Warner Bros. Discovery’s DTC Business Unit Becomes First Major Studio Streaming Biz to Post Fiscal-Year Profit

Warner Bros. Discovery’s direct-to-consumer business unit is the first studio-based streaming business (excluding Netflix) to post a fiscal year profit. WBD’s DTC business includes global Max, HBO and Discovery+ subscribers.

The media company’s DTC segment posted a fiscal-year operating profit of $103 million on revenue of more than $10.1 billion. That compared to an operating loss of $1.6 billion on revenue of $7.27 billion in 2022.

By comparison, Disney’s DTC segment, which includes Disney+, ESPN+ and Hulu, reported a fiscal-year loss of almost $2.5 billion on revenue of $19.9 billion.

NBCUniversal’s Peacock streaming service generated an operating loss of $2.75 billion in 2023 on revenue and costs of $3.4 billion and $6.1 billion, respectively.

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Paramount Global, which reports fiscal-year results on Feb. 28, saw its DTC segment post a nine-month operating loss of $1.17 billion on revenue of $14.9 billion.

Paramount+ Ups Q3 Subscriptions by 2.7 Million to Reach 63 Million Globally, Segment Loss Falls Below 2022 Level

Paramount Global Nov. 2 reported that its branded Paramount+ subscription streaming service added 2.7 million net paid subscribers in the third quarter ended Sept.30, to end the period with 63 million subs worldwide. The subscriber gain offset a sub loss of 1.3 million in Latin America due to distribution issues.

Streaming subscription revenue, which also includes BET+ and Noggin, increased 46% to $1.3 billion, driven by subscriber growth and pricing increases for Paramount+, and revenue from pay-per-view events. Paramount+ revenue alone grew 61%, driven by subs growth and
increased advertising revenue at its ad-supported tier. The streamer’s average revenue per user increased 16% year-over-year.

Segment operating losses dropped to $238 million on revenue of $1.69 billion, from an operating loss of $343 million on revenue of $1.23 billion in the prior-year period.

“We continue to execute our strategy and prioritize prudent investment in streaming while maximizing the earnings of our traditional business. In Q3, we successfully grew direct-to-consumer revenue and Paramount+ subscribers, while narrowing DTC losses over 30%,” CEO Bob Bakish said in a statement.

Bakish said he now expects DTC losses in 2023 will be lower than in 2022, which he said translates into streaming investments peaking ahead of schedule.

“Looking ahead, we remain on the path to achieving significant total company earnings growth in 2024,” he said.

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Disney+ Brain Trust Among Companywide Staffing Cuts

NEWS ANALYSIS — On Dec. 10, 2020, Disney held its annual Disney+ Day, about a year after the SVOD service launched. Of the 18 speakers that day, seven have left the company — many as the result of re-installed CEO Bob Iger’s mandate to cut 7,000 jobs and save about $2.5 billion in non-content related operating costs.

Executives who have exited since that Disney+ Day in 2020 include CEO Bob Chapek; Kareem Daniel, chairman, media and entertainment distribution; Rebecca Campbell, chairman, international operations and direct-to-consumer; Michael Paull, president of Disney+ and ESPN+; Jerrell Jimerson, EVP, product and design; Lowell Singer, SVP, investor relations; and Kelly Campbell, the former president of Hulu, who left to assume a similar position at NBCUniversal’s Peacock streaming service.

Also gone from Disney+ (though not speaking at Disney+ Day) are Jeremy Doig, chief streaming technology officer, and Kevin Mayer, the former chairman of Disney’s direct-to-consumer business segment, where he was responsible for launching Disney+, ESPN+, and Hulu+ under Iger when the chief executive was all-in on SVOD. Mayer left the company shortly after the Disney+ launch when it became clear he would not replace Iger as CEO when and if he left.

Since Iger’s decision in 2017 to pursue a singular direct-to-consumer streaming market strategy, the objective has completely transformed the company’s business, in addition to hemorrhaging billions of dollars.

Gone was Disney’s $300 million in annual revenue for licensing movies to Netflix, in addition to hundreds of millions more with other third-party distributors. Reigning in third-party content distribution revenue while expanding tech spending ($3 billion to acquire backend streaming provider BAMTech), has resulted in a red bottom line.

The DTC business has lost $9.6 billion since 2020. The segment is expected to generate another billion dollar loss through March 31. In other words, streaming has lost about 87% of Disney’s record 2019 $11 billion pre-pandemic box office.

While Disney contends the DTC business will be profitable by the end of 2024, the uncertainty has rattled Wall Street, which forced the entire media ecosystem to re-examine streaming without rose-colored glasses.

With the exception of Netflix, no media-owned DTC service is profitable. NBCUniversal disclosed April 27 that it expects Peacock to lose $3 billion in 2023. That platform has just 22 million paying subscribers. Disney+ hasn’t been able to turn a profit with more than 161 million global subs at the end  of 2022 (down 2.4 million subs from the end of 2021).

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Yet, despite Iger’s DNA all over Disney’s streaming fiscal black hole, many analysts contend the executive is the right person to right the Disney’s streaming ship.

“While we are encouraged by Bob Iger’s strategic vision for Disney, this is clearly the first phase in [it’s] transformation, which will require adept execution,” Jessica Reif Ehrlich with Bank of America wrote in a February note. “Bob Iger has a long, strong track record which provides confidence he will manage this transition.”

“Our increased estimates … reflect greater confidence in the company’s trajectory under the leadership of returning CEO Bob Iger,” echoed analyst Michael Nathanson.

CEO Bob Iger: Less Is More, Diversity of Content Distribution, Including Home Entertainment, Among New Disney Focuses

Disney CEO Bob Iger is putting a singular focus on operating costs companywide as media companies re-evaluate existing “all-in streaming” business strategies that have led to skyrocketing fiscal losses and cooling subscriber growth, including a $1 billion loss at Disney’s direct-to-consumer digital segment in the most-recent quarter.

Speaking March 9 at the Morgan Stanley Technology, Media and Telecom Conference in San Francisco, Iger, who prefaced his renewed business outlook by claiming to be bullish on streaming, said the company has to figure out SVOD pricing in order to justify ongoing spending.

Iger in February announced companywide job cuts totaling 7,000 as part of an effort to reduce operating costs by more than $5.5 billion.

Calling streaming video the “ultimate” a-la-carte entertainment proposition, Iger said the ease with which consumers can jump and switch between streaming platforms at minimal or no cost has to be rationalized when it comes to subscription pricing.

“In our zeal to grow global subs, I think we were off in terms of that [too low] pricing strategy, and we’re now starting to learn more about it to adjust accordingly,” he said.

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When asked about the status of Disney’s majority stake ownership of Hulu, and opportunity to buy Comcast’s remaining 33% stake for a minimum $27.5 billion in 2024, Iger said the current “very tricky” economic environment informs Disney’s future plans with Hulu.

“Before we make any big decisions about our level of investment, our commitment to our business, we want to understand where [Hulu] could go,” he said.

In addition to growing digital subscribers across Disney+, ESPN+, Hulu and Hulu+ Live TV, Iger says renewed focus on platform content spending and distribution has to be put on the table and out of the streaming basket.

Indeed, when David Zaslav became CEO of the new Warner Bros. Discovery media company, he was surprised to find that 60% of the content on HBO Max was not being viewed. That’s a reality apparently not lost on Iger, who abruptly replaced his successor — and big streaming champion — Bob Chapek late last year in part because of ballooning streaming costs and losses.

While admitting Disney+ will not see the “meteoric” subscriber growth experienced upon launch in late 2019, Iger contends the platform remains relatively new in international markets, excluding India, which comprises more than a third of all Disney+ subscribers.

The CEO criticized his predecessor’s business restructuring that he called, “basically a giant revenue-generating division,” that separated distribution, advertising, sales, subscriptions, etc., from content creation, where Iger said all the money was being spent.

“I happen to believe there needs to be a direct connection between what’s being spent and what’s being earned from a revenue perspective,” he said. “It’s all about accountability. It’s about understanding the marketplace, so when you make decisions on spending, it’s tied directly to revenue generation and vice-versa.”

Iger claimed too much was being spent on marketing platforms and not enough on marketing content and programs.

“That needed to be put back together not just for sanity purposes, but also because there are opportunities to reduce expenses,” he said.

“I don’t think it was as efficient as it could have been … or as targeted as it should have been,” he said, in relation to the $3 billion in content spending cuts. “The emphasis needs to be on quality of content, not volume.”

As a result, in addition to delegating operational, marketing and financial responsibilities to business segment senior executives, Iger wants to revisit distributing content across all channels, including legacy home entertainment.

Disney reported a Q1 operating loss of $212 million on revenue of $2.46 billion in its “content sales/licensing and other” segment, in part due to a dearth of home entertainment releases. The decrease in home entertainment results were due to lower unit sales of new release titles, reflecting fewer releases, and catalog titles.

Iger believes the push toward streaming theatrical titles undermined the licensing and retail businesses.

“Home video, at one point as we called it, was extremely lucrative for our company,” Iger said. “We’re looking at all of that [again].”

The CEO believes content can co-exist on traditional distribution platforms and streaming without damaging either due to differing platform audiences.

“It’s already clear to us that the content exclusivity that we felt would be so valuable in growing subscribers was not as valuable as we thought,” Iger said. “While eventually everything will migrate to streaming. We’re not there yet.”

As Losses Skyrocket, Media Companies Scramble to Turn Around Direct-to-Consumer Fiscal Fortunes

A series of sobering fiscal losses, which include ongoing rollout marketing campaign expenses, technology investments and content licensing fees, among other costs, have prompted the big subscription streaming services to raise their monthly subscription prices, in addition to turning to advertising revenue to offer lower-priced subscription fees.

“We believe several media companies are set for strategic pivots as the industry inches toward seemingly inevitable consolidation,” Jessica Reif Ehrlich, analyst with Bank of America, wrote in a note. “Streaming operators are shifting toward a more-balanced approach that includes a focus on driving profitable growth.”

Profitable growth has proven elusive.

Paramount Global Feb. 16 reported a loss of $1.8 billion in its direct-to-consumer businesses in 2022, which include the Paramount+ subscription streaming platform. That widened more than 81% from a loss of $992 million in 2021. NBCUniversal’s Peacock streaming platform widened its 2022 operating loss to $2.5 billion, from $1.7 billion in 2021, while Disney expects D2C losses to hit $2.5 billion this year.

Disney’s unexpected $1.5 billion D2C losses in fiscal Q4 (ended Oct. 2, 2022) effectively marked the beginning of the end for former CEO Bob Chapek, rattled longtime Disney bull MoffettNathanson.

“Rarely have we been so incorrect in our forecasting of Disney profits,” Michael Nathanson wrote in a note last November, a sentiment that didn’t change in January 2023. “Investors and executives have accepted that streaming is, in fact, not a good business — at least not compared to what came before,” he wrote.

Even Netflix, which was the only SVOD service in the world to generate a profit in 2022 ($55 million, down from $607 million net income in 2021), continues to lose money in its international operations. Collectively, U.S. streaming services lost nearly $11 billion in operating losses in 2022.

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To Michael Pachter, media analyst at Wedbush Securities in Los Angeles, the burgeoning losses may attract media attention and cause collective handwringing on Wall Street, but how does it actually impact the bottom line?

“It’s really a function of accounting,” Pachter said in an email. “What does a movie on Disney+ actually cost Disney? If it’s in the former Starz pay-one window, the cost can be determined. If it’s in catalog, hard to know.”

The analyst believes SVOD services can right the fiscal ship by raising monthly subscription fees, which for Disney+ Pachter contends is around $11 to $12 monthly.

“None of the others will ever be profitable,” he said. “HBO Max is profitable already because it has a core business and charges more [$15.99 without ads] than everyone else, with far more limited content that is parsed out one week at a time. The others would be wise to emulate that model.”

CFO: WarnerMedia’s Simultaneous Theatrical/Streaming Release Strategy is a ‘Failed Experiment’

Since the combination of the former WarnerMedia with Discovery into the current Warner Bros. Discovery media company, senior management has taken strides to distance itself from former CEO Jason Kilar’s controversial decision in 2021 to release all Warner Bros. theatrical releases concurrently on HBO Max.

New CEO David Zaslav, who quickly ended the practice this year, has publicly blasted the strategy as shortsighted and ignoring the legacy appeal of the box office and its impact on distribution channels down the food chain.

Speaking Nov. 17 at the Morgan Stanley European Technology, Media & Telecom Conference, CFO Gunnar Wiedenfels reiterated those sentiments, saying Warner Bros. Discovery continues to embrace a direct-to-consumer ecosystem that does not cannibalize existing distribution channels.

“We have seen the opportunity of [the company] as one integrated media platform being able to use all the revenue streams and cash registers in an entire ecosystem. And I think the market has come to that conclusion as well,” Wiedenfels said.

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The CFO said that diverse distribution of content produces diverse data Warner Bros. Discovery can use to better consumer awareness across the media giant’s brands and content. Specifically, Wiedenfels said Warner Bros. Pictures re-embracing a 45-day theatrical window helps monetize movies across myriad channels.

“The idea of collapsing all that into one streaming window is a failed experiment,” he said. “Why would we not be optimistic about certain legacy monetization streams?”

Widenfels says the company’s mission is to eliminate consumer barriers to content, whether that be accessing content through a company app, through Amazon or old school linear TV.

“We’re going to be open to all those forms of distribution … to get the best return for every dollar of content spend,” he said.

CFO: Disney’s Direct-to-Consumer Business to Up Q1 FY 2023 Revenue by $200 Million Despite Disney+ Hotstar Sub Decline

On the heels of a record operating loss in its direct-to-consumer business segment, Disney believes the worst is behind it as it readies the Dec. 8 launch of a less-expensive ($7.99) monthly ad-supported subscription plan, in addition to enacting price hikes on existing services.

The company will raise the price of its current ad-free option 38% to $10.99 ($109.99 annually), while the Disney bundle (Disney+, ESPN+ and Hulu) with ads will cost $13.99 monthly, and $19.99 monthly without ads.

Hulu with ads will remain priced at $7.99 per month, while Hulu without ads will still cost $14.99 per month. ESPN+ will remain at $9.99 month.

Disney CFO Christine McCarthy

On the Nov. 8 fiscal call, Disney CFO Christine McCarthy said the company’s new ad-supported streaming services would bow with 100 advertisers, but contribute little to the first quarter’s operating results, ending Dec. 31. That said, McCarthy believes the DTC’s peak fiscal losses are in the rearview mirror and that fiscal results should improve going forward.

“We expect DTC operating results to improve by at least $200 million [in the first fiscal quarter] compared to Q4 2022,” McCarthy said, adding the operating improvement in Q2 would be even higher.

“The prices should begin to modestly benefit [average revenue per subscriber] and subscription revenue in Q1,” she said, adding that the Disney+ price hike revenue gains wouldn’t begin to be realized until Q2.

“We don’t expect the launch of the ad-supported tier of Disney+ to provide a more meaningful fiscal impact until later [in the fiscal 2023] year,” McCarthy said, adding that while content costs will increase between Q4 and Q1 2023, marketing costs should decline to help offset that spending.

The executive believes Hulu and ESPN+ will continue to add subscribers in Q1, while core Disney+ subs will only increase slightly in Q1, reflecting tougher comparisons against Disney+ Day performance and the timing of content releases and promotions. McCarthy expects that trend to reverse in Q2 as new content is released in international markets.

“At Disney+ Hotstar, we are currently expecting subscribers will decline in Q1 due to the absence of the [Indian Premier League] cricket rights,” she said, adding that the company expects to see some subscriber stabilization in Q2.

Earlier this year, Paramount Global, through its Indian Viacom18 subsidiary, wrested exclusive streaming rights to the IPL from Disney for $3 billion.

Disney+ Hotstar remains the streaming platform’s largest (37.3%) subscriber base with more than 61 million subs out of 164.2 million worldwide.

Disney Q2 Home Entertainment Revenue Slips Due to Lower Catalog Sales

The Walt Disney Company May 11 said “content sales/licensing and other” revenue, which includes packaged media and transactional VOD, declined 3% to $1.9 billion, compared with $1.84 billion in revenue in the prior-year period. Segment operating income plummeted almost 95% to $16 million, from $312 million a year ago. The decrease in operating income was due
to lower TV/SVOD distribution results and, to a lesser extent, a decrease at home entertainment due to lower sales of catalog titles in the current quarter.

In the prior-year period, top-selling Disney titles included Mulan and Soul, while animated musical Encanto and residual revenue from Shang-Chi and the Legend of the Ten Rings were the top-selling packaged-media titles in Q2.

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The decrease in TV/SVOD distribution results was due to a decrease in sales of episodic television content driven by higher sales of “Modern Family” and “How I Met Your Mother” in the prior-year quarter.

Speaking on the May 11 fiscal call, CFO Christine McCarthy said the decline in home entertainment revenue included management’s “strategic decision” to re-direct Disney titles to direct-to-consumer streaming channels, rather than legacy retail channels.

“As a reminder, these results are deliberately aligned with our decision to utilize our content on our own direct-to-consumer services,” McCarthy said.

ViacomCBS Streaming Push Sends Stock Tumbling Off Paramount Mountain

NEWS ANALYSIS — ViacomCBS is doing more than putting all of its eggs into the Paramount brand basket. The media giant is spending money it doesn’t have in an effort to match competing streaming services’ (i.e., Netflix, Disney+ and HBO Max) content spend on original content.

The day after ViacomCBS senior management announced a corporate name change to Paramount and plans to increase content spending to $6 billion from $4 billion, investors responded by driving the share price down 20% in Feb. 16 premarket trading.

Analysts piled on their concerns despite the Paramount+ streaming platform adding 7.3 million subscribers in the quarter to bring its total sub count to 32.8 million since launching in 2014 as CBS All Access.

“While we can see how Paramount+ with its breadth of content, including sports, kids, general entertainment and news offerings, helps differentiate the streaming service from its peers, we have a hard time looking at the [direct-to-consumer] revenues and investments on a standalone basis,” analyst MoffettNathanson wrote in a note.

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Indeed, streaming subscription revenue grew 84% year-over-year, reflecting strong sub growth from the company’s streaming subscription services. Streaming advertising revenue grew 26% year-over-year, driven by growth in advertising on Pluto TV and Paramount+.

At the same time, expenses related to over-the-top video distribution skyrocketed. Costs at Paramount’s TV production and pay-TV operations increased 38% and 32%, respectively, to $3.5 billion each. Revenue increased around 18% to $3.7 billion and $4 billion, respectively.

“We see another transitional cycle of ratcheted streaming investments at Paramount+, alongside Showtime Anytime and Pluto TV,” Tuna Amobi, analyst with CFRA Research, wrote in a separate note. “We see modest progress on the road to recovery from the pandemic disruption of the ads and TV/film content businesses.”

Disney Ups Hulu Online TV Price, Adds Free SVOD Options

Disney has sent emails to Hulu + Live TV subscribers informing them about a $5 monthly hike to their online TV service subscription. The price hikes, which go into effect Dec. 21, raise the ad-supported option to $70 from $65, while the ad-free tier increases to $76 from $71 monthly.

Key to the price hikes: Subscribers get free access to Disney+ and ESPN+, which along with the Hulu SVOD platform, make up Disney’s direct-to-consumer business across 179 million combined subscribers.

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Hulu+ ended the most recent fiscal period (Oct. 2) with 4 million subscribers, which was down from 4.1 million subs during the previous-year period. The online TV platform still tops a market that includes YouTube TV, Philo, Sling TV, Fubo TV and AT&T TV, among others.

The price hikes following last month’s $1 Hulu SVOD fee surcharge, which now costs $7 with ads and $13 without advertising.