise prices on Hulu and Disney+ faster to meet its long-term profit outlook.
The state of streaming at Disney
Disney's direct-to-consumer segment saw its losses expand year over year last quarter, reaching $887 million in total. The biggest driver of the losses was higher programming costs, which increased 38% in aggregate to $3.6 billion in the second quarter.
For ESPN+, content costs increased 48% to $454 million, and that number is likely set to climb significantly higher in the near future. That's because sports rights have become extremely expensive as live events have become the core factor keeping customers subscribed to cable.
Meanwhile, new digital-only players have entered the market. Apple and Amazon, for example, have bid up sports rights for the NFL and MLS, among others. Even Netflix, which has long ignored sports, has considered select sports rights recently.
Overall, Disney committed to increasing its content spend by about $7 billion this year, and so far, that's reflected heavily in its streaming content spend. At its investor day in 2020, it provided an outlook for Hulu and ESPN+ to turn profitable in 2023 (six months away), with Disney+ reaching the milestone the next year.
More price hikes are coming
Disney will launch an ad-supported version of Disney+ later this year, which may present it with an opportunity to restructure its pricing. Hulu operates both an ad-free and ad-supported tier, charging a $5 monthly premium to remove ads. That's pretty standard across the industry.
Following that standard at its current pricing, Disney would charge just $2.99 per month for an ad-supported Disney+. It seems reasonable that Disney will raise the price of the ad-free tier while offering an ad-supported tier at a lower price than the current $7.99 per month plan.
Disney+ already has about as many domestic subscribers as Hulu, but its revenue per user is just half that of the older streaming service. With plans to keep increasing content spending on Disney+ at a rapid clip, its prices need to come up.
The pressure to raise prices is exacerbated by Netflix's poor outlook for the second quarter, which called for the company to lose 2 million subscribers. The stall in subscriber growth at the world's leading streaming service indicates the ceiling for Disney+ and other streaming services' subscribers might not be so high. Nonetheless, during its second-quarter earnings call, Disney reiterated its expectations to reach 230 million to 260 million subscribers by 2024.
Disney's price hike on ESPN+ will only affect a small portion of Disney's streaming subscribers. It notably isn't raising the price on the Disney bundle (yet), perhaps in an attempt to push more customers to subscribe to all three streaming services. But investors and consumers should expect Disney to continue raising prices across the board as it looks to reach its profitability targets in a reality where subscriber growth may not come as easily as it gets bigger.
