1. Disney’s Streaming Services Turn A Profit

In a somewhat surprising announcement, Disney’s streaming service division actually turned a profit last quarter,  generating $47 million in operating income, compared with a loss of $512 million a year earlier. This was notable in that Disney was not expecting the line to turn from red to black quite so soon.

This was, unfortunately for Disney, offset by predicted losses in their theme parks division, so stocks went south rather than north.

Still, it was notable that Disney was able to actually finally turn a profit on their range of streaming services—Disney+, ESPN+ and Hulu. 

Or was it?

Why It Matters

While Disney’s been jacking up prices and cutting down on password sharing in order to boost subscription revenue, their real power is their ability to generate ad revenue. That power is, of course, concentrated in the hands of Hulu, the OG ad-supported subscription service. 

That OG part is huge. Hulu has had a decade to cement relations with advertisers, create programs and products and otherwise understand what it takes to get ad dollars flowing in. 

Further, it’s estimated that around 60 percent of Hulu subscribers are on the ad-supported plan, while other streamers not-named-Amazon are still all well below 20 percent.

Hulu’s ad income is not broken out as a line item, but we can assume it is fairly substantial, especially compared to ESPN+ and (especially) Disney+, which are still largely the province of the ad-free viewer.

There were some additional positive signs: Disney+ gained over 1.3 million new subscribers last quarter. They also lost a lot—churn continues to plague the Mouse House—and so USCAN (US-Canada) net subscriber numbers only went up 800K, while internationally they dropped 100K.

So ad revenue FTW, but they need to figure out how to get more ad-supported subscribers on ESPN+ and (especially) Disney+.

I say especially Disney+ because (a) ESPN+ is in a slightly better position given that any live sporting events it has will be ad-supported and (b) parents subscribing to Disney+ have incentive to go for the ad-free version.

Disney’s been pretty good about working the bundle angle—you can get various combinations of all three services for a lower rate, but they have yet to lean in on “get a much lower price for the ad-supported” angle, the way, say, Max and Netflix have been with their $10/month Verizon deal.

They are also going to have to figure out where Disney+ and Hulu fit in with each other. There have been a chorus of calls for them to combine the two services, especially since surfacing Hulu content on the Disney+ app (and vice versa) seems to be working.

The final piece Disney is missing is a free tier/FAST of some sort. The goal here is three-fold: 

1. Create a product that, like Hotstar, is capable of bringing in large numbers of viewers in the Global South, where few people have disposable income period, let alone disposable income for a streaming TV service. It is our firm belief that all of the big US subscription services are going to need to roll out a free tier if they want to compete in many parts of Africa and Asia.  

2. Create a broader user base for advertising that allows the sales team to sell against the FAST audience and the subscription audience. It’s notable that a recent study by Amagi showed that 78% of respondents would be happy to create a profile on a free service in return for access to content, and having those profiles and their email addresses will be a big help to the ad sales team.

3. Create a vehicle that allows them to obtain new subscribers by getting them hooked on older seasons of current series, while also keeping former subscribers in the loop. This is part of the three-legged stool we see all streaming services evolving into: ad-free subscription, ad-supported subscription and free.

What You Need To Do About It

If you’re Disney, it makes sense to continue to merge Hulu and Disney+. Whether that is doing what you’re doing now and offering bundle pricing while teasing content from one service on the other’s UI, or whether it’s doing a full-on merger is something you’ll need to test. Your decision will turn on whether or not you find there are a sizable number of people who would gladly subscribe to either Hulu or Disney but would balk at having to subscribe to both. Let that metric be your guide,

If you are the rest of the industry, definitely take this as a good sign but also be aware that thanks to Hulu, Disney has a huge head start on the ad revenue front and you will need to aggressively grow your ad-supported tier to keep up. 

And the wider you keep the gap between ad-supported and ad-free, the more likely it is that your ad-supported numbers will grow. Especially if you make the ad-supported tier the MVP of all your bundles. 

2. Pelicans Fly The Diamond Coop

The NBA’s New Orleans Pelicans became the latest team to abandon the troubled Diamond Sports Group (DSG) and make their nest with a local broadcaster.

This may seem counterintuitive: streaming, which is Diamond’s stock in trade, is ascendant, while broadcast is increasingly seen as old school. Especially given the fact that professional sports in the US also have an age problem—audiences are getting older and many younger fans don’t seem to have the patience to watch a full game—it would seem that streaming was the way to go.

But things aren’t always as they would seem, and the decision ,in many ways, seems to make sense, at least for the Pelicans right now.

Why It Matters

While Diamond is indeed launching streaming apps, it’s also an RSN—regional sports network. RSNs were the original money-printing machines of the cable industry. They knew that fans would pick a cable company based on whether or not it had an RSN available. As such, they could force the operators into deals wherein they needed to include the RSN on even the most basic tiered bundles while simultaneously collecting large sums of money per subscriber from the MVPD, a cost that was then passed on to the subscriber, resulting in high prices for cable TV.

Fast forward to 2024, and those cable bundles are withering on the vine and teams are doing the math and realizing that they can get more viewers by going with a local broadcaster whose station will be available over the air or via a much cheaper bundle from an MVPD or vMVPD.

What’s more, they will have more leverage with broadcasters, who need them more than the other way around. The broadcasters are also going to have strong local ad sales squads that will be able to create extra revenue for the team in a way an RSN could not.

In the case of the Pelicans, there’s a whole other layer to the story too—it seemed likely that the local New Orleans RSN, whose only major league sports rights were for Pelicans games, was unlikely to survive Diamond’s post-bankruptcy reorg. Meaning the Pels likely jumped before they were pushed. There are several other teams—the Memphis Grizzlies, Detroit Pistons and Oklahoma City Thunder—that are rumored to be likely to follow suit as well, for similar reasons.

The Pels new deal is with Gray Television’s WVUE, a Fox affiliate that also includes the Bounce TV diginet. While they will be losing per-household revenue from their DSG deal, (a) those numbers were sure to be cut significantly post-restructuring and (b) WVUE gives them the ability to reach around 3 million households so the potential is there.

Sports Rights In Flux

Pulling back to look at this all from a macro level, it seems a few key things are worth noting:

1. Sports rights are never going to be worth as much as they were in the 00s and 10s. Even if the leagues take back all their rights they are not going to be able to collect the massive fees the RSNs collected from MVPDs, which the leagues and teams all got a chunk of. The leagues will make lots of money—no one is going to bed hungry—but the ultimate impact will be somewhat lower profits and somewhat lower salaries

2. Streaming RSNs are still a few years off. Some teams may be able to make it work, but the interest and infrastructure are not there yet, especially in smaller markets like New Orleans. Give it a few more years though, and it will definitely become a thing. Whether that “thing” is a league-run app or a rebirth of DSG and other RSNs remains to be seen, but our money is on the leagues.

3. The Big Four still need to figure out how to reach younger viewers. There have been some changes made (e.g. baseball’s new pitching rules,) but games that last two to three hours several times each week don’t seem to have much appeal to the under 40 crowd. 

What You Need To Do About It

If you are DSG, double down on those markets where you have multiple teams in your RSN and try and make a go of them, streaming in particular. I still think the business can be viable, but you need to start small and build from there

If you are one of the major sports leagues, starting your own streaming service and owning your own rights is not a bad deal. There are so many distribution outlets, from social media to streaming, that you should come out ahead. Just be prepared to make a real commitment. This is not something you can half-ass.

If you are a local broadcast network, this is a great opportunity and a great way to show your value to the local community. But don’t stop there. You should build out a streaming app or FAST channel of some sorts for the game and shoulder content. Bring advertisers in as sponsors. Be creative. It’s important that you get this right and come off as forward-thinking and modern. Go for it.