Mic Drop #41: Disney+ Needs Bundles (& Perhaps Personalization) to Scale

After FY Q3 2021 earnings, is it still ok to be skeptical about Disney+?

Disney’s FY 2021 Q3 earnings call was fascinating if only for one reason: Disney management conceded it needs bundles to scale Disney+ going forward.

The call also confirmed something I observed in Mic Drop #18: Some Rewards for Skeptics of Disney+ back in February:

Disney seems to be running an A/B/C/D test of different models. Specifically:

• Test A (U.S. only): Bundle of Disney+, Sports (ESPN+), and vMVPD (Hulu + Live) and/or adult audience content (Hulu)

• Test B (Latin America): Bundle of Disney+ and Star+ (ESPN and adult audience content)

• Test C (Europe, Canada, ANZ, Singapore): Disney+ app with Star Branded Tile (adult audience content)

• Test D (India, Indonesia): Disney + Hotstar (Disney+, adult audience content, and sports)

I predicted that the tests “point to more regional-specific decisions for Disney+ UI/UX”.

Disney CEO Bob Chapek was asked by an analyst on the earnings call, “why not just make [the bundle] the core product?”

Chapek answered (emphasis in bold added):

….You noticed that across the world, we’ve got different business models. We’ve got different business models for two reasons. Number one, the unique situation that we find ourselves in each market whether it’s Europe or LatAm or Asia or North America tend to be different in terms of what rights we have and what the consumers are actually looking for. But that also gives us an opportunity to test out different propositions. Obviously, the proposition that we have in Europe with Star as a 6-brand title looks significantly different than our relatively unbundled approach that we have in North America. Again, we’re in the first inning of the first game of all the long season, and we’re taking all this into account.

There may also be certain constraints that were under that could, at least from a short-term standpoint, limit our ability do what long-term we might feel was ideal. But frankly, we don’t know what’s ideal yet. I will say that we’re extremely pleased in every market that we’ve launched our direct-to-consumer services. We’ve exceeded our expectations in every marketplace. So, in terms of the way that we’ve approached the market so far, it’s worked really, really well. Is there an opportunity for improvement by considering something different going forward? Possibly. But, we’re going to continue to learn. And as we learn, I’m sure we’ll refine our offerings in the marketplace, as time goes on.

There it is, six months later to the date, the CEO of Disney confirming my deductions that Disney:

1. is testing different models in different regions, something no one else was picking up on; and,

2. is leveraging those tests to make both regional-specific decisions, and to refine the value proposition. ¹

Should I still be skeptical about Disney+?

A big part of my own skepticism for the future growth of Disney+ dates back to October 2019, when then-CEO Robert Iger pushed back on a recommendation engine in Disney+:

Mr. Iger said he is piloting the service himself. He spent two hours on Tuesday exploring the app and offering notes to engineers. His feedback: make the product rely less on algorithms to predict what consumers want….

“I think if people are clicking on Mickey Mouse, they mostly want Mickey Mouse,” he said.

I think Iger got this one wrong: it’s hard to reach Netflix-level scale for a single app without personalization. The shortcomings of this decision are playing out now in North America, and elsewhere.

North American growth is flat

At the beginning of July, The Information reported 38MM Disney+ subscribers in U.S. and Canada, and 110MM subscribers worldwide. So, at 116MM subscribers, Disney+ has grown 5.5% in one month.

Applying that growth rate to North America, it looks like North America grew by 2MM subscribers. But, that is across both Canada and the U.S.

Disney DTC’s two U.S.-only apps grew similarly:

• ESPN+ grew by 1.1MM subscribers (13.8MM subs in Q2 to 14.9MM subscribers in Q3), and

• Hulu (U.S.-only) grew by 1.2MM subscribers across both tiers.

Given that Disney management has told us bundles are now their marketing focus for growing Disney+, both ESPN+’s and Hulu’s growth suggests Disney+ grew by 1.1MM and 1.2MM in the U.S. or 4% in one month.

This leads to a logical question implied by Chapek’s and McCarthy’s bullishness on bundles in the earnings call: but for the bundle with Hulu (which continues to grow with personalization) and ESPN+, would Disney+ have grown?

It didn’t sound like it.

Disney+ scale relies heavily on low ARPU subscribers

The other challenge for Disney+ is that its greater scale comes at the expense of ARPU.

Disney CFO Christine McCarthy revealed that Disney+ Hotstar accounted for the majority of net subscriber additions between Q2 and Q3, making up ~40% of our total Disney+ subscriber base.

So, of 116MM subscribers, 46.4MM are from India, Indonesia, Malaysia and Thailand.

First, that weights ARPU down to $4.16 from $6.12 without those countries. In other words, Disney+’s Netflix-like scale comes at an un-Netflix-like cost to revenues: ARPU for all Netflix geographic regions grew in Q2 2021.

Second, this means there are 69.6MM subscribers across all other Disney+ countries. Less North America, that is ~30MM subscribers or ~20% of Netflix’s Latin American subscriber base.

Disney+ has a long way to go to catch up to Netflix. It understands that it needs bundles as one solution.

But, with Bob Iger exiting in December, is it time to open the door to personalization on Disney+?

I think so because I think Disney+ as a product needs personalization to scale better, with or without bundles.

1. To be fair and realistic and not delusional, no one else I have read since February.