Disney has 'the burden of the brand' amid critical ad tier launch: Analyst
Disney (DIS) faces an ultra-competitive landscape as it gets ready to roll out its $7.99 Disney+ ad tier in December, one month after Netflix's (NFLX) much-anticipated debut.
Despite the slowdown in ad spending, analysts remain bullish on the profitability prospects of ad-supported services. That said, investors will be watching Disney's execution carefully as the fight for ad dollars escalates.
"Disney has a burden of the brand where there's a higher expectation in the quality of the ads experience," Eunice Shin, a partner at consulting firm Prophet, told Yahoo Finance Live (video above). She explained that ad buyers will have "a very broad spectrum of where they can go and place their ads — that creates a very competitive marketplace."
Disney stock began to recover on Thursday amid a broader market rally, rising by more than 4% as of the market close. Shares plummeted in after-hours trading on Tuesday after the company reported fourth-quarter earnings that missed expectations across the board, with the exception of subscriber net additions. Those losses accelerated on Wednesday as investors zeroed in on Disney's weakening park revenue and widening losses within the company's streaming division.
Disney+, Hulu, and ESPN+ lost a combined $1.5 billion in Q4 after losing $1.1 billion in the third quarter. Average revenue per user for Disney+ also disappointed, dropping to $3.91 (vs. estimates of $4.29) amid an adverse foreign exchange impact and a larger subscriber mix.
Management said that it expects streaming losses to shrink by about $200 million in the first quarter of 2023 and that Disney+ is still on track to achieve profitability in fiscal 2024.
One way the company plans to hit that target is through advertising.
Shin noted that Disney's top challenge will be crafting an ad experience that doesn't create friction on the platform and helps it stand out relative to competitors.
"How do you win in a compelling space with a lot of competition and a lot of expectations?" Shin emphasized. "Media buyers are expecting a return. They're expecting results. Disney+ and all these other streamers are really going to have to deliver on that."
Kutgun Maral, an analyst at RBC Capital Markets, warned in an interview with Yahoo Finance Live that the ad tier will likely take time to grow.
"It's probably more of a back half of 2023, and more meaningfully in 2024, kind of event in terms of the upside we see from advertising," he surmised, adding, "Part of the upside on this ad-supported tier will hinge on, hopefully, an improved macro environment."
Disney+ saw net subscriber additions rise to 12 million in the fourth quarter, beating expectations of just over 9 million. The beat came after the company reported a surge of subscribers in the third quarter (14.4 million) following new market launches and a robust slate of content.
The company warned that it expects core Disney+ subscriber growth and Indian service Hotstar subscriber numbers to be lower in the first quarter. Content spend is expected to be in the low $30 billion range for full-year 2023.
Alexandra is a Senior Entertainment and Media Reporter at Yahoo Finance. Follow her on Twitter @alliecanal8193 and email her at alexandra.canal@yahoofinance.com
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