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Have Disney shares won the streaming wars?



While Disney claims to have overtaken Netflix in subscriber terms, there is more to the numbers than first meets the eye.

Source: Bloomberg

Disney (NYSE: DIS) shares have shot up by 28% over the past month to $122, as the entertainment titan benefitted from strong results and an ever-so-slightly less hawkish Federal Reserve.

However, Disney stock was at $197 as recently as March 2021, and the current recovery comes after more than a year of sustained share price falls.

Disney share price: Q3 2022 results

Disney’s Q3 results were a strongly positive affair. Total revenue increased by 26.3% year-over-year to $21.5 billion, 6% above the Refinitiv average analyst estimate. And encouragingly, net income rocketed by 53% to $1.4 billion, while diluted earnings per share was $1.09, up from $0.80 a year ago.

Its Parks, Experiences, and Products division was the star performer, delivering $7.4 billion of revenue, 9% higher than analyst estimates. CEO Bob Chapek enthused ‘we had an excellent quarter, with our world-class creative and business teams powering outstanding performance at our domestic theme parks.’

While it’s tempting to attribute the parks performance to post-pandemic demand, the company argued the strength of the results meant it was ‘far more resilient and far more long-lasting’ than just a temporary boom.

Chapek’s was keen to highlight the ‘big increases in live-sports viewership, and significant subscriber growth at our streaming services. With 14.4 million Disney+ subscribers added in the fiscal third quarter, we now have 221 million total subscriptions across our streaming offerings.’

disney 2
Source: Bloomberg

Disney vs Netflix: market share struggle

Chapek’s focus on subscriber numbers is a thinly veiled reference to streaming rival Netflix. The trailblazer has lost nearly 1.2 million subscribers so far this year, and now has only 220.7 million, on paper fewer than Disney.

Further, Netflix’s share price has suffered similarly to Disney’s, having collapsed from $690 in October last year to $174 a month ago, before recovering to $249 today.

And while Disney has adjusted its predicted 2026 subscriber base down by 15 million to 245 million due to the loss of Indian premier league cricket rights, the company expects to grow far faster than its older rival.

As PP Foresight analyst Paolo Pescatore posits, this is a ‘pivotal moment in the streaming wars... Disney is at a different phase of growth to Netflix. There are still millions of users to acquire as it continues to expand.’

Given Disney’s massive back catalogue, rights to the world’s two largest cinematic franchises Marvel and Star Wars, and multi-billion-dollar revenue derived outside of its streaming business, it’s tempting to think the battle with Netflix is over.

But before Chapek pops the champagne, there are four reasons to think otherwise.

First, the way each company counts their subscriber numbers is very different. Disney tallies each service separately, so that one household paying for Disney+, Hulu, and ESPN+ is counted as three subscriptions. Disney has penetrated far fewer households than first appears, and certainly fewer than Netflix.

Second, Disney generates only 39% as much average revenue per user (ARPU) as Netflix in its home market, the US and Canada, with an ARPU of $6.27 compared to Netflix’s $15.95. In the Asia Pacific region, it’s even worse, with Disney+ Hotstar’s ARPU at $1.20 per month, compared to Netflix’s $8.83.

These low numbers are predominantly down to its 2019 launch strategy, when it undercut Netflix by charging subscribers only $6.99 a month for Disney+.

Now Disney is attempting to increase the cost of all four of its services — Disney+, Disney+ Hotstar, Hulu and ESPN+ — to get its ARPU numbers up. From December, Disney+ subscribers can either accept adverts or see their costs increase by 37.5% from $7.99 to $10.99 a month.

In this recessionary environment, Disney may struggle to get anywhere close to Netflix’s ARPU without haemorrhaging subscribers.

Third, while Netflix has lost subscribers this year, Kantar research indicates ‘Netflix consistently has one of the highest Net Promoter Scores…there is a long-standing group of loyalists who are less likely to churn…the platform outperforms competitors on satisfaction with both content and interface related features.’

While Netflix is irritating customers over account sharing, it holds massive reserves of goodwill that Disney may be underestimating.

Finally, Netflix’s high ARPU means it made a healthy $5.1 billion profit in 2021. Disney’s streaming service is still loss-making and expected to be so until fiscal 2024. In fact, Disney’s direct-to-consumer (streaming) division lost over $1.1 billion in Q3, up from a $293 million loss in the same quarter last year. By contrast, Netflix saw Q2 net income of $1.44 billion.

MoffettNathanson analyst Michael Nathanson notes the industry is pivoting to a ‘new wave of sobriety…the focus for streamers is return on invested capital and free cash flow generation.’

And as debt becomes more expensive, Disney’s promises of streaming jam tomorrow may become harder to sell.

Charles Archer | Financial Writer, London
16 August 2022


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