The good news is that Walt Disney's (DIS 0.55%) streaming losses continue to shrink, largely thanks to cost cuts. The bad news is that its streaming subscriber growth has evaporated -- possibly because of these cost cuts. And it's not clear how, when, or even if the company's streaming arm will get over the profit hump as it stands now.

Disney's new streaming headwind isn't new

In its fiscal second quarter, which ended April 1, Disney brought in $21.8 billion in revenue, from which it booked operating/non-GAAP earnings of $0.93 per share. Sales were up 13% year over year while profits slipped 14%. Both numbers were in-line with expectations. Disney's film, TV, and theme park businesses continue to do well by virtue of generating operating income, although its linear TV and media/entertainment arms suffered declining bottom lines last quarter.

The one real sore spot? Its direct-to-consumer unit -- aka, streaming. Higher subscription prices helped pump up that unit's revenue by 12% to $5.5 billion. But it still booked an operating loss of $659 million during the quarter.

Chart illustrating Disney's slowing streaming revenue growth and continued operating losses.

Data source: Walt Disney. Chart by author. Revenue figures are in billions of dollars. Operating income/loss figures are in millions of dollars.

To Disney's credit, that's better than the $887 million loss that its streaming segment suffered in fiscal Q2 2022. It was also its second consecutive sequential reduction from fiscal Q4 2022's loss of nearly $1.5 billion. It was still a sizable loss, however, and this pattern of losses could persist for the foreseeable future.

The chart below puts things in perspective. Subscriber growth for Disney+ in the U.S. and Canada has been slowing down for some time, but last quarter, the number of subscribers actually fell by 300,000. The international version's base grew by a little less than 1 million subscribers, while the Disney+ Hotstar service (which serves India and Southeast Asia) suffered a net of 4.6 million cancellations. Hulu and ESPN+ also barely moved forward, picking up a mere 600,000 net new subscribers between them.

Chart illustrating a slowdown in Disney's streaming subscriber growth has turned outright negative this year.

Data source: Walt Disney. Chart by author. All figures are in millions.

Higher prices likely have much to do with this. The domestic version of Disney+ now drives monthly revenue of $7.14 per user, versus a more modest $5.95 per user just at the end of last year. The international version costs an average of 6% more.

Yet higher prices can't get all the blame. People are simply losing interest in Disney's content, as well as streaming content in general. Hub Research's most recent report on the matter indicates that after three years of pandemic-enhanced growth, the number of different TV entertainment sources used by the average consumer in the U.S. is shrinking. Last year, people were regularly watching an average of 7.4 different video entertainment sources. Now, they're only utilizing 6.4.

Chart showing domestic consumers are using fewer sources of video entertainment.

Image source: Hub Research's Best Bundle 2023 Report.

In a similar vein, viewership-ratings outfit Nielsen reports that as recently as November, Disney+ accounted for 2% of domestic television screen time, while Hulu commanded 3.9%. In March, those numbers came in at 1.8% and 3.3%, respectively. It's not a huge setback in absolute terms. In a crowded streaming market against a backdrop of economic uncertainty, however, those are huge relative setbacks that suggest the appeal of Disney's streaming content is weakening.

That's only the U.S., but if it's happening here...

There's too much uncertainty behind Disney stock

Disney could spend more on making great content, but it has no assurance that the additional spending will pay for itself. It can continue to cull its streaming expenses, but that might make it tougher to create and promote the streaming content it needs to draw and keep subscribers. It could raise prices (again), but it doesn't appear Disney's pricing power is unlimited. It's possible there is no pricing/content-spending formula that will work to make Disney's streaming operation as we know it sustainably profitable.

CEO Bob Iger knows all of this, by the way, and is maneuvering. Hulu and Disney+ content will soon become available in a combined app. In the meantime, a bunch of previously budgeted content won't be getting made after all. Another price increase for the domestic ad-free tier of Disney+ is also in the works for later this year. Iger feels good about it too. The fact that the subscriber losses stemming from the last price hike were modest "leads us to believe that we, in fact, have pricing elasticity," he said during Wednesday's earnings call.

That could be dangerously wishful thinking, though. Subscriber growth was already slowing before last quarter as competing services continued to win market share.

In the meantime, while cost-cutting often seems brilliant on the surface, it runs the risk of undermining an operation that's actually quite critical to a business.

It's not inconceivable that Disney's streaming business will never produce a meaningful profit -- or any profits. After all, most other media companies' streaming arms also remain in the red, including those of Paramount Global, Comcast, and Warner Bros. Discovery. This business isn't just highly competitive. It's very expensive.

Streaming is still a modest part of the company's revenue mix. But given how it's also a big focal point that may not ever actually deliver on the bottom line in the way that was expected, investors may want to think long and hard about owning this stock. Disney's streaming business shouldn't be facing this kind of trouble at this stage of the game. That it is may reflect much bigger flaws in the whole streaming business model.