Disney+ went from a budding start-up to an industry powerhouse in just three years, boasting more than 164 million subscribers worldwide. Add in another 43 million Hulu viewers and Disney’s 207 million subscribers are a short distance from the industry leader Netflix (NFLX -1.72%), with 223 million. Investors expect Disney to surpass Netflix’s subscriber count in the coming years.
However, recent events and pressure from Wall Street could prompt the company to take one of the biggest risks in Disney’s long and storied history, a move that could easily backfire, setting the company’s progress back years.
A match made in heaven?
Disney has operational control of Hulu and is expected to acquire it Comcastremaining 33% share of the streaming service in about a year. Under the terms of a deal made in 2019, Disney can close the deal as early as January 2024. Each streaming platform has a distinct lineup of popular titles, but combined, the lineup is unrivaled.
The viewer data appears to support that view. A recent report reveals that the combination of Disney+ and Hulu holds 30 percent of the top 100 shows on subscription streaming services in the United States so far this year, according to data compiled by Ampere Analysis. For context, Netflix, the individual leader, controls 23%.
Multiple media reports suggest the company is considering a plan that would merge Disney+ and Hulu, creating a single streaming dynamo. While a combination might seem like a good idea at first glance, vision is short-sighted and ignores an important consideration.
The marriage deduction
No doubt there would be other benefits to such a marriage. The company would be able to capitalize on the popularity of the two services, boasting a larger library while also providing cost efficiencies by focusing on a smaller range of the most popular titles.
In the midst of the economic downturn, there has been a renewed emphasis on profits, something that has plagued the streaming industry. Disney hasn’t been immune, reporting an operating loss of $1.47 billion in its direct-to-consumer (DTC) segment during its fiscal fourth quarter. This achievement brought the segment’s losses for the year to more than $4 billion. However, in his recent earnings call, former CEO Bob Chapek said, “We still expect Disney+ to be profitable in fiscal 2024.”
That could change if Disney merged two top-notch streaming services and charged a higher fee for the combined package than for either component individually.
The fly in the ointment
Disney recently made two major announcements regarding the future of Disney+. The company will roll out an ad-supported tier to bring more price-sensitive customers into the fold, while also raising the cost of its existing ad-free plan, starting December 8.
If Disney were to eventually merge Hulu and Disney+, the total number of subscribers would automatically drop by at least 43 million, the number of Hulu subscribers that would be folded into the larger Disney+. Additionally, the company would no doubt institute further price increases based on the greater value and greater programming choices of the new, more robust service, but some subscribers may not see it that way.
Investors may recall the public outcry in 2011 when Netflix split its streaming service and DVD plans, charging $7.99 a month for each, or $15.98 for both. Before that split, $9.99 a month covered the cost of both services. At the time, headlines shouted “Netflix raises prices by 60%,” prompting outrage from customers. When the fervor died down, Netflix had lost more than 800,000 subscribers during that fateful quarter, an important lesson Disney should take to heart.
What does this mean for investors
There seems to be little doubt that Disney will finalize the acquisition, as Hulu’s paying customers are significantly more valuable right now than those who subscribe to Disney+. Hulu is only available in the US, and its average revenue per user (ARPU) is double that of Disney+ in North America.
Before long, Disney has orchestrated a dominant position in the streaming industry, a lead that could be squandered if the company decides to merge its two biggest streaming moneymakers. The company already offers a bundle that includes Disney+ (no commercials), Hulu (with commercials), and ESPN+ for $13.99 a month ($14.99 starting December 8). Viewers who want the best of both worlds already have the opportunity to pay for more programming.
Disney has already raised prices and doesn’t want to alienate existing subscribers and risk a mass exodus, just for bragging rights. Things are fine the way they are now and it seems like a mistake to combine Hulu with Disney+.
Danny Vena has positions at Netflix and Walt Disney. The Motley Fool has locations and recommends Netflix and Walt Disney. The Motley Fool recommends Comcast and recommends the following options: $145 January 2024 Long Calls on Walt Disney and $155 January 2024 Short Calls on Walt Disney. The Motley Fool has a disclosure policy.