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If Disney+ Is the Reason You Own Walt Disney, You Better Read This

The rationale seemingly holds water well enough. The streaming, on-demand video market was on firm footing before COVID-19 took hold of the world, but it truly took off during the pandemic. Walt Disney's (NYSE: DIS) prioritization of streaming platforms over other means of monetizing its shows and films last year made perfect sense. Forecasts for as many as 260 million Disney+ subscriptions by 2024 didn't seem out of line.

Now that growth outlook, however, may be way too bold.

Image source: Getty Images.

That's the message of recent reporting from technology industry source The Information. Based on internal Disney data reportedly seen by The Information contributors Wayne Ma and Jessica Toonkel, the pair wrote, "U.S. subscriber growth at Disney's Disney+ streaming service slowed sharply in the past few months [...] with most of the growth in the service this year coming from India and Latin America."

Take that reporting with a grain of salt. Not all the critical details are available, and Walt Disney itself disputes the broad idea. Indeed, the media giant has directly addressed the article in question, reportedly saying it contained "factual inaccuracies and does not reflect the performance of the service."

Given what we do know about Disney+ though -- and the streaming environment in general -- shareholders can't afford to dismiss the prospect that the service is already running into a stiff headwind.

By the numbers

As of the three-month stretch ended April 3, 2021, Disney+ boasted 103.6 million paying subscribers when including India's Disney+ Hotstar service. That's still very impressive, all things considered. The service only launched in Nov. 2019, and Hotstar only debuted in April 2020. While the pandemic helped grow this customer base quickly, plenty of other competition emerged in the meantime.

It's naive, however, to ignore the fact last quarter's sequential subscriber growth of only 8.7 million is the weakest quarterly growth rate since the platform's second quarter of existence. And bear in mind that particular quarter was competing with an impressive pace of signups upon its inaugural launch.

Data source: Walt Disney. Chart by author.

Diehard Walt Disney shareholders will be quick to point out that Disney+ is not yet available all over the world, and besides, the service's price increase that went into effect in March was likely to have some sort of adverse impact on subscriber growth. And to be fair, there's something to those arguments.

There are still red flags no Disney investor can afford to ignore, however.

One of them is the fact that streaming rival Netflix is also peaking in terms of subscriber growth, here and abroad. Last quarter's total quarter-on-quarter addition of just under four million paying customers was not only below expectations for six million but the second-worst showing since the company's subscriber growth surged at the start of the pandemic in early 2020. North American subscriber growth was particularly poor at just 450,000 members, yet no region thrived. Netflix's customer base in Europe, Africa, and the Middle East produced the biggest growth, but even then only improved by 1.8 million despite the enormous opportunity to further penetrate these nascent markets.

So what's this got to do with Walt Disney? It's an indirect sign that foreign consumers aren't embracing any particular streaming service faster than U.S. consumers are anymore.

And the launch of other platforms like AT&T's HBO Max and ViacomCBS' Paramount+ in overseas markets in the future will only make those markets increasingly challenging for Disney to compete in. In fact, while U.S. consumers may eventually end up using eight different streaming services, according to data from Ampere Analysis, the same outlook suggests overseas households will only pay for between three and five such services. This only further raises the bar for Disney+.

As for the impact of the price increase, any price hike is generally going to work against a service's near-term marketability. In this case, though, the proverbial sticker price isn't the price Disney+ customers are paying. The service continues to become effectively cheaper thanks to discounts resulting from bundling and Hotstar's lower cost with last quarter's monthly average monthly revenue per paid subscriber coming in at $3.99. That's down from $5.63 a year ago (and down from the previous quarter's figure of $4.03). Indeed, the actual, true cost of Disney+ was steadily sliding before and after the launch of Hotstar in India, and then in Indonesia in September.

Data source: Walt Disney. Chart by author.

The subscriber growth headwind can't entirely be chalked up to rising prices, or even mostly chalked up to the price hike.

The bottom line

Never say never, of course. Disney might find a way to reignite growth for its premier streaming service if (as The Information suggests) it's truly slowing. Also, bear in mind all streaming platforms are making year-over-year comparisons with results generated during the pandemic's earliest days. That's a big hurdle.

As the old adage goes, where there's smoke, there's fire. There's probably something to the suggestion that Disney+ isn't growing as quickly as it once was. The same goes for Hulu and ESPN+. Whatever headwind is blowing, it could jeopardize the company's goal of hitting 230 million to 260 million total Disney+ subscriptions by 2024. Indeed, that goal may be out of reach even if you count all three of Disney's streaming services together.

Data source: Walt Disney. Chart by author.

If the one of the main reasons you own Disney is the belief the media giant can penetrate and then lead the streaming market based on management's aggressive growth targets, you've certainly got a lot to think about.

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James Brumley owns shares of AT&T. The Motley Fool owns shares of and recommends Netflix and Walt Disney. The Motley Fool has a disclosure policy.


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