Disney: The Turning Point
From “A Worrisome Circumstance” (May 2023): “As I think about the ‘logical progression’ for Disney DTC, a single platform strikes me as a superior strategy for driving discovery and engagement… The way to incentivize subscription and usage of a bundle / consolidated app that has high-value content for everybody in the family is pricing; super fans with a narrow interest in sports, Marvel or Star Wars, etc., should be paying a significant premium for the a la carte offering - in my mind, much more than they’re being charged currently. This is a long-term journey for Disney, particularly as it relates to marquee sports rights. They’ve already started down this road, but it’s now clear they will need to move more quickly - particularly given the accelerated pace of pay-TV subscriber losses. (They have 20.0 million three service / trio subs, up from 16.8 million a year ago; that number should be, and really needs to be, much higher over time.)”
Two things have now become clear: (1) Management has come around on the logic of the single platform product strategy; and (2) their DTC pricing architecture is undergoing a meaningful evolution. On the first point, consider this comment from the Q3 call: “We're moving closer to a more unified one app experience domestically to pair high-quality general entertainment [Hulu] with content from our popular brands and franchises [Disney+] for bundle subscribers. It's a formula for success that we have already proven in our international markets… We see a future where consumers can access even more of Disney's streaming content all in one place, resulting in higher engagement, lower churn, and greater opportunities for advertisers.”
While it wasn’t 100% clear how sports / ESPN fit into that discussion, this comment from CEO Bob Iger was noteworthy: “Overall, we're considering potential strategic partnerships for ESPN around distribution, technology, marketing, and content opportunities where we retain control.”
With discussions about “strategic partners” and the sports betting deal with PENN Entertainment, it’s evident that Disney is rethinking its hand at ESPN. While ESPN+ was an early entrant in OTT / DTC sports, there hasn’t been enough financial progress over the past 5+ years to make it anywhere close to a swap for linear. These recent developments, along with the DTC pricing announcements discussed below, give some reason to for optimism; I think ESPN is getting back on the front foot. (As it relates to sports and the TV business, note that advertising revenues at Linear Networks declined 14% YoY in Q3, inclusive of 4% YoY growth at ESPN; amidst the implosion of entertainment programming on U.S. linear TV, live sports are a bright spot.)
That brings us to the second major development: on Wednesday, Disney announced another round of significant price increases for its DTC services. As I (most recently) argued in May, while the late 2022 price increases were a big step in the right direction, the price point for the standalone apps needed to keep moving much higher over time. As you can see below, that’s what will happen in October: prices for the ad-free tiers of Disney+ and Hulu will be increased by 27% and 20%, respectively, with ESPN+ hiked by another 10% (at $10.99 per month, it’s ~120% higher than the price at launch in 2018).
The price of the ad-free trio bundle (Disney+, Hulu, and ESPN+) was also increased significantly – up 25% to $24.99 per month - with the discount remaining unchanged relative to the group of individual services (~40% cheaper through the bundle). Given that 20.1 million U.S. customers are on the trio bundle, which is equal to roughly 80% of the subscriber base for ESPN+, I think that this was a pretty surprising move (in a good way). It suggests that management has a high level of confidence in customer’s perception of the bundle value proposition; said differently, they believe the DTC services have untapped pricing power. (“We took a pretty significant price increase in late 2022 - and we didn't see significant churn [from] it.”)
