Streaming was hailed as the bright spot of Walt Disney's (NYSE:DIS) fiscal third quarter. And it was. With the COVID-19 pandemic still going strong, keeping most movie theaters shuttered and most patrons away from theme parks, direct-to-consumer was the only one of Disney's segments to grow its top line during the three-month stretch ending in June.
However, despite ending the quarter with more than 57 million Disney+ subscribers -- in addition to more than 35 million paying Hulu members -- Disney's direct-to-consumer business remains in the red. In fact, its losses have remained uncomfortably significant.
As the old adage goes, you have to spend money to make money. It's usually true, and Walt Disney is no exception to the rule.
If there were ever to be even a partial exception to this norm, though, Walt Disney is arguably it. All of the content watchable via Disney+ is already owned by Walt Disney, and only a few shows like The Mandalorian are high-budget originals that add to the platform's total operational cost. Ditto for Hulu, which largely brings together content from Disney's subsidiaries like ABC, Fox, and A&E, but has also developed a handful of originals like The Handmaid's Tale. Content costs shouldn't be too terribly high for the company's streaming services, and it's not as if Walt Disney needs to do a massive amount of marketing to create awareness for these streaming venues. Consumers created plenty of buzz for the company as Disney+ came to fruition.
Yet, there it is. Two and a half quarters after Disney+ launched, the company's official Q3 (calendar second quarter) commentary on its direct-to-consumer and international unit explains that "the increase in operating loss was due to costs associated with the ongoing launch of Disney+, partially offset by higher results at Star and ESPN+." Star, or Star India, is a broad streaming entertainment platform brought into the Disney fold when the company acquired 21st Century Fox in 2018. The company announced this week, however, that Star's service would soon be available in other foreign markets.
Regardless, to date, things have been steadily worsening for all of its streaming businesses. The chart below tells the tale. Last quarter's $706 million operating loss for this arm simply extends its streak of losses.
Changes coming... eventually
By and large, the company doesn't indicate it's worried. It knows losses are normal in the early days of any new venture. The current aim is to simply build an ecosystem of paying customers, cultivate loyalty, and then figure out the right price later. During the February quarterly earnings call shortly after Disney+ launched, then-CEO Bob Iger explained: "We really are not focused right now on price at all. We believed all along that we would have an opportunity to address pricing as we added more content, particularly original content, and the price-value relationship went up to the consumer, but it's not a priority of ours right now because we're still very new at this." Newly named CEO Bob Chapek didn't say anything on Tuesday that would imply he's got a different perspective.
And to be sure, as the company's direct-to-consumer business grows, Disney will find opportunities to not only cull costs but find an appropriately higher price point too. It would be naive to believe there's a great deal of price elasticity ahead, however.
Disney+ is reasonably priced at $6.99 per month, and its content library includes top-notch stuff from Disney's vault, and Marvel, and Star Wars. Kids love it, for good reason. The amount of content available -- measured in hours of watchable video -- through Disney+ is still usually only a fraction of that of rival streaming service Netflix, though, and it's still geared mostly toward kids. Plus, there's only so much Star Wars and Marvel video anyone can watch. The company needs more content and higher prices. The former adds costs. The latter crimps marketability.
The same dynamic applies to Hulu and ESPN, as well as Disney's stake in the Star service meant for overseas streaming customers.
There's a price-vs.-cost balance that's attainable, but it could prove more difficult to find than anticipated. You'll recall that Netflix sometimes faced pushback when it raised its subscription fees. You may also recall that it took Netflix years to start turning profits, and it was only last year that the streaming media giant's net income could be considered normal and healthy despite being in the streaming business since 2007.
There's no reason to believe Walt Disney won't face similar challenges, prolonging the point in time at which its direct-to-consumer effort actually starts adding to the bottom line rather than subtracting from it.