If you want to know why Walt Disney (DIS 0.93%) is upping its streaming prices, it's not difficult to figure out. These services are costing the company considerably more than the revenue they're generating. And the problem is still getting worse rather than better. Something's got to give sooner or later -- and sooner than later.
The thing is, while higher streaming prices might prompt some subscribers to grumble, the price increase is apt to prove more palatable than you might suspect. This puts real profits on the radar.
Necessary price increases
On the off chance you're reading this and aren't aware, the price of Disney+ and Hulu are about to go up. The cost of ad-free Disney+ will move from $7.99 per month to $10.99, while Hulu's ad-free monthly cost will rise from $12.99 to $14.99. The ad-supported version of Hulu will see a $1 price increase to $7.99 per month, and the ad-supported version of Disney+ will cost $7.99 per month when it launches in September.
In addition, Walt Disney announced a price increase for ESPN+ last month, from $6.99 to $9.99 per month beginning later this month. While cheaper for consumers, ad revenue driven by ad-supported streaming platforms tends to offset the price difference, generating total per-user revenue that's comparable to ad-free services' revenue.
Comparable price hikes will also be put in place for bundles of the three services, as well as for full-year subscriptions. The price increases could be tough to impose on consumers that have become accustomed to dirt-cheap streaming services. However, there's seemingly little choice in the matter for Disney.
The graphic below tells the tale. Walt Disney's total streaming revenue has steadily grown since the company began reporting it in early 2020. All told, the company did a little over $5.1 billion worth of streaming business last quarter alone. The problem: Walt Disney's streaming operations also lost a little over $1 billion during the three-month stretch ending in early July, which is also a record following a streak of widening losses.
Given the underlying loss trend, clearly Walt Disney needs something to change -- and soon -- with its streaming subscriber base nearing the company's expectations for streaming subscriber counts. The intended price increase just might do the trick.
The new math works
The planned price hikes are steep, to be sure -- around 40%, on average. Though not notably more expensive than access to Warner Bros. Discovery's HBO Max or Netflix, Disney's streaming services will be on par with the cost of rivals' similar services. And consumers may be better prepared for these higher prices than you might think.
Survey data compiled by Morning Consult early this year puts things in perspective. A poll of more than 2,000 adults living in the United States indicates consumers believe a monthly cost of between $11 and $16 per month is a fair price for an ad-free streaming service, with $12 being the optimal price. For ad-supported streaming services, consumers felt a monthly cost of between $8 and $14 was reasonable, with a $10 price point being the optimal cost.
Consumers seem to understand it costs money to make quality content worth viewing. Moreover, Disney's new pricing paradigms are well in line with prices consumers say they feel is fair.
If higher prices don't adversely impact the size of the subscriber base or future growth (and if production costs don't grow further), these new prices just might be enough to get Disney's streaming services over the profit hump. Assuming a 40% uptick in last quarter's streaming revenue of $5.1 billion, that would have instead meant a total top line of $7.1 billion.
That extra $2 billion is more than the $1 billion operating loss booked for the quarter in question by another $1 billion.
A much-needed reversal of fortune
It's just back-of-the-envelope math, so take it with a grain of salt. Disney's streaming business may fare worse, or better, and certainly there will be at least some fallout from the upcoming price increases.
There's a reason Disney shares rallied firmly following the release of its fiscal Q3 results showing growing streaming losses, however. That's the accompanying announcement of price increases that have a shot at making these streaming services viable. And following the stock's steep sell-off since early last year, that swing's a very welcome prospect.