Disney Makes a Mickey Mouse Mistake

Is Disney a haunted mansion? Squishy earnings. Writer and actor strikes. A woke fight with Florida Gov. Ron DeSantis. Indiana Jones bombed, and Marvel is mostly milked. But these are nothing compared with the age-old trap Disney has voluntarily walked into: When growth stops, raise prices to make up for lower volume.

The company’s earnings release last week says it all: “Lower affiliate revenue resulted from a decline in subscribers, partially offset by higher contractual rates.” And after losing subscribers, Disney raised Disney+ and Hulu ad-free streaming prices 20% last week. You can’t raise prices to infinity and beyond. Consumers eventually break.

Sure enough, attendance appears down this summer at Disney theme parks. No wonder. Tickets can cost $169 a day; 2-Day Park Hopper Disneyland tickets are $345 plus $30 a day for parking. Then add $8 pizza slices, $6 lemonade and $5 churros. Dinner at the River Belle Terrace might include less-than-mouthwatering bargains such as $19 BBQ Tofu or $22 Pimento Mac and Cheese. The Disneyland Hotel charges $425 a night, though you can find rooms for $200 outside the park. Add $20 embroidered Mickey Ear hats, and I calculate the tab can be more than $1,600 a day for a family of five. It’s “The Happiest Place on Earth,” except if you’re paying for it.

Disney CFO Christine McCarthy said in May that ticket prices track inflation. That’s not quite true—the New York Post reported last year that Disney theme park ticket prices are up 3,871% in 50 years, well above inflation. Ms. McCarthy cited spending on other stuff: “It’s T-shirts and hats, but also build your own light saber. Not cheap. But people tend to spend the money. That is consumer choice.” It seems consumers are choosing not to show up. Can you blame them?

The cable business may be worse—cord-cutters are killing it. Disney-owned ESPN has around 70 million paid subscribers, down from some 100 million 10 years ago. PwC thinks that number will drop to 50 million by 2027. One reason is constant price increases. ESPN now costs $9.42 a month per subscriber for cable operators, vs. 49 cents for the average channel in the basic-cable bundle. Many cable subscribers don’t even watch sports. Like clockwork, whenever ESPN and cable raise fees, athlete salaries and ticket and beer prices go up. It’s a virtuous circle for everyone but consumers.

The business model of professional sports is quickly deteriorating. After Disney bought 21st Century Fox in March 2019, it divested 21 regional sports networks to Sinclair Broadcast Group for $10 billion. A Sinclair subsidiary named Diamond Sports holds 19 sports networks and $8 billion in debt. Much like ESPN, Diamond pays exorbitant rights fees, which teams use to pay even more exorbitant salaries to athletes. Manny Machado of the San Diego Padres has a $350 million, 11-year contract, exceeding teammate Fernando Tatis Jr.’s $340 million, 14-year deal.

In March, Diamond Sports filed for bankruptcy and stopped making payments to the Padres. Major League Baseball took over some local broadcasts. Diamond made a late rights payment to the Cincinnati Reds and a court ordered it to make payments to the Diamondbacks, Guardians, Rangers and Twins. But for how long? Have athlete salaries peaked?

ESPN is in the same bind, holding rights deals with the National Football League, National Basketball Association, Major League Baseball, National Hockey League, tennis and golf associations, and Formula 1. How is it going to pay rights fees with dwindling subscribers? Double prices for streaming? Disney’s gambling deal last week with Penn National smells of desperation and will dilute ESPN’s brand.

The entire pricing structure of sports is being called into question. How will the Padres pay Messrs. Machado and Tatis in the long term? I doubt rights fees are going up. Beers at the ballpark already cost $16—about $1 a sip. So raise ticket prices? Ask Disney about that. “That is consumer choice,” and customers are savvy and fickle.

I’ll repeat former General Electric CEO Jack Welch’s best line: “Any idiot can raise prices.” Spotify raised prices $1 a month. Netflix raised most plan prices 10%. Peacock raised the price of its premium streaming plan by $1, to $5.99. Warner Bros. Discovery’s Max is up a buck. Heck, the price of a first-class stamp is now 66 cents as volumes dwindle. Welch might have meant “many” instead of “any.” Tesla is starting to learn about high prices, having discounted its electric cars this summer to move excess inventory.

Disney CEO Bob Iger implied he might sell a minority stake in ESPN. Disney could also free it from cable through a stand-alone app, though it would probably have to charge $40 to $50 a month to match today’s revenue. Not likely. Disney’s stock is back where it was in August 2014. Customers aren’t dumb. They vote with their feet (or clicks). Disney’s CFO was right: That is consumer choice. Raise prices at your own peril.

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