Disney CEO affirms streaming future, but not without short-term pain

On his first conference call with investors and reporters since returning to the Walt Disney Company, chief executive Robert Iger made a few bold proclamations.

First, the company he helped lead into the 21st century needs to reorganize around a few key business sectors. Second, the future of his media empire is rooted firmly in streaming platforms. And third, none of the company's long-term initiatives are going to come cheap, so the company had to look for ways to cut costs.

On Wednesday, Iger and the rest of Disney's executive leadership team revealed how they're planning to undertake those ambitions, just minutes after the company surprised Wall Street analysts with growth in streaming subscribers and direct-to-consumer revenue.

For its fiscal 2023 first quarter, Disney grew its domestic subscriber base for Disney+ by 200,000 customers, to round out the three-month period ending December 31, 2022 with 46.6 million subscribers in the United States and Canada. Overseas, Disney+ grew by 2% to end the quarter with 57.7 million customers.

Disney also saw gains at its sports-centric ESPN+ service, which grew 2% to 24.9 million paying subscribers. Its general entertainment service, Hulu, also saw an uptick in subscribers, ending the quarter with 43.5 million customers to its SVOD and 4.5 million customers paying for the virtual MVPD version of Hulu that includes linear broadcast and cable channels. Global direct-to-consumer revenue was $5.3 billion, a 13% year-over-year increase, accounting for nearly one-third of the company's overall revenue. Its DTC operating loss grew to $1.1 billion, a 78% increase in loss compared to 2021.

Operating loss aside, the subscription and revenue gains were impressive, considering Disney raised the subscription price of its three core direct-to-consumer products in 2022, with the latest price increase affecting Disney+ and Hulu subscribers within the financial quarter reported Wednesday. But while ESPN+ grew its average revenue per user (ARPU) to $5.53 — a 14% quarterly increase — the domestic ARPU for Disney+ fell by 2%to $5.95.

The drop in ARPU for Disney+ was unusual, particularly after Disney raised its base subscription fee while also introducing a cheaper version of the streamer that was subsidized by advertisements. On Disney's earnings conference call, Iger said the company needed to take a closer look at its pricing structure and promotions for its direct-to-consumer streaming services.

"We are in a global arms race for subscribers," Iger said, noting the increasingly-competitive streaming market without naming any of his competitors. "In our zeal to go after subscribers, I think we might have gotten a bit too aggressive in terms of our promotion, and we're going to take a look at that."

Iger didn't say whether Disney would consider future price increases on any of its services, or if the company intends to move away from a bundle that gives subscribers access to Disney+, Hulu with Live TV and ESPN+ at a discount. But he did suggest a combination of both might be possible, particularly after Disney+ posted domestic subscriber gains even after raising prices last quarter.

"We took our pricing up substantially on Disney Plus, and we only suffered a de minimus loss of subs," Iger said. "That tells us something."

Linear business no longer growth engine

The majority of Wednesday's conference call was spent on the topic of streaming, which Iger directly affirmed was the future of the company, particularly as its linear content business continues to erode.

While Disney's linear business — which includes ABC, the Disney Channel, the ESPN multiplex of sports networks and, more recently, FX and National Geographic through the purchase of some cable assets from Fox — proved to be healthy for several decades, Iger said technology has resulted in an authority shift where consumers, not C-suite executives, dictate what content gets made and how it gets distributed.

"When you think about what streaming is...it is the ultimate a-la-carte proposition for the consumer," Iger said. "It gives the consumer so much more authority than they ever had before. It gives them the ability to watch programs, not channels or bundles."

The core linear business still presents opportunities for revenue and marketing, but not so much for growth anymore, Iger said. He noted an episode of the show "Abbott Elementary" might get viewed by someone in the 60-plus demographic on ABC, only to be watched the next day by someone in the 30-plus demographic on Hulu.

When asked on the call if Disney would eventually consider converting ESPN from a linear brand to an a-la-carte, streaming-only offering, Iger said he believed it was inevitable, but declined to say when the company might actually make that happen. (He shot down reports that suggested Disney would spin off or sell ESPN, saying the brand is too strong and too lucrative to do that.)

"[Streaming] remains our number one priority," Iger said. "It is in many respects our future. But we're not going to abandon our linear or traditional platforms while they can still be a benefit to us and our shareholders."

But Iger said Disney would take a more tepid approach to content creation for its linear and streaming brands, leaning harder on its core brands — Pixar, Marvel Studios, the Star Wars film franchise, the Simpsons and others — that still draw audiences to the theaters, convince them to tune in on television and keep paying for their Hulu and Disney+ subscriptions. The comment suggested Disney's channels and platforms wouldn't overly-experiment, but rather stick with what's familiar and what works.

"Times have changed...obviously, things have gotten more competitive," he said. "The forces of disruption have only gotten greater. And there have been things...that have gotten tougher from a macroeconomic perspective. That said, we're still a company focused on creativity at its highest form."

But that creativity will have to come at a lower cost, and with fewer people at the company. At the top of the conference call, Iger said Disney would lay off 7,000 workers around the world this year as it seeks to reduce expenses by at least $5.5 billion.

Speaking on the call, Disney's Chief Financial Officer Christine McCarthy said the majority of the company's savings — about 50% — would come from its marketing divisions, while 20% would come from labor (including the layoffs) and another 30% from technology and product procurement.

The doing-more-with-less approach is just one facet of the company's long-term strategy for growth. Iger also says there are business opportunities in licensing out Disney's intellectual property — mostly, it's films and TV shows — to third parties.

The strategy would be a reversal taken by his predecessor, Robert Chapek, who moved away from licensing Disney films and TV shows to platforms like Netflix and Starz in favor of building up Disney+ and Hulu as a destination for Disney-owned content.

But Iger says there are untapped revenue channels that can help Disney work through some of its short-term business challenges.

"We have opportunities using the talent we have to create for third parties, and we're going to look at that very seriously," Iger said. "I actually think there's a nice opportunity to create a growth business for that company."