Disney aims for more profits at Disney+ with more ads, less content, higher fees

Disney laid out the profit plan for Disney+ streaming service on its investor call after reporting its most recent quarterly results, and it’s likely not going to make its customers very happy. It entails cutting back on the content offered, selling more ads and charging higher subscription fees.

For investors, the news out of streaming was good news.

Disney+ and its other two services, ESPN+ and Hulu, together trimmed losses by $228 million, or 13%, from a year earlier to $659 million. The improvement from the previous quarter was even greater, as it trimmed losses by nearly $400 million from $1.1 billion.

Disney did it with a 2% drop in subscribers for Disney+ to 157.8 million, and a 1% drop in subscribers overall, when including ESPN+ and Hulu in subscription totals. It was able to trim losses with fewer subscribers through higher subscription revenue and a decrease in marketing costs, partially offset by higher programming and production costs.

The company’s ongoing efforts to trim losses and begin to make profits on its streaming business could disappoint some of the people who have enjoyed Disney+, however.

First of all, it expects to remove some of its existing content on the streaming services, and will be taking a $1.5 billion to $1.8 billion charge in the current quarter related to the removal of that content. And CEO Bob Iger said the company will produce less content for the services going forward.

“It’s critical we rationalize the volume of content we’re creating and what we’re spending to produce our content,” Iger said about the cuts to the streaming service.

Secondly, it is looking to increasing the amount of advertising on its various services, including a European version of Disney+ with ads that will debut later this year.

“We have only just begun to scratch the surface of what we can do with advertising on Disney+, and I’m incredibly bullish on our longer-term advertising positioning,” Iger said.

And for those subscribers who want to pay for an ad-free version of Disney+, they will be paying higher subscription fees, Iger said “to better reflect the value of our content offerings.”

The company said it saw only a very minor decrease in subscribers to the ad-included service when it raised subscription rates. And it said it wants to increase the subscription rates for the ad-free service partly to drive more subscribers to the ad-included versions, since it can make more money selling ads once it has more subscribers.

Media companies like Disney see a need to grow streaming services since more and more households are ending traditional cable or satellite service. Iger said Disney is still learning the proper business model for streaming as it makes the transition.

“We’re still a start-up in many ways. The goal was, as you know, global subs. And we wanted to flood the so-called digital shelves with as much content as possible to achieve obviously as much sub growth as possible,” he said.

But the company wants to be careful about trimming its offerings without spooking subscribers into cancellations.

“And now as we grow the business in terms of the global footprint, we realized that we made a lot of content that is not necessarily driving sub growth,” Iger said. “And we’re getting much more surgical about what it is we make. So as we look to reduce content spend, we’re looking to reduce it in a way that should not have any impact at all on subs.”

Overall the company reported a drop in adjusted quarterly profits, as earned $1.9 billion, or 93 cents a share, excluding special items, matching the forecast of analysts surveyed by Refinitiv, but down 9% from the $2.1 billion it earned on that basis a year earlier.

Including special items, net income nearly doubled to $2.1 billion from $1.1 billion. Revenue rose 13% to $21.8 billion.

Operating income from its cable and broadcast networks fell $1 billion, or 35% to $1.8 billion, as it was hit by lower ad revenue. Revenue from content sales, which includes movie tickets and licensing, rose 18% to $2.2 billion, although after cost that segment of the business essentially broke even.

The theme park business did well, as operating income rose 23% from a year ago to $2.2 billion. It was helped by higher operating results at our international parks and resorts were due to growth at Shanghai Disney Resort, Disneyland Paris and Hong Kong Disneyland Resort.

Its domestic park revenue was helped by more passenger cruise days on the Disney cruise line compared to a year earlier. Walt Disney World Resort in Florida had lower income due to higher costs, partially offset by increased volumes.