Q: What just happened?

Disney's entertainment direct-to-consumer business (excluding ESPN+) returned a $47m operating profit in the quarter to end of March 2024 (calendar Q1, fiscal Q2), two quarters earlier than management had previously predicted the entire direct business would reach profitability. Disney still says it is on target to reach profitability for the whole division by calendar year end. The profit had been unexpected by the majority of analysts, including many on Wall Street, but was exactly in line with predictions made by Ampere in its November 2023 report: The race to profitability: when will studio streaming pay? News of the streaming profit was largely lost in the press reporting of Disney's results, which focused on the parks business and a hit to the share price after management said they expected a slow down for the 'Experiences' division. Management did warn of some lumpiness in the direct business for the rest of the year (in line with Ampere's model which suggests a slight dip in calendar Q3 before moving to consistent profitability) but said: "we continue to expect our combined streaming businesses to be profitable in the fourth quarter, and to be a meaningful future growth driver for the company, with further improvements in profitability in fiscal 2025."

Q: Why is this important?

This is a huge milestone for Disney and for the entire studio streaming ecosystem. Of all the studios, Disney was the only major to go 'all in' on streaming, pulling back key content for its streaming platform, massively reducing licensing to third parties and closing a number of its international thematic linear channels. As a result, managing the decline of its traditional business and the transition of its revenue streams to streaming was make or break for the entertainment division. Disney's results show that that transition is now in full swing: as with other studios (and linear channel businesses around the world), Disney's linear business is in fairly sharp decline (revenues dropped 10% in the past six months against a year earlier). There is no going back from here. 

Q: How did we get here?

Wall Street was taken off guard by Disney's unexpected streaming profit, but it was Wall Street and investor negativity towards streaming and the direct-to-consumer transition that set the scene for this milestone. Of course, there were wider industry drivers as well, principally the end of COVID-induced subscriber carry-forward (the phenomenon of future growth moving back into the lockdown period that led to a couple of boom years for streaming) and streaming saturation in numerous key Western markets (meaning finding new customers was increasingly difficult). As commentators became increasingly vocal in their call to make, rather than just spend, money, all the major studios embarked on a massive cost-cutting exercise, targeting the two big cost centres for direct: content costs and staff. That set the scene for turning a profit in fairly short order, the results of which are clear in this milestone result for Disney.

Q: What are the wider industry implications?

Perhaps the most important aspect of this milestone is what it means for other areas of the business. Ampere data has shown a significant downturn in original commissioning activity across the globe, led by the major streamers and studios. We first picked up on this trend in Q2 2022 and with a second major decline in the last two quarters of 2023, it seemed the age of peak TV, was well and truly over. Let's be very clear: we are not predicting a return to the peaks of 'peak TV', but the move to profitability (especially as other studios are likely to follow in the coming quarters), takes a huge amount of downward pressure off content spend. With the studios now returning to licensing models to extract extra revenue from their content (itself a result of streaming saturation effects as the economics using exclusive high value content as a customer acquisition tool changes when their are fewer customers left to acquire), a mix and match approach is emerging, with streamers seeking the highest quality licensable titles to mix in with their own Originals. One thing that has never changed about the on-demand streaming model, though, is its voracious appetite for fresh content. Original production is a key part of that and with pressure now easing on costs, some resurgence of original production must surely follow.

There are further implications for the whole linear TV business and for advertising. It's news to no one that linear is in decline and ad-spend shift is already well underway, but the move to direct streaming profitability may well now accelerate that shift. As the 'proof of concept' is now signed, sealed and delivered, the industry will move even faster to transition away from traditional outlets. With all the major streamers (bar Apple), now fully invested in ad-supported streaming (both through hybrid tiers on their direct services and through FAST channels on pure-ad streaming platforms), the scene is set for more traditional TV spend to move over to streaming. 

Streaming TV platforms offer two things that online video (largely social media driven), have hitherto fallen down on: long-form premium content consumed primarily on the big screen in the home, and a brand-safe environment. On top of that, they allow buyer targeting, just like online video. With drivers coming from both ends (the studios themselves with a re-invigorated view of the streaming direct model and the advertisers with a growing appreciation of what the new ad-opportunities offer), the transition of ad dollars to streaming will begin to take off.

For traditional distribution platforms, then, pressure will mount (as if it hadn't already) to revamp bundles and offers to fight cord cutting. That means more deals with streamers akin to Disney/Charter, and perhaps impetus to finally create streaming bundles as even premium channels like ESPN can no longer hold together a high-cost cable offer without the streaming elements.

Finally, there are implications for M&A activity. One of the calls from Wall Street was pressure on studios and streamers to merge. Paramount was on the receiving end of many of the calls, with commentators declaring it was 'too small' to compete. We always countered that assertion (Paramount actually has access to a huge array of content and many popular TV content franchises) and, while Paramount is, of course, already deep in negotiations to merge with Sony or agree a buyout with Skydance, its recent financial results also showed it was well on the road to streaming profitability. The final conclusion: reports of the death of Hollywood and the studio business model, it seems, have been greatly exaggerated.