“A Worrisome Circumstance”
An update on The Walt Disney Company
From “Disney: Breaking The Dam” (November 2021): “Previously, I argued the company’s U.S. DTC bundle approach was sensible (and I still believe it was at the time of launch given the position Hulu had established in the U.S. market, along with the ownership issues Disney had to navigate while still learning the ropes in the DTC business). That said, I think the time has come for a change: Disney needs to collapse Disney+ and Hulu into a single app (ESPN+ is a different animal, but I think tighter integration within a single app makes sense here as well). As we saw with Hamilton, Disney+ has the ability to attract millions of new subscribers who may be outside of the Marvel / Star Wars / children’s demos; the question is how they can convince these subscribers to keep using and paying for the service… I believe that the consolidation of Disney’s U.S. SVOD services is the answer to this problem.”
The problems referenced in that last sentence, and discussed in detail throughout the write-up, were user engagement and ARPU’s. The rapid subscriber growth reported by Disney’s DTC business in the early years after the launch of its namesake service was impressive, but I felt the long-term answer to key questions on ARPU, engagement, and retention would be greatly influenced by the quality and quantity (variety) of content offered, as well as how those services were packaged (for example, their U.S. bundle).
Scale, when measured solely in terms of the number of paid subscribers across the various DTC services, wasn’t sufficient; they needed to figure out how to deal with variables like churn and pricing power, which in my mind would be greatly influenced by the level of platform engagement. This was particularly important for the long-term future of ESPN / sports rights, which is why I believed the DTC bundle - and ideally a single service for those subs - provided the clearest path for Disney’s linear to streaming transition. I continue to believe this is the right decision for the long-term health of the business (importantly, and in contrast to some notable legacy media peers, I also believed Disney could effectively execute that strategy).
On Disney’s Q2 FY23 call, CEO Bob Iger revealed that they’re beginning to implement this change: “We will soon begin offering a one-app experience domestically that incorporates our Hulu content via Disney+. While we continue to offer Disney+, Hulu, and ESPN+ as standalone options, this is a logical progression of our DTC offerings that will provide greater opportunities for advertisers, while giving bundle subscribers access to more robust and streamlined content, resulting in greater audience engagement and ultimately leading to a more unified experience.”
This decision is noteworthy, particularly given what Iger was saying a few months ago; at that time, he openly discussed the idea of selling Hulu and questioned the role of “undifferentiated” general entertainment content – i.e., much of the content you’d find on Hulu. He has since walked back those comments, which I think is sensible; in my view, his prior characterization was a misguided way of thinking about the role of general entertainment content as part of Disney’s broader DTC strategy. Some recent Nielsen data for the U.S. market helps to explain why I feel that way: in March 2023, the newest season of “The Mandalorian” - the epitome of Disney’s branded IP - was streamed for a total of 3.6 billion minutes; in the same month, Netflix had two shows with comparable or higher viewership (3.6 billion minutes for “You” and 4.7 billion minutes for “Outer Banks”). Why are these shows, which would’ve fit anybody’s definition of “undifferentiated” entertainment programming a few years ago (“You” struggled on linear TV before the streamer acquired the rights), exhibiting huge success on Netflix? Iger’s announcement about the consolidated app – which he called “a significant step toward creating a growth business” – may suggest he’s starting to agree with me on the answer to that question; scale, measured in terms of paid subs / distribution and mind share / engagement, is very important to the long-term success of Disney’s streaming businesses collectively. That statement, while relevant for entertainment programming, is especially true for ESPN (sports rights).