The streaming industry has heated up in recent years, with a number of new services entering the market and vying for viewers. As a result, consumers now have an almost unlimited amount of choice when deciding what to watch.
From an investment perspective, this raises a question: What is best power storage to own?
Two of the more formidable players in the industry, Netflix (NFLX 0.10%) and Walt Disney‘s (HAZE -0.45%) Disney+, each has hundreds of millions of subscribers today. But the former leads the latter in one key metric.
Make more money on each customer
In its most recent period (third quarter 2022, ended September 30), Netflix generated average revenue per user (ARPU) of $11.84, which was much higher than the ARPU of $3.91 for Disney+. Even excluding Disney+’s cheaper Hotstar service, average monthly revenue per paid subscriber was just $5.96 in the company’s most recent fiscal quarter (Q4 2022, ended Oct. 1).
The low ARPU at Disney is contributing to big operating losses: $1.5 billion in the last fiscal quarter in the company’s direct-to-consumer (DTC) segment. And this has led to Bob Iger returning as CEO last month to help bring profitability to the streaming industry. The previous CEO, Bob Chapek, said about earnings for the fourth quarter of 2022 that Disney+ will be profitable by fiscal year 2024.
To its credit, Disney+ has seen tremendous growth over the past three years. Since its launch in November 2019, the service has amassed 164.2 million subscribers. By comparison, Netflix today has 223.1 million members after first being offered as early as 2007. So the rapid expansion of the Disney+ user base is amazing, and a nod to how popular and valuable the company’s intellectual property is.
But the path to profitability seems unclear. The monthly the price of a US Disney+ membership just jumped from $7.99 to $10.99 for the ad-free version. And this should help drive ARPU higher. It will also certainly push cancellations up as well, given how competitive the streaming market is today.
I question how much pricing power Disney+ really has. According to data from Nielsen, Disney+ had just 2% of total TV viewing time in the US in the month of November, while Netflix had 7.6%.
Netflix has consistently increased its monthly membership rate over the years, and until the beginning of this year, the business continued to add new customers at a rapid pace. The advantage Netflix had when it introduced price increases was the lack of serious competition. A different competitive landscape today makes me think it will be difficult for Disney+ to raise prices over time.
Add this to rising content costs, and profitability for House of Mouse’s DTC unit may prove elusive.
How should investors interpret this?
It might not seem like a big deal at first to focus so much on a single metric, but I think Netflix’s massive ARPU leadership provides some important insights.
The first is that scale really matters in the streaming market. Netflix had a first-mover advantage that allowed them to spend tens of billions of dollars on content while gaining tens of millions of new subscribers year after year. And as a result, despite its recent troubles, it has planted itself at the top of the industry with a trailing 12-month net income of over $5 billion. Plus, Netflix plans to be free cash flow positive in the current year, with “significant growth” in 2023, it says.
Companies that were late to the game, like Walt Disney and Disney+, will have to burn cash until they reach the tipping point of users that will lead to sustained profitability, if at all.
As things stand now, Netflix seems to be the best stock to own.
Neil Patel has no position in any of the shares mentioned. The Motley Fool has positions in and recommends Netflix and Walt Disney. The Motley Fool recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.