The Walt Disney Company announced better-than-expected results last week when it unveiled its earnings for the second quarter of 2022 (the company’s third fiscal quarter.)
The data point that caught the most attention? That total Disney DTC subscriptions — including Disney+, but also Hulu and ESPN+ — reached 221.1 million.
Many headlines subsequently focused on Disney’s overall streaming subscription tally now being higher than Netflix’s. This focus is understandable — who doesn’t love a rivalry? But it’s also notable because their numbers are trending in the opposite direction.
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As you may remember, Netflix lost almost 970,000 net subscribers during the three-month period ended June 30. That was less than anticipated in April, when it predicted a net loss of 2 million subscribers. And its 220.67 million subscriber count isn’t very far from Disney’s. But the contrast between their fates is still headline-grabbing, for good reason.
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Netflix’s most direct rival within Disney’s offerings, Disney+, gained more subscribers than expected in the last quarter — 14.4 million, above expectations of 10 million. Over that same period, Netflix had two rounds of layoffs, letting go around 450 employees, or 3% of its workforce.
Disney’s DTC growth adds a new perspective to Netflix’s struggles. No more tailwinds from the pandemic causing a correction? That also happened to companies like Hopin and Peloton. But if Disney is doing OK, is Netflix more directly to blame for its woes?
Well, it’s complicated — and that warrants a deeper look at what we learned about Disney last week.
On a couple of aspects, it can be argued that Disney is doing things faster or better than Netflix. But the House of Mouse is also bracing for changes that will affect the entire streaming sector and justify some broader caution. Let’s dive in.
International over domestic
One of the interesting data points about streaming services is whether most of their users are based in the U.S. and Canada or in the rest of the world. At Netflix, the switch from mostly domestic to mostly international happened in 2017, 10 years after its launch. In that regard, Disney has been moving much faster, and the growth differential is also worth noting. As TechCrunch’s Aisha Malik reported:
Most … Disney+ growth for the quarter occurred outside of the United States and Canada, where the service added 100,000 subscribers to reach 44.5 million. The company reports that international Disney+ subscribers increased by 6 million to reach 49.2 million. In addition, Disney+ Hotstar, which is available in India and Southeast Asia, added 8.3 million subscribers to reach 58.4 million.
Things looked different at the end of July 2021, when Disney+ still had more subscribers in the U.S. and Canada (37.9 million) than in the rest of the world (33.2 million, excluding Disney+ Hotstar.) In one year, faster international growth flipped the cards.
Of course, the global market that Disney is addressing today is much more mature than what Netflix encountered in the 2000s. And its offering also includes bundles and wholesale deals. But it still says a lot about Hollywood power that Disney+ was launched “in over 50 new markets during the quarter,” as Disney CEO Bob Chapek noted on the company’s earnings call.
Sports over games
During the call, Chapek highlighted increases in live sports viewership through ESPN+ as one of the factors that contributed to “an excellent quarter.”
Meanwhile, Netflix has been notoriously reluctant to enter the battle for sports content just yet. It makes sense up to a point: Sports rights are costly. But at the same time, the streaming company has made bets outside of its core focus that don’t seem to pay off — on gaming, for instance.
A few days ago, TechCrunch reported on data from Apptopia revealing that “Netflix games have been downloaded 23.3 million times in total, and on average, there are 1.7 million daily users. This means that [less] than 1% of the streaming giant’s subscriber base — around 221 million subscribers — are interested in Netflix’s games.”
It is hard to tell how many Netflix subscribers would be interested in live sports, but my hunch is that it would be more than 1%.
Netflix is not yet considering live sports — but here’s why it should
Even Apple, whose strategy for Apple TV is a bet on quality over quantity, has ventured into sports. Last June, it signed a partnership with Major League Soccer that will run from 2023 to 2032.
When it comes to live sports, the situation isn’t exactly rosy at Disney. The company didn’t renew rights to Indian Premier League cricket for Hotstar, which might make it harder for the Asia-focused service to attract and retain subscribers. But this mostly affects India, where the average revenue per user is much lower than in the U.S. and Canada.
Competition from sporting events might be harder to face for Netflix, especially in Q4 of this year. According to FIFA president Gianni Infantino, the FIFA World Cup taking place in Qatar is expected to be followed by 5 billion people globally — which won’t do any favors to streaming churn.
Lowered forecast through 2024
That Disney’s DTC streaming beat expectations last quarter took the focus off another important fact: The company isn’t as optimistic about the next couple of years as it used to be.
Disney, TechCrunch reported, “announced that it has lowered its 2024 forecast for Disney+ to 215 million to 245 million subscribers. Disney had previously set its Disney+ subscriber guidance at 230 million to 260 million by the end of fiscal 2024 but is now lowering this guidance by 15 million on both the low and high end.”
The assumption that fewer people than expected will sign up for a streaming service seems fair in the current macroeconomic context. And this likely also explains Disney’s caution around raising its prices.
Shrinkflation
While the price of the ad-free Disney+ subscription in the U.S. is climbing to $10.99 per month starting December 8, the company will launch an ad-supported plan, Disney+ Basic, on that same date. It’s priced at $7.99, which is what an ad-free subscription used to cost.
Can’t spend more? Just deal with the ads is the implicit message. For other services, Disney is increasing prices across the board, both with and without ads. By doing so, it is following the footsteps of another rival, Amazon, which is set to increase the price of its Prime subscription — including Amazon Prime Video — in the U.S. and in Europe.
Disney is increasing the price of its ad-free Disney+ subscription to $10.99
“With our new ad-supported Disney+ offering and an expanded lineup of plans across our entire streaming portfolio, we will be providing greater consumer choice at a variety of price points to cater to the diverse needs of our viewers and appeal to an even broader audience,” Kareem Daniel, chairman of Disney Media & Entertainment Distribution, said in a statement.
Disney knows firsthand that there is demand for ad-supported streaming. During the earnings call, chief financial officer Christine McCarthy noted that two-thirds of Hulu subscribers are on the ad-supported tier.
Tech-enabled AVOD
Netflix, too, will launch an ad-supported tier at a lower price point, in the “early part” of 2023. That’s later than Disney+ Basic, but neither of them is early to the game. Besides Hulu, there are many ad-supported video on demand (AVOD) platforms — for instance, Fox-owned Tubi.
One of the challenges of AVOD platforms is securing rights to premium movies and series. This will likely be easier for a studio owner like Disney than for Netflix, which already said that not all content will be included in the ad-supported tier.
Some entertainment executives, the WSJ noted, said that studios “likely will seek a premium of 15% to 30% over existing contracts to grant Netflix the right to put their content on an ad-supported platform.”
A 15% to 30% premium might seem rich, but AVOD has more potential for revenue than it used to — thanks to technology. As a matter of fact, both Netflix and Disney have entered adtech deals, respectively with Microsoft and The Trade Desk.
Disney is setting an ambitious goal for its ad-supported tier: That it will have “a lower ad load and a lower frequency than Hulu,” according to McCarthy. Company executives previously alluded to four minutes per hour, which would be much less than linear TV in the U.S.
If Disney thinks a lower ad load might be viable, it’s likely because it thinks advertisers are prepared to pay a premium for the Disney brand — and for its first-party data. It may be true, but launching an AVOD platform amid an advertising slowdown that could get worse looks like a gamble.
With both Disney and Netflix making that same bet, it will be interesting to see whether it pays off for them — or maybe for one, but not the other. We will have to wait for 2023 results to check on that, but there should also be other interesting data points to look into in the meantime — including in earnings from Apple, Amazon and Microsoft.
