Image: The Mandalorian, Disney+
1. Mickey Mouse and the Misleading Streaming Numbers – On Wednesday morning, The Walt Disney Company made the bold claim that its Direct-to Consumer division (Disney+, Hulu, ESPN+) became profitable for the first time, a full quarter ahead of original projections. Walt’s frozen head is probably doing backflips right now despite the suspended animation. Yet look a little closer and it seems as if Disney is trying to pull a fast one. The company is likely making its D2C profitability claim off EBIT (earnings before interest and taxes) because operating income (earnings after wages, taxes, interest, etc.) was still in the red this past quarter. Operating income is a better marker of profitability overall and the company did manage to shrink these losses by 96% YoY.
UCAN Disney+ ARPU shrank 3% QoQ despite the region boasting the highest yield customers. Disney+ Core (UCAN + International excluding Hotstar) saw its ARPU shrink 1%. Disney+ only added 200,000 subscribers last quarter and the company projects “modest” growth among Disney+ Core subs next quarter.
Sure, operating income will likely be in the black next quarter for true profitability. But that’s mostly from cost-cutting rather than organic growth. The company is obviously hoping that September’s password sharing crackdown will offset the churn resulting from yet another price hike. But there doesn’t seem to be a tangible long-term strategy other than doing what others in the industry have already done.
2. Disney’s Franchise Fatigue – Speaking of Disney, Star Wars and Marvel are trending in the wrong direction overall. The average Season 1 global demand for the three most recent Star Wars live action series has dropped 17.3% compared to the first three, with the peak demand down 13.4%. Marvel has struggled at the box office lately outside of Deadpool & Wolverine. Bringing back the Russo Brothers to direct the next two Avengers films, as well as casting Robert Downey Jr. as Doctor Doom, sends a message of fragility. 2010s nostalgia is a finite resource with which to prop up 2020s entertainment. Disney’s failure to develop live-action franchises alongside Disney and Star Wars over the last 15 years has resulted in an overreliance on core IP, leaving the company vulnerable to the types of creative cold streaks we saw in recent years. Franchise IP are the engines behind the famous and elusive flywheels the industry is always after. We’ve yet to see Bob Chapek or Bob Iger 2.0 reignite that ember with something completely new, which puts a ceiling on the company’s long term growth prospects.
3. What Is Disney’s Sports Streaming Strategy? – One more Disney story – what the hell is going on with the company’s sports efforts? By next year, Disney will have the following products in the market: ESPN linear, ESPN+,
ESPN Flagship OTT, and Venu Sports (the joint sports streaming venture between Disney, Warner Bros. Discovery, and Fox). This feels eerily reminiscent of the brand confusion then WarnerMedia dealt with regarding HBO, HBO Go, HBO Now and HBO Max. Consumers want simplicity, convenience, and cost-effectiveness. Granted, Disney will likely enjoy immense learnings from all these different efforts that will help its sports streaming strategy long term. But in the immediate future, this poses a confusingly cannibalistic problem for its customers. Let’s not forget, Disney has been in talks for more than a year to find a strategic partner(s) for ESPN and has still yet to do so. Cable bundle fees drive legacy media and with those drying up and an unclear sports path ahead (with rising media rights and production costs), throwing everything at the wall in the hopes that something sticks doesn’t seem to be a sound battle strategy.
4.David Zaslav Is Desperate for Dealmaking – The embattled Warner Bros. Discovery CEO has seen his company’s share price drop around 70% from when the company was formed in April 2022. In an effort to try and stop the bleeding (and cash in on further pay days), Zaslav has made it painfully obvious in public comments this summer that WBD is open for M&A business. The most-discussed and expected combination dating back a few years
remains WBD and NBCU. Such a combination would create a market-leading corporate demand share of 26.8% (easily surpassing Disney’s 18.5% this quarter). Corporate demand share helps to assess the long-term viability of the top media companies as they look to both consolidate high-performing original content exclusively in-house to drive sub growth/retention as well as license revenue-driving programming externally. Comcast has a lot of cash on hand, with more coming from the Hulu sale, and can also spinoff NBCU to merge with WBD as a separate entity. And since WBD does not own a broadcast network, the regulatory hurdles would likely be less stringent. Still, such a combo would own an untenable amount of declining cable channels which is a no-go these days.
5. Don’t Let WBD Pull a Fast One With Its Subscriber totals – Though Wall Street is no longer enamored with raw streaming growth for the sake of growth, there’s no doubt that a positive subscriber trajectory paints a more
lucrative picture overall. As such, WBD is taking full advantage of that pseudo-loophole. The company had previously announced it wouldn’t report subscriber numbers for its niche streamers. Now, with the shuttering of animation SVOD Boomerang (which costs $6 per month), WBD will move the remaining subscribers to the ad-free version of Max (which costs $17 per month). Why would WBD willingly take such a significant financial bath? Because this is a sneaky way to continue juicing the company’s overall subscriber count, similar to how the acquisition of a niche streamer last quarter led some to believe that the core Max product was “growing.” Throw in the fact that WBD counts linear HBO revenues in its D2C profitability calculations, and you can see the tricky lengths the company is going to create the verisimilitude of success. Where is the Game of Thrones shame nun when you need her?!
6. Will There Be a Second Life for ‘Halo’ – Paramount+ cancelled the poorly-received big budget HALO after two seasons. Since debuting on March 24, 2022, the series is the 29th most in-demand TV show available on Paramount+ in the US and 8th most in-demand worldwide. Given the streamer’s greater emphasis on domestic business, it no longer made sense to continue. But the series is being shopped around in the hopes that it will live on within a new home. During the show’s second season, Disney+/Hulu boasted five shows within HALO’s top 15 in affinity while Apple TV+ boastedc four series in the top 15 of affinity. (As a reminder, content consumption affinity measures which titles are being watched together. In this example, it means HALO viewers were very likely to watch those shows on those platforms next). Given the bad buzz around the show and its cost, it’s unlikely to continue in its current form elsewhere. But should a miracle happen, I’d expect it to come from one of those streamers.
7. Bundles Abound, But Universal Interface Remains Elusive – This week, the Disney+-Hulu-Max bundle launched. It joins Verizon’s ad-supported Netflix/Max bundle, Comcast’s upcoming StreamSaver bundle (Peacock, Netflix, Apple TV+), the standard Disney bundle (Disney+, Hulu, ESPN+) and others in the market. Yet despite this inter-and cross-company cooperations, these bundles still don’t offer access to all of the included apps within one digital ecosystem. Consumers must still navigate between apps to unlock the full value, which is far from a seamless user experience. Of course, these companies want to maintain strict user data, ad-sales and promotion control. But this creates a confusing and frustrating viewing experience that leads to leakage to other forms of entertainment such as Spotify, YouTube and TikTok. This is yet another reason why the “Streaming Wars” is a misnomer and that the “OS Wars” are the true key to future digital dominance. Baby steps are being taken in this department – a small selection of Max programming will be available on Hulu – but recreating the simplicity of cable over the internet will
supercharge streaming’s teenage years.
8. Netflix’s International Ambitions – US audience demand for non-English programming grew consistently for five years before falling in back-to-back quarters this year. Though American preference for non-English content
may be cooling a bit, the return of Squid Game later this year will reignite interest (which has still been pretty steady – multiple non-English series ranked among the 25 most-watched TV shows in Netflix’s most recent engagement report). A whopping 61.9% of Netflix’s original library in the US is comprised of international programming, though just 17.2% of US original audience demand was devoted to such programming in Q2. Ideally, the company wants to even out that ratio in order to get more bang for its content budget buck.
One Fun Stat
• As of Q2 2024, Netflix accounts for one quarter of the world’s streaming original series. With new (or at least ‘new to you’) content necessary to mitigate subscriber churn, this volume gives Netflix a massive structural advantage. The next closest competitor in global supply share for original series is Amazon Prime Video at 9.0%, followed by Disney+ at
4.0%.
Five Key Reports to Check Out
