Key Takeaways
- Disney+ outperformed expectations recently by surpassing Netflix subscriber numbers three years ahead of schedule.
- Disney is investing heavily in 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 of investors, some companies just operate 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 felt this was an extremely aggressive projection. Not only had Netflix been the first to market, they had a big headstart and their own outstanding growth trajectory.
Fast forward to today, and Disney has over-delivered, officially passing Netflix's subscriber count three years early. Let's look at what impact this has on Disney stock.
Netflix vs. Disney
The Disney streaming service, comprised of Disney+, Hulu and ESPN+, reported 221 million customers at the end of its fiscal year third quarter of 2022, beating out Netflix's subscriber count of 220 million for the same period. Disney+ added 14.4 million customers during the quarter, beating expectations of only 10 million new subscribers.
In contrast, Netflix reported 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 that is obsessed with global subscribers, something that investors should be more aware of moving forward.
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The gray area in reporting these subscriber numbers is phantom accounts. Many Netflix subscribers share their passwords with others, which impacts the overall subscriber count. Disney+ subscribers certainly do the same. However, because Netflix has begun to lose subscribers, it has stated that it will start to crack down on password sharing, which is another surefire way to continue this trend. Ask all those lonely record executives from 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 the prices for its services would increase. Disney+ with ads will cost $7.99 a month, the current cost of ad-free service, pushing the price of their ad-free service up to $10.99 by late 2022.
Depending on the subscription plan, Hulu is getting a $1 to $2 price increase. Netflix also announced an increase in pricing, with its basic plan increasing from $8.99 a month to $9.99, standard tier increasing from $13.99 to $15.49 a month, and 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 such as Disney+. When Netflix announced its price increase in March 2022, consumers were starting to deal with the early stages of inflation and becoming more sensitive to increases in prices across the board. Netflix chose the wrong time to increase its pricing as Disney faced little backlash when it followed suit a short time 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 the fiscal year 2022, up 8.56% from the same period the previous year, despite the loss in subscribers. The company has been operating since 1997 and has come a long way from its beginning as a DVD rental service that mailed out movie hard copies a few at a time. Of course, the company matured and made very good decisions to partner with movie studios to access the latest films and investing 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 diminishing in real time.
The company has 25 years of experience in streaming media and has done a lot of work developing an intuitive interface that's easy for users to understand. This, along with partnering 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 of the content the subscriber receives and the quality of the video.
These features mean that Netflix is well-positioned to profit even after losing a substantial portion of its subscriber base. In contrast, Disney is in the early stages of its build-out and burning cash to secure its CDN and position itself as a reliable provider of quality streaming content.
How Disney+ impacts earnings
Disney's streaming channels cost Disney a total of $1.1 billion in the third quarter of the fiscal year 2022, which was $300 million higher than expected. Part of the cost was from the amount of money Disney is putting into creating original content to draw in and keep viewers. Another part was from investing in the technology to deliver the content to subscribers. Disney's Chief Financial Officer Christine McCarthy stated that the losses from Disney+ will reach their peak during the 2022 fiscal year. The company expects its streaming services to become profitable by the 2024 fiscal year.
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The revenue per user dropped by 5% in the current quarter from North American customers switching to cheaper package options. Disney offers all three channels in a bundle with no ads for Disney+, and with ads for ESPN+ and Hulu for $14.99 a month, $12.99 for the bundle with ads, and $19.99 for all three streaming services with no ads in sight.
Overall, Disney+, Hulu and ESPN+ have had little impact on earnings for Disney 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. As a whole, Disney reported profits that beat Wall Street's expectations. Its total revenue for the previous nine months was $21.5 billion, an increase of 26% over the same time the previous year, and an operating profit of $3.6 billion. Shares of Disney rose 6% after the news. Investors view 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 nicely from the pandemic, with people returning to parks and cruise lines in droves. The parks are profitable again, and will continue to be for the foreseeable future. Visitors continue to spend money at Disneyland and Disney World despite apparent belt tightening due to inflation. It's worth noting that theme park attendance is cyclical, so visitor counts are likely to drop at some point. However, Disney is not relying on its parks and cruises alone to drive profitability.
The purchases of the Star Wars franchise, Pixar, Marvel and the Muppets greatly expanded Disney's reach into the world of entertainment, in spite of a treasured back catalog. It also owns the ABC network and ESPN, two properties already well-established and respected by the time Disney bought them. Disney Studios continues to create new properties in the spirit of Walt Disney's animated movies, which also helps keep revenues flowing. The company is a media giant that continues to be run by savvy CEOs who look to deliver the Disney experience without wearing out its customers.
Speaking of ESPN, there are rumors about whether Disney should keep or sell off this portion of the company. For many years ESPN has been a significant driver of income for Disney, with income estimates of $11 billion annually, though Disney does not officially break out this number, publicly. The issue with the broadcaster is that it costs more money for the rights to air live sports, and the channel is losing subscribers. This could result in less ad revenue and turn a profitable segment into a losing one.
Finally, it is crucial to know that Hulu is a jointly owned venture by both Disney and Comcast, with Disney owning 66% of the streaming service and Comcast the remaining 33%. As part of this agreement, Disney has the option to buy out Comcast and completely own Hulu beginning in 2024. However, the price tag for the buyout will be steep, as the minimum agreed-upon amount is $27.5 billion. Disney and Comcast have stated they would like 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 stock price falls in value. While the future of Disney is strong, there will be volatility surrounding what the company decides to do with ESPN and Hulu. While many experts don't think this will significantly impact Disney's long-term prospects, it could lose subscribers if the Disney bundle goes away and Disney+ is the only option.
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