Disney’s streaming services reach profitability on back of price hikes and advertising
Disney’s combined streaming services became profitable for the first time, the entertainment giant revealed in its fiscal Q3 earnings.
Streaming, which consists of Disney+, Hulu and ESPN+, achieved an operating income of $47m — a substantial turnaround compared with the $512m loss this time last year and $1.5bn loss in Q4 2022. The company also outlined it was on track “for that profitability to improve” next quarter.
However, the lion’s share of profits were driven by ESPN+. Without its inclusion, Disney’s direct-to-consumer (DTC) segment lost $19m. This is distinct from last quarter, when Disney+ and Hulu achieved profitability while ESPN+ lost $18m, dragging the segment below breakeven.
In total, Disney posted revenue of $23.16bn — a 4% increase compared with a year earlier.
‘Pricing leverage’
“Now we’re making money,” Disney’s chief financial officer, Hugh Johnston, proudly proclaimed on the company’s earnings call on Wednesday.
Johnston attributed the move towards streaming profitability to both price hikes for streaming subscriptions as well as improved ad revenue. He stated that DTC streaming advertising was up 20% (total advertising increased 8%).
“Overall, the ad market is really, really strong and healthy for us,” said Johnston. And a lot of that is the product of the fact we have live sports and that our streaming services are doing well for us.”
CEO Bob Iger added that Disney’s leadership feels “very bullish” about the future of the streaming business. Touting the quality of Disney’s entertainment output across film and TV, Iger said: “When we look across our portfolio of IP […] what we are basically seeing is growth in consumption and the popularity of our offerings, which gives us the pricing leverage we think we have.”
For example, Inside Out 2, released in June, has already become the highest-grossing animated film of all time.
That pricing leverage was on display ahead of earnings, when the company announced it would once again be raising subscription prices in the US. Iger said Disney has “only had modest churn” from such price increases — something that he argued reflects inelastic consumer demand for its content, as well as the value of newly added features to its streaming services.
“We do feel like we’ve earned that pricing within the marketplace,” Johnston added.
Moreover, Disney will start rolling out its password-sharing crackdown beginning next month — a move that the executives expect to help drive additional subscription growth, be it for the cheaper ad tier or the premium ad-free tier.
The goal, according to Johnston, is to achieve double-digit margins in its DTC business. However, he declined to provide a timeline for when that might be expected.
Analysis: Are price hikes sustainable?
Despite Disney’s bullishness on its pricing leverage, churn will remain a concern given other streaming services have also hiked prices substantially over the past year.
When consumers get squeezed, they are forced to consider cutting back on subscription expenses. While Iger is betting the quality of Disney’s content — and the fact that Disney+ is the de facto family-friendly streaming option — will keep churn at a manageable level, at a certain point the company will hit a wall, where further hikes are no longer sustainable.
As Mike Proulx, vice-president and research director at media research and advisory Forrester, argued: “With price hike after price hike, it’s apparent that Disney’s streaming business won’t sustain its new-found profitability on the merits of user growth and ad revenue alone.”
Disney and Warner Bros Discovery’s bundle: Is streaming turning into cable?
Proulx added that until there is “a mass exodus of users”, Disney — and its competitors — will continue increasing prices, concluding: “The total cost of streaming has become prohibitive, which is why bundles are back in a big way.”
In May, Disney announced a streaming bundle with Warner Bros Discovery that would allow consumers to purchase Disney+, Hulu and Max for a reduced price relative to the cost of all three services separately.