Disney narrows streaming losses as it bets on investment in Epic Games

Source: Disney

Disney lost 1.3 million Disney+ streaming subscribers in its first fiscal quarter but reduced the streaming service’s losses by US$300 million – part of a strong set of results that may help it fend off the unwelcome attentions of activist investor Nelson Peltz.

Disney simultaneously announced that it was taking a US$1.5 billion equity stake in Epic Games and would collaborate on an all-new games and entertainment universe that will further expand the reach of Disney stories and experiences.

Disney CEO Bob Iger meanwhile confirmed that ESPN would be offered as a standalone streaming service in the autumn, while “the full suite” of ESPN channels would be made available as part of the new sports streamer JV announced with Fox and Warner Bros. Discovery.

Bob Iger

The ESPN standalone service in the US will be bundled with Disney+ and Hulu, while the wider US sports offering is pitched primarily at cord-nevers.

Disney+ Core subscribers – excluding Disney+ Hotstar in India – decreased by 1.3 million in the quarter to December, which Disney said was in line with prior guidance and reflected a substantial price increase in the quarter as well as the end of the global summer promotion.

The company said it expected to reach profitability at our combined streaming businesses in the fourth quarter of fiscal 2024.

Disney expects Disney+ Core subscriber net additions of between 5.5 and six million and ongoing positive momentum in ARPU in the second quarter.

Speaking on the investor call, CFO Hugh Johnston said that domestic net adds are expected to be in the range of 7.5 million, driven by the company’s distribution deal with cable giant Charter Communications, but that international subs were expected to “decrease modestly” because of changes to wholesale deals and price hikes.

Hulu subscribers increased by 1.2 million during the first fiscal quarter. The base was up 2% year-on-year to 49.7 million, with all of the increase from SVOD-only subs, with the Live TV + SVOD base flat year-on-year at 4.6 million.

Iger said that Disney had seen “an incredible response to the beta launch of Hulu on Disney+, which has far exceeded every metric”, with the full launch to follow next month.

Direct-to consumer revenues increased by 15% year-on-year to US$5.5 billion, while linear network revenue declined by 12% to US$2.8 billion. Content licensing revenue also declined, by 38% to US$1.6 billion.

The D2C operating loss improved by 86% from US$984 million in 2022 to US$138 million in Q124.

Q1 revenues for Disney overall were flat year-on-year at US$23.5 billion, while pretax profit rose by 62% to US$2.9 billion. Free cash flow jumped from negative US$2.155 billion in the prior year to US$886 million.

Following the results, Iger told CNBC that involvement in the company’s business by activist investors like Nelson Peltz was “the last thing that we need right now” and that Disney was making solid progress. The Q1 results are likely to strengthen that case.

Disney’ board has recommended shareholders to reject Peltz’s attempt to secure board representation.

Epic Games investment

Disney’s collaboration with Epic will create a ‘persistent universe’ that will interoperate with leading game Fortnite and will additionally provide opportunities for consumers to play, watch, shop and engage with content, characters and stories from Disney, Pixar, Marvel, Star Wars and Avatar.

Powered by Unreal Engine, the universe will enable players, gamers and fans to create their own stories and experiences, express their fandom, and share content with each other, according to Disney.

Disney and Epic Games have already attracted hundreds of millions of players through Fortnite content integrations, season collaborations, in-game activations, and live events, including the Marvel Nexus War with Galactus, which drew more than 15.3 million concurrent players.

Unreal Engine is used to produce assets and content across the Disney portfolio including in the development of video games like Kingdom Hearts 3 and Star Wars Jedi: Survivor; in cinematic editing and animation for film and streaming; and in the creation of some 15 Disney Parks attractions including Millennium Falcon: Smugglers Run at Star Wars: Galaxy’s Edge.

On the Disney investor call, Iger said that the relationship with Epic Games would “create a transformational games and entertainment universe that integrates Disney’s world-class storytelling into Epic’s cultural phenomenon, Fortnite”.

“This marks Disney’s biggest entry ever into the world of video games and offers significant opportunities for growth and expansion. The new immersive universe will allow fans to unleash their own creativity and experience the Disney stories in worlds that they love in groundbreaking new ways,” he said.