It's no secret that Walt Disney (DIS -2.45%) is going through a rough patch.
The entertainment giant's shares have swooned after the last two years as revenue growth has slowed, post-pandemic profits have been slow to rebound, and CEO Bob Iger made a surprise return, a sign that the company was heading in the wrong direction under former CEO Bob Chapek.
Meanwhile, the media industry is facing multiple challenges as cord-cutting weighs on profits at linear TV. Further, much of the streaming industry, including Disney, is losing money on streaming.
Disney's latest earnings report did little to reassure investors that the company was making a comeback. Revenue in the quarter rose just 4% to $22.3 billion, its worst revenue growth since it declined more than two years ago during the pandemic.
Segment operating income was flat in the quarter at $3.56 billion, and adjusted earnings per share was down from $1.09 to $1.03.
Disney stock was down initially on the earnings report, but the stock rallied after the earnings call when the company announced another round of price hikes at Disney+. The announcement comes just eight months after it raised prices on the ad-free version from $7.99/month to $10.99/month.
Image source: Getty Images.
Pricing power or a sign of desperation?
Disney will raise the price of Disney+ from $10.99/month to $13.99/month and is also raising the price on Hulu from $14.99/month to $17.99/month.
The initial price hike on Disney+ seems to have encountered relatively little resistance. North American Disney+ subscribers were down by 300,000 to 46 million, while the average price paid, which factors in the Disney streaming bundle that includes Hulu and ESPN+, rose more than 2% to $7.31. That's a good trade to make for Disney.
On the earnings call, CEO Bob Iger addressed a question about the price hike last December, saying, "We really didn't see a significant churn or loss of subs because of that." Even at $13.99/month, Disney+ is still cheaper than competing services, like Netflix, Warner Bros. Discovery's MAX, and Hulu.
By now, it's clear that Disney underpriced its namesake streaming service when it rolled it out in 2019. In its third-quarter earnings, just reported, its loss in the streaming segment narrowed from $1.06 billion to $512 million, representing an improvement of nearly $1 billion from its nadir three quarters ago.
The price hike is also not as much of a gambit as it might appear. Disney is keeping the price of its ad-supported tier unchanged at just $7.99/month. So subscribers can trade down to the ad-based tier if they don't want to pay more.
So far, the company has signed up 3.3 million subscribers to the ad-supported version and says 40% of new subscribers are choosing the ad-supported version. Iger also said the company was aiming to migrate more subscribers to the ad tier, which makes sense as Disney has tons of experience as an ad-based network, and Hulu's ad tier brings in roughly the same revenue as the ad-free tier.
Beyond Disney+
For years, ESPN also seems to have been losing value. However, the company is now focused on monetizing its sports media empire with a new deal to get into sports betting, launching ESPN Bet with PENN Entertainment, which will bring in $1.5 billion over the next 10 years. Additionally, Iger said, "Taking our ESPN flagship channels direct to consumer is not a matter of if, but when," a move that is starting to seem past due.
The transition from linear TV to streaming will take years to play out, and results at Disney and its peers are sure to be bumpy as that transition moves forward. However, it's a mistake to bet against a company with the intellectual property and flywheel business model of Disney. The streaming business won't be an overnight success, but price hikes look to be a smart move as it aims to turn profitable in streaming.
