Before we get to today’s main topic—the slight cracks emerging in Disney’s streaming strategy—a couple of spare thoughts on the biggest story of the day.
Meta notified employees Wednesday morning that it’s laying off about 11,000 staff members, or 13% of its workforce, the company’s first major restructuring in its history. Mark Zuckerberg took responsibility for the cuts, admitting that he failed to foresee how many people would scale back their app usage as life returned to pre-pandemic normal.
The big question, still unanswered, is how Meta will apportion those layoffs. In his message to employees, Zuckerberg said every part of the company would feel some pain, particularly singling out recruiting and business teams. But as discussed here Monday, Zuckerberg’s prized yet massively unprofitable Reality Labs unit—responsible for developing augmented reality, virtual reality, and metaverse technologies—likely won’t feel the brunt of job cuts.
Also, some perspective on Meta’s layoff count is in order. While 13% is certainly a significant proportion of the Facebook and Instagram parent’s workforce, these layoffs only return Meta to its employee headcount as of early 2022. And while Reality Labs accounts for a sizable chunk of hiring over the past year, Meta’s headcount in marketing and sales divisions increased 14%, and general and administrative units grew by 30% during that time.
All of which to say: Meta should be able to restructure without needing to dramatically revamp its master plan.
Now, onto the House of Mouse.
Disney disappointed Wall Street a bit on Tuesday, announcing fiscal fourth-quarter earnings that showed record losses in its streaming business, which covers Disney+, Hulu, and ESPN+. The unit recorded operating losses of nearly $1.5 billion for the quarter, up from roughly $1.1 billion in the prior quarter.
CEO Bob Chapek and his leadership team attributed the mounting woes to rising content costs and some unexpected areas of revenue softness, including dips in ad sales for Hulu and Disney+ Hotstar, its service for Indian subscribers.
Chapek continued to maintain his position that Disney’s streaming business will reach profitability by 2024, with the prior quarter representing peak losses. He cited the December dawning of price hikes and arrival of an ad-supported Disney+ tier, along with continued subscriber growth and some realignment of costs, as reasons for optimism.
For now, Chapek still makes a viable case for streaming profitability.
Disney+, which accounts for 70% of the company’s 235.5 million streaming subscriptions, has been a bargain at $7.99 per month when compared with top rivals, suggesting there’s room for raising prices. Even after the December price hike to $10.99 per month for ad-free programming, Disney+ will remain notably cheaper than Netflix ($15.49 per month for ad-free service) and HBO Max ($14.99 per month). Disney also should be able to stave off too much churn resulting from the price hike via its ad-supported tier, which will run $7.99 per month.
At the same time, Disney doesn’t appear to have hit market saturation quite yet. The company added another 14.6 million subscribers in the prior quarter, beating analysts’ expectations. Half of that growth came from international markets where subscribers pay top dollar for the service. (Disney’s Indian customers get Hotstar at deeply discounted prices.)
Still, tiny fissures are popping up in the foundation of Disney’s strategy—which could develop into ruptures if the ground moves under the streaming industry.
Disney’s price hikes arrive at a rather inopportune time, as the world economy wavers in the face of stubborn inflation and geopolitical strife. Chapek acknowledged as much Tuesday, saying for the first time on an earnings call that his profitability timeline assumes “we do not see a meaningful shift in the economic climate.”
Disney’s heady content spending also puts added pressure on attracting and retaining consumers. Headed into a period of subscriber uncertainty, Disney executives said their content budget for the current fiscal year will be in the low $30 billion range, a fractional uptick from the prior year. For context, Netflix officials expect to spend roughly half that amount on content this year.
Wall Street also left Tuesday pondering the meaning of a 10% drop in average revenue per Disney+ subscriber in the U.S. and Canada. Corporate executives partially attributed this to more customers opting to bundle Disney+, Hulu, and ESPN+, which prompted some analysts to question whether subscriber growth totals are a bit inflated.
As PP Foresight analyst Paolo Pescatore said, according to Reuters: “Expect more bumps ahead and further losses in the streaming business, as there’s no silver bullet to profitability.”
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Jacob Carpenter
