Walt Disney (DIS -0.04%) unleashed a whirlwind of news last week. In its fiscal first-quarter earnings report, CEO Bob Iger made it clear that he was back to building mode after spending the first year since his return fixing the business.
The entertainment giant announced a $1.5 billion investment in Epic Games, the maker of Fortnite. It set a date for the launch of its flagship ESPN streaming service for the fall of 2025 and announced a new combined sports streaming service with Fox and Warner Bros. Discovery. And Iger said the Taylor Swift concert movie is coming to Disney+ in March.
The company also raised its newly reinstated dividend by 50%, reaffirmed its goal of turning its streaming business profitable by the September quarter, and said it would meet its goal of $7.5 billion in annualized savings by the end of the year.
However, one important change seemed to get lost in the shuffle. Read on.
Image source: Disney.
Disney borrows a page from Netflix
Disney's streaming rival Netflix (NFLX -0.63%) has seen subscriber growth soar over the past year in part due to its crackdown on password sharing, which it calls paid sharing.
Now, Disney is preparing to implement its own paid-sharing program on Disney+ and Hulu. On its earnings call, the company said it will allow existing Disney+ account holders to add others for an extra fee. It gives free riders the option of getting their own account, being added to the main account, or losing access to the service. Disney expects to roll out those changes this summer.
At Hulu, it has already warned subscribers about sharing with those outside of their "primary personal residence," saying that they need to comply with the new policy by March 14. That should lead to millions of new subscribers at no additional cost to Disney, which could bring a significant windfall to the bottom line.
Roughly 8 million new subscribers could translate into an extra $1 billion in annual profit based on monthly subscriber fees. As of the end of the first quarter, Disney+ had 111.3 million core subscribers, which doesn't include Disney+ Hotstar subscribers and 49.7 million Hulu subscribers.
Netflix began cracking down on password sharing aggressively in the second quarter of 2023. In the three quarters since then, it has added 27.8 million subscribers, an unusually strong streak, especially coming after the post-pandemic lull in its subscriber growth.
Netflix hasn't said how many of those subscribers were added due to paid sharing, but it could be half of them since the company did say there were over 100 million unpaid users previously, an enormous pool of potential subscribers. It started the second quarter with 232.5 million subscribers. Assuming that half of the recent additions came from paid sharing, then that program would have lifted Netflix's total subscribers by 6%.
A similar bump for Disney based on its total subscriber base of 161 million, not including Hotstar, would translate into an additional 9.7 million subscribers, enough to add more than $1 billion in operating profit, assuming no extra costs. Disney might not reap the same benefit as Netflix, but the bump in subscribers is likely to be significant, and the marginal cost should be almost nothing.
Why streaming profitability is crucial for Disney
Disney stock has underperformed for years. Just a few months ago, it was trading at a nine-year low even as the broad market was headed back to an all-time high.
Much of the weakness in the stock owes to the challenges the company has faced in transitioning its linear media business to a streaming-first operation. It's clear why it has been challenging -- there are several moving parts in that process. Disney owns ABC, ESPN, and several other cable networks, and the company traditionally brought in billions in box office receipts each year.
The weakness in the business and the stock has come from the decline in profits from its linear media business while it loses money on streaming. But that could soon change. If Disney can deliver streaming profitability on time and demonstrate a path to growing those profits, the stock is likely to soar.
Its experiences division, based around its theme parks, just produced record revenue, profits, and operating margin. The missing piece for the stock is the success of the streaming business. Paid sharing should help change that by delivering a significant boost in streaming profits. Once it can demonstrate that to investors, the stock could be headed toward all-time highs.
