Two notable data points came out of Disney's Q1 earnings yesterday.
First, it broke out its domestic U.S. and Canada subscribers for Disney+ for the first time, revealing it had 42.9MM in FY Q1 2022, and 36.3MM in FY Q1 2021. It confirms something that I had long suspected: Disney+ has struggled to break past 40MM subscribers in the U.S.
Assuming Canada is anywhere between 5-10% of domestic subscribers, it may still be beneath 40MM.
But, I think this quote from CFO Christine McCarthy on the Q1 earnings call may be the most notable data point:
We added 4.1 million paid domestic Disney+ subscribers, including a benefit of approximately 2 million incremental subscribers from our strategic decision to include Disney+ and ESPN+ as part of a Hulu Live subscription.
These 2MM incremental Hulu Live subscribers are U.S. only, as it is not available in Canada. So, Disney+ domestic growth from the Hulu Live subscription bundle was ~5%. [1]
The implication is no other single marketing initiative seems to have driven anything close to 5% domestic growth for Disney+ in FY Q1 2022, or previously in 2021. Or, if it did, Disney has not highlighted it (Hamilton probably did drive similar growth, but it also drove high churn, as The Wall Street Journal recently reported).
The Consumer as Disney's "North Star"
We are a big company with many constituents and stakeholders, all of whom have a place in our decision-making. But at the end of the day, our most important guide—our North Star—is the consumer. Right now, their behavior tells us and our industry that the way they want to experience entertainment is changing—and changing fast thanks to technology and the pandemic. We must evolve with our audience, not work against them. And so we will put them at the center of every decision we make.
There were some confused reactions to this excerpt in particular, perhaps best summed up in this conclusion to Ryan Faughnder's excellent essay, HBO Max is doing fine. But is streaming actually a good business?
At the risk of over-analyzing, that doesn’t sound like a company that’s committed to old models, like putting Pixar movies exclusively in theaters.
Companies are willing to shake up their 100-year-old legacy businesses (these old-fashioned things called movie studios) on the idea that streaming represents a better future, or at least one in which they remain relevant in a world of TikTok, video games and metaverses. It’s fair to ask if streaming really is the better way.
There was also an interesting, more provocative take on this quote from Puck News' Matt Belloni on the KCRW podcast, "The Business":
...it started at Warner with Jason Kilar and now Bob Chapek has picked it up. They seem to be using "our audience comes first" as a buzzword for enacting a number of changes that might be unpopular within the company. I mean, what Chapek is basically saying is that "don't complain if you are at Pixar and your movie Turning Red which was supposed to come out in theaters in March is now going to go straight to Disney+ because that's what the customer wants." But that's not exactly true. The customer is not what they're chasing here. They're chasing new business models and I think they should probably be a little bit more honest about that.
I think the success of the Hulu Live bundle does a better job explaining what Disney is doing better than both of these critiques, as much as both have elements of truth to them.
Meaning, Disney+ grew 5% in FY Q1 2022 though not because of the viral success of Encanto's "We Don't Talk About Bruno" or any particular piece of content like Hamilton in the summer of 2020. Rather, both existing consumers (4MM in FY Q4 2021) and target consumers of Hulu Live saw marginal value in the pricing of the bundle.
Looking at the 4.3MM subscribers for Hulu Live in FY Q1 2022, that means either:
the bundle drove 300K new subscribers or 7.5% growth for Hulu Live and/or
~40% of Hulu Live subscribers adopted the Disney+ and ESPN+ bundle plan
Both are big numbers for any streaming service, and the second one is extraordinary given how flat growth has been at both Hulu and Disney+ over recent quarters.
Why Marketing, and not Content, is King
I think this data point hits on what both Belloni and Faughnder missed in their criticisms of the Chapek memo: effectively, existing Hulu Live consumers have told both Disney and the market that Disney+ and ESPN+ are valuable to them at a much lower price point. But there are other implications lurking in this data point, like:
Cord-cutting homes may be more amenable to signing up for the Hulu Live virtual MVPD if they can get the additional services at a lower price point,
Existing Disney streaming subscribers may be more amenable to signing up for the Hulu Live virtual MVPD if they can get the additional services at a lower price point, or
We may be seeing a market trend where consumers are telling Disney that they value Disney+, ESPN+ and Hulu in cost-effective bundles rather than as individually-priced services.
On this last point, ESPN+ seems to be the bellwether here as it has grown 7x since the launch of the Disney+ bundle and its value proposition has changed little.
Marketing > Content
Faughnder, Belloni and many others interpreted Chapek's memo as a justification for more direct-to-consumer distribution, and I don't think they were necessarily wrong. But I also think these critiques went too narrow in their interpretation of what Chapek meant.
Meaning, Chapek's point was never only about limited content production - which Chapek told investors will "rectify itself in the second half of this year" - nor is it only about more direct-to-streaming content distribution decisions like Pixar's Turning Red.
Rather, it was an elegantly stated objective that reflects a new reality for Disney: what direct-to-consumer streaming consumers need and are willing to pay for is very different from what theatrical consumers need and are willing to pay for, and what Theme Parks consumers need and are willing to pay for.
As Matt Belloni rightly observed, it's another version of what WarnerMedia CEO Jason Kilar wrote in Wonder Woman 1984, This Christmas, Movie Theaters and HBO Max back in November 2020:
We are, of course, in an extraordinary moment. This entails a patchwork of regulations, geographic considerations and, most importantly, fan preferences.
That said, Kilar's "fan preferences" point has a broader meaning: it's not only about how and where audiences consume content, it's also about the economics of that consumption. The general market assumption has been that the economics are simple for consumers: streaming is cheaper than theater (and in the case of Hamilton, unusually cheaper), and therefore it will win in the long term.
But Disney's best domestic growth data point since Hamilton Q4 2020 was driven by consumers signing up for both a virtual MVPD and a lower price point ($5) for two streaming services that normally would total nearly $15 individually. That would imply a sufficient percentage of consumers are telling Disney that they don't value these two services at the price points Disney is offering them at.
So, Disney's "North Star" is also in understanding the types of pricing and other incentives a consumer needs to both sign-up and also not churn out. That is not only a question of content production or content distribution, alone.
Rather, it tells us marketing - and not content - may be king in streaming. [2]
[1] This is true whether Canada is as little as 5% of Disney+ domestic subscribers or as much as 10%.
[2] Ironically or coincidentally (or however one wants to frame it), we will learn the flip side of this relationship between marketing, pricing and growth in Netflix's FY Q1 2022 after its recent price increases take effect.