Disney’s path to subscriber success is outside the US; less clear way to profit

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A smartphone with a “Disney” logo is seen on the keyboard in front of the words “Streaming Service” in this illustration taken on March 24, 2020. Image: Reuters/Dado Ruvic

The quarterly results of Walt Disney Co. show a path to subscribe a quarter of a billion subscribers: international expansion. But the furious growth of customers outside the United States is not so sure that it will generate windfall profits.

Disney’s streaming earnings beat Wall Street estimates for the company’s Disney+ video service, but the costs of the business failed to impress some investors and analysts.

The shares fell 3% to $102 a share after the company reported its second-quarter results on Wednesday, reflecting new skepticism about the streaming business in the wake of Netflix’s recent stumbles.

“Of course Disney added more subscribers than Netflix. On the other hand, they lost a lot of money to get there,” said Richard Greenfield, media and technology analyst at LightShed Partners. “Wall Street is increasingly focused on profits.”

Disney+ ended March with 138 million subscribers, 7.9 million more than the previous quarter. The service is set to launch in 42 countries this summer, a Disney source said, expanding its global reach to 106 countries. It will produce approximately 500 programs in local languages ​​from around the world to attract subscribers in these markets.

CEO Bob Chapek said Disney+ is on track to meet the company’s projected goal of 230 million to 260 million subscribers by September 2024.

But more than half of its quarterly subscriber earnings came from Disney+ Hotstar in India, where subscribers pay an average of 76 cents a month. In the United States, customers pay $6.32 on average.

Operating losses from the company’s streaming business, which also includes ESPN+ and Hulu, rose to $877 million in the quarter, triple the loss from a year ago, reflecting higher programming and production expenses. Programming spending is expected to increase by more than $900 million in the third quarter as the company invests more in original content and sports rights.

“We think great content will drive our subs, and those subs at scale will drive our profitability,” Chapek said during an investor call. “So we don’t see them as necessarily opposites. We see them as somewhat consistent with the general approach we have presented.”

Paolo Pescatore, an analyst at PP Foresight, predicted that Disney+ will continue to grow as it expands into new markets and offers compelling content to stream, such as the Oscar-winning animated film “Enchantment.” But that may not be a financial success.

“Clearly there is too much focus on net adds for all providers,” Pescatore said. “Unfortunately, given the nature of streaming, there will be high levels of churn that will affect all providers. This, in turn, will affect revenue and the bottom line.” JB

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