For the past several quarters, investors have rewarded The Walt Disney Company's (DIS) stock for increases in subscription numbers for Disney Plus, its streaming service. In a future dominated by streaming video on demand (SVOD), the higher the number of subscribers for Disney Plus, the more the revenue. Or so the logic goes.
A recent report by consultancy firm Deloitte that predicts significant customer defection numbers for streaming services could spell bad news. Should Disney investors brace themselves for declining revenue?
- Consultancy firm Deloitte has predicted a significant churn rate for streaming services in 2022.
- Disney investors should look beyond Disney Plus to the company's other streaming offerings such as Hulu for its long-term streaming growth story.
- Disney Plus has the second-lowest customer churn rate among streaming services.
A Significant Churn Rate
According to the Deloitte report, more than 150 million paid subscriptions will be canceled globally for all streaming services in 2022. The global churn rate, or the rate at which customers leave streaming services, will be 30%. The churn rate in the United States, the biggest market for streaming services, will be higher at 38%, a roughly 3% increase from 2021. Even as it brings in new subscribers, customer churn can adversely affect revenue, when the number of customers leaving a service is greater than the number of people joining it.
Deloitte says its 2022 estimates represent a new normal. "While that cancellation number seems high, churn is about canceling but also potentially adding new services, so we do predict that more subscriptions overall will be added in totality than canceled, and that the overall average number of subscriptions per person will rise," said Jana Arbanas, leader of TMT sector coverage at Deloitte. "In some cases that is because one individual is subscribing to obtain access to specific content, canceling that service once that content has been consumed, and potentially re-upping that service again [later on]." According to Deloitte's research, 25% of consumers, mostly from Generation Z (people born in or after 1997), have engaged in canceling and again signing up for a particular service in the past year.
Should Disney Investors Be Concerned?
Disney has invested heavily and cut dividends to manage its balance sheet as it spends to expand its streaming footprint. The company plans to garner between 230 million to 260 million subscribers by 2024 for Disney Plus. Customer defection could spell bad news for its stock. However, there are a couple of reasons why a higher-than-average churn rate prediction might not affect the House of Mouse.
First, the company has a diverse line of streaming channels to help mitigate the more severe effects of customer churn. Most investor attention is focused on Disney Plus, which itself is a loose collection of various services. Looking beyond Disney Plus, the company also has Hulu and ESPN+. The latter is poised for growth, while the former has already established itself as a formidable streaming revenue generator for Disney.
What this means is that Disney can count on other sources of streaming revenue, beyond Disney Plus, for growth. The company's most recent quarter was an example, when operating losses at Disney Plus, which reported a significant decline in new sign-ups, were “partially offset” by an increase subscription numbers at Hulu, which Disney acquired from its 21st Century Fox purchase.
Even as Disney Plus reported a decline of 9% in average revenue per user (ARPU) on a yearly basis this past quarter, Hulu increased its ARPU across both versions of its service. For the standard streaming service, it reported a 1% increase in ARPU to $12.75, while the Live TV and streaming combination jumped by 18% to $84.89.
According to estimates, Disney Plus will be the third most popular streaming service with 59.5 million subscribers, behind leader Amazon.com Inc.'s (AMZN) streaming service and Netflix, Inc. (NFLX). However, Disney leads the pack with a total 113.8 million subscribers, when you take into account subscription numbers for Hulu, which is expected to have 54.3 million people paying for its service.
The second reason for investors to repose faith in Disney is its rich content library. Both work to ensure that customers think twice before switching to another service. It has enviable legacy content and is investing heavily to produce new quality content across its streaming portfolio. According to online publication Variety, the monthly churn rate for Disney Plus at the end of 2020, its first full year of operation, was 4.3%. This is the second-lowest churn rate in the streaming industry after Netflix, which had a churn rate of 2.5%.The churn rate for Hulu more than doubled to 4.9% from a year ago in April 2021, according to statistics.