The Business Of

Movies | Disney | Outlook

Morning All!

Fri-yay! The weekend is so close! But before we get there, we’ve got one final newsletter to round off The Business Of Disney and also The Business Of Movies! Let’s have a quick recap of some of the fun, surprising things we’ve learnt about The Business Of Disney this week.

• How Do They Make Money - Disney is the largest merchandiser in the world! ~$50bn of Disney merchandise is sold annually and Disney take a ~10% cut.

• What Are Their Costs - labour is the largest cost line for Disney’s parks. And Walt Disney World in California is the largest single-site employer in the world!

• What Do They Do With Their Profits - if you thought Netflix spent a lot on content ($16bn in 2022), think again. Disney spent $30bn in 2022!

Today, for the final part, we’ll look at what the future looks like for Disney. And shortly after this email gets sent out we’ll have a special Career Talk with the co-creator of The Business Of…!

Career Talk - Software Development

That’s right! It’s the next edition of our Career Talk newsletters. Ever since I (Nigel) started writing The Business Of, I’ve been using ‘we’ when referring to The Business Of. But who’s we? Well, today you’re about to find out!

This week we’re exploring Software Development with my friend Sam Houston - the tech brains behind The Business Of! After graduating from the University of Bristol in 2015 with a Maths degree, Sam became a software developer at IPCortex and then DWYL. Working on cool projects like the Thomas Cook app. And he’s now been a software developer at RVU (owner of Uswitch.com, Confused.com) for 2 years.

I’ll be chatting to Sam about;

• how he got into software development,

• what skills he needed to become a full-stack developer,

• what coding languages he’d advise students to learn,

• the importance of having a technical founder in a company, and,

• why software developer contractors get paid so much (>£500/day)!

It really isn’t one to miss for anyone who’s interested in coding, or thinking about a career in software development! But before that, let’s dive into the outlook for Disney.

Bye Bye India?

So, one of the main points from this week has been that Disney’s growth in streaming hasn’t led to increased profits. In fact, it’s been very loss-making! Which may’ve surprised some of you because we saw that Disney had 235m subscribers across their 3 streaming platforms. Disney+, Hulu and ESPN+. Which is actually more than Netflix’s subscriber count of 231m!

However, the issue for Disney is that their streaming revenue in 2022 was 38% less than Netflix’s. Why? Because the average revenue per subscriber (ARPS) for Disney was about 38% less! $7.39 (Disney) vs $11.76 (Netflix). The chart below (from Tuesday) shows us this graphically…

Now, as subscriber growth starts to slow (like we saw at Netflix), a big, big priority for Disney will be lifting this ARPS. Otherwise, Disney won’t be able to grow their streaming revenues enough to start making a profit!

But how can Disney lift their ARPS? Well, there’s two main ways. The first, and probably the obvious option - is for the company to lift the monthly prices for their subscribers. Since the company’s founding, we’ve seen this happen twice - in Mar 2021 and Dec 2022. With the chart below showing how significant the latest price hike was!

The second, and less obvious, way Disney could can lift ARPS is by changing the mix of their subscribers. So that the subscribers who pay more become a higher proportion of their subscriber count. And at the company’s latest earnings call, CEO Bob Iger gave us a little indication of how that would happen. He said this…

So what’s Bob saying here? Well he’s saying that some markets aren’t working for Disney at present. And that it isn’t sensible for Disney to be spending so much on global content in regions where subscribers don’t pay much. That makes sense.

But what’s Bob REALLY saying here? He’s saying that India is an issue for Disney.

Shhh Bob! Don’t let Virat hear you!

As we saw on Tuesday, India makes up ~40% of Disney’s subscribers. But the average revenue Disney makes from an Indian subscriber is only $0.88 per month! That’s clearly super low! So what can and may Disney do? Well, they could stop investing in their product in India and slowly reduce the % of subscribers that are from the region. And by losing the IPL cricket rights and not renewing key shows like Game of Thrones in India. It’s clear that Disney don’t mind if they lose a few subscribers in India!

Bye Bye Cable?

This week we came across a phrase many readers many not be familiar with - cord cutting. And we touched on the fact that this is the trend whereby more households are opting to ditch their TV providers. And just watch shows on streaming platforms. I also confessed that I’m one of these ‘cord-cutters’!

We saw the damage cord-cutting is having on Disney. As their ESPN subscriber count has fallen from >100m subscribers a few years ago to 74m now. But another trend is beginning to pressure Disney further. And that trend is skinny bundles.

What are skinny bundles? Well, I’ll use a UK example. Previously if we wanted to watch TV, we had to get a package from Sky. And in these TV bundles, we’d have 900 channels - of which most people would watch 5-10. But the price we’d pay would be for all 900! Which seems like a huge waste right?

Well, what skinny bundles do is they allow people who want to watch TV to pick which channels they want. No longer do you need to pay for 900 channels! You can just pay for the 5-10 that you want. Great for us viewers. But not so great for Disney.

Because previously, Disney could sell ESPN, ESPN 2, Disney Channel, ABC, National Geographic, + the rest of their channels to the tv-pay provider. And even if people didn’t watch those channels, Disney would get revenue as they were technically subscribers! Cheeky I know! But that’s all changing. Because now people can choose what they watch, Disney have been, and will continue to see subscribers to their channels fall.

And that’s not all. On top of revenues being pressured, Disney are seeing their costs rise! The chart below shows us how much the annual media rights for the NBA went up in the latest deal renewal…

But hold on. If it costs Disney more to acquire the content from the NBA, NFL, MLB. But they have less subscribers watching it because people prefer streaming - will the cable TV business even exist soon…? Disney’s CEO isn’t sure it will!

Hello Adversity, Meet Bob

It’s fair to say, Disney have had some of their most eventful years recently! Cord cutting is posing a serious risk to what’s historically been very stable cash flows from their TV business. Rising content costs add further pressure to the profitability of that segment. Netflix’s rise saw Disney jump into streaming in 2019. COVID closed down parks and hammered group margins. And the company are dabbling further in advertising, (link) like we saw with Netflix. Gosh, there’s a lot going on!

So where do Disney start? Well, as for any company, you need the best people (smartest, most experienced, etc) making the big decisions. And in 2022, we saw the return of the real king of Disney. No, not Tony Stark. CEO Bob Iger. In 2020, Mr Iger stepped down as CEO of Disney after 15 years in charge. Transforming the company along the way. But after all the chaos of the last few years, Disney’s board felt like they needed him back in charge.

So, can Bob change things up? Well, he seems incredibly committed to making sure Streaming becomes profitable soon. He said it was his number one priority. Showing his awareness that the cable TV business really is dying a slow death. And Disney need Streaming profits to make up for that.

This week in fact, Disney start their first round of layoffs under Bob. With a total of 7,000 people set to lose their jobs. So, plenty of questions for Mr Iger and co.. And whilst Disney’s short-term future looks uncertain, shareholders will be hopeful that the company can re-create its business model soon!

Roll Call!

So that brings us to the end of The Business Of Movies: Part 3. We hope you enjoyed understanding the business of Disney. To go back and read any of the previous newsletters from Monday-Thursday, you can find them here. You can also find newsletters for Tesco, Deliveroo, Man United, Ninety One, LVMH, Cineworld and Netflix there too!

But as we said earlier, it’s not quiteee the end because we have a fascinating Career Talk coming up imminently! Next week, we’ll be taking our scheduled week off! So you don’t get sick of us aha! And so we can build up our content and take a little break.

21st Apr 2023

Nigel Jacob CFA