Monday , November 30 2020

Disney’s big bet on streaming in two ways could still disappoint investors

According to most measures, the new project shoots at all cylinders. Walt Disney‘with (NYSE: DIS) Disney + streaming service added another 16.2 million subscribers during the quarter ended Oct. 3, for a total of 73.7 million. It’s amazing, given that it was only launched in November last year, but that’s just the beginning. Industry analytics equipment Digital TV Research estimates that Disney’s flagship streaming product will serve more than 194 million customers by 2025, making it second only after Netflix 09.30 NASDAQ: NFLX.

Shareholders praising Disney’s extended bet on streaming, however, may want to prepare for the worst, even though they hope for the best. The price power that Walt Disney enjoys with Disney + has yet to be truly tested, and the bottom line of service may never fully replace the revenue currently generated by movies and cable TV companies that help squeeze out.

A man with his thumb pointing down.

Image source: Getty Images.

Disney management is faced with Catch-22 pricing

The company’s stock price lately suggests that investors value Walt Disney’s potential for growth outside the environment in which COVID is to blame, and most shareholders have cheered on management’s recent decision to prioritize streaming. This seems to be the place of the future of the film and television industry.

Still, Walt Disney’s accounting team undoubtedly underestimates its Disney + product.

The company reports collecting, on average, $ 4.52 per month per Disney + subscriber during its fourth fiscal quarter (which ended in October). That’s less than the cost of $ 6.99 per month listed on the Disney + website, and even less than the $ 5.83 monthly cost when sharing a full service subscription of $ 69.99 over 12 months. The discount reflects a proportional Disney + portion of the package that includes ESPN +, Hulu and Disney + sold at a price of $ 12.99 per month. More importantly, that cheap, effective price of just $ 4.52 a month makes Disney + the lowest-cost streaming service of its kind. The cheapest plan that Netflix offers starts at $ 8.99 a month, and at that price, consumers don’t get much. Its premium service sells for $ 17.99 per month. AT&T‘with (NYSE: T) the price of the new HBO Max is $ 14.99 per month.

Priced at less than $ 5 a month, Disney’s streaming services collectively boosted sales of $ 16.9 billion in the recently concluded year. But an operating loss of $ 2.8 billion is still needed.

Both were improvements. The top line was up 40% from a year earlier, and the operating loss was $ 171 million less than the loss from the comparable quarter a year earlier. And given his young age, perhaps a more relevant comparison would be this year’s figure of the second calendar quarter. They are not particularly encouraging, though. For the three-month period ended June, Disney’s direct consumer service and its international division turned revenue of $ 3.9 billion into an operating loss of $ 706 million. The top line sequentially improved by 23%, but the loss decreased by only 18%.

Walt Disney’s streaming business is still losing money despite strong subscriber growth.

Data source: Disney investor reports. Graph by author. All dollar figures are in the millions.

Fans of the new Disney focus will argue that its streaming services simply need a larger scope – customers who pay more – to cover relatively fixed costs such as production and promotion. Digital TV Research’s estimate that Disney + subscribers could reach 194 million in the short term would do the trick. A higher price would work just as well.

Both ideas present challenges. A higher price would make his streaming services unknown less marketable. But to get more members at a lower cost, you may need to spend more on content.

Income cannibalization

Investors should also keep in mind that any client who streams Walt Disney to himself is a client who is less likely to remain a cable TV subscriber or even a movie viewer.

This trend is already in place. The Leichtman Research Group suggests that the linear cable television industry in the U.S. lost about a million customers last quarter. That’s another million cable customers who no longer contribute to the transportation fee Disney charges cable customers for access to its program.

This is important simply because cable television remains the company’s largest and most profitable business. Over the full year ended September last year, media networks generated $ 24.8 billion of the company’s $ 69.6 billion revenue and $ 7.5 billion of its operating revenue of $ 14.9 billion. Studio entertainment added $ 11.2 billion in first place and generated $ 2.7 billion in operating income. Last year’s cable business generated year-on-year revenue of $ 28.4 billion and operating profit of $ 9.0 billion.

As mentioned earlier, Disney’s streaming business boosted sales of $ 16.9 billion in the recently concluded year. Not bad. But with an operating loss of $ 2.8 billion, it’s hard to see it replacing the level of earnings produced by the same cable TV and film industry that ultimately aims to squeeze out.

Disney’s media networks and movies bring in much more revenue than it generates for their streaming business.

Data source: Disney investor reports. All dollar figures are in the millions. Graph by author.

Keep in mind the bigger picture

Certainly, Walt Disney may somehow be able to organize the growth of streaming that does not completely eliminate its business with media networks, while at the same time selling streaming services at prices that completely replace the operating profit made by its TV and film branches. Everything is possible.

But it’s not likely, and that could be a problem. Until the company clarifies its streaming growth plans and the impact of streaming on other ventures, investors should consider trade-offs throughout the company and not remain particularly focused on their best growth driver.

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