Walt Disney's (DIS 1.54%) Disney+ streaming service has gained subscribers at an incredible pace since it first launched in late 2019. The pandemic certainly helped, but the company's iconic franchises and a rock-bottom pricing strategy did some work as well.
While the core Disney+ service rapidly gained over 100 million subscribers, profits have been hard to come by. The direct-to-consumer segment posted an operating loss of $1 billion in Disney's most recent quarter, almost entirely wiping out profits from the linear networks business.
A price hike that paid off
Former Disney CEO Bob Chapek, who was ousted late last year to make way for Robert Iger to return, had announced a substantial price hike for the ad-free Disney+ tier before his departure. Iger ended up sticking with that decision, and he said in February that subscriber losses were minimal.
There's now additional data to back that up. A report from analytics firm Antenna, as reported by The Wall Street Journal, found that 94% of Disney+ ad-free subscribers stuck with their subscriptions after the monthly price was raised from $7.99 to $10.99.
This kills any notion that the success of Disney+ was solely due to its low price. That low price accelerated subscriber additions, but ultimately, customers stayed with the service due to Disney's vast catalog of content.
Losing a single-digit percentage of subscribers, some of which likely switched to the cheaper ad-supported tier, in exchange for a 38% increase in price seems like a good trade-off. At $10.99 per month, Disney+ is still priced well below competitors like Netflix and Warner Bros. Discovery's HBO Max. Netflix's standard tier is priced at $15.49 per month, while HBO Max's ad-free service goes for $15.99 per month.
This suggests a couple of things. First, Disney likely has plenty of untapped pricing power in the streaming market. That's a consequence of the strength of Disney's brands and franchises, which include Marvel, Star Wars, Pixar, and everything under the Twenty-First Century Fox umbrella.
Second, another significant price increase is likely to come soon, perhaps later this year. Disney could probably boost the price by another few dollars per month, bringing Disney+ closer in price to its main competitors, while keeping the lion's share of its subscriber base intact.
A path to profitability
Combined with taking a hard look at content spending, the recent price hike and any future price hikes will go a long way toward turning Disney+ into a profitable endeavor. In Disney's most recent quarter, average monthly revenue per paid subscriber to the core Disney+ service was just $5.77. That includes the impact of annual plans, bundles, and the ad-supported tier.
In contrast, Hulu, in which Disney holds a majority stake, produced average revenue per paid subscriber of $12.46 for its standard streaming service. It's not hard to imagine Disney doubling the average revenue per paid subscriber for Disney+ over the next few years as it boosts pricing to better reflect the competitive landscape.
Disney+ has the potential to be a cash cow for Disney, but the company needs to get pricing right. The price hike last year is a step in the right direction, and minimal subscriber losses suggest that there's more room to raise prices in the future. The days of Disney+ being a bargain are coming to an end, but the company appears capable of holding on to most of its subscribers as it charts a path toward profitability.
