It's going to be more expensive to stream Disney+ without ads later this year. Walt Disney (DIS -1.01%) had a few meaty revelations in its earnings call following a mixed fiscal second-quarter report. But one of the gutsiest things from boomerang CEO Bob Iger was the promise of higher prices for the popular streaming service in its original ad-shaking form.
"We plan to set a higher price for our ad-free tier later this year to better reflect the value of our content offering," Iger said during the call.
Inching monthly rates higher isn't necessarily a controversial move in this inflationary climate. What hasn't gone up these days? However, take a closer look at this particular situation and you begin to worry more about the floor than the ceiling.
Going from one ex-stream to another
Disney routinely raises theme park admissions, cruise fares, and plush toy price tags. Why is this move any different? Well, there are a few colorful details about this particular situation that are essential to add at this point.
- Disney increased pricing for the same ad-free tier -- by 38% -- just five months ago.
- Premium subscribers have declined sequentially worldwide in back-to-back quarters.
- Iger is driven to reduce overhead by at least $5.5 billion a year, and $3 billion of that will be in the form of content cutbacks.
Paying more for less doesn't sound like a savory value proposition, and it's about to become fiscally clear. In the current quarter, Disney is taking an impairment charge of roughly $1.5 billion to $1.8 billion for removing certain content from its streaming platforms.
This is also a volatile and impulsive market. It's so easy as a subscriber to dump a streaming service these days, and plenty of hungry rivals with promotional offers are poised to woo defectors to their platforms. No streaming service matched the ad-free flavor of Disney+ on its $3 per-month hike in December. Who would be silly enough to follow it on the way up now?
Image source: Disney.
This doesn't have to end badly for the House of Mouse. When it boosted the monthly rate of its flagship Disney+ tier from $7.99 to $10.99, it also introduced an ad-supported offering at the original $7.99 a month price point. Iger said during Wednesday afternoon's call that the strategy is to "widen the delta" in terms of pricing. The ad-free version will move higher. The cheaper tier will hold its ground, there to catch anyone hike-sensitive.
It gets better. The connected TV ad market should only improve from here. Disney's new tier with marketing missives launched with a light ad load during the holiday season. The offering will become more lucrative as more sponsors pay up to reach this valuable audience.
Disney wouldn't be widening the gap between the two tiers unless it thought it could make up the growing price difference through ad revenue. The leading media stock knows what it's doing, even if it may be the only major streaming service to risk whipping out a price gun in this digital arms race.
