Disney’s streaming spend will ‘be in $30 billion zip code’ for next few years: Analyst
Bloomberg Intelligence Senior Media Analyst Geetha Ranganathan joins Yahoo Finance Live to weigh in on Disney's fourth-quarter earnings results and why she thinks the company will hone in on streaming over the next few years.
Video Transcript
SEANA SMITH: Another mover after hours, Disney. That stock in the red, off just around 6% after missing on both the top and the bottom lines. Also reporting that it lost $1 and 1/2 billion in its DTC business. Let's talk a little bit more about that. For that, we want to bring in Geetha Ranganathan. She is Bloomberg's Intelligence senior media analyst. Geetha, it's good to have you. So I guess, first, just your reaction to the top and bottom line miss and also what we're seeing play out after-hours right now.
GEETHA RANGANATHAN: Yeah, thank you so much for having me. And I think a big part of the miss was really on the parks side. So we were expecting to see something like about $1.9 to $2 billion in operating income for parks. They came in about 20% lower, at about 1.5 billion. So it's going to be really interesting to see what they're saying right now on the call, whether that's really got to do more with the cost side and inflationary pressures on the cost side, or whether it's really a demand issue or a little bit of both.
On the streaming side, they actually delivered really, really good streaming subscriber momentum because they reported over 12 million subscriber additions for their Disney+ product, which was well over 30% above expectations. But I think, as you pointed out again, the narrative here is shifting away from just subscribers to profitability. And they did report $1 and 1/2 billion, as you mentioned, in losses and $4 billion for the whole year, for whole of fiscal 2022, although they did still promise that they will break even to deliver slight profitability in fiscal 2024. So, again, we need a little bit more context there. But I think those are the two things that are really of weighing on the stock in after-hours.
RACHELLE AKUFFO: So, Geetha, what are you going to want to hear in the earnings call that's going to give you perhaps a bit more hope, given what we've seen with some of these disappointing figures here for this earnings season?
GEETHA RANGANATHAN: So, really, I want to kind of get a deeper dive into why we are seeing that past weakness. Was it because of Hurricane Ian? Because, yes, we were expecting that to have a little bit of an impact on the bottom line. The parks were closed for about two to three days. But maybe it's something much more than that.
But more than anything, I think what we consistently asked management, just kind of given the recessionary environment, just kind of given these macroeconomic fears building, we've repeatedly asked management about whether they expect the parks to perform well, whether they expect bookings to kind of sustain momentum. And they've repeatedly said yes. So kind of a little bit intrigued about what's really going on there. But at the same time, we've also heard a lot about inflationary pressures in terms of even labor unions kind of demanding wage increases and things like that. So I'm not sure if that is what is contributing, and of course, would love to hear more from management about those issues.
DAVE BRIGGS: Just anecdotally, I was at Disney Parks in Q3. Every single hotel room was full-- never seen anything like it. The Disney+ story is an interesting one. Lost now $8 billion total since they started that. But there are some positive notes-- gained 12 million subs. And when you look at Hulu, ESPN+, and Disney+, there are 235 million subs. That is more than even Netflix. But how do they get to profitability by the end of '24? Is it cutting the content spend, or is there something else?
GEETHA RANGANATHAN: Yeah, it's a little bit of everything. So content spend is still going to be pretty high. This is a company that spends about $32 billion on content-- or at least, they spent $32 billion on content in fiscal 2022. They're going to be in that $30 billion zipcode for the next couple of years.
But it's really about getting efficiency in that spend. It's about getting more operating leverage in your model, as you kind of scale up on subscribers. And that's what they're hoping to do, and kind of become more efficient and get more ROI with every content dollar spent. And that's kind of the game plan in terms of getting to that breakeven profitability and hopefully generating profits. We're seeing Netflix kind of do that. Obviously, Disney wants to take a page out of that playbook as well.
SEANA SMITH: Geetha, how much do you think the ad tier that's launching next month and also the price increases, how much do you see that moving the needle in order to get to profitability?
GEETHA RANGANATHAN: I think it moves the needle pretty substantially because one thing is it really kind of boosts RPU. We saw a little bit of downward pressure on the Disney+ RPU coming into this quarter. I think a lot of that might have to do with the ad numbers being a little bit low, especially for the Hulu product, as well as for ESPN+. But with them now introducing this new ad tier for Disney+, as well as kind of raising those prices pretty substantially almost 40%, it's obviously going to support the top line, and then that obviously flows to profitability in the bottom line as well. So I think it's absolutely very, very critical. And they've done it at the right time.
RACHELLE AKUFFO: And Geetha, as you look at the losses that we're seeing now in after-hours trading-- they're down about 6%, the stock-- do you think investors have this risk priced incorrectly?
GEETHA RANGANATHAN: Yeah, I think what we were really looking at was parks kind of being able to defy that malaise, if you will. We were seeing them report some really, really stupendous numbers in terms of park profitability. Remember, the past few quarters, they were reporting profits that were well above pre-pandemic levels. And we were seeing per capita spending somewhere like 40%, 45% above pre-pandemic levels. So I think investors might have kind of thought that they can extend that.
And there's been some really good steps taken by management, whether it's price increases, whether it's more operational efficiencies. But I guess the costs finally caught up. We'll have to wait and see what they actually say. And then, of course, the question is whether the demand can really hold. I mean, you spoke about parks being full, hotels being full. That's exactly what management is saying, but maybe bookings are waning off a little bit.
