“Disney” keeps growing fast. But streaming loses $1.5 billion

Disney+ is still growing fast as the streaming service takes Walt Disney Co. into the future of entertainment. But the effort to stay dominant in the age of Netflix is costing the Burbank giant in a big way.Disney’s direct-to-consumer division, which also includes Hulu and ESPN+, on Tuesday reported an operating loss of nearly $1.5 billion, more than doubling its loss of $630 million during the same quarter a year earlier.

Armed with shows and movies from the “Star Wars” and Marvel franchises, Disney+ added 12.1 million subscribers during the company’s fiscal fourth quarter, bringing its total to 164.2 million, including cheap subscriptions from India. Including Hulu and ESPN+, Disney’s streaming operation has surpassed 235 million subscribers.

However, the losses have led the company to look at its spending and pricing in order to achieve its profitability goals. Disney in August said that it would raise its monthly fee for Disney+ by $3, to $11 a month, starting in December, while also introducing a version with commercials at the current rate of $8 a month.

Disney Chief Executive Bob Chapek said in a statement Tuesday that the company still expects Disney+ to become profitable in fiscal 2024, with losses peaking in the most recent quarter. Still, he acknowledged that inflation and a feared recession could derail Disney’s timeline for streaming profitability. During the full fiscal year, direct-to-consumer business lost Disney $4 billion.

“[W]e expect our DTC operating losses to narrow going forward and that Disney+ will still achieve profitability in fiscal 2024, assuming we do not see a meaningful shift in the economic climate,” Chapek said. “By realigning our costs and realizing the benefits of price increases and our Disney+ ad-supported tier coming Dec. 8, we believe we will be on the path to achieve a profitable streaming business that will drive continued growth and generate shareholder value long into the future.”

Disney’s chief financial officer, Christine McCarthy, told analysts that the company had reached an “inflection point” as it expects smaller losses in the coming quarters. She also signaled that Disney was looking to “rationalize” costs, with an expected slowdown in spending on content and a reduction in marketing and other expenses.

Overall, Disney posted a quarterly profit of $162 million, virtually flat with the same period a year earlier. Earnings and sales fell short of analysts’ expectations, despite a continued rebound at Disney’s massive parks business.

Excluding certain items, earnings came in at 30 cents a share, missing Wall Street projections of 56 cents, according to FactSet. Revenue rose 9% to $20.2 billion, less than the $21.3 billion predicted by analysts.

Disney shares closed at $99.90, down 53 cents. The stock dropped 7.5% in after-hours trading.

The challenges in streaming illustrate a key problem for media and entertainment companies trying to battle Netflix for subscription dollars. Creating the premium content that drives sign-ups costs billions of dollars a year. That, plus marketing expenses, means companies are losing money at a rapid clip while also cannibalizing their traditional TV and movie businesses.Warner Bros. Discovery CEO David Zaslav has made clear his opinion that beefing up an online subscription business at all costs is foolhardy, even as the company looks to combine HBO Max with Discovery+.

“The strategy to collapse all windows, starve linear [television] and theatrical [box office] and spend money with abandon, while making a fraction in return, all in the service of growing sub numbers, has ultimately proven, in our view, to be deeply flawed,” Zaslav said last week.

With that view and a $50-billion debt load, Warner Bros. Discovery has cut costs and canceled a raft of shows, including “Westworld.” Even Netflix, which has no box office or TV channels to sacrifice, has taken steps to pump the brakes on spending while shifting its model by introducing a cheaper, advertising-based tier.

Of the traditional entertainment companies diving into streaming, none has moved more aggressively than Disney, which introduced Disney+ in November 2019 at a price of $6.99 in the U.S. It grew quickly, thanks to hits such as “The Mandalorian” and “WandaVision,” but much of its subscriber count has come from India, where its Disney+ Hotstar offering costs little for viewers and brings scant revenue to Disney. The company lowered its subscriber projections after losing the streaming rights to Indian Premier League cricket matches.