Walt Disney (DIS -0.17%) blew the market away with its second-quarter earnings report. It not only beat Wall Street predictions on its top and bottom lines but also catapulted the entertainment giant into the lead over rival Netflix (NFLX -0.76%) by adding 14.4 million new subscribers to its Disney+ streaming service.
That's emboldening Disney to raise the price of Disney+ while introducing a new, lower-cost, ad-supported version as consumers have proven willing to pay for commercials. But pricing is a tricky business, and while tapping into this trend could be a genius move, Disney also might be making a big mistake by pricing both at a premium level.
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Leapfrogging to the forefront
Disney now has 221.1 million subscribers to its various streaming services, compared to 220.7 at Netflix. It was only expected to add 10 million new subscribers to its account, but a strong lineup of must-see programs had consumers signing up in droves. That comes as viewers grew tired of Netflix's push for quantity over quality in content and canceled their subscriptions to the streamer in record numbers. Netflix lost almost one million subscriptions in the second quarter, the most it's ever recorded.
It could be part of an overall fatigue setting in among viewers who now have a choice between not only Disney and Netflix but also Amazon Prime Video, Apple TV+, Hulu, Tubi, Freevee, HBOMax, Paramount+, Peacock, and more. According to data from the industry analysts at Kantar, viewers have had enough, and streaming growth has stalled.
Its latest Entertainment on Demand Barometer report shows 4.5 million consumers canceled their streaming subscriptions in the second quarter, reducing industry household penetration to 85%. Consumers are paring their subscriptions down to just a few, and of those with only one subscription, Amazon Prime Video was the choice of 69%.
Of course, consumers aren't paying $149 a year to get streaming video from Amazon; they're paying for free delivery from the e-commerce site with movies and TV shows thrown in for free. And that is why Disney's pricing plan for Disney+ is so critical -- and why its decisions here may be a big mistake.
Paying up for advertising
Disney raised the monthly price of Disney+ from $7.99 to $10.99, a 38% price hike. However, that is still a bargain relative to Netflix, which raised the monthly price of its most popular subscription plan from $13.99 to $15.49 this past January.
Although that increase alone carries some risk, Disney's mistake is launching its new, ad-supported service in December at the old $7.99 per month price. There does not appear to be enough value proposition between ad-free and ad-supported to justify consumers signing up for the lower-cost service. While that may actually be the plan -- subtly encouraging viewers to pay up to go ad-free -- it undermines the premise and promise as a whole.
Disney just did something similar with ESPN+, raising the subscription price of the sports-centric streaming service from $6.99 to $9.99 a month, hoping viewers would just choose to go the package-deal route and add in Disney+ and Hulu for an extra $4 more per month. However, the entertainment company could arguably generate more revenue overall if it had made the ad-laced service an actual bargain.
Too smart by half?
The streaming video industry is certainly evolving. There was a time not that long ago when consumers suffered through advertising on broadcast TV because it was free but ended up paying more for streaming services to avoid the ads.
Then, as providers began raising prices, they started offering free versions so long as you didn't mind watching some ads. Now, it's gotten to the point that viewers not only see ads but also have to pay for that privilege.
Maybe Disney is smart to generate ad revenue while also charging its customers to watch them. On the other hand, that seems a big mistake because it's not viewer-friendly -- a move that could ultimately cause its total streaming subscriptions to drop over time.
