Disney and Fox Streaming And Advertising Trends During 4Q22

To keep tabs on the health of the advertising industry in general, and video in particular, I always try to look closely at financial results from the biggest players with additional focus on streaming services and content spending.

Yesterday, both Disney and Fox reported results for the calendar fourth quarter, painting a picture that was unsurprisingly negative, if not as terrible as it could have been considering the incredibly weak sentiment among advertisers that persisted throughout 2022.

Disney’s DTC Businesses Now Generate More Than $20 Billion in Revenue During 2022, Up Double Digits over 2021 Levels.  First, Disney.   Much of the focus of the results was understandably on the streaming business.  Disney+ core (i.e. the Disney+ branded offering outside of India and Indonesia) subscribers were up by 24% year-over-year with 20 million new subscribers, if only more marginally sequentially.    If we assume 90% of the US and Canada business was in the US, the brand’s domestic revenues were approximately $840 million for the quarter – down 3% year-over-year – and $3.1 billion for the year, up 13% vs. 2021.    Hulu was somewhat stronger, up 3% on the quarter in total revenue (to $1.6 billion) for its SVOD business and 5% including the vMVPD, which continued to grow by ending the quarter with 4.5 million subscribers who generate an average of $87.90 in revenue per month.   Across these services as well as ESPN+, total revenue amounted to more than $5.3 billion in the quarter and $20.2 billion during the year at a global level, up from $4.6 billion and $17.5 billion for equivalent year-ago periods, respectively.   The negative effects of changes in foreign exchange rates would have restrained growth by several percentage points, suggesting high ‘teens like-for-like growth globally, better than the approximately 13% growth rate domestically.

This data can be compared to figures produced by trade association DEG this week (citing data sourced from Omdia) which indicates that spending on subscription streaming services in the US was up by 15.4% to $7.9 billion for the fourth quarter of 2022 and 17.3% for all of 2022.  Total spending on video in their definition amounted to $9.5 billion for an 8.3% gain.  Presuming stability in traditional pay TV spending for the quarter and year (with increased costs per subscriber offsetting declines in subscribers, total spending on video would have risen by a low or mid-single digit percentage.

DTC Advertising Declined 8.5%, Driven By Hulu.  Within Disney’s DTC businesses advertising revenues were down by 8.5% in the quarter to just under $900 million (or $3.6 billion for the year), only up 5.4% on the calendar year.  Lower impressions at Hulu were cited as a primary cause of the outcome, despite the growing numbers of subscribers.

DTC Programming Expenses Amounted to $15.5 Billion During 2022 vs. $11.5 Billion in 2021.  Expenses remain high for the streaming services, with $4.2 billion in amortized programming costs during the quarter and $15.5 billion during the calendar year.  Implicitly, cash costs would have been higher when compared with these amortized figures, which were up from $3.2 billion and $11.5 billion in the respective year-ago periods.   While there are differences with other pure streaming services because Hulu as a vMVPD pays conventional cable networks carriage fees, this figure probably only amounts to around $3.5 billion of annual costs.   Overall, as a percentage of revenue, programming costs amounted to 79% of revenue for the quarter and 75% for the year, up from 68% and 66% in year-ago periods despite the larger subscriber and revenue bases.   For reference, during calendar 2022 Netflix incurred $14 billion of GAAP content expenses on $32 billion of annual revenue.   Company-wide, during its fiscal 2022 year, Disney incurred $30 billion of costs on licensed and produced content with $24 billion of related amortized expenses.

With this context and the recent news of investor activism targeting the company, cost-cutting plans were announced, with particular focus on reducing content expenses.  The company stated that it would look to reduce this spending by $3 billion on an annualized basis over some period of time.  Company-wide content spending is set to be stable at around $30 billion this fiscal year, which includes spending on sports exceeding the $10.8 billion in sports programming rights commitments Disney disclosed in its most recent 10-K.  Because of the timing of when cash is deployed into producing content and when costs are recognized, spending could fall while the recorded costs could continue to rise.

Cost-Cuts Likely Directed To Linear Services.  Although it’s possible that a rationalization of costs will impact Disney’s streaming services, it seems more likely that reductions in spending will be directed to linear broadcast and cable networks, which would be particularly unsurprising, as owners of these properties will inevitably look to “harvest” them given secular declines in subscriptions, viewing and – likely – advertising as well.

Linear Advertising Also Down Single Digits.  Illustrating current trends on advertising beyond current period declines at the DTC businesses, overall advertising at the linear networks was down by 4.8% for the quarter with broadcasting only falling 2.0% and cable down by 6.8% (with ESPN down by 4% - impacted by the timing of the college football playoffs – and other networks implicitly down by much more).  Of course, if political advertising were excluded broadcasting at the US national level would likely have been down by more than cable.  International advertising was down by a lot more, in part because of currencies but also because of the timing of cricket matches in India and so total company-wide advertising fell by 11%.

Fox Saw Similar Underlying Trends At Linear Networks; Tubi Grew Ad Revenues 25%.  Meanwhile, Fox also reported results for its most recent quarter.  Advertising was down by 0.7% for the cable networks but up by 5.0% at broadcasting.  Backing out 25% growth for FAST service Tubi and political revenue at the local stations of around $180 million, underlying network revenue was probably down mid-single digits despite the inclusion of revenues from FIFA World Cup soccer and additional NFL games (although impacted from the absence of the NFL’s Thursday Night Football). Of note, in its 10-Q filing the company indicated “lower direct response advertising revenue” at Fox News.  Commenting on the current quarter the company indicated it is not seeing soft advertising market and is expecting to be up excluding the Super Bowl. 

Mid-Single Digit Underlying Declines From Big Network Groups Reporting 4Q22 Results So Far.  These figures can be placed in context of recent results from Comcast, which reported its results late in January.  Comcast posted growth of 4.0% in its advertising business at NBCU Universal, but a 5.6% decline excluding the impact of FIFA World Cup soccer.  Political advertising would also have contributed several percentage points to growth.  Similar to sentiments from Fox, their commentary also conveyed that the advertising market likely bottomed late in the fourth quarter of last year.