Disney's traditional television business has gone from superhero to weak link in just a few short quarters.
Income from its TV networks has dropped faster than expected as the world's largest entertainment company struggles to boost its share price and get its streaming-video business to profitability .
The situation presents a quandary for Disney. For the past 3½ years, the company has been subsidizing the losses that its streaming division has incurred by using cash earned from two other businesses: theme parks and so-called linear TV, which makes money from ad-sales revenue and cable subscription fees paid to networks such as ESPN, the Disney Channel and Freeform.
Disney in recent months has been trying to reduce its streaming losses by slashing costs, laying off workers and evaluating moves such as selling its flagship ESPN channel directly to cable cord-cutters.
In Disney's most recent financial quarter , operating income from the linear TV segment fell by 35% to $1.8 billion, its sharpest year-over-year decline in at least three years. Operating income from Disney's parks, experiences and products unit has exceeded that of the linear-TV business for two consecutive quarters for the first time since Disney launched its streaming business.
Disney Chief Financial Officer Christine McCarthy has said the downturn in the linear-TV business isn't permanent and has affected rivals too, and that when the advertising market improves, so will Disney's finances.
"Advertising is cyclical. I think everyone is pretty much down on advertising," she said at an investor conference earlier this month. "But the fact of the matter is, advertising will come back. When the ad market does become more robust, we are very, very well positioned."
The rapid deterioration of the linear-TV business points to more fundamental change in the kind of business Disney is, analysts say.
"We would joke 10 years ago that the company could be called ESPN instead of Disney—that's how good the sports broadcasting business was," analyst Michael Nathanson said.
"Now that the parks business is the majority of the company's profitability, and it's growing very strongly, people are going to realize that this is first and foremost a leisure company that just happens to have a call option on streaming and linear media," he said.
Since returning for a second stint as chief executive in November, Robert Iger has said he is focused on fixing streaming and hitting the goal of getting the business to break-even by September 2024.
He has made some progress. In the quarter ended April 1, streaming losses narrowed to $659 million, nearly $200 million less than what Wall Street analysts had projected. Since the company's flagship Disney+ service launched in late 2019, the streaming division has accumulated losses of $10.3 billion, according to financial filings.
And ESPN, home to shows such as "Monday Night Football" that are hugely valuable to advertisers and cable companies, is laying the groundwork for a shift to a fully streaming-focused model at some point in the future, The Wall Street Journal has reported, a change that would allow Disney to sell sports entertainment including live events directly to consumers and offer advertisers the chance to target subscribers more precisely.
But none of that has been enough to cheer investors, who have traded shares of Disney for under $100 each for much of the year. Since the start of 2023, Disney's stock price has risen 5.2%, closing at $91.35 on Friday, compared with the S&P 500 index, which is up 9.2% on the year.
In December, Disney raised prices for Disney+ and some of its streaming bundles at the same time that it launched a lower-priced, ad-supported tier , in a bid to increase the average revenue it gets each month from streaming users.
The move worked for subscribers in North America and Europe, pushing average revenue up by 70 cents from the previous quarter to $6.47, according to Disney's financial filings. But at the same time, in India, where the Disney+ Hotstar service accounts for more than one-third of the total 157.8 million Disney+ subscribers, average monthly revenue per user fell to 59 cents, from 74 cents the previous quarter.
The ad-supported tier of Disney+ has signed up 1.1 million subscribers in just over four months of existence, according to new statistics published by media analytics firm Antenna, but Disney watchers say it will be a while before the impact of those new users is visible in financial results.
McCarthy said at the conference earlier this month that the company plans to raise prices for its streaming services again.
Meanwhile, a soft TV advertising market and a writers' strike that threatens to delay production of new series for both streaming and broadcast have limited enthusiasm for media companies more broadly.
All this adds up to more pressure on companies such as Disney to get streaming to profitability and fewer sources of income to rely on going forward to subsidize big spending on content.
"Cable is dead, let's all be honest," said Evan Shapiro, a former TV producer and executive who now teaches media management at New York University.
Shapiro said large media companies need to lessen their dependence on the profit generated by linear TV, given how quickly cord-cutters are unsubscribing from cable TV packages.
"Big media companies like Disney really should create a certain date for when they're going to abandon the horse-and-buggy model," he said. "It would create a lot of clarity."
Iger said last year, before retaking the helm at Disney, that traditional TV "is marching to a distinct precipice, and it's going to be pushed off." This year, at Disney's upfront presentation in New York—the annual gathering where media companies pitch their most promising programs to Madison Avenue buyers—Disney focused heavily on sports, bringing onstage pro athletes and commentators to sing the praises of ESPN and coverage of events such as the NBA playoffs.
Analysts at MoffettNathanson in New York recently reported an annual rate of cord-cutting of 6.9% in the first quarter of 2023, the steepest decline on record. More than two million households canceled their traditional TV plans—or those that are delivered via cable, satellite or a telecom service—in the quarter.
"Sports ratings are holding pretty well, but you're seeing an acceleration in cord-cutting, and that's why linear TV profits are in free fall," Nathanson said. "For Disney, it's really about self-help on the cost side. Other companies have been more aggressive about quickly shutting down program spending and cutting administrative costs."