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Hotstar must die for Disney+ to live
The Nutgraf is a 10-min newsletter sent at 10 AM IST every Saturday. It connects the dots and synthesizes one big event in business, technology and finance that happened over the week in India. In a way you’ll never forget.
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Just 10 mins longSynthesis not analysisSometimes memes
11 Mar, 2023
First the IPL and now HBO. And it all makes sense for Disney.
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Good Morning Dear Reader,
There was one question on everyone’s mind last week:
Where do we watch the final season of Succession now?
If you missed it, Disney+Hotstar had just made this announcement:
Disney+Hotstar will no longer be the default destination for HBO content in India beginning March 31 following non-renewal of the deal, potentially leading to higher subscriber churn for the OTT platform that also lost out on the digital rights to the Indian Premier League (IPL) - the richest tournament in the sport.
Disney+ Hotstar has been the home of HBO content ever since the two companies signed an exclusive pact in 2015. As of December 2022, the platform had 57.5 million paid subscribers.
In the October-December quarter, the platform had lost 3.8 million subscribers after losing IPL rights and the non-renewal of content deal with telecom giant Reliance Jio.
End of HBO deal may take some shine off Disney+Hotstar, The Economic Times
Well, looks like another prediction of mine is coming true, albeit sooner than I expected.
The general consensus is that this is a setback for Disney+. It will lead to a steep fall in Disney+ subscribers globally, primarily because it has less content now, which makes it much less attractive as a streaming service.
It’s widely accepted that losing subscribers is generally a bad thing. Nobody has made more money by reducing the number of people who are ostensibly giving you money.
A lot of analysts simply don’t understand that streaming in India works differently, though, with vastly different rules. Last year, when people were jumping up and down at Netflix India’s poor subscriber growth and blaming its content slate, I wrote that Netflix India had a distribution problem.
Then, there’s Disney+Hotstar, which frankly is even weirder. Most people routinely report how Disney+Hotstar has nearly ten times the number of subscribers that Netflix India has without any explanation of how these subscribers are calculated, and what it means. Last year, I went a bit deeper into the numbers and suggested that structurally, Disney+Hotstar is essentially cable television masquerading as a streaming service.
And today, with the IPL gone, and HBO gone, the assumption is that this is a terrible outcome for Disney+Hotstar.
But is it?
Disney is not a dumb company. Disney chose not to fight for the IPL rights. It chose to get rid of HBO content in India. It understands the consequences of its decisions, and the only reason why it’s made those decisions is because it’s prepared to accept those consequences.
In fact, I’d go one step further and claim that Disney wants those consequences.
Disney is making Hotstar less attractive, expecting to lose subscribers, because it does not want those subscribers anymore.
But to understand why, we need to understand Disney’s motivations, its realities, and its priorities.
And above all, we need to learn about the fourth myth of bundling.
Let’s dive in.
Hotstar must die for Disney+ to live
The last few months have been action-packed at Disney.
And it all began with Disney’s quarterly earnings call in November.
Simply put, it was a disaster. I’d written about the previous earnings call in August (which was actually quite good for Disney), but the November one was terrible. Revenue was down. Profits had plummeted. However, Bob Chapek, CEO of Disney seemed oblivious, and tried to put a positive spin on things. Long story short, everyone got spooked. And to make matters worse, an activist investor purchased around a billion dollars of Disney stock and started advocating for a shake-up and cost cutting.
So Disney did the sensible thing.
It fired its CEO and brought back the previous one, Bob Iger.
Iger had led the company for nearly 15 years and then gone into semi-retirement. And here he was, back to save the company.
Last month, he reported Disney’s first quarterly earnings call after his return. This was a highly anticipated event, with analysts closely watching what direction Disney would take.
Iger delivered. He announced sweeping cost reductions worth billions of dollars, including content creation expenses and thousands of job cuts. He reiterated that the focus would be on profitability. The markets loved it. Disney’s stock price went up. The activist investors announced that they were pleased with the strategic priorities of the company and ended their campaign to seek a board seat.
However, there was one other aspect about the earnings call which worried investors.
The drop in Disney+ subscribers was mainly driven by a decrease in Disney+ Hotstar subscribers. The international streaming service, available in India and parts of Southeast Asia, saw a decline of 3.8 million subscribers, down from 61.3 million subs in the previous quarter.
On the semi-positive side, Disney+ gained 200,000 domestic subscribers in the U.S. and Canada.
The results put Disney+’s 2024 target into question. Disney+ plans to reach 215 million-245 million subs by 2024, which could see streaming king Netflix, with over 230 million global subscribers, lose its crown. However, it’s looking like Netflix can relax—at least for now.
Notably, Iger announced during today’s earnings call that Disney will no longer provide subscriber addition guidance, the same move that Netflix recently made.
Disney+ reports its first subscriber loss of 2.4M subscribers, plans to lay off 7K employees, Techcrunch
For many investors, the primary metric on how they measure the success of a streaming service is through the number of subscribers. This is simplistic, and as I’ve written earlier, also deceptive. Disney+Hotstar has ten times more subscribers than Netflix in India, but its average revenue per subscriber is a fraction of Netflix.
To Disney’s credit, they are aware that India is different and have been laying the groundwork for a while now. Back in August, for the first time, while setting guidance for the number of subscribers, they separated out Disney+'s forecast from Disney+ Hotstar. And now, Disney has abandoned giving subscriber guidance entirely.
The reasons why Disney is doing this is obvious—it expects to lose many more subscribers from Disney+Hotstar in India. The reason why they did this in August is obvious—they lost the IPL rights and hence decided to separate it out to show analysts that they were “losing” low-value subscribers in India.
Netflix India may have had a distribution problem, but Disney+Hotstar has a content problem.
And to understand this, we need to look at bundles.
I’ve written before about the pyramid of India’s consumers. Essentially, it looks like this.
If you think about it, you can map these users to the content in Disney+Hotstar’s bundle.
India’s California users are the ones who subscribed to Hotstar to watch HBO shows like Game of Thrones, Succession and The Wire. The ones who paid Hotstar to watch the IPL primarily come from the middle of the pyramid, and finally regional cinema and TV shows are the reason why people like my parents (and probably yours) watch Hotstar.
This bundle is what made Disney+Hotstar formidable. Its content cut across all strata of India’s online shoppers, and even bled into each other (like the IPL).
And now the top of the pyramid is gone. And so is the middle.
There are rumours that HBO intends to launch HBO Max in India, which will be the eventual destination of its content. I’m not sure if this will happen, but the one thing I’m certain about is that it won’t find paid subscribers. Anyone who thinks that India’s California users will seamlessly transition from Hotstar to HBO Max is wrong.
But to understand why, we need to understand how bundles work, and what made Hotstar unique.
One of my favourite pieces on the internet is a thesis written by Shishir Mehrotra, CEO of Coda, about the four myths of bundling. You should read the whole thing, but today, I’m going to call your attention to his fourth myth. Essentially, Mehrotra argues that the best bundles are the ones that combine different things together, not similar things. This is counterintuitive, because we are conditioned to think that bundles work when the products in them are similar.
As an observation, consider the example above ー would you really bundle UFC with knitting? How would you explain that? Or another example: by this logic, you should bundle a left-leaning outlet (like MSNBC) with a right-leaning outlet (like Fox News), but how would you explain that? Note that in both of these examples, the existence proof is already there. The existing cable bundle already produces these types of seemingly conflicting pairs. Imagine explaining to the Fox News fan that the only way for them to get access to Fox News is to also pay for MSNBC. Seems unfathomable, and yet that is the basis of the cable industry.
Often what is required is a subtle shift in positioning. McDonald’s does it with friendly labels like Value Meal and Happy Meal ー why else would it make sense to require toy customers to purchase a hamburger with their toy? Cable providers have shifted to terminology like Triple Play and Quadruple Play. ESPN found a way to intermix gymnastics with football by calling it a “sports network”. At Spotify, the Student bundle provide a natural anchor for a number of packages by emphasizing the “essential goods for students”. Scribd bundled together documents with ebooks, then audiobooks, and more recently with a Perks program. And Amazon keeps stretching our definition of the “Everything Store” by continuously adding new benefits (free shipping, books, movies, shows, etc) to the Prime bundle.
Disney+Hotstar was attractive because it combined HBO shows, the IPL and Malayalam movies all in one subscription. This combination makes less sense than, say, Mubi, which is a subscription for indie movies, but in many ways it’s also extremely effective. This is why people who subscribed to Disney+Hotstar for watching Succession are not going to do the same thing to HBO Max.
But even with the most formidable bundle of all, Disney+ couldn’t figure out a way to make Hotstar profitable.
So they are changing their approach.
In the last earnings call, Iger made a comment about how Disney was planning to think about subscribers and bundles going forward.
It's also obvious to us we can't get the profitability and turn this into a growth business without growing subs. So, while we're taking off-the-table sub guidance, we're still going to look to grow subs. We just want to grow quality subs that are loyal and where we actually have an ability to continue to price effectively to those subs. In addition, we're going to lean more into our franchises, our core franchises, and our brands.
I talked about curation and general entertainment. We have to be better at curating the Disney and the Pixar and the Marvel and the Star Wars of it all as well. And of course, reduce costs on everything that we make because, while we're extremely proud of what's on the screen, it's gotten to a point where it's extraordinarily expensive. And we want all the quality.
Bob Iger, Disney Earnings Call
There were zero mentions of India or Hotstar in the earnings call.
But I think we all know what Iger was talking about.
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Synthesis not analysis 
