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Disney+ Soars, Legacy Businesses Crash: Disney Earnings Foretell The Future Of The Company

Disney’s Q3 results show a stark discrepancy between its legacy businesses and the new streaming services, foretelling the future of the entire company.

Disney’s overall revenue crashed 42% to $11.8 billion in Q3 compared to the same period in 2019. This was due to legacy businesses that were torched by the full brunt of COVID-19 closures. The parks, experiences and products segment revenue was down by 85% in Q3 over the same period in 2019; studio entertainment revenue was down by 55%; and media networks revenue was down by 2%. These legacy businesses were too dependent on crowded theme parks, crowded cruise ships, crowded theaters, and crowded sports stadiums for advertising revenue.

Disney posted total segment operating income of $1.1 billion in Q3 which ended June 27, 2020, down by 72% versus the same period in 2019. For the nine-months ending, total segment operating income was down by 34% to $7.5 billion versus $11.4 billion in 2019. Note, however, that the company suffered an income loss from continuing operations of $4.7 billion in Q3.

Disney sees a flicker of life in the legacy businesses as the theme parks go through a phase reopening, as live sports build, and as television and film production begins to rise. But these efforts depend on elements outside of its control: the resolution of the coronavirus via a vaccine to prevent it, therapeutics to cure it, and the degree of consumer confidence to attend live events.

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Moving forward, Disney’s core strategy pivots to its direct-to-consumer and international segment. Revenues rose over 100% from $5.9 billion for the nine months ending on June 29, 2019 to $12.1 billion for the nine months ending on June 27, 2020. Disney+ grew to 60.5 million paid subscribers as of August 3, up from 33.5 million reported on March 28, 2020. ESPN+ grew to 8.5 million subscribers as of June 27 (up from 7.9 million on March 28), and Hulu grew to 35.5 million subscribers (up from 32.1 million). Combined, the direct-to-consumer segment now has over 100 million paid subscribers (up from roughly 70 million on March 28).

Disney has done an excellent job of motivating current subscribers to keep Disney+ while enticing new subscribers to join, all with a drip, drip, drip of exclusive content. The latest notable releases included Hamilton on July 3 and Beyoncé’s new visual album, Black is King, on July 31.

But the blockbuster move is to put live-action Mulan on Disney+ as a premium video on demand for a rental fee of $29.99 on September 4 in the United States, Canada, and other select markets.

This is due to the insufficient number of theaters that will be open worldwide to successfully launch the film theatrically. But it will be shown in theaters simultaneously in markets that have open cinemas but no Disney+. While Disney says this is a one-off effort to recoup its investment and to boost Disney+ memberships, we have to believe it will be used as a test to ascertain the viability of launching tentpole films with a premium direct-to-consumer delivery.

Though only available since November 12, 2019, Disney+ has already become a dominant force within Disney’s direct-to-consumer segment. The entire group’s 100+ million paid subscribers compares well to Netflix, which has 193 million global subscribers, and Amazon Prime AMZN , with about 150 million.

These major streaming services are all up substantially from last year, suggesting that the universe for streaming customers continues to expand, especially internationally.

Lagging behind due to their late start are Comcast’s Peacock streaming service with about 10 million sign-ups since its launch in April, and AT&T’s HBO Max streaming service with 4.1 million subscribers at the end of June after one month of launch.

In an earlier article I predicted that Disney+ could become a dominant $30 billion division by 2025. It is on track. So while Disney’s legacy businesses crashed and will take time to limp back to life, Disney+ will continue to soar and be the dominant force within the company for many years to come.

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