Disney (DIS -0.45%) appears to be shifting its focus from subscriber growth to cost-cutting on its Disney+ streaming platform. One possible reason for the change could be that the threat of a macroeconomic slowdown is forcing management's hand. If that were to happen, the money the company spends to promote the service and bring in new subscribers wouldn't have the same value as in the past.
For instance, sky-high inflation may force potential new subscribers to tighten their purse strings and forgo a subscription to Disney+ (or any other streaming service ). Instead of spending money to solicit those dollar-conscious new subscribers, Disney may be refocusing its budget on building out Disney+'s streaming platform.
Green flag
On the bright side of this new approach, Disney+ is raising its prices later this year. The company recently announced that the price of its ad-free stand-alone Disney+ service in the U.S. will jump from $7.99 per month to $10.99. In addition, Disney will be offering a new ad-supported version of the service starting at $7.99 per month.
Disney believes its platform offers some of the most compelling content in streaming; therefore, the price hikes are warranted. Some investors may be worried about higher churn from rising prices. Churn occurs when subscribers bolt because they don't want to pay more. But Disney+ is one of the lowest-priced services on the market, with some of the most coveted content. Since its launch, Disney+ has added popular shows and movies, and the rewards of price hikes should far exceed the risk of churn.
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Its new ad-supported platform comes at a time when some social media companies are warning investors about slowing ad revenue. Though Disney+ may be selling ad space into a slowing market, it is a brand-new revenue stream that the entertainment giant did not have before. Increased subscription and ad revenue could boost the platform's profitability.
Red flag
On the other hand, Disney's reduced subscriber forecast may give investors pause. In its most recent quarterly report, the company lowered its long-term subscriber goal. Prior to the report, Disney expected to reach 230 million to 260 million total subscribers from its stable of streaming services -- which include ESPN+ and Hulu, in addition to Disney+ -- by 2024. Now the company forecasts 215 million to 245 million by 2024. The lower figures come on the heels of Disney losing streaming rights to Indian Premier League cricket, one of the most sought-after assets in India's burgeoning market.
On an encouraging note, the company added 14.4 million new subscribers last quarter. Interestingly, a scant 100,000 of the new subscribers came from its bread-and-butter U.S. market; the remainder came from international markets, mainly India.
Now what?
All in all, the moves should be positive for Disney+. When the December price increases take hold, current subscribers will automatically be switched to the ad-supported version at the same price. The new ad revenue should increase average revenue per user (ARPU). For subscribers who want an ad-free experience, the price jumps $3 per month per subscriber. Attrition from churn should be modest, considering subscribers canceling their Disney+ service will be faced with switching to other platforms with arguably less desirable content.
As the company continues to make massive investments in its streaming infrastructure, Disney+ is losing money. During the first nine months of its fiscal 2022, its direct-to-consumer segment, which houses its streaming service, lost over $1 billion in operating income. However, Disney predicts profitability in the segment in its fiscal 2024. After that, expenses required to build the platform may slow, which could allow profits to flow freely.
Streaming investors may want to heed the concise words of Paramount founder Sumner Redstone: "Content is king." Armed with a library of Legendary Princess movies, the Star Wars brand, Marvel franchises, and addictive shows for kids, Disney looks to capitalize on its content over the long run. Investors may want to follow suit.
