What does it mean for investors?
- Disney+ recently exceeded expectations by surpassing the number of Netflix subscribers three years ahead of schedule.
- Disney is betting heavily on the streaming service with a goal of reaching profitability.
- Hulu is jointly owned by Disney and Comcast, and both want to own the streaming service alone.
Disney stock has long been a favorite among investors, some companies just do better than others, and Disney has been one of them for a long, long time. When the company announced a plan to enter the streaming market in 2019, estimates were that it would overtake Netflix in size by 2025. At the time, many analysts thought this was an extremely aggressive projection. Not only had Netflix been the first to market, they had a huge head start and their own unprecedented growth trajectory.
Fast forward to today and Disney has delivered, officially surpassing Netflix’s subscriber numbers three years early. Let’s see what impact this has on Disney stock.
Netflix vs. Disney
The Disney streaming service, which consists of Disney+, Hulu and ESPN+, reported 221 million customers at the end of its fiscal 2022 third quarter, beating Netflix’s subscriber count of 220 million for the same period. Disney+ added 14.4 million customers during the quarter, beating expectations by just 10 million new subscribers.
In contrast, Netflix reported that it lost 1 million subscribers for the second quarter in a row. However, Netflix profited from its subscriber base, while Disney+ is still operating in the red. But profit has never been the top priority in this space obsessed with global subscribers, something investors should be more aware of going forward.
The gray area in the reporting of these subscriber numbers is phantom accounts. Many Netflix subscribers share their passwords with others, which affects the total number of subscribers. Disney+ subscribers certainly do the same. But because Netflix has started losing subscribers, it has stated that it will start cracking down on password sharing, which is another sure way to continue this trend. Ask all the lonely record executives of the late 90s and early 00s. Disney+ has not made any announcements.
Disney followed up the news of their increased subscriber base with an announcement that prices for their services would increase. Disney+ with ads will cost $7.99 a month, the current cost of the ad-free service, pushing the price of their ad-free service up to $10.99 by the end of 2022.
Depending on the subscription plan, Hulu gets a price increase of $1 to $2. Netflix also announced a price increase, with the Basic plan increasing from $8.99 a month to $9.99, the Standard tier increasing from $13.99 to $15.49 a month, and the 4K tier increasing from $17.99 to $19.99.
The price increases are relatively low, but Netflix has more competition than ever from other streaming services like Disney+. When Netflix announced its March 2022 price increase, consumers began to deal with the early stages of inflation and became more sensitive to price increases across the board. Netflix picked the wrong time to raise prices, as Disney faced little backlash when it followed shortly after inflation had become even more prominent.
Why Netflix still makes more money from subscribers
Netflix reported $7.97 billion in revenue for the second quarter of fiscal 2022, up 8.56% from the same period a year earlier, despite the loss in subscribers. The company has been in business since 1997 and has come a long way from its beginnings as a DVD rental service that sent out movie copies a few at a time. Of course, the company matured and made very good decisions to partner with movie studios to get access to the latest movies and invest money to produce original content. The company also entered the streaming market long before other media companies joined the field, giving them a massive advantage that seems to be waning in real time.
The company has 25 years of experience in streaming media and has done a lot of work to develop an intuitive interface that is easy for users to understand. This, together with working with internet providers for a reliable backbone capacity and delivery of media to subscribers, has resulted in predictable operations and costs. Netflix also built out its own content delivery network (CDN) to maintain control over the content the subscriber receives and the quality of the video.
These features mean that Netflix is well positioned to make money even after losing a significant portion of its subscriber base. In contrast, Disney is in the early stages of building out and burning cash to secure its CDN and position itself as a reliable provider of high-quality streaming content.
How Disney+ affects revenue
Disney’s streaming channels cost Disney a total of $1.1 billion in the third quarter of fiscal 2022, which was $300 million higher than expected. Part of the cost came from how much money Disney spends on creating original content to draw in and retain viewers. Another part was from investing in the technology to deliver the content to subscribers. Disney CFO Christine McCarthy stated that losses from Disney+ will peak during fiscal year 2022. The company expects the streaming services to become profitable by fiscal year 2024.
Revenue per user fell 5% in the current quarter from North American customers switching to cheaper package options. Disney offers all three channels in an ad-free package for Disney+, and with ads for ESPN+ and Hulu for $14.99 a month, $12.99 for the package with ads, and $19.99 for all three streaming services with no ads in sight.
Overall, Disney+, Hulu and ESPN+ had little impact on Disney’s revenue despite reporting a loss of $1.06 billion in operating income for the direct-to-consumer portion of the Disney Media and Entertainment Distribution segment. Overall, Disney reported profits that beat Wall Street’s expectations. Its total revenue for the previous nine months was $21.5 billion, up 26% year-over-year, and an operating profit of $3.6 billion. Shares in Disney rose 6% following the news. Investors see the operating loss of Disney+ as a temporary problem and are confident that Disney will make the service profitable.
The future of Disney stock
Disney has recovered well from the pandemic, with people returning to parks and cruise lines in droves. The parks are profitable again, and will continue to be so for the foreseeable future. Visitors continue to spend at Disneyland and Disney World despite apparent belt-tightening due to inflation. It’s worth noting that theme park attendance is cyclical, so visitor numbers are likely to decline at some point. However, Disney does not rely on its parks and cruises alone to drive profitability.
The acquisitions of the Star Wars franchise, Pixar, Marvel and the Muppets expanded Disney’s reach into the entertainment world, despite a valuable catalog. It also owns the ABC network and ESPN, two properties already well-established and respected when Disney bought them. Disney Studios continues to create new properties in the spirit of Walt Disney’s animated films, which also helps keep revenue flowing. The company is a media giant that continues to be run by seasoned CEOs who want to deliver the Disney experience without wearing out customers.
Speaking of ESPN, there are rumors about whether Disney should keep or sell this part of the company. For many years, ESPN has been a significant revenue driver for Disney, with revenues estimated at $11 billion annually, although Disney does not officially release this number publicly. The problem with the broadcaster is that it costs more money for the rights to broadcast live sports, and the channel loses subscribers. This can result in less advertising revenue and turn a profitable segment into a loss-making segment.
Finally, it is crucial to know that Hulu is a company jointly owned by both Disney and Comcast, with Disney owning 66% of the streaming service and Comcast the remaining 33%. As part of this deal, Disney has the option to buy out Comcast and fully own Hulu starting in 2024. However, the price tag for the acquisition will be high, as the minimum amount agreed is $27.5 billion. Disney and Comcast have stated that they want to own all of Hulu, so it will be interesting to see how this plays out.
The bottom line
For investors, Disney is a stock well worth the investment, and many investors load up when the share price falls in value. While the future of Disney is strong, there will be volatility around what the company decides to do with ESPN and Hulu. While many experts don’t think this will significantly affect Disney’s long-term prospects, it could lose subscribers if the Disney bundle disappears and Disney+ is the only option.
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