Disney (NYSE:DIS) gave investors a closer look at its direct-to-consumer streaming video plans at its investor day last month. After closing its acquisition of Twenty-First Century Fox assets, the company has a two-thirds stake in Hulu, and it's successfully gotten ESPN+ off the ground. It plans to launch its Disney-branded streaming service in November.
Disney has been forthright with investors about how much its investments in streaming will cost, providing a lot of details at the April event. On the company's second-quarter earnings call on Wednesday, CFO Christine McCarthy went further, telling analysts its direct-to-consumer businesses in the third quarter will produce $460 million in operating losses compared to last year. That compares to a negative impact of around $200 million this past quarter (when it only had 10 days of Fox's 30% stake in Hulu).
Investors should expect operating losses to continue to surge for Disney's direct-to-consumer businesses through the launch of Disney+. Here's what's driving those losses and what investors can expect in the long term.
Increased share of Hulu
Disney acquired Fox's 30% stake in Hulu when it closed the acquisition in late March. The second quarter will see the full impact of that acquisition on Disney's operating income. Additionally, Hulu bought back AT&T's 10% stake in the company, giving Disney a two-thirds share of the streaming service last month. That will have a small additional impact next quarter -- the first full quarter following the deal.
While Disney plans to invest more in content for Hulu's on-demand and live TV products, it also thinks operating losses will peak this year at around $1.5 billion. That's in line with last year, when reports from Hulu's various owners indicated it was producing a similar loss.
Management expects Hulu's operating losses to diminish over the next five years, reaching profitability by 2024 with between 40 million and 60 million subscribers. It already has 28 million subscribers, so it's well on its way to reaching that goal. But the recent success of Hulu could push Disney to invest more in the property, which would sustain operating losses in the near term for potentially greater long-term profit.
Ramping up marketing for Disney+
Disney wants 95% of Disney+'s target audience to know about the service by the time it launches in November. That means spending on marketing now, even before it can show any revenue from subscribers.
Promotions began with Star Wars Celebrations in Chicago last month, and they will continue throughout the summer at various events. Disney hasn't laid out an exact marketing strategy around Disney+, but it has the cash and capabilities to produce excellent brand awareness by leveraging its existing properties.
Investors can expect losses to pile up for Disney+ this quarter and next, and they could accelerate when the company starts amortizing its content expenses in the fourth quarter. Disney doesn't expect operating losses for Disney+ to peak until sometime between next year and 2022.
More content deals for ESPN+
Disney may already have 2 million subscribers for ESPN+, but it's certainly not letting off the gas. Management expects to reach between 8 million and 12 million subscribers by 2024, and it's going to invest in content to get there.
Most recently, the company extended its contract with UFC and bought the exclusive in-home pay-per-view rights. Those costs will start showing up this quarter.
Disney has an opportunity to pursue the NFL's Sunday Ticket package, which includes the rights to broadcast every Sunday afternoon game during the regular season. When asked about whether ESPN will pursue those rights, CEO Bob Iger remained tight-lipped except to say, "There has been some exploration as to whether there was an opportunity there." The rights would be extremely expensive and drastically change the financial outlook for ESPN+ if Disney could strike a deal.
A long game
Disney has been very up front about how its push into direct-to-consumer services will impact investors. Management has a very long-term outlook on the business, and it's certainly willing to take big operating losses today for a big potential payoff five years from now. That's even more important with the company's massive exposure to the pay-TV industry through its media network division, where cord-cutting is stymieing growth in operating income.
Management has also committed to providing meaningful updates on subscriber metrics for its streaming services, which ought to give investors a clear view of how Disney's investments are paying off.