Walt Disney's (DIS +1.81%) streaming businesses finally reduced their operating losses last quarter. But it didn't happen for the reason you might be thinking. Content costs -- the cost of producing or licensing the films and shows for its various platforms -- actually grew again during the quarter ended in December. Indeed, these costs actually grew more than Disney's streaming revenue did, seemingly in conflict with the company's plans to curb spending.
So how'd the company make net progress toward profitability for the quarter in question? It dramatically cut other operating expenses. It's a decision, however, that just might come back to haunt Walt Disney's long-term streaming ambitions.
Disney's streaming content costs are still sky-high
As the old saying goes, a picture is worth a thousand words.
Take a look at the comparisons of each of Disney's streaming services' programming and production costs. As a percentage of streaming revenue, Walt Disney isn't actually making any net progress in terms of curbing its net or relative content costs. In fact, the difference between its content costs and streaming revenue has been shrinking since early last year.
Data source: The Walt Disney Co. Chart by author. All figures are in millions.
The $500 million sequential improvement in Disney's streaming bottom line for the fiscal 2023 first quarter instead stems from a dramatic reduction in selling, administrative, and general expenses. Last quarter's $545 million reduction in this spending drove the figure down to $1.16 billion -- the least Disney shelled out for these costs since the middle of 2021.
Data source: The Walt Disney Co. Chart by author. All figures are in millions.
The organization's supplemental disclosures don't detail exactly how this money is spent (or isn't spent). It's not a stretch, however, to suggest the savings came from lowered selling costs ... namely, less promotional and marketing activity. Administrative spending is typically difficult to cull in a single quarter. Selling expenses aren't.
And like it or not, every spending decision has an effect. Sometimes, the effect is for the better, and sometimes, it's for the worse. Occasionally, you get a little of both.
Given this, the question investors should consider here is whether or not the sharp, sudden reduction in streaming-related selling and administrative spending took a toll on Disney's streaming subscriber growth. As a reminder, on a worldwide basis, Walt Disney lost 2.4 million Disney+ subscribers last quarter.
Data source: The Walt Disney Co. Chart by author. All figures are in millions.
It did see net customer growth in the all-important North American and international markets (excluding Disney+ Hotstar). It saw very little such growth, though. The entertainment giant only added 1.2 million international Disney+ users and a mere 200,000 North American Disney+ subscribers. Both are less-than-magical results.
Not a fiscally viable, stand-alone business
To its credit, the company is planning further cost cuts and renewing its focus on profitability. It's starting by laying off 7,000 employees, en route to a target of $5.5 billion worth of savings.
Walt Disney is also reorganizing itself -- again -- into three distinct operating units. These are Disney Entertainment, ESPN, and Disney Parks, Experiences and Products. These divisions will operate independently of one another, particularly as it pertains to their profit and losses. More to the point, it looks like the shake-up will meld streaming with the company's studios and television arm.
None of this changes the fact, however, that its streaming endeavors have yet to reach fiscal viability on their own. It's not even clear they can reach fiscal viability as-is, and as they're currently priced. Again, streaming subscriber growth hit a wall last quarter, coinciding with considerably less selling and administrative spending.
It matters to investors simply because -- as CEO Bob Iger put it on the latest earnings call -- streaming is "in many respects, our future."
