Disney+, the flagship streaming service from Walt Disney Company (DIS 1.66%), dazzled Wall Street investors through its early stages. The company blew past the initial subscriber forecast of 10 million at its launch in November 2019, and sign-ups continued to soar through the pandemic.
However, more recently, subscriber growth has hit a wall and Disney has jacked up prices on its streaming services to make up for a large shortfall on the bottom line.
Now, according to Bloomberg, Disney says that it will fall short of earlier subscriber targets it had given for 2024. In August 2022, it was aiming for 215 million-245 million subscribers at Disney+ by the following year.
The revelation looks like the latest setback for the entertainment giant, which just resolved a contract dispute with Charter Communications. Disney agreed to allow its streaming services to be included in Charter's bundles, which looks like more of a win for the cable operator than for Disney. The agreement will add some subscribers for Disney, but it will make less money from them than it would have selling directly to the consumer.
The news that it will miss its subscriber target shouldn't come as a big surprise. The service it refers to as Disney+ Core, which doesn't include Disney+ Hotstar subscribers primarily in India, added just 800,000 subscribers in the second quarter to reach 105.7 million. Disney+ Hotstar subscribers, meanwhile, fell by 12.5 million in the quarter to 40.4 million as the company lost the rights to broadcast Disney's top cricket league, the Indian Premier League.
In other words, even adjusting for the loss of cricket, Disney+ is barely growing, so adding 70 million subscribers by next year seems virtually impossible. Disney+ Hotstar also costs a fraction of the regular Disney+ service, so it's not to the bottom line of the streaming business.
Image source: Getty Images.
Priorities have shifted
Just as they have in the rest of the tech sector, streaming stock investors have moved their focus from top-line growth or subscriber growth over to the bottom line. Legacy media companies like Disney are still burning hundreds of millions of dollars a year on streaming, and Wall Street is demanding that they prove that these businesses can be viable.
Disney stock is now hovering near 52-week lows even as the broader market has surged this year. While Disney is losing money on streaming, its linear TV business is rapidly shrinking with operating income in the segment down 23% to $1.9 billion in its most recent quarter.
The biggest imperative for the company at this point is to stem the declining profits in its media and entertainment division. CEO Bob Iger seems squarely focused on that, with the company announcing another round of price hikes at its streaming service to drive profitability in its direct-to-consumer segment by 2024.
Correcting the record
Disney underpriced the Disney+ service launch, charging just $6.99/month at the time. And while it's built a considerable audience for the service, a money-losing streaming service was never the goal. Now, monetizing it is especially vital as it sees its profits dry up in linear TV.
Disney still has some other cards up its sleeve. The company is planning to launch an all-streaming version of its flagship sports network ESPN, though it's unclear when that might happen. Meanwhile, Iger has floated the idea of selling non-core media assets, including ABC, and Bloomberg also reported that the company was holding talks with Nexstar on a possible sale of ABC.
Such a move could help Disney pay down some of its $47 billion debt burden, a large chunk of which came from its Fox acquisition, which looks increasingly questionable as the company muddles through its transition to streaming.
Stepping back from the subscriber target isn't a problem in and of itself, but it's a reflection of larger strategic failure at Disney. This includes the mispricing of Disney+, the questionable Fox acquisition, handing the reins to former CEO Bob Chapek before taking them back, and kowtowing to cable providers in the Charter deal.
Disney doesn't seem to know how to adequately value its content outside of the cable ecosystem, but the company needs to figure it out soon as cord-cutting will only continue to eat into its linear TV income stream. The streaming business should eventually be profitable, but things seem likely to get worse before they get better.
