Disney is spending billions to keep Disney+ afloat, meanwhile the service is seeing meager results.
In the first quarter of 2023, Disney+ recorded its first drop in subscribers. Since the first quarter of 2020, the streaming platform has been riding the wave of exponential growth, but as the months rolled by, it found itself in treacherous waters. Content fell flat, with the media conglomerate caught up in confusion. In Q1 2020, Disney Plus had 26.5 million subscribers worldwide, with the figure growing to 33.5 million over the second quarter. This figure more than doubled by Q4 2020, where the platform was home to 73.7 million subscribers.
Two years in and the platform still showed remarkable growth. By Q3 2022, the number of subscribers doubled again to 152.1 million subscribers. In the last quarter of 2022, users peaked at 164.2 million, upon which they started to fall. During the first quarter of 2023, subscriber numbers fell to 161.8 million, ultimately falling to 146.1 million global subscribers in Q3 2023. Disney+ recovered to 150.2 million in the last quarter of 2023, but is yet to reach its peak.
Disney now finds itself at a crossroads where it wants to maintain the business practices of old whilst having to keep Disney+ afloat. A daring strategy by Bob Iger to capitalize on the exponentially growing online video streaming market. What happened in the months leading up to the loss in subscribers and how does the company plan to turn the tides.
Building Disney+
In April 2019, Disney unveiled its streaming service Disney+, which would serve as the media conglomerate’s response to the growing dominance of tech companies in the media space. Disney+ would have a launch price of $7 per month, undercutting Netflix’s cheapest plan of $9 and far below its standard tier option of $13 a month.
A few months later, in September 2019, Joy Press from Vanity Fair, spoke with Disney+ executives Ricky Strauss and Agnes Chu about how the media conglomerate would move its heavy weight around to disrupt the streaming market. The interview was a few months ahead of the November 2019 launch, with dozens of original series being announced along the way to support Disney+ during its release. Strauss and Chu both oversaw the content and marketing strategy for Disney+, being responsible for resetting the status quo set by Netflix, who dominates the streaming market to this day.
Press pointed out that streaming services were heavily reliant on reboots and sequels, especially Disney. Strauss notes that Disney has a wide array of channels to choose from, greatly expanding its content library after the acquisition of Fox. He points to the vast library of Marvel and Disney, Pixar and Stars Wars and National Geographic. All the IPs would be available to Disney+ customers. On top of its existing library, Strauss adds, the company is working on creating exclusive original movies and shows for the streaming service.
Chu meanwhile, admits that Disney+ will be pivoting toward the nostalgia factor. Chu notes that many of the initial subscribers will be signing up to rewatch their favorite Disney shows and movies. What percentage of the content during launch would consist out of new original content versus existing IPs, Chu wouldn’t disclose, but she highlights that during launch, existing franchises will be the majority.
The team at Disney+ hoped that its existing content would be enough to pull subscribers in and with the new content it will be adding, it wanted to show that it could rival previous hits. One of such franchises, Strauss pointed out, was Monsters at Work, which is an extension of the massively popular Monster Inc. movie. Reason for making Monsters Inc. prominent during the ramp-up of Disney+, is the social media team at Disney discovering that the franchise was still pretty much thriving in popular discourse. A confirmation for executives at Disney that nostalgia would be a solid bet at launch.
Disney’s streaming service would also be a perfect vehicle for original series from the Star Wars universe. The original episodic series, the Mandalorian, would be the first live-action Star Wars show since the acquisition of LucasFilms by Disney back in 2012. The original series would be a testament to Disney’s commitment to bring high-quality, high value, IPs to its streaming platform.
The technology that drives Disney+
The content library would be supported by state-of-the-art technologies. In February 2021, Zach Anderson from website Product Board, spoke with Vice President of Product at Disney+, Michael Cerdà about how the team set out to deliver high quality content through its cross-channel, multiplatform online video streaming service. Cerdà worked on several projects at well-known brands like Live Nation, Vevo, Goldman Sachs and Facebook. He now managed the Disney+ product, which at the time boasted 85 million subscribers and was still in its ramp up phase.
Cerdà explained that the team’s goal is to deliver endless entertainment to its customers. The team set an ambitious goal to create the best stories ever told. In order to achieve this, they had to create technologies that could deliver amazing content across multiple devices around the world. Disney paid close attention to the underlying architecture that allowed users to quickly find and watch their favorite content. The front page would feature new and popular series and include a section divided per channel, highlighting content from National Geographic, Disney and Pixar among others.
Disney knew that in order to attract new users and keep them coming back, it had to match the experiences from its competitor, Cerdà commented. The team had to deliver a seamless account sign-in, after which personalized recommendations had to be shown to the user. Furthermore, the portal had to include profile avatars, support up to seven accounts, easy and unlimited downloads and handle up to four simultaneous sessions. Disney launched hundreds of customer research sessions to create this smooth customer journey.
Customer research, which can be as easy as launching online UX testing tasks to in-house customer interviews that track user behavior, can drastically alter the user experience that was initially designed by internal teams. Cerdà highlighted that the team placed a heavy weight on creating a smooth customer journey in the app. Adding that the app needed to feel awesome, with the platform being able to deliver high quality content consistently. This meant teams were segmented to focus on specific parts of the app to nail down the optimal experience along each step of the customer journey.
After release, each section of the app had a dedicated product manager who was tasked to keep improving their respective section of the portal. Cerdà explained that the emphasis remains on the pre-signup phase, where teams create and optimize the package and deal sections, ensuring smooth payments, which leads to increased conversion rates overall. The post-signup teams meanwhile work on content presentation, search, navigation and the recommendations algorithm.
Ideas for product development are shared among teams at Disney+, from product marketing to data. They can contribute to the so-called Productboard. This ensures that all teams are involved with every stage of the development cycle. It must be said that a lot of these practices work great in theory, but any company will run into friction regarding prioritization and release management, as each stakeholder within an organization has different priorities.
Disney+ disrupts
Before Disney+ hit the market, many were convinced that Netflix would need to step up its game or else Disney would take the proverbial cake. In August 2017, Disney shocked the media industry, announcing that it would pull its content off of Netflix. In order to deliver high quality streaming, Disney announced it would purchase a majority stake of 75 percent in MLB Advanced Media spin-off, BAMTech. A year prior it had already acquired a 33 percent stake worth $1.58 billion. CEO Bob Iger told CNBC that it marked a dramatic strategic shift for the company, as it witnessed impressive results at the technology company.
Disney had to act, even if the Netflix deal was highly profitable. Before its decision to upend its licensing deal with the streaming company, it could license its popular series to Netflix for a hefty sum. Disney meanwhile had already turned a profit for most of the IPs available on Netflix and could now bank in once again, leaving the pricey operations to the streaming company. Numbers have never been disclosed, but the deal is estimated to have cost Netflix between $200 million to $300 million per year. However, this model could only work for so long.
James Stewart for the New York Times noted that for some time, Silicon Valley started to encroach on Hollywood’s territory. Tech giants like Google, Apple and Amazon were getting in the rearview mirror of established Hollywood content giants, ready to nullify its money making machine. Netflix proved that it could become a serious threat, surpassing 100 million subscribers in July 2017, with little signs of slowing down. Hollywood might have been wary to step in earlier, because stopping Netflix in its tracks would require an enormous warchest.
Consumer internet analyst at Piper Jaffray, Michael Olson, told The New York Times, those who wanted to compete with Netflix should prepare themselves for a long and hard fight. Adding that Disney was the best positioned to step into the ring. Over the decades it had built a strong portfolio full of franchises, fueled by nostalgia. The relationship between Disney and Netflix had also changed as the years went by. Netflix was an easy revenue machine for Disney. But Netflix started to build its own library, pouring billions into original content. Morphing into Hollywood’s bread and butter.
In May 2018, Derek Thompson at The Atlantic was convinced that Netflix should be afraid of Disney, who was ready to dethrone the streaming giant. Thompson based its assumptions on the strong IPs that Disney had in its library, highlighting generation-defining franchises such as Snow White and the Seven Dwarfs. Disney continued to bring theatrical marvels to audiences around the world for decades to come. During the 2010s, Thompson pointed out, of the ten highest grossing movies, eight were released by Disney.
Troubling times ahead
Disney took a wild bet with its own streaming service. Senior media and entertainment analyst at Cowen & Company, Doug Creutz, already told the New York Times back in 2017, that Disney was taking a huge gamble by introducing its own streaming service. Disney might have the strongest IPs in the industry, cutting out revenues upwards of hundreds of millions per year to launch a streaming service that had yet to prove itself, was a risky move even for Disney.
While the die was yet to be cast, with commenters still impressed by Disney’s catalog, the media giant put a lucrative deal on the line. If the bet paid off, it would reap enormous profits, if it failed, it might run itself into the ground. But, as the years passed, Disney ran into trouble on multiple fronts. Pixar, one of Disney’s most priced production studios, was having a meltdown over the course of 2018. Co-founder of Pixar, John Lasseter had to exit the company after sexual harassment allegations surfaced, sending shockwaves through the studio’s operations. A few months after the Lasseter fall-out, Ed Catmull, co-founder of Pixar, announced his retirement. The timing couldn’t be worse for Disney and it had to pour vast sums of money into Disney+ to maintain steady operations.
Disney content spending started to skyrocket, which was necessary to remain on par with competing services like Netflix and HBO. In 2018, Disney spent $23.8 billion on content, with Netflix spending a modest $12 billion. Disney increased spending to $27.8 billion the following year, with Netflix slightly increasing to $13.9 billion. Disney made another push, increasing its content spending to $28.6 billion in 2020, compared to Netflix who decreased its spending to $11.8 billion. Disney decreased its budget to $25 billion, but increased content spending again the following year, passing the 30 billion mark, increasing the budget to an astounding $33 billion.
Problems at Disney+ started to accelerate as Disney CEO Bob Chapek outlined his vision for the company, parting ways with Iger’s vision for its digital products, his predecessor who served as one of the leading figures behind Disney’s transformation. In September 2022, Chapek explained to Reuters that the Disney brand was a lifestyle, with the company having to craft a strategy that would nudge it into the next generation of entertainment. Chapek envisioned a future where Disney would have its own metaverse, filled with unique and personalized entertainment. A daring statement about a technology that yet to prove itself.
In order to fuel its digital ambitions, Chapek announced a 38 percent price increase of its streaming service and a new advertising supported tier. The base price for its non-ad supported plan, would increase from $7.99 nad $10.99 per month, with its ad supported version, coming in at $7.99 per month. CNBC commented that the pricing model was a departure from Iger’s strategy to keep Disney+ the cheaper alternative to all the other streaming services available to consumers. People close to Iger noted that he believed customers would consider Disney’s streaming service a good deal, even if it couldn’t match the strong content delivered by rivaling platforms.
The reasoning makes more sense considering that Disney had been ramping up content spending, whilst heavily relying on its existing library. This strategy was justifiable during the launch days of Disney+, but would remain unsustainable over the long term, as The Walt Disney Company’s business model was positioned differently compared to its primary competitors like Netflix and Amazon Prime. Chapek’s opinion on the pricing strategy strongly opposed that of Iger.
Chapek explained that the company had launched an extraordinary service for a competitive price. Commenting that now the time was right to increase the price, as over the past years it had added high quality content to its service. Believing that customers would still consider the streaming service good value for money. The price hike, however, was far higher than initially outlined by Iger, who wanted a slow ramp up of $1 per month per year, CNBC commented. One might argue that Chapek felt opportunistic and found the timing right as many companies increased their price over the course of 2022.
Disney+ wasn’t the only streaming service within the Walt Disney Company that saw a price increase. Chapek raised the price for its sports streaming service ESPN+ from $6.99 to $9.99, whilst simultaneously deciding to stop its licensing deal with the Indian Premier League. It must be noted that the rights to secure the streaming rights to the Indian league would run into the billions of dollars for Disney, which might not be a worthwhile endeavor in the highly competitive Indian online streaming market.
In order to drive up value and add much necessary content to its service, Disney started to skip theatrical releases, which were an important revenue driver. Instead, David Sims at the Atlantic commented, the media company debuted major franchises such as Disenchanted, which showed major box office promise, on its streaming service. Sims noted that a theatrical release could have generated at least tens of millions in revenue at the box office, before it would find its way to Disney+. Other franchises such as Soul, Turning Red and Luca would eventually receive their own theatrical releases.
Disney+ loses subscribers
In May 2023, Disney lost 4 million subscribers over the quarter of 2023. The drop in subscribers went against analysts’ predictions, who expected the service to add another 1 million subscribers. Shares fell by 5 percent after the disappointing results. The Guardian highlighted that the drop in subscribers was fueled by Disney losing the streaming rights for the Indian Premier League cricket matches on its Hotstar streaming service in India. Subscriber loss was fueled by 300,000 cancellations in Canada and the United States.
While finances had stabilized at Disney+, just like other streaming services, it was losing subscribers after a strong surge in subscribers during the pandemic, The Guardian commented. Despite better financial results, Disney’s streaming service still operated in the red, clocking in at a loss of $659 million. The financial burden is lower than the $1.1 billion loss the year prior, but turning a profit turned out to be a headache for the media giant.
Road to recovery
In November 2023, Disney announced drastic budget cuts to turn its streaming product profitable. The company announced it would reduce costs by an additional $2 billion, one of the already $5.5 billion reduction it had communicated in February. The budget cuts would be supported through lay-offs, comprising 7,000 employees that would have to find opportunities elsewhere, representing about 3 percent of the total workforce.
Of the $5.5 billion, $3 billion will be shaved off in the content development department, which will have to make its streaming products profitable as subscriber growth recovers. The Walt Disney Company reported a 11 percent growth in subscribers for Disney+, with a 1 percent growth in the United States and Canada. Its ad-supported product meanwhile welcomed 2 million subscribers. CNBC noted that Walt Disney isn’t the only media company that is trying to make its streaming service profitable.
Warner Bros. Discovery has been reducing its spending on content creation in a bid to generate a positive ROI for its own streaming service. The slowdown in spending, the news outlet pointed out, was in response to intensified competition in the streaming market, whilst subscribers growth was starting to flatten out for many platforms. Media companies were struggling to overtake Netflix for years, with some even losing market share, despite pouring billions to create new original content.
Increased revenue
The outlook to make Disney Plus profitable might be looming on the horizon if its executives are able to steer the platform into more stable waters. Revenue per user has been steadily increasing after a slow down of the course of 2020 and 2022. In the first quarter of 2020, Disney+ generated $5.56 on average per paying customer per month. This number increased to $5.63 per month in Q2 2020, after which it started to plummet. Falling to $4.03 in Q1 2021, a drop of 27.5 percent over the course of just 12 months.
In the first quarter of 2023, the average monthly revenue per user fell to $3.93. An eye watering drop of 30.2 percent from the peak in Q2 2020. Luckily for Disney, revenue generated per user started to pivot into growth at the turn of second quarter of 2023, growing to $6.47 and reaching an all time high in Q4 2023, with $6.7. The revenue still has to climb or remain stable for Disney to compensate for all the losses it had accumulated during its ramp up.
The long run
Bob Iger took a gamble by pulling Disney’s content from Netflix. At surface level the timing seemed right. Netflix was growing rapidly and other tech giants were seeing a profitable business model. They had the infrastructure and the technological know-how to build their own content streaming services. Meanwhile, Hollywood was left in confusion. The media consumption dynamic had rapidly changed in just a few years. Yes, it was making a nice profit by licensing its content to these platforms. But simultaneously it was fueling a monster of its own creation.
This proverbial monster would learn and adapt to make genre defining content of its own. Hollywood had to step in, with Disney picking up the battle ax to represent the media industry and safeguard its business model. The basic execution was simple: upload the existing library of Disney to its digital service Disney Plus and undercut competitors through low pricing. In theory this worked well for the first years. However, the tides quickly started to turn as Disney executives like Chapek got anxious, unable to handle the slow pricing strategy Iger had envisioned. Disney was spending billions and it had to turn a profit soon.
Hence, was Chapek the precursor for the fall-out of Disney+? That’s difficult to determine. Yes, the pricing strategy of Chapek was the complete opposite from that of its predecessor. However, Pixar ran into trouble just before and over the course of the pandemic. The pandemic drastically changed media consumption, with the studio not pulling the record number of box office sales of days past. Meanwhile, Netflix was gaining subscribers and Disney had to spend billions upon billions to keep up and justify its price hikes.
Bob Iger returned, announcing drastic budget cuts to turn the ship into profitable tides. Whether this will be enough to put Disney+ back on a course of increasing revenues and subscribers numbers is yet to be seen. Case in point remains, that while all signs were green for Disney to drastically shake-up the streaming market, the reality proved far less predictable then many did ever anticipate.
