Why Disney+’s surge in profit is a warning for streaming rivals
Analysis
‘Bundles are back’ as Disney reports growing profit for its direct-to-consumer business. But analysts fear streaming growth — and therefore room for competitors — is limited at best.
“I’ve been negative for several years now on SVOD,” the media analyst Ian Whittaker told The Media Leader‘s Year Ahead event in January.
“I just don’t think the market penetration is there for them and I think what you will see in 2024 is this flatlining coming through and it will be hard to see further penetration.”
Television is good at telling stories that defy expectations, often with a twist. So it was for Disney+, which celebrated its five-year anniversary last week by announcing a surge in profitability in the third quarter of 2024.
This stands in stark contrast to the state of UK broadcasters, which are enduring a gnarly 2024 as linear ad revenues shrink and digital income grows at a slower rate.
Yes, Disney’s streaming service is a part of a multipronged global operation backed by a century-old American giant with an embarrassment of IP riches. But that’s the point of the streaming wars: time spent watching a Marvel movie on a smartphone is considered “TV time” as much as settling in with the family to watch Coronation Street on ITV.
So when Disney+ reports a $253m profit in its direct-to-consumer business, as it did in its Q3 earnings release, it’s a sign that the house that Walt built has turned a digital corner.
As The Media Leader reported 18 months ago, all major streaming challengers to Netflix were then running at a loss. Netflix itself only began reporting significant annual profits in 2017.
Video spend ‘growing by low single digits’
Disney attributed the improved performance of Disney+ to prices hikes, subscriber growth, an increase in ad revenue due to higher impressions, and cutting marketing costs.
The media analyst Brian Wieser said some of this growth will be due to bundling with third parties and some is due to advertising, with the bulk of revenue associated with distribution or subscription fees.
Pay-TV providers across the world have inked deals with Netflix and Disney in different markets to provide discounted subscriptions to their ad-free versions as part of a “soft” bundle (where the services are offered as an add-on to a “hard” bundle of channels). That was unlikely to change this year, European TV operators from Viaplay, Deutsche Telekom and Liberty Global told our Connected TV World Summit in March.
No wonder “bundles are back” and explain Disney+’s surge to profit, according to Forrester’s VP research director Mike Proulx.
“Disney’s ‘trio bundle’ will work even harder with the addition of an ESPN tile on the Disney+ user interface,” Proulx said. “Because sports is an outsized driver of ad revenue, this move also helps expose Disney’s sports content to users who may not have been aware of it — likely leading to more subscribers.”
However, Wieser added, being profitable “illustrates the shift in what is mostly consumer spending on video services which is otherwise growing by low single digits.”
“Management noted on the call that 37% of total domestic subs have chosen AVOD options while 30% have done the same at a global level, implying a much lower level of penetration of ad-supported streaming for the business outside of the US, which is mostly Disney+,” Wieser noted from Disney’s investor call, following the earnings release.
Warner Bros Discovery, meanwhile, added 7.2m subscribers to streaming platform Max in Q3, the biggest quarterly growth since its launch. The company’s DTC business, which comprises Max, HBO, and Discovery+, reported a $289m profit for the quarter (up 70% year on year), but it is unclear how much of that $2.3bn business is made profitable because of legacy HBO deals with pay-TV operators like Sky in the UK.
Likewise Paramount, whose flagship global streaming service Paramount+ recorded a 25% annual revenue growth, helping to deliver 10% overall DTC growth to $1.86bn. Paramount’s subscription revenue grew 7% to $1.3bn, while advertising was up 18% to $507m. Subscriber growth and price increases were also cited as drivers for growth, with Paramount+ now boasting 72m subscribers (up 3.5m last quarter).
As for streaming’s market leader Netflix, its revenue is now a relatively colossal $9.83 billion (up 15%), with operating income of $2.91bn. Netflix’s operating margin was 30%, compared to 22% a year ago. In its quarterly shareholder letter, the company spent a significant amount of space on its content and its advertising tiers, with plans to significantly expand in both areas.
Netflix now has 70m global monthly active users for its ad tier, a 75% increase in users since Netflix last provided an update on the number of ad tier members in May (40m). This time last year, when its ad tier was just a year old, Netflix’s ‘Basic With Ads’ had just 15m users.
All about scale
If the world’s major streaming platforms are all reporting increased subscriptions and revenues, is Whittaker’s prediction turning out to be wrong?
It’s too early to say, according to Ian Daly, AV investment lead at media agency the7stars.
Whereas Wieser sees evidence of single-digit growth, Daly warned The Media Leader that overall subscriptions have “reached critical mass”.
This means pureplay streaming services can only increase profitabilty, Daly explained, with price hikes, tweaks to tiers, reducing churn, reducing (or ‘optimising’) content spend, reducing the cost of delivery and, of course, improved advertising yield (either through higher CPMs and/or better targeting).
For a “media ecosystem” like Disney, WBD, or Paramount, which has a global movie distribution operation as well as linear broadcast TV businesses, the path to profit is all of the above, plus bundling deals and the ability to move costs between different parts of the business. Imagine if Disney offered cheaper Disney World access to Disney+ subscribers, or if Max customers could get discounted cinema tickets for Warner Bros movies.
“A profitable and healthy streaming landscape is a good one for advertisers and agencies. The major question at the moment is where the likes of Discovery+, Paramount+ (and soon Max) will top out from a household-penetration point of view,” Daly added.
“If they don’t achieve scale, they won’t attract sufficient advertising spend and the death spiral begins.”
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