Disney's direct-to-consumer business is growing, but so are its operating losses

This is an excerpt from a story delivered exclusively to Business Insider Intelligence Digital Media Briefing subscribers. To receive the full story plus other insights each morning, click here.Disney's direct-to-consumer (DTC) and international segment grew revenue 15% to $955 million in Q1, though it also grew losses to $393 million, up from $188 million in the year-ago period, per the company's Q1 2019 earnings report on Wednesday.Disney attributed losses in the segment to its ongoing investments in ESPN+ which launched last April, costs related to the upcoming launch of Disney+ in November, and losses from the consolidation of Hulu.The segment includes Disney's DTC streaming businesses Hulu, ESPN+, and Disney+; the company's majority-ownership stake in streaming video tech company BAMTech; and Disney's international channels.Disney reported $14.9 billion in total revenue — up 3% year-over-year (YoY) — in Q1, which was Disney's first full quarter since closing its $71.3 billion acquisition of 21st Century Fox assets.DTC represents a significant part of Disney's future growth, although losses in the segment will continue to grow as Disney ramps up its investments. In fact, DTC losses will grow further as it builds up its streaming offerings in a bid to overhaul how it distributes content to consumers.Those losses are compounded by the fact that Disney is sacrificing hundreds of millions of dollars in the short term that would have come from licensing its content to rival platforms like Netflix as it retains content rights for its own service. On the earnings call, CEO Bob Iger provided two key details that indicate how Disney will position its DTC assets to grow the business:Franchise films will land on Disney+ — but not until after they run in theaters. Iger said that the company will distribute Marvel films on Disney+, including box-office behemoth “Avengers: Endgame” on December 11 — about one month after the service launches. As a result, those films are unlikely to spur adoption of Disney+; for example, a new film appearing on the service at the same time as it appears in theaters could trigger a spike in SVOD sign-ups in response. But even without day-and-date release that is common on Netflix, among others, we view Disney+ as a service whose chief value prop will be in providing households with a deep repository of Disney library content, on-demand, from across its host of brands. Further, Disney will supplement that value prop with originals attached to popular IP that could drive sign-ups among super-fans: On the call, Iger reiterated that Marvel would create spin-off series linked to popular characters from the universe, specifically for distribution on Disney+.Disney wants full ownership of Hulu — but will continue to license content from companies like Comcast and WarnerMedia. On the call, Iger confirmed talks with Comcast to acquire its more than 30% stake in Hulu, which would give Disney full ownership of the streaming service. If Comcast were to exit, however, Iger said that there would “probably be an ongoing relationship,” in which Hulu would still look to license NBCUniversal programming for the service. Original programming like “The Handmaid's Tale” will likely help to drive new subscriber sign-ups — but licensed content is what keeps those subs tethered to the service, as the vast majority (97%) of Hulu streams likely come from licensed content, per 7Park Data. Therefore, it's in Disney's best interest to maintain supplier relationships with media companies that no longer hold stakes in Hulu. This year marks the true beginning of Disney's transformation as it builds out its DTC business alongside its traditional network business. Disney is in an awkward position of being in two businesses built on contradictory distribution models.Iger has conceded that the network business is in decline, amid cord-cutting and eroding ratings and ad revenue. At the same time as that decline proceeds, Disney will continue to experience losses to its DTC business — although those losses will recede as the streaming services grow subs. Interested in getting the full story？ Here are two ways to get access: 1. Sign up for the Digital Media Briefing to get it delivered to your inbox 6x a week. >> Get Started2. Subscribe to a Premium pass to Business Insider Intelligence and gain immediate access to the Digital Media Briefing, plus more than 250 other expertly researched reports. As an added bonus, you'll also gain access to all future reports and daily newsletters to ensure you stay ahead of the curve and benefit personally and professionally. >> Learn More Now