Disney (DIS +2.26%) is losing billions on its streaming services. The media company reported $4 billion in operating losses for its direct-to-consumer (DTC) segment over the previous 12 months. Leading those losses is Disney+, the company's flagship streaming service.
The company is pouring tons of money into content for the service as well as marketing and technology. And while it has paid off in subscriber growth, investors have been scared off by the steep losses.
Management says profits are coming. At the very least, it says, operating losses will decline.
When can investors expect Disney+ to actually turn a profit?
Management reiterated its expectations for Disney+ to generate an operating profit sometime in fiscal 2024.
Chief Financial Officer Christine McCarthy clarified that she means the service will have a profitable quarter in fiscal 2024. And very likely she means the fourth quarter of fiscal 2024, which ends in September of that year.
NYSE: DIS
Key Data Points
There are several factors that will drive profitability for Disney+. Pricing will have a big impact. Disney will implement a major price hike in December, pushing current subscribers in the U.S. to pay $3 more per month. With around 28 million stand-alone subscribers (40% of domestic subscribers pay for the Disney bundle), that will add about $1 billion in annual revenue if it doesn't affect subscriber churn.
Disney is also adding an ad-supported tier for Disney+. It can have the same impact on revenue per user as the price increase, but should produce a positive effect on subscriber growth versus implementing the price hike alone.
The company is also cutting back on marketing. There are fewer core markets for Disney to launch in, which means it doesn't need to pay for big launch campaigns. After three years of operations in many countries, Disney+ is a well-known name and a fully familiar streaming product.
Importantly, Disney is going to leverage its content investments. It plans a much more modest increase in overall content spend in fiscal 2023 compared to 2022, and it could level off further in 2024. Disney has been more disciplined in bidding for big content rights like the cricket matches of the Indian Premier League, which drive millions of subscribers for Disney+ Hotstar. Considering content is the biggest driver of expenses for Disney+ and its other streaming services, sustained subscriber (and revenue) growth should translate into strong profit improvements.
Staying on track
While investors will still pay attention to Disney+ subscriber growth, profitability ought to take a front seat.
With over 160 million global subscribers for Disney+, and an additional 70 million Hulu and ESPN+ subscribers, Disney has quickly established a massive subscriber base. That was a goal of its ultra-low pricing to launch the service back in 2019, and it has certainly achieved as much. Now it's time for Disney to prove it can turn that scale into profits.
That means operating income for Disney's DTC business will likely have a bigger impact on the stock than its subscriber count. To that end, McCarthy provided a good outlook on what investors should expect from the segment over the next two quarters during her remarks in the fourth-quarter earnings call: small improvements in the first quarter, with a much larger impact from price changes in the second quarter.
And 2024 is a key year for Disney's DTC business, since it'll have the option to buy the rest of Hulu from Comcast. Likewise, Comcast could force a sale to Disney. The price of that sale will be contentious, but Disney is likely to end up with full ownership of the streaming service.
Owning Hulu outright gives Disney more maneuverability to make Disney+ profitable or improve performance of the segment. It could end up combining the two services into one big streaming service.
Ultimately, management is aiming toward profitability in late 2024. With that as its north star, it's likely going to make it happen barring any unforeseen economic events.
