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Why Disney is no shoo-in for the streaming throne

May 12, 2022, 5:07 PM UTC

Investors rubbernecking at the fiery crash of Netflix’s stock price might want to take a quick peek under the hood of its chief streaming rival, Disney.

As Netflix smolders following its first net subscriber loss in a decade—shares are now down 71% year to date—Disney’s latest earnings report shows it’s not a lock to overtake the streaming sector’s top spot. And with Netflix poised to launch an ad-supported tier sooner rather than later, the heat might soon shift to Burbank.

Disney+ net subscriptions jumped by 7.9 million in the company’s most recent quarter, easily topping analyst projections of 5.2 million net adds, according to Wednesday’s earnings report. The strong showing quelled fears of a Netflix-like slowdown in subscriber growth, but the nitty-gritty details show signs of potential trouble in the Magic Kingdom.

Disney executives noted during Wednesday’s earnings call that more than half of the 7.9 million increase came from Disney+ Hotstar, its streaming service in India. Disney said it derives just 76 cents in monthly revenue per paid Hotstar subscriber, a fraction of the roughly $6.35 per month it earns off U.S., Canadian, and other international markets.

Company officials also said their direct-to-consumer business—primarily composed of Disney+, Hulu, and ESPN+—continues to hemorrhage cash. Operating losses in the first three months of 2022 totaled $887 million, up from $290 million during the same time last year, as the company makes monumental investments in expensive content. 

Disney CEO Bob Chapek didn’t seem too perturbed about those trends Wednesday. The company is profitable on the whole, with net earnings at $470 million on the strength of linear television and theme parks. Chapek said Disney+ also remains on the path to profitability in fiscal 2024, when it hopes to hit 230 million to 260 million subscribers (it had 137.7 million as of early April).

“We’re very confident that going forward, we’re going to hit both of those sub guidance and profitability guidance by bringing in the cost at a reasonable level relative to their ability to attract and retain our subs,” Chapek said.

Wall Street, however, is a bit squishier. 

As The Hollywood Reporter noted Thursday, analysts remain split on the feasibility of reaching those targets. Some maintain confidence that Disney has plenty of room to grow, especially as it launches in about 50 countries and territories in the coming weeks and preps for an ad-supported tier later this year. Others aren’t convinced that Disney can pick up its subscriber pace fast enough to meet its goals.

“We think direct-to-consumer growth was better than feared in the wake of the Netflix report, but likely not so strong as to convince skeptics [including us] that the company is comfortably on track for its fiscal year 2024 sub/profitability guidance,” Cowen managing director and senior research analyst Doug Creutz wrote in an investor note.

Disney also might have less leash to rack up huge losses on its direct-to-consumer business. While other divisions can continue to prop up Disney+ and its streaming sisters, the bear market no longer values high-growth, cash-burning units as much as it did just a few months ago.

Netflix, meanwhile, may start looking more attractive soon after an understandable correction on its stock price.

The streaming king is already profitable, with net income of $1.6 billion in the first quarter of 2022. The parent companies of Disney+, Paramount+, Peacock, and other streaming services, by contrast, are losing hundreds of millions of dollars each quarter on those platforms as they try to catch up. 

Media reports also show Netflix is moving aggressively toward adding a lower-cost plan with ads—an option that could help reverse subscriber losses and bring in billions in ad revenue—and cutting back on lavish spending. Building out an ad infrastructure will certainly take time, but Netflix has proved its ability to pivot quickly over its 25-year history.

Disney still has an inside track to toppling Netflix. It just won’t be a magic carpet ride getting there.

Want to send thoughts or suggestions for Data Sheet? Drop me a line here.

Jacob Carpenter

Correction, May 12, 2022: This article has been updated to correct the year cited for the first-quarter operating loss of Disney’s direct-to-consumer business. It was 2022. 

NEWSWORTHY

Crypto keeps dropping. Rattled cryptocurrency markets remained shaky Thursday, as the value of top tokens continued to tumble and the world’s largest stablecoin briefly lost its intended $1 peg. Bitcoin prices dropped another 4% and Ethereum values sank 10% over a 24-hour stretch, as buyers cooled on the two largest coins by market cap. Tether, a stablecoin with an $82 billion market cap, briefly fell to 95 cents early Thursday morning before rebounding to 99.7 cents by early afternoon. The drop followed the collapse earlier this week of stablecoin TerraUSD, which remains well off its theoretical $1 peg, and related token Luna, which is virtually worthless after trading at more than $80 last week.

Taking on Apple. Google’s hardware ambitions became clearer Wednesday, when the company touted its new Pixel-brand watch and tablet, as well as its latest smartphone model and wireless headphones, the Associated Press reported. The devices, which won’t be available until fall 2022 at the earliest, put a Google spin on products largely pioneered by Apple in recent years. The Alphabet unit also unveiled a prototype for artificial intelligence–enabled glasses, though company executives said they have no immediate plans to sell a mass-market version. 

Shopping for an IPO. Instacart acknowledged Wednesday that it has taken initial steps toward an initial public offering, though the grocery delivery company could still opt to remain private after an exploration period, the New York Times reported. Instacart boomed during the pandemic, but the San Francisco–based company has struggled to find its footing as growth in the grocery delivery market slowed. Investors also have soured on newly public companies in the past several months, a trend that could work against Instacart launching an IPO.

Another SEC-Elon showdown. The Securities and Exchange Commission is investigating whether Elon Musk violated federal rules by failing to timely disclose his large stake in Twitter earlier this spring, the Wall Street Journal reported Wednesday. It’s not immediately clear whether the SEC would levy any significant penalties against Musk, though regulatory experts said any violations likely would not derail the Tesla CEO’s planned $44 billion acquisition of Twitter. Federal rules mandate that shareholders must disclose their stake in a public company once it exceeds 5% of its shares. Musk missed the disclosure deadline by 10 days, according to his regulatory filings.

FOOD FOR THOUGHT

Fully in control. Lina Khan’s job got a whole lot easier Wednesday. The Federal Trade Commission chair, who has promised an aggressive antitrust campaign against large tech companies, now has a Democratic majority on the commission after the Senate confirmed Georgetown University law professor Alvaro Bedoya on Wednesday, Politico reported. By seating Bedoya, whose drawn-out confirmation process took eight months amid Republican opposition, Democrats now own a 3-2 advantage on the commission. The majority can vote to pursue more aggressive actions and lawsuits against companies that Khan has derided for wielding too much power over the tech market.

From the article:

Now Khan has the leeway to pursue a potential antitrust suit against Amazon, crack down on employers’ non-compete agreements and go after middlemen blamed for increasing pharmaceutical prices—while taking steps to protect consumer privacy. And she may be able to cause headaches for Elon Musk’s deal to buy Twitter.

It’s all part of an aggressive anti-monopoly and consumer-protection agenda that has elated progressive activists and angered many Republican lawmakers since Khan took the helm of the agency in June.

But don’t assume Bedoya will be an automatic yes on everything Khan advances.

IN CASE YOU MISSED IT

“The most terrifying thing I’ve ever seen”: Europe’s proposed online child sexual abuse crackdown slammed by cybersecurity experts and privacy activists, by David Meyer

Binance billionaire CZ urges crypto community to “go back to building real products that people use,” by Christiaan Hetzner

Billionaire Sam Bankman-Fried has lost half his net worth in 2022, but he says the crypto market isn’t going to zero and will recover with stocks. “Crypto markets have mostly stabilized,” by Taylor Locke

Buying the dip or catching a falling knife? Cathie Wood scoops up bombed-out Coinbase shares, by Christiaan Hetzner

Meta, TikTok, and thousands of major websites are found swiping data you enter on forms—even if you don’t hit submit, by Sophie Mellor

These are the new tech hubs of the post-COVID era, by Tristan Bove

Apple iPod sellers cashing in for thousands of dollars on nostalgia-fueled demand—but don’t expect the wave to last, expert warns, by Chloe Taylor

BEFORE YOU GO

Keeping Austin weird. Social media might get strange in the Lone Star State really soon. The Texas Tribune reported Wednesday that a new state law prohibiting viewpoint-related censorship by large social media companies can immediately go into effect after a federal appeals court unexpectedly lifted a temporary injunction blocking it. So what does that mean for Facebook, Twitter, YouTube, and other platforms that routinely police hate speech and other unseemly utterances? Nobody knows! None of the major social media companies have announced whether they will tweak their operations or pull out of Texas following the ruling. The new law doesn’t call for fines or criminal penalties against corporate violators—just declaratory/injunctive relief and reasonable attorneys’ fees—so it will probably be status quo. But this sure doesn’t feel like the end of the story.

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