In an interview earlier this month, CEO Bob Iger spoke at length about the state of affairs at Walt Disney (DIS -0.04%). On the topic of streaming, he noted that when Disney+ launched in 2019, the priority was adding viewers at scale. The importance of that can't be overstated as Disney+ signed more than 10 million subscribers in the first 24 hours, quickly growing to 100 million.
Image source: Disney.
That said, Iger admitted that the technology was lacking in a number of ways. The platform wasn't built to control customer acquisition and retention costs or increase viewer engagement, and it wasn't conducive to controlling marketing expenses. Disney is currently working to correct those shortcomings, with Iger making this stunning admission: "The gold standard there is Netflix." He added:
We need to be at their level in terms of technology capability. And one of the reasons why their margins are so much more significant than ours is because they have that technology. So our marketing expenses are significantly higher. Our churn rates are higher than they need to be.
By a wide margin
In all fairness to Iger, Netflix had a 13-year head start -- and its results help illustrate Iger's point. Excluding foreign currency impact, the streaming pioneer has delivered operating margins of roughly 20% or more in each of the past four years. Furthermore, after years of burning cash to fund its expansion, Netflix's free cash flow has exploded higher, cresting at $6.9 billion in 2023.
There's good news. Disney's combined streaming business is on track to generate a profit by the end of fiscal 2024. This is partially the result of aggressive cost-cutting as Disney is on track to exceed its initial goal of $7.5 billion in cost savings. Furthermore, the sports streaming deal with Warner Bros. Discovery and Fox could unleash additional profit potential for ESPN.
Those factors, plus the improvements in its streaming infrastructure and Iger's track record of success, show why Disney will be the mouse that roared in streaming.
