Once upon a time, in the enchanted land of Walt Disney (DIS -1.01%), the Disney+ streaming business was full of pixie dust and potential. But as they say, all magic comes with a price. Disney's 2023 second-quarter report revealed some hiccups in its direct-to-consumer (DTC) segment, where Disney keeps its portfolio of video-streaming services. So while the House of Mouse did see some growth, it wasn't all smooth sailing.
A whole new (streaming) world
Disney's Q2 2023 DTC results showed some mixed signals. The good news is that the company managed to boost its revenue from subscribers, particularly in the United States, where the domestic Disney+ average revenue per subscriber (ARPU) rose from $6.32 to $7.14. Moreover, the theme parks and resorts segment also enjoyed a 17% year-over-year sales jump, contributing to the overall revenue increase of 13%.
However, the company faced some challenges in growing its subscriber base, with Disney+ core subscribers experiencing only modest growth of over 600,000 net additions. Additionally, the average revenue per subscriber for some international streaming services took a hit, with Disney+ Hotstar ARPU dropping from $0.76 to $0.59.
Disney's bumpy magic carpet ride
During Q2, Disney experienced modest growth in Disney+ core subscribers, with over 600,000 net additions. However, this growth was not uniform across different regions. For example, in the international streaming market, Disney+ core subscribers increased by nearly 1 million names. But, at the same time, the company saw a slight decline in domestic subscribers (in the United States). This decline was primarily due to the impact of the price increase for Disney+ subscriptions, which led some subscribers to cancel their memberships.
As a longtime Disney shareholder, I'm concerned about the weak subscriber trend at Disney+ Hotstar. The India-based service lost 8% of its customers in the second quarter alone, even though ARPU dropped 20% lower in the same span. The Hotstar business, which became a Disney property in the 21st Century Fox buyout, is losing customers despite robust price cuts.
As for ESPN+ and Hulu, both platforms experienced a slight increase in subscribers during the quarter. However, Hulu's average revenue per user (ARPU) was impacted by lower per-subscriber advertising revenue, which was in line with Disney's expectations of near-term softness in the addressable advertising space.
To sum it up, Disney added subscribers in the international market, but lost some in the domestic market, likely due to the price increase for Disney+. While ESPN+ and Hulu saw a slight increase in subscribers, Hulu faced challenges with advertising revenue, which affected its overall ARPU.
It's the circle of revenue
Disney's revenue streams are rebalancing as the company experiences various levels of growth across its different segments. With the stalled growth in the direct-to-consumer segment, theme parks and resorts have picked up the pace and contributed to overall revenue growth.
Mind you, this shift looks more like a temporary storyline than a permanent feature. CFO Christine McCarthy said as much on the earnings call:
"Just to remind everyone, we did say, and it is the case, that we had peak losses in direct-to-consumer in the fourth quarter of 2022. That was the quarter that we reported in November," she said. "We will be improving significantly from 2022 peak losses in Q4 through the balance of fiscal 2023. So, you should assume that what you saw back in Q4 was the peak loss and we have improved for the next two quarters."
The parks segment saw 17% year-over-year sales growth in the quarter. This growth was mainly driven by higher volumes of visitors and increased guest spending at theme parks and resorts. In addition, higher sales volumes of merchandise, food, and beverages also contributed to the revenue increase in this segment.
In addition to the parks segment, Disney grew in other areas like theatrical distribution and direct-to-consumer subscription revenue. Although the DTC growth was slower than expected, the company's diverse range of revenue streams allowed it to continue to grow its overall revenue.
So, as Disney's DTC segment faced some challenges, the company was able to rely on the strong performance of its theme parks and resorts to balance out the revenue flow and keep the company moving forward.
Hakuna Matata: No worries in the long run?
Disney's Q2 report may have unveiled some wrinkles in the DTC magic carpet, but the entertainment giant is taking action to smooth out the ride. By combining streaming services, optimizing advertising strategies, and leveraging its vast content library, Disney seems poised to tackle these challenges head-on.
Investors know that Disney is a multifaceted company. Several sector-spanning conglomerates are built around an entertainment-based foundation, but Disney is the poster child for media conglomerates. I mean, look for that term in a dictionary and you should find Mickey Mouse staring back at you from the page.
So while the DTC segment's performance might not be as magical as some had hoped, the company can roll with the digital punches thanks to stronger trends in other parts, like theme parks. This balancing act gives Disney the luxury of working through game-changing business plan updates in relative peace.
As the wise Rafiki once told Simba, "Change is good." I really think that's true in the long run, even if the changes are uncomfortable and downright messy in the short term. Disney's willingness to adapt and evolve in the face of shifting trends and subscriber behavior should help it navigate the uncertain waters of the streaming world.
