Disney+, the flagship streaming service of Walt Disney Company (NYSE: DIS), blindsided Wall Street investors in its early stages. The company surpassed its initial forecast of 10 million subscribers when it launched in November 2019, and signups have continued to rise throughout the pandemic.
More recently, however, subscriber growth has hit a wall and Disney has raised prices for its streaming services to make up for a major shortfall in the bottom line.
Now, according to Bloomberg, Disney says it won’t meet the previous subscriber targets it set for 2024. In August 2022, it was targeting 215 million to 245 million subscribers to Disney+ by the following year.
The revelation appears to be the latest setback for the entertainment giant, which has just resolved a contract dispute Charter communications. Disney agreed to include its streaming services in Charter’s bundles, which seems like more of a win for the cable operator than for Disney. The deal will bring in some subscribers for Disney, but it will make less money than if it sold directly to consumers.
The news that it will miss its subscriber target shouldn’t come as a huge surprise. The service it refers to as Disney+ Core, which does not include Disney+ Hotstar subscribers mainly in India, added just 800,000 subscribers to 105.7 million in the second quarter. The number of Disney+ Hotstar subscribers fell by 12.5 million to 40.4 million in the quarter as the company lost the rights to broadcast Disney’s top cricket competition, the Indian Premier League.
In other words, even taking the loss of cricket into account, Disney+ is barely growing, so getting 70 million subscribers next year seems next to impossible. Disney+ Hotstar also costs a fraction of the regular Disney+ service, so it’s not profiting from the streaming business.
Image source: Getty Images.
The priorities have shifted
Like the rest of the tech sector, investors in streaming stocks have shifted their focus from revenue or subscriber growth to earnings. Legacy media companies like Disney are still wasting hundreds of millions of dollars a year on streaming, and Wall Street is demanding they prove these companies can be viable.
Disney shares are now hovering near 52-week lows, even as the broader market has soared this year. While Disney is losing money on streaming, its linear TV business is shrinking rapidly, with operating income in the segment falling 23% to $1.9 billion in the most recent quarter.
The biggest need for the company right now is to halt declining profits in its media and entertainment division. CEO Bob Iger seems fully focused on that, as the company announces a new round of price increases for its streaming service to boost profitability in its direct-to-consumer segment by 2024.
Correct the record
Disney underpriced the launch of the Disney+ service, charging just $6.99 per month at the time. And while it has built a significant audience for the service, a money-losing streaming service was never the goal. Now it’s especially critical to generate revenue as linear television sees profits drying up.
Disney has a number of other cards in store. The company plans to launch an all-streaming version of its flagship sports network ESPN, although it’s unclear when that will happen. Meanwhile, Iger has floated the idea of selling off non-core media products including ABC, and Bloomberg also reported that the company was in talks with Next star about a possible sale of ABC.
Such a move could help Disney pay off some of its $47 billion debt load, much of which comes from the Fox acquisition, which looks increasingly in doubt as the company struggles through its transition to streaming.
Taking a step back from the subscriber target isn’t a problem in itself, but it’s a reflection of a larger strategic failure at Disney. This includes Disney+’s mispricing, its questionable acquisition of Fox, handing the reins to former CEO Bob Chapek before taking them back, and caving to cable providers in the Charter deal.
Disney doesn’t seem to know how to adequately value its content outside of the cable ecosystem, but the company needs to figure that out quickly as cord-cutting will only continue to drain its linear TV revenue stream. The streaming industry should eventually be profitable, but things seem likely to get worse before they get better.
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Jeremy Bowman has positions at Walt Disney. The Motley Fool holds and recommends positions in Walt Disney. The Motley Fool has a disclosure policy.
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