The days of heavy losses in Disney ‘s streaming division appear to be over. But the days of profitability on par with industry leader Netflix may remain elusive for a bit longer. The good news for Disney shareholders is that CEO Bob Iger doesn’t need to get there overnight for the company’s stock to gain ground. Disney has acknowledged Netflix as the gold standard in streaming, with profit margins the company would “love” to have, Iger said last year. Netflix’s operating margins in 2023 were 20.6%, up from 17.8% in the prior year. The goal for 2024 is 25%. Disney’s streaming margins, while still negative due to losses and nowhere near Netflix’s, have improved significantly in recent quarters and are now on the doorstep of an important milestone. The company reiterated alongside its earnings report this month that its combined direct-to-consumer unit — home to all its streaming properties including flagship Disney+, Hulu, and ESPN+ — is on track to reach profitability in its fiscal 2024 fourth-quarter ending in September. That marks a significant turnaround for the business, which had become a drag on Disney’s overall profitability and stock price as losses mounted and pandemic-fueled subscriber growth cooled. In the 12 months ended Oct. 1, 2022 , Disney’s DTC segment lost $4 billion as the company spent heavily on producing shows and movies and marketing. That was around the time Wall Street began to sharpen its focus on profits due to the Federal Reserve’s interest rate-hiking campaign. Subscriber growth was no longer all that mattered to investors, as had been the case since Disney+ launched in late 2019 amid the early days of the streaming wars and unknowingly just before Covid hit. “We invested too much way ahead of possible returns,” Iger conceded at the MoffettNathanson media conference last week. Iger returned as CEO in November 2022 , less than two weeks after Disney reported that massive streaming loss . DIS .SPX 5Y mountain Disney’s stock performance compared with the S & P 500 over the past five years. Simply reaching profitability is hardly the finish line. Disney management has said it plans to achieve double-digit operating margins in its DTC segment over the long term and feels a sense of urgency getting there. The exact timeline is uncertain, though, and in recent calls with investors, Iger did not provide details on the trajectory. Estimates on Wall Street vary. Some firms such as Morgan Stanley predict double-digit margins will happen in Disney’s fiscal year 2026. JPMorgan’s model assumes it will be a fiscal 2027 event. In any case, further progress on streaming profitability is crucial for the stock to shake off its malaise. Disney has underperformed the S & P 500 in each of the past three calendar years, though so far in 2024 its stock is outpacing the index by more than two percentage points. “The most important driver of growth to [Disney] shares is its DTC segment,” Morgan Stanley wrote in a note last month. To be sure, Netflix’s significant head start in streaming, having launched more than a decade before Disney+, helps explain its more robust profitability. It also has a larger and more engaged subscriber base working in its favor. Other key differences: Netflix has just one streaming brand while Disney has been managing multiple, including some international-only properties like Disney+ Hotstar in India. Disney’s streaming overview Disney+ is its flagship streaming service across the globe. The company has an entertainment service called Star+ in certain Latin American countries, but it’s in the process of winding that down and merging it with Disney+. Disney+ Hotstar offers entertainment, family and sports programming in India, Malaysia, the Philippines and Thailand. It’s merging the service into a joint venture with Reliance Industries. Disney owns 67% of domestic-only service Hulu thanks to its 2019 acquisition of 21st Century Fox. It’s in the process of buying the remaining 33% from CNBC parent Comcast. ESPN+ offers live sporting events and other on-demand sports content. Against that backdrop, it understandably may take Disney time to reach Netflix-like margins in streaming. But as investors, we want to see it happen. Here’s a closer look at three main ways Disney can move further in that direction. More revenue and engagement Disney’s streaming business faces a significant challenge compared to Netflix: It generates less average revenue per subscriber, a key metric for investors often abbreviated as ARPU. That’s despite the fact Disney’s cost per subscriber for Disney+ and Hulu are “almost identical” to that of Netflix, TD Cowen analyst Doug Creutz said in an interview. In the January-to-March quarter, reported on May 7, Disney+ core ARPU was $7.28, up 6% from the final three months of 2023. Disney+ core is defined as the 117.6 million subscribers in the U.S., Canada, and remaining international markets, excluding India. Netflix, on the other hand, generated an ARPU of $11.79 in the March quarter, according to FactSet’s consolidated data. Netflix ended the period with 269.6 million paid subscribers, the company said in its first-quarter earnings release on April 18. Hulu’s ARPU is roughly on par with Netflix’s global figure but with far fewer subscribers, at just 45.8 million. ESPN+ had an ARPU of $6.30, with 24.8 million subscribers, in the three months ended March 30. The ARPU discrepancy on Disney+ core helps explain why Netflix is much more profitable than Disney’s streaming business. It also shows there’s plenty of opportunity to close the gap. One way to do so is to raise the price of Disney+ beyond what it has already done in recent years. When the service launched in November 2019, it cost $6.99 a month, or $69.99 annually. Following a series of hikes , the standalone service, without ads, now costs $13.99 a month, or $139.99 annually. “I would argue they probably priced it too far in the hole because they probably could have driven subs at a higher price point, but they’re going to have to raise price,” TD Cowen’s Cruetz said. Disney’s pricing strategy has for more than a year included an ad-supported version of Disney+, which costs $7.99 a month. It rolled out in the U.S. in December 2022, but only started to hit international markets in the fall of 2023. Disney makes more money off a user when they opt for the ad-supported tier, with management saying last year that it has improved ARPU in the U.S. Expanding the offering to overseas markets, it added, is a “stepping stone on our path to profitability.” Increasing user engagement is another important part of Disney’s margin-expansion plan. The No. 1 way to do this is by having compelling content that users want to watch, which can help entice subscribers to stick around, reducing what’s known as “churn.” Used to describe people who cancel their subscription, churn is costly and pressures margins. More engagement can lead to better advertising opportunities on the platform, as well. For example, Disney’s decision earlier this year to allow bundle subscribers to access Hulu content within the Disney+ app is all about boosting engagement. “The combination of those two is an engagement play more than anything else,” Iger said at the MoffettNathanson event. To achieve Netflix-style margins, KeyBanc Capital Markets analyst Brandon Nispel said Disney must invest in more content to attract a global paying audience. Still, Disney will need to strike a fine balance between spending enough to create compelling content to better engage worldwide audiences, but not too much that it will eat into profits. Disney acknowledges international expansion as a growth opportunity for streaming. Outside of the U.S., management has targeted key markets across Europe, Africa, and West Asia. Given that Disney’s streaming business has rolled out pretty much everywhere across the globe, Cruetz said moving forward “it’s about driving more penetration in those markets.” He added, “Partnership with local distributors can be helpful here, too.” Analysts at Morgan Stanley echo this sentiment, writing in an April to clients that Disney “will need to drive significant net additions outside the U.S. through international content development and improve the technology and product underpinning its streaming services globally.” Partnerships A little help from partners can help Disney boost streaming margins. These partnerships can take on different shapes, involving either competing streamers or a company that sells a different service — like a cell phone plan — paired with access to Disney’s services. In general, the streaming industry is likely to see increased partnership activity, Creutz of TD Cowen said. The latest is a matchup with Disney and HBO’s parent Warner Bros Discovery , whose flagship streaming service is called Max. On May 8, the companies announced a streaming bundle that grants access to Disney+, Hulu, and Max in one service. The bundle will be available in the U.S. this summer. Pricing has not yet been disclosed. The bundle can help reduce spending on content and combat churn. “Being bundled with other video services also allows you to not have to spend quite as much on content — you can rely on the other guys’ content to a certain extent to keep churn down,” Creutz said. “While your ARPU probably goes down, your users go up, and you don’t have to spend as much on marketing, so your costs go down. Disney has a different kind of partnership with cable TV provider Charter that takes advantage of a wholesale distribution model. Beginning in January, subscribers to Charter’s Spectrum TV Select were given access to the ad-supported version of Disney+ at no additional cost; access to ESPN+ arrived in March . The agreement was the result of a carriage renewal dispute between the two companies last year. “We obviously have gotten added subscribers and in addition to that, cannibalization has not been very high. And, overall, the engagement has been good,” Iger said on the May 7 earnings call. “As for it being a template for the future, I don’t think I would go to that level. Each of these deals in many ways has to be architected to the specific needs of the partner as well as our needs … but it’s been a successful deal for us and for Charter.” The Disney-Charter deal is what’s known as a “wholesale” agreement, while the traditional approach of an individual signing up directly with the streaming provider is considered a “retail” subscriber. “Going at it alone with your own product and trying to reach the customer and retain them – that’s a model that has a very difficult time working,” KeyBanc’s Nispel said, in explaining the benefits of partnerships. Disney may receive fewer dollars per subscriber that arrive through a wholesale partnership, but the costs to acquire them are generally lower. The trade-off can benefit margins because marketing is a significant expense for streamers. That’s especially true considering Charter subscribers receive access to the ad-supported version of Disney+. In that case, the more people using the service the better because that helps Disney “generate more revenue on the advertising front,” Iger said the recent conference. Monetize password sharing Disney will soon crack down on password sharing across its streaming services, as Netflix did before it. On its recent earnings call, Iger said Disney is “heartened” by Netflix’s success on its initiatives, which began last year and helped reignite subscriber growth for the company. Disney expects its crackdown, which begins next month in “select markets,” to contribute to growth, as well, Iger said. It will roll out more broadly across the world in September. Disney+ accounts suspected of improper sharing will be presented with new capabilities to allow their borrowers to start their own subscriptions. Account holders who want to allow access to individuals outside their household will be able to add them to their accounts for an additional fee. “I feel good about this being a necessary and very, very productive next step in terms of rolling out the technology that we need to get to the double-digit margins [previously discussed],” Iger said on the call. In a note last month, Wells Fargo said the password-sharing crackdown helps calm investor nerves around Disney’s ability to grow subscribers. Analysts see the initiative adding about 4 million subscribers in both fiscal 2025 and 2026. The firm’s operating margin target for 2026 is 12%. (Jim Cramer’s Charitable Trust is long DIS. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. 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The atmosphere at the Disney Bundle Celebrating National Streaming Day at The Row in Los Angeles on May 19, 2022.
Presley Ann | Getty Images Entertainment | Getty Images
The days of heavy losses in Disney‘s streaming division appear to be over. But the days of profitability on par with industry leader Netflix may remain elusive for a bit longer.
The good news for Disney shareholders is that CEO Bob Iger doesn’t need to get there overnight for the company’s stock to gain ground.
