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Disney's Dilemma

Most companies couldn't get away with intentionally making a product worse for existing customers and then forcing them to pay more if they wanted their "old product" back.


But that's essentially what Disney recently did with Disney+.


Existing Disney+ subscribers in the United States were likely happy with their $7.99 ad-free experience, but then Disney came along and offered them a choice:


"Increase your monthly $7.99 payment to $10.99 (the new cost of "Disney+ Premium") and continue to enjoy an ad-free experience... or continue to pay your current $7.99 price but get interrupted periodically with commercials!"


That's an ultimatum that would make Maleficent proud.


Here's my best explanation as to why Disney would simultaneously raise prices and introduce ads... and why doing so in their current situation actually makes sense.



A Brief History of Disney+


Disney+ has been hugely popular with consumers since it was introduced in late 2019.


The streaming service launched with decades worth of incredible content available for a low monthly fee, so it's not surprising its subscription numbers were immediately strong.


Then a global pandemic kept people at home looking for things to watch, and Disney+ began to release the exciting new shows it created exclusively for the streaming service... and so it's no surprise the numbers continued to climb.


In fact, when Disney reported its fiscal 2022 results in November 2022, the company revealed that in just three years, Disney+ had achieved over 164 million subscribers.

Worldwide Disney+ subscribers (in millions) from 2020 Q1 to 2022 Q4. (Source: Statista)

Unfortunately, Disney isn't immune to the law of large numbers. Enthusiastic Disney fans signed up for the streaming service as soon as it became available; more casual Disney fans interested in the new content Disney was releasing followed sometime later. But eventually, the only people left were those who already decided they simply weren't interested in Disney's offering and those who needed much more serious convincing to pay what Disney was charging. So how could Disney+ continue to grow?


We know Disney clearly recognized this problem because, in August 2022, it revised its streaming subscriber target from an initial estimate of 230-260 million subscribers by October 2024 to a significantly lower 215-245 million.


chartr published a great infographic to illustrate this revised forecast:



The infographic doesn't make the downward-revised estimates look so bad, but consider the math: lowering its subscriber acquisition targets by 15 million people over the course of two years means Disney now expects to capture 625,000 fewer people EVERY MONTH FOR THE NEXT TWO YEARS than it had previously thought possible. Yikes.


And while Disney+ remains popular with consumers, it's increasingly becoming less popular with shareholders because it loses an enormous amount of money.


Below is a snapshot from Disney's 2022 Q4 earnings report:



For those of you who aren't comfortable reading financial statements, allow me to help: Disney+ (i.e. "Direct to Consumer") lost over $4 BILLION in 2022 compared to a loss of "only" $1.7 BILLION in 2021. Disney+ isn't just losing money, they're losing more than ever.



Disney had to know Disney+ was going to require significant investments to succeed; to believe otherwise would simply be, well, Goofy. But the company had likely calculated it would eventually become profitable with enough subscribers... which meant slowing subscriber growth was a significant cause for concern.



Disney's Decision


Disney had clearly started thinking about ways to make Disney+ profitable in early 2022. It understood that doing so would require cutting costs or increasing revenue... ideally, both. But since Disney+ costs mostly relate to the content creation and acquisition required to have a viable streaming service in the first place, Disney knew increasing revenue would have to be a top priority. So if you're a streaming service, how do you increase revenue?


The answer is that you get more subscribers, you charge your existing subscribers more, or you find a new revenue source.


We've already examined why "getting more subscribers" was easier said than done, so let's look at the remaining two options.


Option A: Charging Your Existing Subscribers More.

Option A was to increase the price of existing Disney+ subscriptions, from $7.99 to some amount higher than that. Forget about increasing the number of Disney+ subscribers: if Disney could simply maintain its existing subscriber base but charge each consumer more for access to its content, that would result in increased revenues. Mission accomplished!


Option B: Find a New Revenue Source

The most obvious way for Disney+ to generate additional revenue outside of subscriptions was to introduce advertising to the service. And if it did so in the form of a lower-priced, ad-supported tier, this option would generate additional revenue in two ways:

  • A new, lower-priced tier would likely attract new subscribers who weren't able (or willing) to pay $7.99 a month for Disney+... but might consider paying a lower price in exchange for watching ads. More subscribers equal more subscription revenues. And if the new ad-supported tier was attractive enough to earn new subscribers but not appealing enough for existing subscribers to consider downgrading their subscriptions, that would have resulted in a net revenue increase.

  • An ad-supported tier would mean the ability to sell commercial slots to advertisers eager to interrupt an episode of Andor with a toothpaste ad. Plus, it's a safe bet that what they'd charge advertisers for access to our eyeballs would more than compensate for whatever amount they'd lose from people choosing lower-priced Disney+ subscriptions, so that would be an added bonus.


Either option would have been a viable way to increase Disney+ revenues.


So which option did Disney decide to go with?


They chose Option C: everything all at once.


At first, this seems to be an odd decision. Remember, one of the two reasons for implementing an ad-supported tier was because doing so might attract NEW subscribers who thought a $7.99 ad-free experience wasn't worth the cost. But how many of those value-seekers would likely sign-up for a new tier with advertising that cost the same as the previous ad-free tier? Assuming we're talking about rational consumers, my guess would be "zero".


In fact, simultaneously launching a price increase and an ad-supported tier makes sense for Disney only under one condition: if the company believed significantly growing its subscriber base was no longer possible.


If Disney believed it had already exhausted its total addressable market in the United States and that further subscription growth would be minimal, then squeezing more dollars out of its existing subscribers and implementing a new revenue source (i.e. advertising) made perfect sense. In fact, it was really the only logical way to achieve revenue growth.


Now take a moment to recall Disney recently revised their subscription forecasts downward.


Disney was a victim of its own success. It successfully launched Disney+ at a low price point and attracted immediate interest, but after two years of growth charts resembling one of The Mighty Ducks' hockey sticks, growth rates had started to look Frozen... and shareholders were getting impatient.


As a Disney shareholder myself, I'm a little bit concerned by the company's implicit admission that its future growth prospects are limited, but I'm glad they're actively doing something about the situation.


As a consumer, I'm actively doing something about the situation too: I just renewed my Disney+ subscription for another year, locking myself in at the current price point.


You know, in case the Canadian business decides they've run out of growth prospects too...


 

P.S. Regular readers may recall I published a fairly comprehensive report last year titled, "Bringing the Magic Home: How Disney+ can drive Subscriber and Revenue Growth in the Canadian Market." Call me biased, but I believe every recommendation I made in that report is still valid. Perhaps someone working on Disney's U.S. business should have read it.


P.P.S. If you think we've seen the end of streaming service price increases, think again.


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