Reaction to Disney Fiscal Q4: Subscriber Gains Mean Growing Pains

After announcing Disney+ added a jaw-dropping 12 million subscribers last quarter, you’d think Disney stock would be soaring on the results. Maybe if it was 2020 or even 2021, but not in 2022. Shares sank as much as 10% in the after-hours trading session Tuesday. 

Disney was the final major streaming player to release results, and if there’s anything we learned this media earnings season, it’s that streaming subscriber growth is no longer the only metric by which investors and analysts measure success.  

Disney’s direct-to-consumer segment’s operating losses totaled a whopping $1.47 billion, up from $630 million in the same period last year. Disney+ is nearing its three-year anniversary, and since its launch the streaming service has lost more than $8 billion. Not to mention, average revenue per user (ARPU) for core Disney+ fell 5% from a year ago.

None of this was good, but at least management is aware. CEO Bob Chapek acknowledged that Disney had been aggressive over the past three years with its content spend in order to gain a lead in the streaming wars. “We knew record growth would result in short-term losses,” he said on the conference call. 

But those days are hopefully in the rearview mirror. Chapek noted that Disney’s DTC business reached peak losses in Q4, and those losses will begin to shrink in Q1. And in case you were worried, Disney+ is still on track to reach profitability by fiscal 2024. 

There are two major strategic initiatives coming in exactly one month on Dec. 8: A new ad-supported tier and price increases.  

Disney expects both efforts to prop up sagging ARPU, and the price increases are also projected to help with profitability. While some may argue that Disney has the pricing power to charge extra bucks for its streaming products, the price hikes come amid an economic slowdown.  

The best-case scenario is that the consumers who don’t want to pay the higher fee choose to opt for the new ad-supported product instead of leaving the service outright.  

But the chances of outright cancellation of Disney+ could also increase, especially because Disney+ is still offering promos with partners like Verizon. Once those promotions expire, it’s unclear how many of those free subscribers convert to paying. 

It’s not an apples-to-apples comparison, but remember what happened to Netflix following its latest price hike at the end of March? There were certainly other factors at play, but the next two quarters following the price hike were some of the worst in Netflix’s history with two consecutive quarters of subscriber declines. Not to mention the carnage the stock suffered as a result. It’s all about timing. 

Disney’s price hikes and ad-supported tier are long games. The benefits of those moves won’t be realized for at least a couple of quarters. And that’s not to say they don’t have the potential to be massive long-term value drivers for the company. It’s just a really challenging time to be asking consumers to pay more money.   

Maybe Disney doesn’t think the recession will be nearly as bad as others predict. Judging by Disney’s theme parks, the consumer looks healthy. Disney’s theme parks had a record year, and CFO Christine McCarthy said the company is still seeing robust demand and expects a strong holiday season in Q1.  

On the other hand, Disney could also be sorely underestimating the strength of its businesses and the loyalty of its fans. It’s hard to say now, but the biggest year lies ahead for the media behemoth following a very strong 2022. And Chapek’s strategic execution will under a microscope, as investors pray Disney doesn’t suffer the same growing pains as rival Netflix.