Disney’s ad-supported tier will be for anyone who ‘feels that pinch,’ analyst says

Bloomberg Intelligence Senior Media Analyst Geetha Ranganathan joins Yahoo Finance Live to discuss the launch of Disney+'s ad-supported tier, how Disney+ differs from its competitors in the streaming industry, and the outlook for Disney's profit growth.

Video transcript

RACHELLE AKUFFO: Well, Disney+'s ad-supported tier goes live, and users can now opt for a lower price tag for a Disney streaming subscription, as consumers feel the pinch amid inflation. Now, the move comes as the media giant pulls streaming profitability into focus about how will it shape up against the competition. Well, here to discuss, we have Geetha Ranganathan, Bloomberg Intelligence senior media analyst. Good to see you, Geetha. So with the introduction of this new tier, what do you think this means in terms of the competition and in terms of the price range as well?

GEETHA RANGANATHAN: Yes, it's a really interesting move by Disney here. They're hiking up their prices on their premium product by almost 38%. So you're going from about an $8 product to $11. But at the same time, they're giving consumers that option because they're introducing that ad-supported product at $8. So for anybody who kind of feels that pinch, of course, they can spend down to that ad-supported product.

And remember, this ad-supported product is not necessarily going to be filled with commercials. They're trying to keep the ad load pretty minimal. It's only four minutes per hour versus the eight minutes that you see on Hulu versus the 15 minutes that you see on linear television. So they're kind of trying to do it in as-- what do I say-- as smooth a way as possible, keeping it very, very-- less intrusive and less disruptive to the viewing experience.

AKIKO FUJITA: Geetha, two questions. I mean, how many users are likely to switch over or downgrade to the ad-supported tier? And to what extent is this going to drive additional revenue for Disney?

GEETHA RANGANATHAN: Yes, so right now, we have about 165 million subscribers on the Disney+ product. We think, at least in the United States, anywhere from about 20% to 30% of the US subscriber base could look to kind of go down, spend down, or trade down to the ad-supported product.

But again, it really-- we have to kind of wait and watch because if you look at Hulu-- and Disney owns Hulu. They own 66% of Hulu. Hulu, actually, if you look at their profile of subscribers, almost 70% or 75% of Hulu subscriber base is on the ad-supported version. So it's been a huge hit-- ads have been a huge hit with Hulu. I think it's going to be a little bit different with Disney+, but I think, again, we can expect to see at least 1/3 of the user base kind of convert to that ad-supported product over time.

RACHELLE AKUFFO: Now, when you compare it to something like Amazon Prime, obviously, they have a different ecosystem that involves shopping and everything else when you get the Prime membership. How does Disney stack up in terms of that and also in terms of global reach? We know that at least for Netflix, they're looking internationally for reach.

GEETHA RANGANATHAN: Yeah, so Disney also has an international product. And remember, again, with Disney-- you brought up Amazon Prime, which is a really, really great example. And remember, Disney, just a few months ago, was kind of looking to introduce a product very similar to Amazon Prime and call it Disney Prime, where they would kind of have this membership, not just to their streaming product, but also to kind of merchandise, also entry into their theme parks.

So they are also looking to build that ecosystem. We're not really sure where they're going to go with it right now. But arguably, I mean, they have the best content. They have the best streaming content in the industry. They have some great franchises. They have some great IP. So they know that subscribers are going to come.

And if you just look at some of the numbers that Disney has posted ever since they launched their product about three years ago, I mean, this is a company that has added about 40, 45 million subscribers year after year on their Disney+ products, so just some staggering growth there. And expect it to grow even further with this new ad-supported tier.

In terms of how much revenue they can generate, I think it's going to be a little bit of an early-- a slow ramp, if you will. This is still early days. But they do have a nice template there with the Hulu ad-supported model. So we expect Disney to generate anywhere from about $500 million to even up to a billion dollars in ad-supported revenue on the Disney+ product in their first year of operation. But expect it to be somewhere like $2 to $3 billion going forward in the next two to three years' time.

AKIKO FUJITA: Yeah, you could argue, in some ways, that the timing is right. A lot of families trying to cut costs on the streaming side of things, and this offers an alternative. Geetha Ranganathan, Bloomberg Intelligence senior media analyst, good to talk to you today.