The growth-at-all-costs phase of the streaming wars is over; now, profits are the priority.
Faced with slowing subscriber growth in their core domestic markets, some streaming services are shifting their focus from adding users to increasing their bottom line. The result is that streamers such as
Walt Disney Co.
,
Netflix Inc.
and
are each doing some combination of reducing costs, raising prices and creating new ad-supported tiers that offer content at lower prices to consumers but also establish a new revenue stream for the companies.
The streaming providers said the price increases are warranted because of the amount of content offered. “We have plenty of room on price value,” Disney Chief Executive Officer
Bob Chapek
said Wednesday.
The price increases come as growth has stalled domestically, usually the most-profitable market for streamers. Just 100,000 of the 14.4 million net new subscriptions to its flagship Disney+ service in the most recent quarter came from the U.S. and Canada. Of the rest, about eight million came from India, while about six million came from other countries, including 52 new markets where Disney+ has launched since May.
“Domestically, Disney+ is tapped out,” said analyst Rich Greenfield of LightShed Partners. “Disney is operating under the belief that, just as in their theme parks, they can raise prices dramatically and count on customers not dropping the service.”
Disney said that in early December it will raise the price of its ad-free, stand-alone Disney+ service in the U.S., to $10.99 a month from $7.99, and the company will begin offering an ad-supported tier for Disney+, starting at $7.99. The company also announced increases to one of its bundle packages.
In addition, the company scaled back its projections for total global subscribers to Disney+, largely in response to lower anticipated growth in India, where Disney recently was outbid for the right to stream matches from a popular cricket league.
Markets welcomed news of the price increases and the company’s better-than-expected quarterly results. Shares of Disney rose 4.7% on Thursday to close at $117.69.
Investors and analysts expect higher subscription costs and the introduction of ads to Disney+ to result in higher profits from the streaming segment, but add that price increases risk alienating some customers and increasing the platform’s churn rate, or the percentage of users who cancel the service each month. The U.S. churn rate for Disney+ is already on the rise, increasing to 4% in the second quarter from 3.1% a year earlier, according to the media analytics firm Antenna.
“We do not believe that there’s going to be any meaningful long-term impact on our churn,” Mr. Chapek said about the price increases. He said Disney+ was one of the lowest-priced streaming services when it launched, and has become more valuable over time as it has added more popular shows and movies.
Other companies that focus on streaming video are making similar moves. Warner Bros. Discovery, the newly formed media giant that owns the premium television service HBO and the streaming services HBO Max and Discovery+, reported last week that it had added 1.7 million new subscriptions. As with Disney, about all of Warner Bros. Discovery’s subscription growth came from overseas—its direct-to-consumer segment lost 300,000 domestic subscribers in the quarter.
David Zaslav,
the newly formed company’s CEO, has taken an ax to Warner Bros. Discovery’s spending, scrapping multiple high-budget movies that were in production or near completion and destined for release on HBO Max, including “Batgirl” and “Wonder Twins,” after deciding that the best return on capital for them was a tax writeoff.
“Our focus is on shaping a real business with significant global ambition but not one that solely chases the subscribers at any cost or blindly seeks to win the content spending wars,” said JB Perrette, Warner Bros. Discovery’s head of streaming, on a call with analysts last week.
Warner Bros. Discovery said it expects losses in its streaming business to peak this year, and expects profitability for the segment in 2024. Similarly, Disney, whose direct-to-consumer segment has lost more than $7 billion since Disney+ launched in late 2019, predicts that Disney+ will achieve profitability by September 2024.
Warner Bros. Discovery has signaled it will launch an ad-supported tier of HBO Max next year. The company has alluded to a new pricing strategy focused on the goal of streaming profitability, but it hasn’t revealed pricing details.
“We will shift away from heavily discounted promotions,” Mr. Perrette said.
At Netflix, customer defections jumped after it raised the price of U.S. plans by $1 to $2 a month earlier this year. In the U.S. and Canada, the company lost 1.3 million subscribers during the second quarter, more than twice the 640,000 it lost in the region in the first quarter. Like Disney+, Netflix is now looking to increase the revenue per user that they draw by selling ads.
Doing so helps streaming services make more money from their existing customer bases, while offering an alternative to price hikes, according to industry analysts.
Existing subscribers to Disney+ will be automatically put into the ad-supported tier unless they elect the higher-priced ad-free version, and some shows, such as “Dancing with the Stars,” will stream with no ads on any tier, a Disney executive said. Disney said that in general, the ad load on Disney+ will be lighter than that of other services, and will benefit from consumers who cancel cable subscriptions and replace them with streaming services.
Netflix said in July that it expected some loss of customers following a price hike and that customer departures are returning to the levels where they were before the increase.
The Los Gatos, Calif.-based company has said its coming ad-supported tier of service is likely to appeal to more-price-conscious customers who are willing to pay less in exchange for viewing ads. Netflix hasn’t said how much its ad-backed tier will cost, but it is expected to charge less than the most basic plan that is currently available, which costs $9.99 a month for a single viewer with the lowest video-resolution quality.
While there has been an overall slowdown in net subscriber growth in the U.S. and more consumers jumping between streaming services, the amount of time people spend watching streaming content continues to grow, said Marc DeBevoise, CEO of the video technology company
That trend makes selling ads a more attractive strategy for streaming services, he said.
“There aren’t more people to get to subscribe, but there are more hours to capture,” he said. “It is still a growing pie of total viewership.”
Write to Robbie Whelan at robbie.whelan@wsj.com and Sarah Krouse at sarah.krouse+1@wsj.com
Corrections & Amplifications
JB Perrette is Warner Bros. Discovery’s head of streaming. An earlier version of this article incorrectly said J.B. Perette. (Corrected on Aug. 11)
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