Crowded market leaves streaming services scrambling for profits

Disney plans layoffs and spending cuts to make streaming profitable, while Netflix signs up Chris Rock for a live show to keep its edge.

Disney added more than 12 million new subscriptions to its streaming portfolio in the past quarter, but its direct-to-consumer unit lost almost $1.5 billion as a result, twice as much as the year before.

At 235 million, it now leads the market in the total number of subscriptions, overtaking Netflix, which reported it had 223 million users last month. But that’s not what investors want anymore – they need to see a profit.

“This raises questions about whether or not Disney's streaming business is sustainable,” Sophia Jones, an investment analyst at PiggyBank, said.

At $20.1 billion, Disney’s revenue was up by 9% this past quarter when compared to the previous year, while profits saw a 1% growth at $162 million. Both numbers were lower than projected as streaming ate at the margins of its other units, such as theme parks and resorts.

"Disney has more money than other companies to throw at content creation and direct-to-consumer offerings thanks to their other revenue streams. But I think they're slowly finding out that streaming isn't as profitable as they'd hoped, despite it being a necessity," Chris Brantner, a lead streaming analyst at Sportscriber, said.

The company said it made a “strategic” decision to invest heavily in Disney+ content and the platform’s global expansion, promising that it would achieve profitability in 2024 “assuming we do not see a meaningful shift in the economic climate.”

Cost-cutting spree

To achieve streaming profitability, Disney will have to cut costs – something its rivals are already doing.

According to Disney’s internal memo sent to executives shortly after the disappointing quarterly results were announced, the company would embark on a wide-ranging cost-saving strategy.

It would include a “targeted” hiring freeze, as well as other measures such as limiting business travel to essential trips. The memo also suggested Disney might have to let go of some of its 190,000 employees as part of its efforts to make the organization more “nimble” and efficient without sacrificing quality.

Netflix took a similar approach as its growth stagnated earlier this year. It fired about 3% of its total workforce, closed down or gave up some of its office space, and cut down on perks. It also shifted to hiring more junior staff and cutting costs on cloud infrastructure but sought to keep spending on content stable. It currently stands at $17 billion.

Netflix says its current $17 billion content budget is “at about the right level” and is upbeat about company prospects after adding 2.4 million new subscribers in three months leading to October, beating investor expectations and reversing two-quarters of losses.

Warner Bros. Discovery has moved even more aggressively after the April merger of WarnerMedia and Discovery Inc. It was followed by heavy budget cuts, hundreds of layoffs, and canceled projects.

The company said it did not get rid of any shows that were “helping” it. As it moves to combine HBO Max and Discovery+, its two flagship streaming services, into a single platform in 2023, it also seeks $3.5 billion in savings.

Warner Bros. Discovery’s streaming services had almost 95 million subscribers. While it trails behind Disney and Netflix, the company would not pursue subscribers at all costs, seeing the strategy as “deeply flawed.”

Focusing on subscriber growth-starved television and box office releases, its two other key business interests, while “making a fraction in return,” the company said.

Eyes set on live streaming

This harsh assessment of the situation comes as streaming services increasingly see live broadcasting, a dominium where traditional television still reigns, as the last frontier to conquer.

Netflix has announced its first-ever live show, a stand-up hosted by comedian Chris Rock, will be available worldwide as it happens early in 2023.

Branding the broadcast as a historic moment, the streaming giant has its eyes set on a true price – live sports programming. It is a milk cow that generates 31% of all ad revenue for traditional television in the US, according to Nielsen Sports.

Of course, sports broadcasting rights do not come cheap, which is a problem for newly cost-conscious streaming services. To avoid towering sports rights bidding costs, Netflix is looking into the possibility of buying lower-profile leagues.

The company was also apparently exploring options to live-broadcast tennis and surfing, hoping to use its massive platform to popularize lesser-known sports to become big franchises.

Netflix has already helped boost the profile of sports like Formula One in the US through a popular documentary series – only to lose streaming rights for the franchise to Disney’s ESPN, according to the Wall Street Journal.

Cable 2.0

Companies like Amazon and Apple are also spending heavily to have high-profile sporting events on their streaming platforms, making the field more and more crowded.

“The carriage fees for the programming people want to see live, namely sports, are just too damn high. And they keep going up, so the services have to keep raising prices, which in essence are turning them into cable 2.0,” Brantner, the streaming analyst, said.

As pressure for profitability grows, companies start introducing multi-tiered subscription plans. Netflix launched a lower-priced ad-supported subscription plan in November, and Disney will do the same in December. Both have increased prices for ad-free plans.

“Much like Netflix, Disney introducing an ad-supported tier will help boost numbers in the short-term. However, market saturation will soon hit here in the US, and the company will increasingly rely on numbers across the world for growth,” Brantner said.

American streaming giants hold leading positions in major markets worldwide, either through local subsidiaries and partnerships or by investing in localized content like Netflix’s Korean-language smash hit Squid Game.

Global growth, however, is no longer a given as local services emerge and, in some cases, outcompete American rivals.

Take Vidio, an Indonesian-based streaming platform that now dominates the country of 276 million people. Its programming might be better attuned to local tastes and sensibilities, but it also has rights to live-stream major sporting events like the English Premier League in the world’s fourth largest country.

“There are still big opportunities for streaming companies to grow globally, but it will be a slow process,” Jones said.