The Ticking Time Bomb That Could Undercut Disney Stock

The Ticking Time Bomb That Could
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Disney+ subscriber numbers have been a source of optimism in the industry, increasing every quarter while Netflix grabs the headlines for missing its estimates and seeing very slight subscriber declines.

Yet this success is due in part to a decision that has the potential to backfire on par with Netflix’s recent stock tribulations.

Some 36% of Disney+ subscribers are actually subscribers of a different service — Disney+ Hotstar, which existed in India prior to Disney+ and was rebranded with Disney+ content added to give the main service a big boost in sub numbers. By folding Hotstar into Disney+ and then being able to claim total Disney+ subscribers as the larger figure, Disney succumbed to the pressure of demonstrating that its streaming service could be competitive with Netflix.

But Disney content is not the core driver for Hotstar subscriptions. That would be the streaming rights for the Indian Premier League, the massively popular domestic cricket league. For a U.S. equivalent, imagine if Hulu held exclusive NFL streaming rights for all games.



In the latest reported figures, for the calendar period of Q1 2022, there was little difference in monthly ARPU for Disney+ users located in the U.S. and Canada ($6.32) versus the rest of the world ($6.35). Yet the figure for Hotstar is $0.76 — over eight times smaller than the international figure.

Like sports rights in the U.S., IPL rights are very expensive in the local market, with the base price for the total rights packages set at $4.2 billion (Rs 32,890 crore). And it could very well end up a lot more expensive than that. Up for auction beginning June 12, these rights cover 2023-27.

Sony and Amazon are among the companies registering their interest in bidding, but it’s not hard to imagine any major global player looking at this as a once-in-a-lifetime opportunity to substantially ratchet up their own global tallies.

It’s not a given that Disney will overspend to maintain the IPL on Hotstar. In the company's latest quarterly earnings call, CEO Bob Chapek said the company would be cutting content spend. Though he didn't specify whether that would apply to IPL, Chapek also noted on the call that he was confident Disney+ would achieve its ultimate subscriber goal of 230M-260M global subs by September 2024 with or without Hotstar maintaining its IPL rights.

Chapek's comments effectively placed Disney in a difficult position that exposes the vulnerability of its stock. If Disney pays up to keep IPL on Hotstar, any such outlay will negatively impact the already low ARPU and be unfavorably viewed by investors.

If Disney doesn't pay for IPL, it raises the possibility of losing between 20 million and 30 million global subs for Disney+ from cricket fans canceling Hotstar, a development that could trigger a serious stock dip. Chapek also contended that Disney has built out Hotstar’s local programming enough to mitigate the impact of losing IPL, but that's a nuance Wall Street won't necessarily appreciate.

Ultimately, what Disney does here could be a test of whether investors truly value profitability over sheer subscriber volume, and that may be a tall order given the dramatic drop Disney+ could experience in its subscriber base.

At least Netflix had a legitimate reason for its Q1 2022 subscriber count falling by 200K: The cessation of business in Russia due to the invasion of Ukraine cost the streaming service around 500,000 subscribers. That set off a massive decline in valuation; Netflix stock fell by $89, to $260 (-25%), in after-hours trading upon the announcement, before settling at a range of $180-$190.

Disney’s own stock has been down about 25% over the past three months, coming to rest at $108 last Friday. Losing IPL would shake investor confidence in Disney's ability to hit the 230-260 million target Chapek reiterated earlier this year. Damage control will be paramount for the company to reassure the market that the long-term projection is still reachable, but the damage done to the short-term stock price could be considerable.