Deeper Dive—Disney+ has an ARPU problem

Disney+ has officially blown past the top end of its early subscriber growth forecast, but the meteoric rise is putting a big dent in the service’s revenue.

Disney+ ended the company’s fiscal first quarter with 94.9 million subscribers, already significantly higher than the 60 million to 90 million subscribers Disney had originally hoped for by 2024. The company now expects between 230 million and 260 million Disney+ subscribers globally within that same timeframe.

However, while subscribers continue to sharply rise, the average revenue per user (ARPU) for Disney+ is trending hard in the opposite direction. For the first quarter, Disney+ ARPU fell 28% year over year from $5.56 to $4.03. That’s because approximately 30% of Disney+ subscribers are on Disney+ Hotstar in India and Indonesia. The company said Disney+ Hotstar ARPU is “significantly lower” than Disney+ ARPU in other markets including the U.S. and Europe.

Disney didn’t elaborate on just how much lower ARPU is at Hotstar but media analyst firm MoffettNathanson did the math.

“We believe that 45% to 50% of the incremental subscriber growth continues to come from Disney+ Hotstar, which we now calculate has RPU of less than $1, around $0.50 lower than we thought it was last quarter,” wrote Michael Nathanson in a research note.

During Disney’s investor day in December, CFO Christine McCarthy provided the above-mentioned revised subscriber growth forecast for Disney+ and shared that the company expects 30% to 40% of those subscribers will come from Disney+ Hotstar.

At current estimated ARPU levels, it means that Disney+ could have as many as 104 million subscribers paying less than $1 per month for the service by 2024.

Of course, several positive ARPU factors will come into play between now and 2024. Beginning March 26, 2021, Disney+ will be priced in the U.S. at $7.99 per month or $79.99 per year, while the Disney Bundle with Disney+, Hulu, and ESPN+ will be priced at $13.99 per month.

The company said it will also be increasing the price of Disney+ in continental Europe by two euros to 8.99 per month, with similar adjustments in other markets. McCarthy said the price increases reflect an increase in the underlying value of the Disney+ product offering, as well as the inclusion of Star general entertainment content – which is launching Feb. 23 – in many markets. Disney said that in most international markets (including Disney+ Hotstar markets) Star will be part of Disney+, with a combined price point for consumers. In 2021, Disney+ with Star included will also launch in Japan and South Korea.

Disney will also launch Star+, a sports and entertainment streaming service that will be available on its own or bundled with Disney+, in Latin America later this year.

So, 2021 will bring higher price points and more markets for Disney+. Given the ramp in high-profile content from Marvel, Star Wars and other brands, there’s a good chance Disney+ will raise prices again before too long so it can help cover increasing programming costs.

Despite ARPU pressure from Disney+ Hotstar, MoffettNathanson projects Disney’s direct-to-consumer segment will grow to $35 billion in revenue and EBITDA totaling $380 million by 2024.

The subscriber growth for Disney+ is undeniably incredible. It has already established the service as a major SVOD powerhouse just over one year since it launched. Disney’s direct-to-consumer revenues for the quarter increased 73% to $3.5 billion and Disney+ is likely still on track to be profitable by 2024. But that slumping ARPU can’t help but take some of the shine off of those numbers.