As TV advertising flags, streaming steps in at Disney

Disney posted steady third quarter results with modest revenue increases ahead of more expensive subscriptions, but CEO Bob Iger is beginning to look beyond linear TV for the company’s next phase of growth.

Why Disney matters

One of the emerging connected TV titans, Disney+ is out of its initial growth phase and into a state of relative maturity. Still, Iger, who was brought back in as CEO to help balance the books of the company and its cash-burning streaming operation, needs to cut costs and find profits by the target date of September 2024. The financial challenge comes amid steady declines in the highly profitable TV network business.

The race for streaming profitability comes from more than an arbitrary deadline. The money from TV networks that had helped to fund expansion is beginning to dry up as audiences move away from traditional TV. Among its roster of TV properties, sport network ESPN appears to be the remaining jewel in the crown, capable of retaining audiences and advertisers.

“Moving forward, I believe three businesses will drive the greatest growth and value creation over the next five years,” Iger told investors. “They are our film studios, our parks business and streaming, all of which are inextricably linked to our brands and franchises.”

What’s going on with TV

Traditional TV, it appears, is on the way out despite being highly profitable:

• “The trends being fuelled by cord-cutting are unmistakable,” Iger told investors. Revenues for US channels decreased 4% in the quarter versus the same period last year, which the company attributes to lower advertising revenue for its ABC network and others.
• International channels are down 20% year-on-year, a result of lower advertising revenue, with the loss of Indian Premier League rights the main contributor. Overall, linear networks revenues are down 7%, according to a press release.
• ESPN, while also profitable in its current TV form, appears to be on a clear trajectory toward becoming a streaming proposition. Yet its position as an advertising destination remains solid, explained interim CFO Kevin Lansberry: “While domestic linear advertising revenue declined year-over-year, ESPN ad revenue increased by 4%, demonstrating the relative strength of sports.”

Pivot to connected TV advertising

The company’s direct-to-consumer streaming operation is moving in the right direction financially as revenues grow healthily (+9%) and losses shrink off the back of price hikes and lower marketing spend. The aim remains to get the service turning a profit by late 2024.

The company revealed price increases to the ad-free tiers of both Disney+ and Hulu by over 20%, starting in October. In November, the company will also extend its advertising tier to parts of Europe and Canada. Advertising on these channels will be fundamental to attaining profitability and stability:

•  “As of the end of Q3, we’ve signed up 3.3 million subscribers to our ad-supported Disney+ option. Since its inception, 40% of new Disney+ subscribers are choosing an ad-supported product,” said Iger.
  
• Subscribers overall grew quarter on quarter but fell below analyst forecasts with a 24% decrease in subscribers to Disney+ Hotstar in India, and a 1% decrease in North American subscribers. Again, the loss of IPL rights in India was the reason for the downturn globally; Disney+ alone, meanwhile, grew modestly.
• Revenue per subscriber for US Disney+ grew from $7.14 to $7.31, largely through gains in per-subscriber ad revenues.