Disney lost $553 million last quarter establishing its SVOD

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In April, Disney officially announced it would be launching a subscription video-on-demand service (SVOD) called Disney Plus. The corporation explained its streaming video platform would be home to its Disney, Pixar, Marvel Studios, and “Star Wars” content. On Tuesday, the entertainment giant shed some light on how much money it’s spent to establish the service via its fiscal third-quarter financial disclosures.

Disney revealed that its direct-to-consumer (i.e., streaming) segment lost $553 million in Q3, in part due to the capital it’s invested in setting up Disney Plus. As a result of that expenditure and its costs associated with its purchase of Fox’s assets, the firm missed its quarterly forecasts by more than $1 billion.

Furthermore, Disney COO Christine McCarthy said the firm’s SVOD costs would expand to $900 million in Q4.

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Why Disney is Spending So Much on Its SVOD

While Disney’s SVOD development costs are staggering, the corporation’s betting on a significant return on its investment. According to market intelligence firm Reportbuyer, the global SVOD market will be worth $124.57 billion by 2025. Moreover, the organization forecasts a sector compound annual growth rate of 19.6 percent over the next six years.

With that much money on the table, Disney Plus’s near $1 billion launch costs make a lot more sense. Moreover, CEO Bob Iger has made it clear he doesn’t just want to compete with rivals like Netflix and HBO Max. He wants it to become the world’s premiere subscription streaming video content hub.

Accordingly, the company just announced plans for a three SVOD bundle. For $12.99 a month, consumers can gain access to Disney Plus, ESPN Plus, and Hulu, a 38 percent savings. As such, Disney’s attempting to attract consumers by offering popular legacy media, live sports, and new TV content.

Even though the corporation’s entry-level package includes the advertisement-hosting versions of EPSN and Hulu, it’s still a phenomenal deal.

Because of its pricing strategy and diverse content offerings, analysts believe Disney’s play to dominate the streaming sector will succeed. In June, Morgan Stanley’s Benjamin Swinburne told Variety that Disney’s SVOD could acquire 13 million subscribers by the end of 2020. Furthermore, he predicted the corporation’s three streaming services would command one and 30 million subscribers worldwide by 2024.

The High Cost of Long-Term Planning

While Disney’s roadmap is viable, the company will lose a fortune before its SVOD business becomes a success. Though the firm predicts its streaming segment will lose $367 million in Q4, that projection might be too conservative.

For instance, the company’s stock price fell by 2.8 percent after reporting that it missed its Q3 estimates. If November launching Disney Plus fails to draw in a sizable number of subscribers in the last quarter of the year, the company may experience an even more substantial drop in market capitalization.

Also, while Disney has a vast reservoir of available content to put on its flagship SVOD, the company is investing heavily in producing new material. As the corporation revealed at this year’s San Diego Comic-Con, it’s creating some star-laden Marvel Cinematic Universe series exclusively for the platform.

Disney is also spending $100 million to make “The Mandalorian,” a 10-part live-action series set in the “Star Wars” Universe.

Furthermore, Bob Iger just announced the firm would reboot a host of Fox properties to fill out its streaming platform’s library. “Cheaper by the Dozen,” “Home Alone,” and “Night at the Museum” are all getting Disney Plus remakes. If even a handful of these top-shelf new projects goes over budget, Disney’s direct-to-consumer segment will be even further underwater.

Ultimately, the corporation’s strategy is sound and should pay major dividends in the long term. But in the near term, Disney’s leadership will have to face several rough earnings calls.