Disney’s Q1 FY23 Earnings Results Webcast - Wednesday, Feb 8, 2023

[Heppenheimer]

What I can't understand is how Disney makes any money when they spend $150 to $250 Million per film (not including marketing), then sends them to Disney+ for $15 a month just 30 or 45 days later. An American family of four now spends $15 to watch that big-budget tentpole film as many times as they want, where just a few years ago that same American family would have spent $50 in movie tickets to see that same film once.

How does charging $15 to see a film in 2023 make more money than charging $50 in 2018? On top of the huge costs needed by Disney to keep the server farms and data centers all pumping out this stuff on demand to America's family rooms?

No wonder Burbank is losing Billions and Billions on Disney+.

Memories of a Cable TV Early Adopter: It's funny you mention 1975 and Cable! I understood Cable TV, and adjusted for inflation it was much more expensive per month than streaming. When I think back to the condo I was living in when I first got Cable, it must have been around 1978 or '79 as I moved to a new place in 1980. I was an early adopter! I also distinctly remember that my first cable subscription came with an overwhelming 36 channels! There was this crappy beige plastic box that sat on top of the TV and it had this cheesy illuminated sliding selector that click-click-clicked into one of the 36 channel options. I remember hating how it looked because the beige plastic clashed with my Disco living room decor of the time. I wish I had a photo of my first cable box to share!

Cable wasn't an impossible model at all in the 70s because...

Most channels were supported by advertising. Cable was merely a method of removing a TV network from the geographic limits of over-the-air broadcasting. Your cable bill mostly paid for the hardware and infrastructure to maintain it, plus the licensing fees for the local provider, but commercials still paid for the majority of the content...

...Speaking of which, it took a long time as well for cable networks to develop their own original content. In the early days, even the "pay channels" mostly just broadcast the uncensored and unedited theatrical cuts of movies that had yet to filter down to the regular broadcast networks. "Regular cable channels" mostly just showed content produced by others, or sports that the major networks didn't want to broadcast. It took many years before the cable networks regularly started producing their own content, and even here, it was still mostly supported by advertising. HBO was one of the only exceptions, but not everyone can be HBO.

So, this is why comparing early streaming to early cable is not equivalent. Cable networks had to show profitability and slowly build audiences before they could start making their own content, the streaming services basically put content first and foremost without the supporting audience or income streams.

 

[doctornick]

Or rent/buy virtually in addition to physical, then all access D+ streaming.

Absolutely, that too. I consider that part of the roll out of physical media but it is worth being noted so your digital downloads or "on demand" via cable, etc.

I don't really understand why the existence of Disney+ (or other streamers) should lead to a dramatic change of the movie windows. I would view Disney+ as the replacement for basically the premium or basic cable spots for a movie, which always was at least a few months after the (longer) theater window closed and was after DVD/download sales. Sure, you want to supplement D+ with movies being on there but no reason to do that at a cost of the theater revenue - it's better to double or triple dip as Disney as always successfully down with each film.

Streamers like Netflix, Prime, Apple that make their own films are a different story since they are basically made to go onto the streaming platform (any theater release is typically more for awards eligibility). But Disney+ shouldn't operate like that. I mean, any "movie" made specifically for Disney+ should be more on the scale of a Disney Channel original film in terms of cost and acting talent not on the scale of a theatrical release. Yes, the pandemic affected things in 2020-21 but that should be ignored now as we are passed that point and theaters are back to normal (well, perhaps a new normal, but more similar to before the pandemic).

 

[TP2000]

Selling a $15/mo package that can be canceled any time means not selling $15/ticket to each member of the family, and multiple times for repeat business.

Still believe the whole streaming business model is unsustainable long term unless the studios are willing to commit to making stuff on shoestrings with no attention to quality or star power in which case streaming originals may become this century’s version of cheapo drive-in fodder.

This is exactly what I find so baffling about it all. It just doesn't pencil out, unless they can radically remake their budgeting process and what they're paying people to make these films.

Or even worse, as you say, they lower the quality as part of that budget cutting process.

I have disposable income to spare, but I still cancel my Netflix the moment I finish the most recent season of The Crown. Now I just wait for Season 6, when I'll pay them another 15 bucks for a month to watch what I want. The ability to cancel and resubscribe at will without a contract seems to be another problem for the streaming model. It's too easy to cancel the product until you want it again for 30 days.

 

[TP2000]

Cable wasn't an impossible model at all in the 70s because...

Most channels were supported by advertising. Cable was merely a method of removing a TV network from the geographic limits of over-the-air broadcasting. Your cable bill mostly paid for the hardware and infrastructure to maintain it, plus the licensing fees for the local provider, but commercials still paid for the majority of the content...

...Speaking of which, it took a long time as well for cable networks to develop their own original content. In the early days, even the "pay channels" mostly just broadcast the uncensored and unedited theatrical cuts of movies that had yet to filter down to the regular broadcast networks. "Regular cable channels" mostly just showed content produced by others, or sports that the major networks didn't want to broadcast. It took many years before the cable networks regularly started producing their own content, and even here, it was still mostly supported by advertising. HBO was one of the only exceptions, but not everyone can be HBO.

So, this is why comparing early streaming to early cable is not equivalent. Cable networks had to show profitability and slowly build audiences before they could start making their own content, the streaming services basically put content first and foremost without the supporting audience or income streams.

I agree with all of that! And you are right to include the geographic/technical limitations of 1970's TV with rabbit ears on top of the Zenith as a reason why Cable was desirable and thus financially lucrative in the 70's and 80's. I'd forgotten that important piece of the Cable puzzle.

At the time I got Cable, the Seattle area could get some of the Canadian stations in on the UHF dial with a big enough antenna from Radio Shack!

I was merely responding to @flynnibus when he questioned why my pea-sized Capitalist brain can't comprehend how streaming pencils out for legacy studios when he asked me this about Cable...

Did you also still think like 1975 and that cable tv was an impossible model too?

Why is streaming now less doable then having another provider broadcast your home content?

 

[HauntedPirate]

Theatrical release date + 90 days = Physical media release
Theatrical release date + 180 days = Streaming release

Easy, predictable, and relatively simple to plan other things around. Instead, the idiot genius MBA's tinker with every single thing around every single movie release, and nothing makes any sense once their pencils spreadsheets get involved. All in an effort to "synergize" and wring a few more pennies out of a movie. What's that saying, something about walking past dollars to pick up pennies?

 

[CastAStone]

The 10-Q is up, not sure since when but it always lags the earnings call by a bit. A few highlights.

~$580M of amortization for 21CF and Hulu in the quarter. Huge.

This cash flow for DTC seems very, very fixable to this particular MBA? I’m not sure why the DTC freak out given what I see here.

Speaking of DTC, the awkward way they phrase this makes me think Hulu and ESPN+ both are already profitable (and Comcast gives us the same impression in re Hulu)

Hotel occupancy is still lagging pre-pandemic levels, and was lower than Q2, which shouldn’t happen. And the YoY revenue growth for hotels is also pretty bad!

Domestic Hotel Occupancy	2019	2020	2021	2022
Q2 (Jan-Mar)		77%	35%	84%
Q3 (Apr-Jun)		0%	50%	90%
Q4 (Jul-Sep)		~5%	~55%	~82%
Q1 (Oct-Dec)	92%	28%	73%	88%

(Disney doesn’t break out Q4 numbers from annual so I have to back into them, hence the ~)

Russia exit was a drag on earnings.

Domestic Parks labor +18% vs YA and while they don’t break it out, at least 2/3 of that is likely just staffing the parks up.

 

[Elijah Abrams]

The 10-Q is up, not sure since when but it always lags the earnings call by a bit. A few highlights.

~$580M of amortization for 21CF and Hulu in the quarter. Huge.

View attachment 699690

This cash flow for DTC seems very, very fixable to this particular MBA? I’m not sure why the DTC freak out given what I see here.
View attachment 699691

Speaking of DTC, the awkward way they phrase this makes me think Hulu and ESPN+ both are already profitable (and Comcast gives us the same impression in re Hulu)
View attachment 699692

Hotel occupancy is still lagging pre-pandemic levels, and was lower than Q2, which shouldn’t happen. And the YoY revenue growth for hotels is also pretty bad!

View attachment 699687

Domestic Hotel Occupancy	2019	2020	2021	2022
Q2 (Jan-Mar)		77%	35%	84%
Q3 (Apr-Jun)		0%	50%	90%
Q4 (Jul-Sep)		~5%	~55%	~82%
Q1 (Oct-Dec)	92%	28%	73%	88%

(Disney doesn’t break out Q4 numbers from annual so I have to back into them, hence the ~)

Russia exit was a drag on earnings.

View attachment 699689

Domestic Parks labor +18% vs YA and while they don’t break it out, at least 2/3 of that is likely just staffing the parks up.
View attachment 699693

So will this convince Iger to keep Hulu?

 

[CastAStone]

So will this convince Iger to keep Hulu?

I don’t know what will convince Iger either way on Hulu; if it’s spun off it will be acquired and merged into some other company’s existing service.

All options on the table includes merging it with D+ as well, presumably.

 

[doctornick]

I don’t know what will convince Iger either way on Hulu; if it’s spun off it will be acquired and merged into some other company’s existing service.

All options on the table includes merging it with D+ as well, presumably.

If Hulu is profitable on its own, then either selling it off for a profit/reduce debt or keeping as an independent service could make sense. I actually think the former is more likely at this point, as Hulu is probably more valuable to Comcast or some other media company than it is to Disney. If they sell it, then the unfortunate consequence would be a weakening of the content on Star in international markets (and less content for a theoretical general interest Star service that could get added to Disney+ domestically).

 

[el_super]

Hulu is probably more valuable to Comcast

Honest question since it's really the only part of Hulu I watch: but would Hulu be all that valuable without the FX content? Would Comcast be willing to make a deal with Disney to keep the FX content?

I still feel that Disney would want Hulu, and Iger's comments were to downplay the value in search of a deal.

 

[Elijah Abrams]

Honest question since it's really the only part of Hulu I watch: but would Hulu be all that valuable without the FX content? Would Comcast be willing to make a deal with Disney to keep the FX content?

I still feel that Disney would want Hulu, and Iger's comments were to downplay the value in search of a deal.

If Hulu is profitable on its own, then either selling it off for a profit/reduce debt or keeping as an independent service could make sense. I actually think the former is more likely at this point, as Hulu is probably more valuable to Comcast or some other media company than it is to Disney. If they sell it, then the unfortunate consequence would be a weakening of the content on Star in international markets (and less content for a theoretical general interest Star service that could get added to Disney+ domestically).

I still like the idea of Disney+ USA adding a Star hub (either with or without a different name), as long as it is an extra charge add-on.

 

[CastAStone]

Honest question since it's really the only part of Hulu I watch: but would Hulu be all that valuable without the FX content? Would Comcast be willing to make a deal with Disney to keep the FX content?

I still feel that Disney would want Hulu, and Iger's comments were to downplay the value in search of a deal.

I think easily more than half of Hulu’s value is the content library it has. As NBCU content has migrated out of that library to Peacock, that has certainly hurt its value to my family. Losing Disney/21CF content would hurt it further.

Hulu‘s name, live TV service, and original programming (e.g. Only Murders, Handmaids Tale) also have value, but a sale where the Disney-21CF back catalog isn’t included or fades out after a few years wouldn’t be very appealing IMHO.

 

[CastAStone]

And the YoY revenue growth for hotels is also pretty bad!

Since I posted this I realized that Disney has significantly increased the number of All Star rooms available for booking since last year and permanently closed 198 deluxe rooms and 2 suites at GF, which likely impacted this.

 

[MisterPenguin]

Would Comcast be willing to make a deal with Disney to keep the FX content?

That would be some chutzpah on their part after removing Comcast/Universal content from Hulu.

 

[Alanzo]

The 10-Q is up, not sure since when but it always lags the earnings call by a bit. A few highlights.

~$580M of amortization for 21CF and Hulu in the quarter. Huge.

View attachment 699690

This cash flow for DTC seems very, very fixable to this particular MBA? I’m not sure why the DTC freak out given what I see here.
View attachment 699691

Speaking of DTC, the awkward way they phrase this makes me think Hulu and ESPN+ both are already profitable (and Comcast gives us the same impression in re Hulu)
View attachment 699692

Hotel occupancy is still lagging pre-pandemic levels, and was lower than Q2, which shouldn’t happen. And the YoY revenue growth for hotels is also pretty bad!

View attachment 699687

Domestic Hotel Occupancy	2019	2020	2021	2022
Q2 (Jan-Mar)		77%	35%	84%
Q3 (Apr-Jun)		0%	50%	90%
Q4 (Jul-Sep)		~5%	~55%	~82%
Q1 (Oct-Dec)	92%	28%	73%	88%

(Disney doesn’t break out Q4 numbers from annual so I have to back into them, hence the ~)

Russia exit was a drag on earnings.

View attachment 699689

Domestic Parks labor +18% vs YA and while they don’t break it out, at least 2/3 of that is likely just staffing the parks up.
View attachment 699693

Thank you very much for the writeup.

 

[doctornick]

Honest question since it's really the only part of Hulu I watch: but would Hulu be all that valuable without the FX content? Would Comcast be willing to make a deal with Disney to keep the FX content?

I still feel that Disney would want Hulu, and Iger's comments were to downplay the value in search of a deal.

I would imagine that any sale of Hulu to another party would include keeping FOX content on that service (at least for some specified period) in addition to obviously the original Hulu content.

Now, any sale could potentially include some back and forth about what specific content would be included. Disney would probably keep the more family friendly FOX stuff for Disney+ which is already on there. Disney could fight to have some FOX content included in the sale be non-exclusive (i.e. be able to appear on both Hulu and on Disney+ if they add a Star component).

Edit: just for clarity, but I think some content already is carried on both Disney+ and Hulu at the same time, like The Orville.

 

[doctornick]

I still like the idea of Disney+ USA adding a Star hub (either with or without a different name), as long as it is an extra charge add-on.

Doubt that. If they were to add a more "adult" section under the Star brand on Disney+ in the USA, it would certainly be run the same as it is internationally, with it being included in the service cost. And with a requisite monthly subscription fee increase.

 

[doctornick]

I think easily more than half of Hulu’s value is the content library it has. As NBCU content has migrated out of that library to Peacock, that has certainly hurt its value to my family. Losing Disney/21CF content would hurt it further.

Hulu‘s name, live TV service, and original programming (e.g. Only Murders, Handmaids Tale) also have value, but a sale where the Disney-21CF back catalog isn’t included or fades out after a few years wouldn’t be very appealing IMHO.

Were Disney to sell Hulu to Comcast, the likely outcome would be a merging of Hulu with Peacock which would mean a return of Universal content to the service.

That said, I think part of the appeal of Hulu to another company (whether it be Comcast or even someone else like Paramount) would not only be the name and like TV but the established subscriber base. Disney+ is thriving compared to other media companies' streamers so other service would be more interested in those Hulu subs potentially be converted to their own services (obviously they would have to retain them).

 

[Indy_UK]

Disney selling their share of SKYTV to Comcast did knock a good chunk off the 20CF debt that they took on. Selling off Hulu too seems like a no brainier to me to knock that down even further.

ESPN+ remain independent for the eventual move where it will stream the live linear channels and then bump the price massively there.

 

[Elijah Abrams]

Doubt that. If they were to add a more "adult" section under the Star brand on Disney+ in the USA, it would certainly be run the same as it is internationally, with it being included in the service cost. And with a requisite monthly subscription fee increase.

How about they launch something similar to Star as a separate service in America that would replace Hulu if Disney decides to sell it?