Disney's dilemma: To hike or not hike the price of Disney+

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Earlier this week, activist hedge fund Third Point wrote to Disney's CEO Bob Chapek to ask him to stop paying dividends permanently and invest the money (~$3 billion) in obtaining original content or marketing for Disney+.

Disney already suspended its dividend payout in June and is expected to halt its next one as well. I'm with Third Point that Disney needs to halt paying dividends immediately for the foreseeable future - at least until the pandemic is behind us. Canceling dividends last minute each time is not a good strategy because the money can't be spent on anything if it's set to cover dividends. 

However, I don't agree with Third Point's recommendation to hike up the price of Disney+. While Disney+ competes with Netflix for consumer attention, the goals of the two services are very different. 
  • For Netflix, streaming is its entire business, the sole driver of its revenue and profits. 
  • For Disney, Disney+ is not about earning subscription revenue; rather, it is a direct-to-consumer touchpoint for Disney’s entire business.
Let me elaborate, Disney+ enables Disney to control the distribution of its content and go direct-to-consumer. This enables Disney to deepen its already strong connections with customers in ways that benefit all parts of Disney and its businesses. Movies can increase original content on Disney+. Content increases the attractions at parks which increase merchandising opportunities. This increases revenues which increase new movies and the cycle repeats. 

This is precisely why Disney was so aggressive in pricing Disney+. The company has a big content library and could have easily tried charging  $9.99/month or even matched Netflix’s monthly subscription. Indeed, had Disney done that, Disney+ would have been more profitable sooner than 2024- target set by Disney. However, the outcome for Disney as a whole, would have been worse. A higher price means fewer customers, and given the many ways that Disney has to monetize customers throughout their entire lives (see the chart below from Chartr) that would have been a poor trade-off to make.


Would the dividend payout be enough to compete with Netflix? 

Hell No. Netflix is the undisputed king of streaming and Disney never built Disney+ to compete with Netflix. Nor will the additional $3 billion, whether used to acquire new content or marketing for Disney+ affect Netflix in any way. According to The Times, Netflix content spending this year alone is expected to surpass $17 billion, and could grow to more than $26 billion by 2028. For comparison, Disney plans to spend $1 billion on Disney+, AT&T’s WarnerMedia plans to spend up to $2 billion on content for HBO Max.

Disney+ was priced so low to make it a non brainer for anyone to subscribe. The overwhelming majority of customers will always choose Netflix and Disney wanted to make sure that customers also choose Disney+ instead of the many other options (HBO Max, Apple TV+, etc.) Disney priced Disney+ so low to maximize the revenues per customer from all the Disney products; it's not to maximize the revenues per customer from Disney+. Disney+ is a way to connect with customers and lure them to its much larger suite of products and businesses.

The pandemic has closed Disney's parks and revenues its profits - 37% of Disney's revenues come from parks and related products. However, the pandemic won't have this impact forever. Third Point claims that it is thinking long term when advising Disney to jack up the prices of Disney+. For me, this is very short sighted. Disney is betting on Disney+ to do its job of connecting with customers and luring them to Disney World, Disney Cruise etc. when the parks open.

More original content offered as part of the monthly subscription fee in Disney+ will not attract more customers nor help reduce churn. However, jacking up the price will certainly increase churn - remember when Netflix announced a price increase?

The right strategy is not to increase the price of Disney+ but follow a model similar to the Mulan strategy. Use the dividend payout money to produce original content or acquire content - like Hamilton- and sell it on Disney+. Mulan has proven that Disney+ can be effective at serving as a platform for shifting the theater window to customers’ living rooms.

Disclaimer: This post is merely my own assessment and is not an investment recommendation. For professional advice, seek input from a licensed investment advisor.

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