The good news is that Walt Disney's (DIS 1.42%) streaming business lost a little less money last quarter than it did in the quarter before. The bad news is, that's the only firmly bullish thing that can be said about the media company's direct-to-consumer operation's fiscal third quarter.
Everything else is lackluster at best or problematic at worst. Chief among these problems is (another) decline in the total number of domestic Disney+ subscriptions and now a contracting number of ESPN+ customers. Streaming is still a relatively small business compared to Disney's theme park, television, and film divisions. As such, the continued loss isn't devastating.
Nevertheless, streaming's persistent losses are chipping away at the company's bottom line, leaving much-needed profit growth at minimal levels. The matter is too serious for investors to ignore, so let's dive in.
Losing less money means little when growth is stalling out
For the three-month stretch ended in early July, Walt Disney turned $22.3 billion worth of revenue into an operating income of nearly $3.6 billion. Sales were up 4% year over year while operating profits were essentially even with the third quarter of the prior fiscal year. Per-share earnings slipped from $1.09 then to $1.03 now, topping estimates of $0.99 per share. The company fell short of its direct-to-consumer subscriber estimates, however, as well as top-line estimates of $22.5 billion.
Of the sales it mustered during the third quarter, $5.5 billion came from streaming services Disney+, ESPN+, Hulu, and the international version of Disney+ called Hotstar. That's up 9% year over year. Streaming operating losses still rolled in at $512 million, though, roughly half of the business's loss booked in the same quarter a year earlier, and a slight improvement on the second quarter's streaming loss of $659 million.
Data source: Walt Disney. Chart by author.
Is that progress? Yes, technically. Revenue growth is stalling out, though. And it's doing so before the company has had a chance to cull enough costs to push its direct-to-consumer business out of the red and into the black. That doesn't mean it can't happen in the future, even with slowing sales growth. It's certainly a tall order, however.
Spending less on content lowers the marketability and perceived value of a streaming service. While it's difficult to quantify just how many consumers might cancel a streaming service (or never sign up for it in the first place, simply based on price), there's no denying that Walt Disney is already hitting a subscriber wall without yet fully dialing back its current streaming spending.
Data source: Walt Disney. Chart by author.
While customer losses with Disney+ and Hotstar are clear, less evident on the chart is that ESPN+ and Hulu+Live also saw slight attrition in their paying customer head counts. After several quarters of merely tepid growth from both platforms, Q3's declines could mark the beginning of a bigger, prolonged downtrend.
Find something else while Disney is regrouping
Again, its streaming business isn't destroying the company. Disney is clearing plenty of profit with its film and television studios as well as its theme parks. It can offset its current streaming losses indefinitely.
Walt Disney has been in the streaming business for years now, however, first with its co-ownership of Hulu and then with the 2018 launch of ESPN+. Disney+ launched late the following year. In that streaming isn't exactly a new industry and Walt Disney is anything but new to the entertainment business, investors had a right to expect more promising progress by now.
The company is struggling to keep and add subscribers as it is. Cutting its investment in content won't help in that regard. Meanwhile, the debut of an ad-supported version of Disney+ late last year doesn't seem to be helping drive subscriber growth at all.
If you're a current or prospective Disney shareholder, just be careful. It was only three years ago that the company completely reorganized itself to focus first on streaming. That plan's clearly not working quite as well as seemingly hoped then.
Keep in mind that rehired CEO Bob Iger appears to be unwinding some of those streaming-centric decisions -- including streaming content spending -- but that's going to be a tricky maneuver to pull off. He'll have to maintain or even improve demand for flagship streaming service Disney+, yet do so with less total programming.
In fact, there's no assurance its current collection of streaming platforms will ever actually work their way to an operating profit. That's no minor drag on the company's overall profits, especially when those resources could be put to more productive use in the meantime. There are better investment options out there while Walt Disney is regrouping.
