Streaming giants have made strides toward profitability but still aren't 'over the hump'
Media giants made more headway on the path to streaming profitability this earnings season.
Over the past two years, price hikes and password-sharing crackdowns, ad-supported tiers, and mass layoffs have all shaken up the industry and brought companies closer to streaming profits.
But the majority of companies still don't make money in those divisions, and investors remain skeptical that profit can be sustained.
Take Disney (DIS) as one example.
The company turned a surprise profit within its direct-to-consumer (DTC) entertainment division in its most recent quarter. The segment, which includes Disney+ and Hulu, posted operating income of $47 million, compared to a loss of $587 million in the prior-year period.
The catch? The company said it expects DTC results in the entertainment unit to be in the red for the current quarter. And including ESPN+, Disney's overall streaming efforts remained a money loser. Its stock fell almost 10% in response.
"This is not consistent, they're not over the hump," Third Bridge analyst Jamie Lumley told Yahoo Finance. "The non-linearity of the trajectory from here is something which I think has investors slightly on edge."
Comcast's NBCUniversal (CMCSA) saw a streaming loss of $639 million in the first quarter. Paramount Global (PARA) reported a DTC loss of $286 million.
Warner Bros. Discovery (WBD) maintained its position as the only legacy media giant to report profits in its streaming unit. However, profitability within the division has been bumpy and also included results from premium pay-TV services like HBO.
Meanwhile, Netflix (NFLX) reported profits of $2.6 billion in the first quarter, prompting Disney CEO Bob Iger to call the company "the gold standard" in streaming.
"If you can demonstrate sustainable profitability, I think that will matter," Macquarie analyst Tim Nollen told Yahoo Finance. "But, of course, it's not the same as Spotify getting into profitability and all of a sudden people like it."
"In this case, these companies are getting into profitability in a business that is disrupting their initial original business," the analyst said, referencing the industry's previous reliance on the linear TV ecosystem. "The more successful streaming is, the more pressure on the traditional side."
Linear ad revenue also continued to decline in the first quarter, with all of the major legacy players seeing double-digit drops as more consumers cut the cable cord.
Prior to the cord-cutting phenomenon, linear advertising and cable affiliate fees had consistently boosted revenues and contributed to margins of around 30% to 40% for broadcast divisions.
That makes advertising the next frontier for companies to return to cable-era margins. But analysts warn there's a long way to go — and it might not ever happen.
"There's still the big question of to what degree streaming will be able to replace the incredibly strong margins of the legacy linear business," Lumley said.
According to Macquarie, DTC advertising was up 22% across major media companies, accounting for 18% of total advertising spend in the first quarter.
"We're still just totally in the middle of this transition and there's still a lot of uncertainty, a lot of unanswered questions," Nollen said, predicting cable-like margins won't be achievable in streaming. "Most of these companies have a tough run ahead."
And the advent of new streaming bundles may not alleviate consumer confusion about when, where, and how to watch.
According to the latest Digital Media Trends report from Deloitte, US consumers pay an average of $61 per month to subscribe to four streaming services. That means fewer opportunities for streamers to retain loyal subscribers over time.
"One of the biggest issues the industry has faced is serial churners," Lumley added. "Even for the top platforms like Netflix, churn is still a very real problem. ... Bundling is a big effort to try to mitigate that."
Recent bundle announcements include Comcast's StreamSaver, which will bundle Peacock with Netflix and Apple TV+ (AAPL). The new offering will be available to Comcast’s broadband internet subscribers.
Meanwhile, Warner Bros. Discovery and Disney announced a new streaming bundle that will combine Disney+, Hulu, and Max, with a launch date set for this summer in the US. In December, WBD partnered with Netflix on a $10 ad-supported bundle offered through Verizon (VZ).
And earlier this year, Warner Bros. announced a sports streaming partnership with Disney's ESPN and Fox (FOXA), set to debut later this fall. Last week, the companies announced its name: Venu.
Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at [email protected].
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