Connect with us

News

Disney CEO Bob Chapek again distances himself from Bob Iger with Disney+ pricing decision

Published

on

Disney Co. executives CEO Bob Chapek, left, and Bob Iger, executive chairman, deliver remarks at Cinderella Castle at the Magic Kingdom during the rededication ceremony marking the 50th anniversary of Walt Disney World, in Lake Buena Vista, Florida, Thursday night, Sept. 30, 2021.

Joe Burbank | Tribune News Service | Getty Images

Disney Chief Executive Officer Bob Chapek keeps making decisions that distance himself from his predecessor, Bob Iger.

As CNBC reported earlier this year, Iger hasn’t agreed with several decisions Chapek has made as Disney’s CEO, including his reorganization of the company and his handling of Florida’s controversial “Don’t Say Gay” legislation.

The latest break is the 38% price increase for Disney+, announced last week as part of a slew of announcements surrounding Disney’s new advertising-supported service, which will launch on Dec. 8. Disney+, without ads, will increase from $7.99 per month to $10.99 per month. Disney+ with ads will begin at $7.99 per month.

Advertisement

Chapek’s pricing strategy differs from the philosophy Iger espoused, according to people familiar with both men’s thinking. Iger wanted Disney+ to be the lowest-priced major streaming offering, said the people, who asked not to be named because the discussions were private. That way, customers would view Disney+ as a stronger value proposition to its competitors even if it felt other services’ content might be more robust. This is also why Iger argued to keep Disney+ separate from Hulu and ESPN+, a strategy Chapek has thus far maintained.

At $7.99 per 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 than Warner Bros. Discovery’s HBO Max ($9.99). At $10.99, the ad-free Disney+ will not only be more expensive than Peacock and Paramount+, but it will also be pricier than Amazon Prime Video ($8.99), which also doesn’t include commercials.

Disney+ without ads will still significantly underprice Netflix ($15.49) and HBO Max ($14.99). Disney’s bundled offering of Disney+, Hulu with ads and ESPN+ with ads, will be $14.99 per month, an increase of $1 from its previous cost.

“We launched at an extraordinarily compelling price across all the platforms that 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’ve continued to invest handsomely in our content. We believe because the increase in the investment over the past two-and-a-half years relative to a very good price point that we have plenty of room on 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 future, the people said. That’s what happened in March 2021, when Chapek was CEO and Iger was still chair. Disney+ jumped from $6.99 to $7.99. Iger stepped down as Disney’s chair in December.

Slow price increases would allow Disney to suck up as many consumers at each price level — $6.99, $7.99, $8.99, etc. — as possible. Iger declined to comment about Disney+’s new pricing. A Disney spokesperson declined to comment on the differences between Chapek’s and Iger’s strategies.

Chapek’s decision to bump Disney+ by $3 per month, from $7.99 to $10.99, suggests he’s moving Disney’s strategy from maximizing subscriber growth to emphasizing profitability. The pricing decision goes hand-in-hand with Chapek’s decision not to pay for the streaming rights of Indian Premier League, the country’s top cricket league. Chapek also decided to raise ESPN+’s price by $3 per month, from $6.99 to $9.99.

Advertisement

Without the Indian Premier League, starting in 2023, Chapek 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 of 2024 is 215 million to 245 million.

During the last two years of Iger’s tenure, in 2020 and 2021, lowering streaming guidance likely would have led to Disney shares plummeting. Instead, last week, Disney shares barely budged when CFO Christine McCarthy announced the news on a conference call and rose 6% the day after Disney’s earnings, which included a 15 million Disney+ subscriber gain in the quarter.

The change has to do with investors’ collective souring on Netflix this year, which has affected the entire streaming video industry.

Netflix effect

Chapek is betting investors are OK with a smaller total addressable market of streaming subscribers if the paying customers lead to a profitable business. Disney’s streaming services lost $1.1 billion in its most recent quarter. The large price hikes should get the streaming business to profitability by the end of 2024 even with a lower total subscriber count, Chapek said last quarter. Still, it’s notable Disney had previously planned on getting to streaming profitability by 2024 even before the price increases.

Netflix’s growth has, for the moment, topped out at around 220 million global subscribers. Shares are down more than 60% this year after Netflix has lost subscribers through the first half of the year and projects to add just 1 million paying customers in the third quarter.

Walt Disney Company CEO Bob Chapek reacts at the Boston College Chief Executives Club luncheon in Boston, Massachusetts, November 15, 2021.

Katherine Taylor | Reuters

Advertisement

The Netflix valuation decline gives cover to executives such as Chapek and Warner Bros. Discovery CEO David Zaslav to reprioritize profit over subscriber growth.

Disney is also taking strides to show the market that it should be focusing on average revenue per user now, rather than just Disney+ subscriber adds. Disney made a point during its third-quarter earnings presentation last week to separate its “core Disney+” subscribers from its Disney+ Hotstar subscribers, based in India, to showcase the much higher average revenue per user for Disney+. The average revenue per Disney+ subscriber was $6.29 per month at the end of Disney’s fiscal third quarter. The ARPU for a 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.

Near-term profits

By pricing Disney+ with commercials at $7.99, the current price of Disney+, Chapek is favoring higher ARPU over accumulating data on how many customers may be willing to pay for Disney+ at a lower price that won’t subscribe at $7.99. Chapek ostensibly already knows the Disney+ market at $7.99 in the U.S. and Canada, because that’s what Disney+ is priced at currently.

Another of Iger’s motivations to underprice competition with incremental raises was that Disney could get a good sense of demand trends as they bumped Disney+ up by $1 per month per year, according to a person familiar with the matter.

Chapek could have learned how many subscribers would be interested in Disney+ at, say, $4.99 per month, if he made that the starting price with advertisements. His decision to start at $7.99 again suggests he’s more interested in near-term profitability rather than quick subscriber gains that could morph into higher paying customers over time.

It also suggests he’s confident the price increase won’t cause a drop in Disney+ demand.

Advertisement

“We do not believe that there’s going to be any meaningful long-term impact on our churn as a result” of the price hikes, Chapek said.

WATCH: Streaming viewership surpasses cable for the first time ever, according to Nielsen.

Source: CNBC

Follow us on Google News to get the latest Updates

Trending