Walt Disney (DIS 0.82%) just raised prices for its streaming subscribers at the end of last year, but Marvel and Star Wars fans could get pinched for even more in the near future. "I think one of the key things that we have to figure out is a pricing strategy that makes sense," CEO Bob Iger said at a recent investor conference.
Iger is looking to balance pricing with subscriber growth to push Disney+ and its other streaming efforts toward profitability over the next couple of years. His comments suggest there's still room to increase pricing. Here's what that may mean for investors.
Maximizing customer lifetime value
Iger spoke about one of the biggest challenges facing the streaming industry: subscriber churn.
Many consumers are taking advantage of the highly promotional environment in streaming video. "You get one month free, watch all you want in a month, sign off that and go to another one that's doing the same thing," Iger said. "I think we have a lot of rationalization to do from a pricing perspective."
Disney has several pricing mechanisms in place to combat churn. First, it offers an annual subscription option for all three services. The annual subscription is usually 10 times the monthly price, effectively offering a 16% discount.
The other offer bundles two or all three of its streaming services. During Disney's fourth-quarter earnings call in November, CFO Christine McCarthy said the bundle drives "higher long-term subscriber value due to notably lower churn."
Still, most subscribers pay monthly and might not stick around very long. To combat the impact of churn, Disney may want to increase the monthly price for subscribers at a faster rate than the annual or bundled subscription offerings.
When Disney increased its prices last year, it didn't increase the bundle's price. Since then, it appears a larger percentage of subscribers have opted for the bundled offerings. But that's had a significant drag on the business's average revenue per user (ARPU), despite the price hike for other subscribers.
To resolve that impact, Disney may push through another price increase. After raising prices on Disney+ in December, Iger told analysts during the company's first-quarter earnings call in February, "We only suffered a de minimis loss of subs." So another price hike, including the bundle's price this time, could result in a slight increase in cancellations while benefiting the overall customer lifetime value.
What another price hike means for investors
A Disney price increase can help put it on a path toward streaming profitability.
On its 2022 fourth-quarter earnings call, management expressed optimism about its goal of reaching breakeven earnings before interest, taxes, depreciation, and amortization (EBITDA) for Disney+ by the fourth quarter of next year. That was before Iger came back as CEO, but he's even more determined to make the business profitable by that time.
Disney lost over $1 billion in operating income from its direct-to-consumer business last quarter. While that's a sequential improvement from the fourth quarter, it still has a long way to go.
Improving ARPU could help immensely. A $1 improvement in domestic ARPU for Disney+ would add $140 million in operating income per quarter if the net impact on subscribers was even. That's achievable if Disney increases the price for both the ad-free tier and bundle while improving ad sales for ad-supported viewers. Additionally, the full impact of last year's price increase won't be seen until the company reports its second-quarter earnings.
But Iger admits pricing is just part of the solution. "Another is we do have to grow subs." So any price hike will have to be very measured, as subscriber growth remains extremely important for the relatively new service. "A third is, basically coming to grips with rising costs of production. And also figuring out just how much volume we need for that platform," Iger added. Rationalizing content costs has become a big factor throughout the industry.
A price hike may be a necessary part of the path to profitability, but it alone will not be enough to reach that level. That said, Disney is well-positioned to push through another price hike on Disney+. That's thanks to its valuable brands, which set its content apart from those of competitors. Iger noted that the Disney+ brand "is highly differentiated. Highly." That should support another price hike with a "de minimis" impact on subscriber growth, he said.
Indeed, Disney could eventually reach pricing in line with its most expensive competitors, which would make it an extremely profitable business. Even as the cable business sees a decline in growth from cord-cutting, the streaming business is ready to offset that long term, creating significant value for shareholders. Patient investors will be rewarded for holding Disney shares as it increases pricing for its streaming business.
