Disney CEO Bob Iger hemorrhaged 4 million streaming subscribers in its fiscal second quarter after his company’s India-based Hotstar video platform lost the rights to Indian Premier League cricket matches.
Now its David Zaslav’s turn to bleed business after his heavily criticized rebrand of Max, which involved dumping one of the most recognizable names in entertainment—HBO—when merging the respective platforms of Warner Bros. and Discovery in May.
The bane of any streaming service is churn: subscribers signing up one month to take advantage of a special offer before jettisoning their membership shortly afterwards, often in favor of a rival platform. Now Warner Bros. Discovery reported on Thursday that some 1.8 million paying customers set sail for other shores in the second quarter over the preceding three months, and it’s a good bet some of those who left may have even wound up at Comcast’s rival platform Peacock.
“We said we were going to build a strong, sustainable direct-to-consumer strategy focused on profitable growth as opposed to chasing subs at any cost,” Zaslav told investors.
The problem for Zaslav, the most overpaid CEO in America last year according to one study, is that the bulk of those subscribers lost—roughly 1.3 million—were the more lucrative U.S. customers who generated on average $11.09 in revenue per user during the quarter versus just $3.65 for its international subscribers.
“While we have seen some expected subscriber disruption, we have experienced lower-than-expected churn throughout this process,” he offered.
The problem all media giants face now is the immensely profitable business model of linear broadcasting is broken because an increasing number of cable subscribers are cutting the cord so they can view content on demand rather than when a network exec decides on their behalf.
Over time, the economics of the business will deteriorate, which is why Iger is considering a yard sale—possibly selling stakes in ESPN and ABC—to maximize the value while he still can.
Disney’s moment of truth next week
Offering the convenience of at-home or on-the-go streaming has been the industry’s natural answer to the shift in consumer habits. And, at least in theory, selling subscriptions comes with the added benefit of recurring revenue that is supposedly stable and predictable in an age of volatility, but in practice the economics aren’t holding up.
Yet no one apart from Netflix—the first to market—has been able to escape the rivers of red ink.
“We estimate they are all losing money, with combined 2022 operating losses well over $10 billion, versus Netflix’s $5 [billion] to $6 billion annual operating profit,” Netflix said in October about the competition.
At least Warner Bros. Discovery’s streaming division managed to nearly break even with a negligible $3 million, a half billion-dollar improvement over the previous year’s period. But the company still predicts that only its U.S. streaming business, which accounts for little more than half its streaming customers, will be profitable this year.
Now streaming execs have raised the white flag in capitulation, with Disney leading the retreat.
After Disney incurred over $10 billion in cumulative streaming losses since launching Disney+ in 2019, the company pledged last August to introduce a new lower-price streaming tier supported by ads. Then, in February, it unveiled $3 billion in production budget cuts.
Finally Disney even announced an impairment charge of up to $1.8 billion to reflect the cost of removing shows from its streaming platform that increase the cost of its cloud hosting bills, including some of its own original programming.
Investors will find out just how Disney+ is faring when the company reports fiscal third-quarter results on Aug. 9. But executives already warned its streaming business will likely see operating losses widen by around $100 million over the previous quarter to around $750 million owing to a shift in the timing of marketing expenses.
