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Disney CEO Chapek distances himself from Iger with the Disney+ price decision

Disney CEO Chapek distances himself from Iger with the Disney+ price decision

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

Joe Burbank | Tribune News Service | Getty Images

Disney CEO Bob Chapek continues to make decisions that distance himself from his predecessor, Bob Iger.

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

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

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. In that way, customers will see Disney+ as a stronger value proposition to competitors, even if they believed the content of other services may be more robust. This is also why Iger argued for keeping Disney+ separate from Hulu and ESPN+, a strategy Chapek has so 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. Discoveryits 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 more expensive than Amazon Prime Video ($8.99), which also does not include commercials.

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Disney+ without ads will still significantly undercut 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, a $1 increase from the previous cost.

“We launched at an exceptionally compelling price across all the platforms 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 the initial launch, we’ve continued to invest heavily in our content. We think because the increase in investment over the last two-and-a-half years compared to a very good price, that we have a good place in terms of price value.”

Iger against Chapek

Iger’s strategy was to slowly raise prices over time, aiming for a $1 per month increase each year in the near future, the people said. That’s what happened in March 2021, when Chapek was CEO and Iger was still chairman. Disney+ jumped from $6.99 to $7.99. Iger stepped down as Disney’s chair in December.

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

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

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 million.

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During the final two years of Iger’s tenure, in 2020 and 2021, reducing the flow guidance likely would have sent Disney shares tumbling. Instead, Disney shares barely budged last week 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 the investors’ collective lashing Netflix this year, which has affected the entire streaming video industry.

Netflix effect

Chapek is betting that investors are OK with a smaller total addressable market for streaming subscribers if paying customers lead to a profitable business. Disney’s streaming services lost $1.1 billion in the most recent quarter. The big price increases should make the streaming business profitable by the end of 2024 even with a lower total number of subscribers, Chapek said last quarter. Still, it’s notable that Disney had previously planned to reach profitability in streaming by 2024, even before the price hike.

Netflix’s growth has currently peaked at around 220 million global subscribers. Shares are down more than 60% this year after Netflix lost subscribers through the first half of the year and plans 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 on November 15, 2021.

Katherine Taylor | Reuters

The decline in Netflix value provides cover for executives such as Chapek and Warner Bros. Discovery CEO David Zaslav to reprioritize profit over subscriber growth.

Disney is also taking steps to show the market that it should focus on average revenue per user now, rather than just adding Disney+ subscribers. Disney made a point during its third-quarter earnings presentation last week to separate “core Disney+” subscribers from Disney+ Hotstar subscribers, based in India, to showcase the much higher average revenue per user for Disney+. Average revenue per Disney+ subscriber was $6.29 per month at the end of Disney’s third quarter. ARPU for a Hotstar subscriber was $1.20 per month.

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Disney plans to have 135 million to 165 million core Disney+ subscribers by the end of 2024 and “up to” 80 million Hotstar customers.

Profit in the short term

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

Another of Iger’s motivations for undercutting competition with incremental increases was that Disney could get a good sense of demand trends as it increased Disney+ by $1 per month per year, according to a person familiar with the matter.

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

It also suggests that he is confident that the price increase will not lead to a drop in Disney+ demand.

“We don’t think there’s going to be any meaningful long-term impact on our departures as a result” of the price increases, Chapek said.

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