How Will Disney Make Money on Streaming?

The Walt Disney Company will report its quarterly earnings on August 6^th.

Wall Street is carefully evaluating Disney right now in the aftermath of the company’s explosive growth.

Disney stock has soared to a relative base of $120 in recent days, which is in stark contrast to the years before then.

Right now, Disney is riding a high, while investors debate whether the growth is artificial.

And there’s one key topic that keeps everyone guessing. It’s the end-all, be-all for Disney right now.

So, how will Disney make money on streaming? Here’s what we know.

A Growing Concern

This story is in the news right now because CNBC’s Paulina Likos posted a (paywalled) analysis of Disney streaming.

I obviously cannot cite any of that work since it’s behind the paywall, but I will say this.

The ultimate conclusion is that $DIS, Disney’s stock, should enjoy a touch more growth.

However, CNBC doesn’t view it as going more than a few dollars higher.

Whether you agree with this conclusion or not, it’s an opinion shared in certain circles.

Disney’s post-tariff stock recovery proved more dramatic than most, which has inexplicably caused concern.

And the key criticism remains Disney’s current duality as it transitions from Linear Networks to streaming.

Currently, Disney is trying to have its cake and eat it, too, which always struck me as the obvious move.

What’s the point in having cake if you’re not gonna eat it? But Disney is taking heat for its greed.

You don’t notice that sort of criticism on Wall Street often, yet here we are.

Investors worry that Disney won’t make enough from streaming to offset its rapidly eroding Linear Networks revenue.

A recent report from Nielsen’s The Gauge has everyone in the industry freaked out right now.

Cable and network television are dying at a faster rate than almost anyone had projected.

Since Disney still earns roughly $10 billion annually from Linear Television, it’s facing dramatic losses.

One day soon, Disney will be making half that money from Linear Networks based on the current rate of erosion.

CEO Bob Iger envisioned Direct-to-Consumer (DtC), Disney’s streaming division, as the long-term replacement.

Alas, the early years have been…rough.

A Loss Leader Turns a Profit

Under former CEO Bob Chapek, Disney aligned its divisions to mitigate anticipated streaming losses.

There was nothing nefarious about the move at the time, although Chapek abused it later.

During Fiscal 2020, the first partial year of Disney+, DtC lost $2.8 billion.

I consider that statement a bit misleading since the total included Disney’s International division, too.

The following year, the streaming services witnessed their losses improve to $1.7 billion.

DtC was still losing money, although it wasn’t as significant as the previous year.

And the explanation was that the pandemic trapped most consumers in their homes.

So, we as a society watched a lot more shows on streaming. Everyone (but maybe Chapek) knew this behavior was temporary.

Still, Disney dramatically increased its content spend to encourage more people to subscribe.

The strategy worked, albeit at a high price. At one point, Disney’s annual content spend approached $34 billion.

At the time, Disney’s total revenue was $82.7 billion. So, yeah. It was waaaay too much.

The personal equivalent would be like somebody earning $50,000 a year buying a Lamborghini.

During the final quarter of fiscal 2022, DtC lost nearly $1.5 billion…in three months.

At that point, Disney fired Chapek and brought back Iger. And there was much rejoicing.

The latter’s mission statement was to fix Disney’s finances after DtC lost more than $4 billion in fiscal 2022.

Within a calendar year, Iger narrowed those losses to $2.6 billion, which was remarkable.

Then, in a reversal of fortune that doesn’t get anywhere near enough praise, DtC turned a profit for the quarter ending in March 2024.

Iger turned a black hole on the balance sheet into a modestly profitable business.

But the Worrisome Word is ‘Modestly’

That’s where Walt Street gets involved. But the concern requires a bit of context.

During the first fiscal quarter of 2020, which occurred during the final three months of 2019, Linear Networks did fine.

This division earned $7.6 billion in revenue and $1.6 billion in profit. And it didn’t have Fox fully integrated yet.

During Disney’s most recent quarter, the same division’s operating income fell to $769 million.

Yes, that’s less than half, and yes, conventional television has fallen that far in just five years.

Soon, Disney could feasibly be earning less from its Linear Networks than from DtC, and that’s the problem.

Disney’s streaming services must grow quickly enough to offset the lost revenue from cable and network television.

Otherwise, Disney will have a gap on its balance sheet, one large enough to make the stock price too high.

For its part, DtC showed a profit of $336 million, which is night and day better than just three years prior.

However, that rate of growth isn’t as accelerated as Linear Television’s rate of decline.

Disney faces a math problem here, and solving it will make all the difference in the world to Wall Street. So…

How Will Disney Make Money on Streaming?

And that brings us to the big question investors want Disney to answer.

Currently, Disney+ claims 126 million subscribers, while Hulu lists 54.7 million and ESPN+ 24.1 million.

But the key to everything is a trick Disney learned from Hulu + Live TV, a service that costs $79.99 per month.

In one of the most underrated media stories of the modern era, Hulu + Live TV nets Disney $99.44 per user per month.

Disney sells a service for $80 yet it returns the company almost $100 in profit. How is that possible?

The answer involves streaming advertising, the unclaimed gold rush of digital services.

For years, streaming businesses made no attempt to distribute ads for fear of alienating customers.

Lately, subscribers have shown that they’ll happily watch ads if it leads to lower subscription fees.

This data surprised Netflix so much that the company recanted on its “no commercials ever” policy.

Similarly, Amazon risked a class action lawsuit by adding advertising to its formerly free content.

Do you know which company is universally renowned for its digital advertising silo?

Yup, it’s Disney, and more improvements are in the offing as we speak.

Also, Disney has started selling merchandise straight from its Disney+ app and licensed store deliveries, too.

Disney wants to take control of your living room while you watch streaming content.

The company will feed you or bring you snacks, and it’ll sell you merch while you watch, too.

Meanwhile, you’ll apparently agree to watch ads if it means you can watch Moana 2 on Disney+ for cheap.

Will this strategy work? We’ll know more when Disney announces its next digital earnings in a few days…

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Feature Photo: Disney