Image: Deadpool & Wolverine, Disney/Marvel
In the dynamic world of entertainment media, paradoxes abound. Nowhere is this more evident than at The Walt Disney Company. On one hand, Disney boasts an unparalleled brand, a treasure trove of intellectual property, and a track record of blockbuster success. On the other, its streaming division faces challenges, and its core franchises show signs of fatigue. Let’s explore the ailments currently plaguing Disney and the upside that may be obscured because of it.
Mickey Mouse and the Misleading Streaming Numbers
Disney continues to dominate in US corporate demand a share, a metric from Parrot Analytics that assesses the long-term value of a company’s content library. This dominance has fueled Disney+’s explosive growth in its early years, maintained Hulu’s domestic trajectory and reengaged Netflix as a licensing partner. But it hasn’t yet made Disney’s streaming efforts impervious to market forces.
In its most recent earnings report, Disney stated that its Direct-to-Consumer division turned a profit for the first time, a full quarter ahead of original projections. That’s good! It’s exactly what Wall Street has been pushing for over the last two years, right?
Yet a deeper dive into its financials suggests a slightly different story. The company is including Disney+, Hulu and ESPN+ together under the D2C profitability umbrella despite separating Sports and Entertainment elsewhere in its financial reporting. Operating income — which measures earnings after wages, taxes, interest, etc. — was still in the red this past quarter (-$19 million). This metric is a better marker of profitability overall and the company did manage to shrink these losses by 96% year-over-year.
Disney+’s average revenue per user (ARPU) in its highest yield markets (US and Canada) shrank 3% quarter-over-quarter. Disney+ Core (which includes UCAN and international consumers, excluding Hotstar subscribers) saw its ARPU shrink 1%. Disney+ only added 200,000 subscribers overall last quarter and the company projects “modest” growth among Disney+ Core subs next quarter.
Operating income will likely be in the black next quarter for true profitability, but that’s mostly due to 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 it’s unclear how else the company plans to improve margins and differentiate itself from the pack other than doing what others in the industry are already trying.
Disney’s Franchise Fatigue
As a big fan myself, it pains me to say that 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%; She-Hulk, Secret Invasion, Ms. Marvel and Echo performed below Loki, WandaVision, The Falcon and the Winter Soldier and Moon Knight. Marvel has also 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, reflects a yearning for perceived safety. Nostalgia for the 2010s 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 over-reliance 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 that ember reignited with something completely new and successful, which threatens to put a ceiling on the company’s long term growth prospects.
What Is Disney’s Partnership/Sports Streaming Strategy?
Disney’s proliferation of offers will soon include (deep breath): ESPN linear, ESPN+, ESPN Flagship OTT, Venu Sports (the joint sports streaming venture between Disney, Warner Bros. Discovery, and Fox), the Disney+-Hulu-Max bundle, the Disney+-Hulu-ESPN+ bundle and the individual services themselves. There is value is providing consumers with a number of access points at different prices in order to maintain flexibility and reach. Some of these bundling packages also pose immensely attractive retention power thanks to complementary libraries with little content overlap. But 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. Disney will likely enjoy significant learnings from all these different efforts that will help its sports and streaming partnership strategy long term. But in the immediate future, this poses a confusingly cannibalistic problem for its customers. The company’s ongoing search for a strategic ESPN partner further underscores the challenges in navigating the evolving sports media landscape.
Despite these challenges, Disney’s robust parks and experiences division provides a financial cushion for experimentation. The company has time to refine its streaming strategy, revitalize its franchises, and find the right path forward. However, without a clear vision and decisive actions, Disney risks squandering its competitive advantage. Disney’s position as a media giant is undeniable, but its future success hinges on its ability to address the challenges facing its streaming business and to cultivate new franchises.
