As Streaming Losses Mount, Is Disney’s All-In Strategy Headed Up River?

Disney’s stock price had its worst day since the start of the pandemic 2.5 years ago, dropping 12% to less than $88 a share as investors digested the uncomfortable news of half a billion dollars more in burgeoning quarterly streaming losses than anticipated.

Average revenue per user declined too, as Disney expands streaming services into global markets without the wallets for a U.S.-level subscription price.

To be clear, Disney also added another 14.6 million subscribers, pushing the company’s flagship Disney+ streaming service to a global total of 164 million, a hefty number second only to industry leader Netflix. Overall, the company’s four services have nearly 236 million subscribers, making it the world leader.

And Disney executives said Q4 will be its worst in terms of streaming losses, at nearly $1.5 billion, with the arrival of an ad-supported tier next month that should help ease deficits next quarter. Higher prices that hit recently across individual components of the Disney Bundle should help too.

The latest losses, however, were about 50 percent higher than had been expected. Needham & Co. senior research analyst Laura Martin called them “its enormous and growing DTC losses.”

Year over year, the jump in streaming losses was even more alarming, up more than 2.3 times the same quarter in 2022. And the company’s international expansion means that more subs aren’t necessarily a lot more money, especially given the strong dollar; average revenue per user dropped 5.5%

That was a nasty surprise for those counting on the company to combine increasing streaming strength, a substantially revived parks and resorts unit, and relatively stable legacy operations in broadcast, cable and film. Put simply, it just hasn’t happened yet.

Meanwhile, the company continues to charge ahead with its streaming investments, launching D+ in new international territories and continuing to spend heavily on well-received streaming originals such as Andor and She Hulk: Attorney At Law, among much else.

No surprise, then, that analysts started ringing alarm bells, cutting earnings estimates and price targets even as they applauded the new streaming customers, and largely maintained their respective versions of a “buy” rating.

Michael Morris of Guggenheim clearly felt the Force drain from his body when he wrote, “These Are Not the Results You’re Looking For.” He cut Disney’s share price $30 to $115.

Jessica Reif Ehrlich at BofA said the results were “better beneath the surface than it appears,” which might be the nicest possible way of saying that the results kinda stink, but at least the company is headed in the right direction.

Michael Nathanson of MoffettNathanson had a bigger picture in mind, looking at those 2023 projections from Disney. That’s the last year the company said it expects to lose money on streaming, before shifting to a profit-making center in 2024. But Nathanson downgraded earnings projections for 2025, given the follow-on effects of what’s happening now.

The company’s own projections for 2023 earnings before interest and taxes were roughly a third that of the 25% consensus among analysts, and way, way below Nathanson’s own 34% estimate.

“Rarely have we ever been so incorrect in our forecasting of Disney profits,” Nathanson wrote in a research note. “Given the company’s confidence that parks trends appear resilient, it appears that the culprit for the massive earnings downgrade is much-higher-than-expected DTC losses and significant declines at linear networks.”

That’s an ugly, but looming, story across Hollywood as companies make the streaming transition, especially against a backdrop of a worsening economy.

Disney, like most of its Hollywood competitors, is walking a complicated path away from its crumpling cash cows in legacy cable and broadcast while pouring the resulting revenues into streaming investments around the planet.

Disney is spending more on programming than its smaller competitors, and investing more heavily in streaming compared to all of them.

Disney is even outspending Netflix, by a lot. But Netflix, it’s important to note, doesn’t have to pay for all those pricey sports rights on ESPN/ESPN+/ABC. Nor does Netflix have to otherwise keep aloft legacy media operations like the fading Freeform.

Now it appears Disney’s full-throated embrace of streaming is hitting some rough-edged reality. As Nathanson put it in a Wednesday morning CNBC interview, streaming “is a spending-driven business, and they’re going to keep spending. But cord-cutting has really collapsed. Those two things came together worse than we expected.”

Comcast, still the biggest cable provider, reported last month that cord-cutting in the past year had sliced nearly 10 percent from its subscriber numbers. It may not be utter free fall, but that business is getting a little scary for companies depending on those sweet, sweet carriage and retrans fees to pay for their streaming transition.

“It’s been a much more difficult pivot,” Nathanson said. “They can’t control the speed of the slowdown in linear. The economy is really hurting them in this transition.”

Given the perfect storm hitting the sector right now, Nathanson suggested that "being patient and cautious is still the way to go.”

Martin, at Needham, was relatively sanguine about Disney’s longer-term prospects: “We do believe that DIS has a strong enough balance sheet to weather a longer COVID-induced earnings downdraft,” she wrote.

The question is whether shareholders, who are bailing hard on Disney’s streaming Jungle Cruise, will get back in the boat soon, in the hope they can profit eventually from a very different media company in a couple of years.