Walt Disney (DIS +1.98%) disappointed investors when it reported just 2.1 million net additions to its Disney+ streaming service for the fourth quarter. While CEO Bob Chapek warned investors about "low-single-digit millions" of subscriber additions for the fourth quarter in September, 2.1 million barely meets the definition of "millions" (with an S).
Digging deeper into the quarterly report and management's earnings call with analysts provided a lot more detail on the streaming business and what investors can expect from the company going forward. Considering the importance of streaming to Disney's future as a media company, here are five things investors need to know.
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1. Disney+ subscriber growth wasn't as bad as it looked
One of the biggest drags on Disney+ subscriber growth in the fourth quarter was Disney+ Hotstar. The South Asian version of the streaming service, with most subscribers in India, struggled to keep subscribers as the Indian Premier League delayed the cricket season. Combined with a new law that doesn't allow subscription services to auto-renew customers, Disney+ Hotstar lost nearly 2 million subscribers.
As such, Disney+ added nearly 4 million subscribers outside of India. While that's still a considerable slowdown compared to the third quarter, it looks a lot better for the core service. Management said Hotstar subscribers now account for 37% of Disney+ customers, which implies core Disney+ subscribers grew from around 71 million to 75 million in the fourth quarter.
It's also worth putting Disney+ subscriber growth into perspective. Disney added 44.4 million global subscribers over the past year, up 60%. Netflix (NFLX +0.13%) managed to add 18.4 million in the same period. Netflix added only slightly more total subscribers last quarter when adjusting for the impact of Hotstar. Granted, Disney+ is still a smaller service, but it's also still available in fewer countries. The point is, streaming services are still working through the pull forward of subscribers in 2020.
2. Hulu + Live TV subscribers are coming back
After three quarters of subscriber losses for its multichannel video streaming service, Disney added subscribers to Hulu + Live TV. It retook the 4 million subscriber milestone, which it hasn't seen since its last price hike went into effect at the end of 2020.
The value of the live TV service is two-fold. First, it supports the Hulu streaming business. Live TV subscribers theoretically generate greater engagement of the on-demand streaming service, leading to more ad revenue. Second, it provides support for Disney's linear networks business, which is still the main source of profits for the overall business. As cord-cutting continues, Disney controlling a greater share of the pay-TV market gives added strength to its cable networks business in negotiations with other distributors.
3. Disney+ is expanding into new markets
Disney+ is currently available in 60 countries. To put that into perspective, Netflix has been available in over 190 countries since 2016. But Disney has plans to catch up quickly.
Next year, the company will expand into 50-plus new markets, Chapek told analysts. The expansion is global, including Central and Eastern Europe, the Middle East, and South Africa. He also expects to reach more than 160 countries by the end of fiscal 2023.
Reaching a fully global market will give Disney greater scale to capitalize on its content investments. That's been one of the big advantages of Netflix's global scale.
4. Disney+ is increasing content spending
After production bottlenecks slowed releases in 2020 and 2021, management is planning to ramp up content spending for Disney+ next year and boost content releases throughout the year before hitting a steady state on its release cadence in the fourth quarter.
Not only is Disney planning for more tentpole series but also more local language content as it expands into more international markets over the next two years. And those local language series can become global hits if Disney plays its cards right.
Original content is the biggest driver of subscriber additions. Management reiterated that it doesn't expect linear additions to Disney+, and the ramp-up in content releases in 2022 ought to lead to more subscriber additions in the back half of the year.
5. Peak Disney+ losses will come in 2022
Management now expects peak losses for Disney+ operations next year instead of in 2021. Management said 2021 produced better-than-expected revenue and that content expenses were lower due to the production delays.
Peak losses in 2022 make sense as the company ramps up its spending on new content releases and expansion into new markets but expects subscriber additions to be heavily backloaded. Management reiterated its expectations for the service to reach profitability in 2024.
All told, the service appears to be on track to reach its long-term targets, and one bad quarter of subscriber growth is nothing to concern investors. It's not the only streaming company to face challenges growing its service this year, as it laps subscriber pull forward from 2020 and a dearth of production. Meanwhile, Hulu is showing strength, especially in its live TV service, which will help bolster the rest of the media business.
