In a recent earnings call, The Walt Disney Co.'s (DIS, Financial) CEO, Robert Iger, and interim Chief Financial Officer Kevin Lansberry provided insights into its streaming business, financial results and strategic direction. The discussion shed light on the company's efforts to improve margins, the importance of partnerships and the role of content in fueling the direct-to-consumer businesses.
Streaming with Disney+ and Hulu
Iger acknowledged that Disney's streaming business, which is not even four years old, still has a lot of room for growth. He expressed admiration for Netflix's (NFLX, Financial) impressive margins, which were achieved over a longer period of time. However, Iger emphasized that Disney is committed to finding the right balance between investment in programming, pricing strategy, marketing expenditure and technological advancements to enhance customer engagement.
Despite being relatively new to the streaming industry, Disney has made significant progress in managing costs. Iger highlighted it has exceeded its cost reduction targets, a crucial step toward improving margins. He also mentioned that pricing adjustments, password sharing, technology-driven customer engagement and advertising are additional avenues for margin improvement.
During the earnings call, Iger mentioned the media gaint implemented a significant price increase for Disney+ in late 2022 and did not see significant churn or loss of subscribers as a result. He also mentioned it just announced another price increase for the premium product, while keeping the advertiser-supported product flat in terms of price. This pricing strategy is aimed at migrating more subscribers to the advertiser-supported tier and taking advantage of the healthy advertising marketplace for streaming. Additionally, Iger noted that a substantial amount of new subscribers are signing up for the ad-supported tier, suggesting the pricing is working for the company. Therefore, based on these statements, it can be inferred Disney is increasing streaming prices to improve the bottom line and drive growth in the streaming business.
While Iger expressed optimism about Disney's ability to enhance margins in the streaming business, he refrained from making specific predictions. He emphasized the company is fully aware of the work that lies ahead and is committed to achieving the necessary improvements.
During the call, Kannan Venkateshwar, an analyst, inquired about Disney's priorities regarding partnerships for its streaming business. Iger responded by emphasizing the need for partners who can contribute to the growth of the direct-to-consumer businesses, particularly Hulu. He mentioned that any strategic decisions regarding the linear networks would be made with the objective of maintaining a steady flow of content to fuel their streaming platforms.
Lansberry was asked about the guidance for the fourth quarter and the drivers of potential acceleration. He acknowledged the need for acceleration in order to meet the full-year high single-digit guidance. While he did not provide specific details, Mayer assured the analysts that Disney is focused on driving growth and will continue to evaluate various factors to achieve their financial targets.
Questions on strategy
Multiple analysts inquired about the strategic direction of Disney in an attempt to determine where Iger would take the company given his return to the helm.
The first question came from JPMorgan's Phil Cusick. He asked about the practical considerations of separating assets like ABC, National Geographic or others from ESPN or Hulu. He also asked if it could be assumed that most of those TV assets had been fully depreciated. Iger responded, "I'm not going to comment on the future structure of the company or the asset makeup of the company. As I've said, we're looking at strategic options both for ESPN and for the Linear Networks, obviously, addressing all the challenges that those businesses are facing."
Next, Kannan Venkateshwar from Barclays asked a question directed at Lansberry, seeking clarification on the drivers of the projected acceleration in fourth-quarter operating income growth, given the guidance for high single-digit growth. Lansberry mentioned there is significant growth in the direct-to-consumer business and the Parks and Experiences business. These two businesses are the main drivers of growth compared to the previous year.
Sports betting
Iger also discussed the company's recent partnership with Penn Enertainment (PENN, Financial) for ESPN Bet, a sports betting platform. He said the decision to enter the sports betting market was driven by the opportunity to significantly grow engagement with ESPN consumers, particularly young consumers. He also highlighted that Penn's offer was better than any others and that Disney trusts in its ability to use this partnership as a growth engine for its business.
The strategic partnership indicates Disney's vision for the future of ESPN. Iger mentioned that the partnerships the company is looking to create are aimed at increasing the content that ESPN offers and possibly providing distribution and marketing support. The ultimate goal is to take ESPN over the top and transform it into a primarily direct-to-consumer business. This shift toward a streaming business aligns with the industry trend and the growing popularity of streaming platforms.
The partnership with Penn and the entry into the sports betting market also raises questions about advertising partnerships with other betting or sports gaming partners. Michael Morris asked if Disney would forego advertising partnerships with other gaming companies. In response, Lansberry said they do not see themselves in a position where they would ever have to forego advertising from other gaming companies.
Overall, the partnership reflects Disney's strategic focus on expanding its reach in the sports betting market and leveraging the growing popularity of streaming platforms. This move aligns with the company's goal of increasing engagement with consumers and driving growth in its business.
My thoughts
Iger's return was sure to bring changes. Sports betting seems like a strange fit with Mickey, but the synergy potential with ESPN is clear. The CEO provided valuable insights into the company's streaming business, financial results and strategic direction. He acknowledged the challenges of competing in the streaming industry, but expressed confidence in Disney's ability to improve margins through cost management, pricing adjustments, technology-driven engagement and strategic partnerships. With a focus on maintaining a steady flow of content, Disney aims to fuel the growth of its direct-to-consumer businesses and solidify its position in the streaming market.
With the recent sell-off of Disney stock, the likely near-term increase in profitability from increasing streaming prices and the future potential for sports betting revenue, it seems like the company is in a good position to outperform over the next few years.
