Disney earnings suggest the ‘streaming wars’ are officially over

Disney’s
DIS,
+3.30%
Wednesday afternoon earnings report marked a coda of sorts for the media industry, with MoffettNathanson analyst Michael Nathanson noting that now all the June-quarter streaming results are in for major players. And, indeed, growth for the industry was muted, with Nathanson noting an aggregate of just 2.7 million domestic streaming additions across the industry, most of which could be attributed to Paramount+ and an “undetermined number of free-trial [subscribers]” at that service.

Low industry growth is “a clear sign that the streaming wars have given way to the reality of financial markets,” he wrote.

See more: Disney+ and Hulu prices are changing — here’s how much your streaming plan will soon cost

There are other signals as well, according to Nathanson, who said that he’s seen many media companies “pivot to a new wave of sobriety, featuring reductions in marketing spend, flatlining cash content spending, price increases, limitations on
password sharing and an embrace of advertising to drive future growth.”

Disney, of course, is one of them. The company is bracing for the early December launch of its ad-supported Disney+ tier, and executives raised prices on Disney+, Hulu, and bundled offerings in anticipation of that launch. Rival Netflix Inc.
NFLX,
+2.72%
is planning its own ad tier and raised prices on U.S. subscribers earlier this year.

“Putting this all together, we are pleased that Disney and Netflix are focusing on driving profitability through pricing, the development of ad tiers, and slowing content spend; yet, we worry that the hand-off from today to that point could be a bit choppy as domestic subscriber growth continues to slow,” wrote Nathanson, who has a market-perform rating on Disney shares and upped his price target to $130 from $120.

Shares of Disney were up more than 9% in premarket trading Thursday.

Analysts seemed split on whether the price hikes and other changes would have the desired effect. Wells Fargo analyst Steven Cahall was optimistic, arguing that Disney’s latest report “will assuage a lot of fears.”

“It now looks like Disney+ is tracking towards tightened and trimmed sub guidance, while the ad-supported tier + price increases + content rationalization = a much improved long-term profit outlook,” Cahall wrote, while reiterating an outperform rating and increasing his price target to $145 from $130. “Along with NFLX and WBD making similar rational moves, we think investors will pay more for at-scale streaming businesses.”

Also in the upbeat camp was Guggenheim’s Michael Morris, who upgraded Disney’s stock to buy from neutral after the report, while lifting his target price to $145 from $110.

“Significant price increases across the domestic streaming portfolio effective 12/8…were ahead of our expectations and lean into a strong price-value relationship and flexibility from an ad-tier launch,” he wrote. Meanwhile, the company’s more cost-conscious approach to streaming content “should bolster streaming profitability trajectory,” Morris continued.

Others were more skeptical about the Disney+ changes.

“We are surprised that, rather than using an ad-driven tier to make Disney+ more affordable and to grow its [total addressable market], DIS is using it to raise its avg DTC [direct-to-consumer] monthly ARPU [average revenue per user],” wrote Needham’s Laura Martin. “It’s an aggressive move in a crowded OTT [over-the-top] market, and this product is late. We worry this pricing strategy will elevate Disney+ disconnects.”

She maintained a hold rating on Disney shares.

Cowen & Co.’s Doug Creutz also deemed the price increases “aggressive.”

“While we believe the company underpriced Disney+ at launch at $6.99, the $3 price hike here seems very aggressive, especially at a time when economically pressured consumers are cutting back discretionary spending (see: mobile gaming),” he wrote. “The company’s new ad-supported Disney+ plan (launching in December) will be at the old ad-free price point of $7.99.” Ad-free Disney+ will cost $10.99 a month.

Creutz added that Disney “only announced price increases in the U.S., even though FX [foreign-exchange] changes have lowered the dollar yield on European Disney+.”

He has a market-perform rating and a $124 target price on the stock.

Of the 29 analysts tracked by FactSet who cover Disney’s stock, 22 have buy-equivalent ratings while the rest rate the stock at the equivalent of hold. The average price target is $174.99, about 22% above Wednesday’s close.

Disney shares have added about 7% over the past three months, roughly matching gains for the S&P 500
SPX,
+1.73%
over that span.