Walt Disney (DIS 2.17%) is raising prices for its Disney+ streaming service, again. It may not be a popular move with consumers who are trying to cut costs amid inflation, but it's a necessary one for the business. Using two charts, I'll show why the business is making a good decision by raising prices for Disney+, and why it may not necessarily hurt demand all that much.
Disney's media business is lagging
Disney has two main operating segments -- the part that holds its theme park business, and the one related to media, including its Disney+ streaming service. It's the latter that is problematic. Through the first nine months of the year, the company's parks and experiences segment has been thriving, with sales of $24.8 billion rising by 17% year over year. And its operating income of $7.6 billion has jumped at even higher rate of 20%.
And while its media business hasn't been doing badly with revenue growing by 1%, its operating income is down a staggering 46%, reporting $1.9 billion less in profit this year compared to 2022.
Image source: Company filings. Chart by author.
Its linear network business is struggling
Disney media's operating income has nosedived this year, but the direct-to-consumer (DTC) part, which includes Disney+, has improved a bit. Its operating loss during the past nine months has totaled $2.2 billion, which is less than the $2.5 billion loss it incurred by this time last year.
The more concerning issue is the drop in income from its linear networks business, where operating profits have declined by 27% to just under $5 billion. The problem there was that the company is hurting from lower ad revenue and lower viewership numbers.
Image source: Company filings. Chart by author.
Now, with a writers strike ongoing in Hollywood and new content potentially limited, that may only exacerbate those issues.
Why Disney+ prices need to go up
Walt Disney recently announced that it would be raising the price of almost all of its Disney+ streaming plans. Its commercial-free plan will rise by 27% to $13.99 per month. It's a necessary increase because, while the DTC losses are shrinking, they aren't improving fast enough to be able to help the business out at a crucial time when the ad market isn't strong.
Last quarter, which ended on July 1, Disney+ reported average monthly revenue per paid subscriber of just $7.31 in the domestic market, which includes Canada and the U.S. Contrast that with rival Netflix, which makes a profit from its streaming operations, and where its average monthly revenue per membership is far higher at $16 for the same market. Even in Netflix's smallest market, Asia Pacific, average revenue per membership is still higher at $7.66.
Disney+ launched in 2019; it came in and offered lower, more aggressive pricing than Netflix, which has helped it grow its subscriber base. But it hasn't resulted in a profitable operation. Disney+ can likely afford to justify raising its prices and remain competitive while significantly improving the prospects of profitability for its streaming service. And by doing so, the company's whole operations benefit.
Is Disney stock a buy?
Shares of Disney are down 27% this year, and the stock is now near its 52-week low. It's trading at 17 times its estimated future earnings, which is below the S&P 500 index average of 20.
For long-term investors, this can be an optimal time to buy the streaming stock. Disney has strong branding power, and while it's facing challenges now, the ad market should improve over time, leading to stronger results in its media segment.
Combine that with a potentially profitable streaming business and a parks business that still looks solid, and this is a stock that could be in a great position to see more earnings growth in the near future.
