It became a lot more expensive to enjoy Walt Disney's (DIS -0.55%) flagship streaming service on Thursday morning in its original ad-free form. Disney+ now costs $10.99 a month for access without commercial interruptions, a $3 or 38% increase. It's a bold move at a time when subscriber-hungry rivals are holding the line on price hikes.
In an ideal world, everyone pays $3 a month and Disney+ is no longer a money pit. There are 164.2 million subscribers worldwide on the platform. Disney investors were shocked to see a $1.5 billion operating loss for the media giant's streaming video segment in its latest quarter. Work the math. If 164.2 million accounts are paying $3 a month more -- or $9 a quarter -- that's nearly $1.5 billion in incremental revenue right there.
Naturally, plugging a hole in a leaky bucket isn't that easy. Many subscribers will walk away from Disney+. If you go by the Hulu example, most users will trade down to the new ad-supported plan at the old $7.99 a month price. More importantly, the price hike isn't being rolled out worldwide. A lot of places in the world -- including Disney's largest market in terms of subscriber numbers -- pay a lot less for the service.
Thursday's pricing move is a big step, but it's not enough to complete this journey.
Image source: Disney.
Changing channels
New pricing won't ring up another $6 billion in annual revenue for Disney. There are a lot of moving parts here, including a few that you probably haven't considered. The good news -- for shareholders, at least -- is that some people are facing an increase that is more than $3 a month. Disney had some pretty ridiculous offers ahead of its launch in November 2019, including pre-paying three years at a price that breaks down to less than $4 a month. That's a $7 increase if those customers stick around on a monthly plan.
The rub for Disney is that most people are not in that boat. Disney+ is available around the world. Domestic users account for 44% of the Disney+ revenue and just 28% of the subscriber count. India is the leader in subscribers through Disney+ Hotstar, making up 37% of the accounts but less than 6% of the platform's global revenue. Disney+ Hotstar users are paying an average of just $0.58 a month.
Blend together all of the Disney+ monthly average subscriber rates -- the domestic users averaging $6.10, India viewers breaking the buck, and everyone else just shy of $6 -- and it averages out to $3.91 a month. Disney will handle future price increases based on what each country's market will bear. However, let's circle back to that 38% increase. Folks in the U.S. and Canada aren't paying $7.99 a month on average. The new monthly rate of $10.99 a month is actually 80% higher than the average.
Sure, some stateside users will be paying less than $10.99 a month even now, especially those who pay annually to lock in a lower per-month price. This will still move the needle if folks stick around. What happens if they leave?
The new ad-supported tier at $7.99 a month will catch many of the subscribers who can't or won't pay more for the plan that's free of the marketing missives. It remains to be seen what kind of ad revenue per user Disney can generate from that new tier, but you have to like Disney's chances. It's been selling ads on its media networks and cable channels for decades.
Disney will win with folks who pay up to keep ads off their screens. Disney will win with the folks who continue to pay $7.99 a month and now have to consume less content because of the ad break interruptions. The only place where the media stock will lose is the audience that cancels in light of the new pricing.
Let's close by talking about the timing of the increase. The move is happening so late in the fiscal first quarter that you won't see the real impact in terms of revenue and user churn until the fiscal second quarter that ends in March. You'll have to stick around and wait a bit before you know how this will all play out. As an entertainment giant Disney knows the value of a good cliffhanger.
