The CEO of Disney Co. Bob Chapek, left, and Bob Iger, executive chairman, deliver remarks at Cinderella’s Castle in the Magic Kingdom during a rededication ceremony marking Walt Disney World’s 50th anniversary in Lake Buena Vista, Fla., Thursday evening, Sept. 30 , 2021
Joe Burbank | Tribune News Service | Getty Images
Disney CEO Bob Chapek continues to make decisions that distance himself from his predecessor Bob Iger.
As CNBC reported earlier this year, Iger disagreed with several decisions made by Chapek as Disney CEO, including his reorganization of the company and his handling of Florida’s controversial “Don’t Say Gay” law.
The latest breach is a 38% price increase for Disney+, announced last week as part of a series of announcements surrounding Disney’s new ad-supported service, which will launch on December 8. Disney+, without ads, will increase from $7.99 per month to $10.99 per month. Disney+ with ads will start at $7.99 per month.
Chapek’s pricing strategy differs from the philosophy Iger espouses, according to people familiar with the two men’s thinking. Iger wanted Disney+ to be the cheapest major streaming offering, said the people, who spoke on condition of anonymity because the discussions are private. That way, customers will see Disney+ as a stronger proposition than its competitors, even if they think content on other services may be more robust. It’s also why Iger argued that Disney+ should be separated from Hulu and ESPN+, a strategy that Capek has maintained so far.
At $7.99 a month with ads, Disney+ will now be more expensive than several other ad-supported products, including NBCUniveral’s Peacock ($4.99) and Paramount Global’s Paramount+ ($4.99), though it will remain cheaper from HBO Max on Warner Bros. Discovery ($9.99) . At $10.99, ad-free Disney+ will not only be more expensive than Peacock and Paramount+, but it will also be more expensive than Amazon Prime Video ($8.99), which also does not include ads.
Disney+ without ads will still significantly undercut Netflix ($15.49) and HBO Max ($14.99). Disney’s bundled offering of Disney+, Hulu with ads and ESPN+ with ads will cost $14.99 per month, up $1 from the previous price.
“We launched at a very attractive price point across all the platforms we have for streaming,” Chapek said last week. “I think it was easy to say that we’re probably the best value in streaming. Since that initial launch, we have continued to invest heavily in our content. We believe the increase in investment over the last two-and-a-half years against a very good price point that we have plenty of room for price value.”
Iger vs. Chapek
Iger’s strategy was to slowly raise prices over time, targeting a $1 per month increase each year for the near term, the people said. This happened in March 2021, when Capek was CEO and Iger was still chairman. Disney+ jumped from $6.99 to $7.99. Iger stepped down from the Disney chair in December.
The slow price increase will allow Disney to suck up as many users as possible at each price point – $6.99, $7.99, $8.99, etc. Iger declined to comment on Disney+’s new pricing. A Disney spokesman declined to comment on the differences between Chapek’s and Iger’s strategies.
Capek’s decision to increase Disney+ by $3 per month, from $7.99 to $10.99, suggests he is shifting Disney’s strategy from maximizing subscriber growth to emphasizing profitability. The pricing decision goes hand-in-hand with Čapek’s decision not to pay for streaming rights to the Indian Premier League, the country’s top cricket league. Capek also decided to raise the price of ESPN+ by $3 per month, from $6.99 to $9.99.
Without the Indian Premier League starting in 2023, Capek lowered Disney’s guidance, first made in 2020, that Disney+ would have 230 million to 260 million subscribers by the end of 2024. Disney’s new subscriber forecast by the end in 2024 it is 215 million to 245 million.
In the final two years of Iger’s tenure, in 2020 and 2021, a cut in streaming guidance likely would have sent Disney shares sharply lower. Instead, Disney shares were barely budged last week when CFO Christine McCarthy announced the news on a conference call and rose 6% on the day after Disney’s earnings, which included a 15 million gain from Disney+ subscribers in the quarter.
The change is related to the collective deterioration of Netflix investors this year, which has affected the entire video streaming industry.
Capek is betting that investors are fine with a smaller total addressable market of streaming subscribers if paying customers lead to a profitable business. Disney’s streaming services lost $1.1 billion last quarter. Big price spikes should bring the streaming business to profitability by the end of 2024 even with lower total subscribers, Čapek said last quarter. Still, it’s notable that Disney had previously planned to break even on streaming by 2024, even before the price hike.
Netflix’s growth so far has reached around 220 million global subscribers. Shares are down more than 60% this year after Netflix lost subscribers in the first half of the year and plans to add just 1 million paying customers in the third quarter.
Walt Disney Company CEO Bob Chapek reacts at the Boston College CEO Club Luncheon in Boston, Massachusetts, November 15, 2021.
Katherine Taylor | Reuters
The decline in Netflix’s valuation gives cover to executives such as Chapek and the CEO of Warner Bros. Discovery’s David Zaslav to prioritize profit over subscriber growth.
Disney is also making strides to show the market that it now needs to focus on average revenue per user, not just adding Disney+ subscribers. Disney made a point during its third-quarter earnings call last week to separate its “core Disney+” subscribers from its India-based Disney+ Hotstar subscribers to demonstrate the much higher average revenue per user for Disney+. Average revenue per Disney+ subscriber was $6.29 per month at the end of Disney’s fiscal third quarter. ARPU per Hotstar subscriber was $1.20 per month.
Disney plans to have 135 million to 165 million core Disney+ subscribers by the end of 2024 and “up to” 80 million Hotstar customers.
Short term gains
By pricing Disney+ with ads at $7.99, Disney+’s current price, Capek is favoring a higher ARPU over accumulating data on how many customers might be willing to pay for Disney+ at a lower price that won’t subscribe to $7 ,99. Capek seemingly already knows the market for Disney+ at $7.99 in the US and Canada, because that’s the price of Disney+ right now.
Another motivation for Iger to undercut the competition with incremental increases was that Disney could get a good idea of demand trends as they increased Disney+ by $1 per month year after year, according to a person familiar with the matter.
Capek could learn how many subscribers would be interested in Disney+ at, say, $4.99 a month if he made that an introductory price with ads. His decision to start at $7.99 again suggests he’s more interested in short-term profitability than in quick wins from subscribers who could turn into higher-paying customers over time.
It also suggests he’s confident the price increase won’t lead to a drop in demand for Disney+.
“We don’t believe there will be any significant long-term impact on our churn as a result” of the price spikes, Chapek said.
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