Walt Disney (DIS 1.01%) is a global media and entertainment conglomerate that owns incredibly valuable intellectual property (IP) that it's able to monetize in many ways. This could mean making money in movie theaters, on traditional cable channels, or in theme parks and cruises. But going forward, the company's direct-to-consumer (DTC) streaming segment is going to become even more important.
After losing billions of dollars in recent years, this division is now generating positive operating income. While this is a critical milestone, investors might want to watch a new data point management just provided.
You won't believe what Disney said about its DTC segment. Understanding trends here might encourage you to own this consumer discretionary stock.
Show me the ads
During the Tech and Data Showcase at CES on Jan. 8, Rita Ferro, Disney's president of global advertising, revealed that in the last six months, there were 157 million global monthly active ad-supported users of the company's DTC streaming content, which includes Disney+, Hulu, and ESPN+. In the U.S. and Canada specifically, the figure was 112 million.
There are some particulars investors should know about this metric. It measures users, not accounts. Since each account has on average 2.6 users, simple math tells us that there are 60 million ad-supported accounts. Excluding Hotstar, this represents less than 31% of the company's total DTC subscribers (as of Sept. 28, 2024).
And on the Q4 2024 earnings call, CEO Bob Iger revealed that 60% of new subscribers in the U.S. are choosing ad-supported plans.
This data point agrees with what the leader in the streaming industry, Netflix, is experiencing. In its Q4 2024 shareholder letter, Netflix management wrote that ad-tier signups were up 30% quarter over quarter. And during the earnings call, co-CEO Greg Peters said ad revenue doubled in 2024, with the expectation it will double again this year.
Management teams at both Disney and Netflix fully understand that the primary objective is to focus on the consumer and to provide them with choices. Some might opt to pay a premium price to avoid ads, while others are fine with the interruptions as long as the monthly fee is lower.
But based on the data Disney just provided, ad-supported plans are a huge hit. Even better, it allows for the company to capture a much larger and price-sensitive audience.
NYSE: DIS
Key Data Points
DTC monetization
Similar to how traditional cable-TV bundles work, Disney is monetizing its DTC segment in two key ways. The first, of course, is via subscription fees. The second might be the bigger driver of financial performance going forward. This is advertising sales.
The end result is a lucrative business model. The basic Disney+ ad-based tier in the U.S. costs $9.99 per month, much lower than the ad-free choice. But Iger said pricing changes are meant to push people to ad-supported options because it has potential to generate better average revenue per user given strong interest from advertisers.
Disney has such valuable IP, from its new blockbuster movies like Deadpool & Wolverine and Inside Out 2, to classic franchises like The Lion King and Toy Story. It also has hit series like Shogun and The Bear that drive viewer interest.
And don't forget about the company's sports rights, with the ability to show games from the college and professional ranks across all major leagues. With the planned launch of a stand-alone ESPN streaming service this fall, there is potential for even more customer growth.
This setup makes Disney's DTC segment an absolute gold mine for advertisers looking to target an engaged global audience. CFO Hugh Johnston agrees.
"The ad tech stack that we've put together, our ability to deliver the right ads more effectively to consumers, particularly in the streaming business, is a competitive advantage that we've built, and it's owned and it's proprietary to Disney," he said on the Q4 2024 earnings call.
The rising success of streaming, with a focus on advertising, at Disney is a key reason to buy the stock right now.
