Remy from Ratatouille isn't the only rodent that's cooking these days at Walt Disney (DIS 1.54%). Shares of Disney moved higher on Wednesday afternoon after the House of Mouse delivered encouraging financial results and announced new pricing for its Disney+ streaming service.
The premium platform currently costs U.S. users $7.99 a month in its commercial-free form. The media giant will follow many of its peers and introduce an ad-supported tier on Dec. 8. However, unlike other services that roll out a cheaper price point for an ad-backed offering, Disney is making that the new $7.99 a month plan. The monthly price for the current ad-free version of Disney+ will go to $10.99, a hefty 38% increase in this iffy economic climate.
After seeing Netflix (NFLX 4.17%) prove mortal with back-to-back quarters of sequential member declines following its most recent increase, Disney could be making a mistake. This is not an ideal time to test a platform's pricing elasticity, but what if Disney knows what it's doing? The Mickey Mouse company better hope that it has a better mousetrap.
Image source: Disney.
It all "ads" up
Disney+ has grown up in a hurry, and it's still not through with its terrible twos. The platform launched in November 2019 and has amassed a subscriber base of 152.1 million fans, a 31% year-over-year increase. Throw in Disney's 22.8 million ESPN+ subscribers and 46.2 million Hulu accounts, and you have a combined base of 221.1 million. Netflix has been driving in reverse through the first half of the year, now at 220.7 million paid members worldwide -- and Disney just passed Netflix.
Purists will argue that Disney didn't really overtake Netflix. There's a lot of overlap among Disney's three services, and even more so now that it's aggressively pushing bundles that include all three distinct digital on-demand platforms.
Disney is confident that its viewers won't subtract the "Plus" with the pricing change, but Netflix also seemed pretty sure of itself when it boosted the monthly ransom of its most popular plan from $13.99 to $15.49 in January. In Disney's defense, the old $7.99 tier will still be there -- families will just have to put up with ads.
During Disney's call, Disney pointed out that two-thirds of its Hulu service subscribers are on the cheaper ad-supported plan. Disney expects the ad-saddled Disney+ to be popular, but will that really be the case? Young families likely appreciate the current ad-free format of Disney+ because their kids aren't tempted by the products, foods, and experiences they see advertised. To Disney's credit, it's taking a smart approach here. It will launch with a much lighter ad load than what it's serving on Hulu. Kids' and preschoolers' profiles will also not have any ads at the beginning. It will still be interesting to see if the value proposition is there.
Netflix pushed through six increases in eight years for its stateside streaming service, starting at $7.99 a month in 2014 until now, and it has nearly doubled. Viewers accepted most hikes, and Netflix's margins were all the better for the loyalty.
Disney+ is certainly entitled to a hike. The operating loss for the consumer-direct platform has been growing wider as it builds out its content catalog and global footprint. Disney expects the platform's red ink to peak in fiscal 2022 and ideally to turn a profit in two years. The trick is making subscribers aware that it's the math -- and not greed -- guiding the shift in pricing.
Disney itself is doing just fine outside of the mounting losses at Disney+. Its domestic theme parks just posted record operating profits, and its media networks business is faring even better on the top and bottom lines. It's a well-rounded media stock. However, with all eyes on Disney+ -- and more on its growth than its profitability -- this could be a mistake if we see a Netflix-like retreat in subscribers for the sake of a positive operating profit. Disney's bean-counter idea of a storybook ending may not match what the market wants from the media mogul.
