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Breaking down Disney's mixed Q2 results

On Thursday, Disney announced that it had added fewer than 4 million subscribers to its Disney+ platform, missing estimates. Julie Hyman, Myles Udland, and Brian Sozzi talk with Rich Greenfield of LightShed Partners about the company’s disappointing subscriber miss and the future of streaming.

Video Transcript

MYLES UDLAND: Last night, we had a huge rush of earnings-- DoorDash, Coinbase, Airbnb among them. But Disney the real star of the show last night. Stock under a little bit of pressure following its latest quarterly report. Joining us now to talk through the numbers is Rich Greenfield. He's a partner over at LightShed. Rich, thanks so much for jumping on this morning. Let's start with your first impressions coming out of the quarter and how you're seeing the state of Disney today relative to maybe where the Street was expecting them to be, coming into this.

RICH GREENFIELD: Look, I think Disney's in the middle of a recovery. I think what you're seeing in terms of the stock performance is that Disney over the last-- essentially over the last 12 to 15 months has essentially decoupled from its earnings. You know, investors are basically giving it credit for kind of a full recovery from the pandemic from a theme park standpoint, even from a movie standpoint.

And so the stock has really risen over the last year primarily on one thing, which is investor excitement that this can be the next Netflix or that they can be a direct-to-consumer streaming success-- led by Disney Plus globally, now has over 100 million subscribers, as well as Hulu and, kind of secondarily, ESPN Plus. But this is really all about Disney Plus. And you've had huge growth in Disney Plus over the course of the past year. This quarter was underwhelming. And sort of their commentary about the rest of the year wasn't nearly as exciting, I think, to investors is what we've seen over the last year.

I think the question a lot of investors are going to be asking is, did the same pull forward we saw at Netflix, was there a lot of pull forward at Disney? And does that mean slower growth over the course of the next 12 months? And I think that's why the stock is selling off here, is that it is just not the direct-to-consumer growth story that people were hoping for, coming out of earnings.

JULIE HYMAN: Well, and you also had some other questions for the company going into earnings, right, Rich, about sort of bigger picture strategy things. And one of the things you asked, which is not really a new question, I think, but it's one that the company hasn't answered, is why ESPN and ABC make sense as a part of Disney. Did we get any sort of answers to that question during this earnings report of the call?

RICH GREENFIELD: Well, look, over the last 12 months, they were invaluable, right? Movie theaters shut down, theme parks closed, consumer products sort of weak. Like, for the last 12 months, the amazing free cash flow that Disney-- sorry, that ESPN, the Disney Channel, that the cable network, even the broadcast network ABC throws off definitely kept this company very healthy from a cash standpoint.

But now that we're coming out of the pandemic, these are assets that just look like they're going in the wrong direction. I mean, look at the viewership of the Oscars. Look at the viewership of-- I mean, take the NBA. NBA viewership during the regular season is down mid teens. You know, consumers are just not turning on linear TV. They're watching-- streaming video. And whether that's Netflix or whether that's Disney Plus or Hulu or YouTube, that's the future. And so we just look at it as these are assets that are not fixable.

And so, Disney didn't really say anything yes or no about what the future of these assets. They clearly have spent an incredible amount. They had two big announcements last night in terms of sports rights, signing up Major League Baseball, as well as signing up LaLiga. But you sort of look at this, and you go, they've set so much in motion over the course of the last six months on a sports rights standpoint, nailing down the NFL. It just feels like the time is going to be right over the coming 12 months to separate these two assets.

No investor we talk to-- and we talk to lots of investors in the media space-- nobody is buying Disney or owns Disney because of its cable network and broadcast franchise. I think investors would cheer, not having to worry about cord cutting anymore as they focus on Disney as a stock.

MYLES UDLAND: And Rich, just quickly to follow on ESPN and the sports rights conversation, you know, Bob Chapek made a passing comment about the Sunday Ticket package, which I think is up maybe after next season. Is that, to you, like, a logical fit within an ESPN Plus that is a more expensive standalone outside of a Disney type structure? And is that something that makes sense?

RICH GREENFIELD: Look, Sunday Ticket is a premium product. Generally, you're charging $300 a year. The question really becomes, how many incremental subscribers can you drive? Because you don't make money. If you're buying Sunday Ticket for effectively $1 and 1/2 to $2 billion, you're not making money selling it at $300 a year or $350 a year. The way DirecTV historically made money on it is in order to get Sunday Ticket, you had to have DirecTV. It's a little hard signing up for a $5 or a $6, $7 a month Disney Plus. It doesn't really square very well with making money on Sunday Ticket.

Now, look, maybe Hulu Live-- you know, Hulu Live is a $65 a month product. It could be an interesting add-on to Hulu Live. I think my guess is, Myles, when you think about Sunday Ticket, it's probably going to be nonexclusive. You're probably going to see a number of digital players. Like, I wouldn't be surprised, whether it's Apple or Amazon, ESPN Plus, you could see this being sold by multiple players.

If someone's going to come in and pay $2 billion and take the whole thing, it's probably Amazon or Apple. My guess is probably Amazon, just given their increasing interest in football. But again, I wouldn't be surprised if it went, for the first time ever, went nonexclusive, just because the number, that $2 billion number the NFL is probably looking for, is a really big number and probably is going to require multiple players to step up.

BRIAN SOZZI: Rich, I really enjoyed your live tweeting of the earnings call last night. And you brought up a couple of good points regarding the 45-day exclusivity window for two movies later this year. Normally, Disney has a 90-day window. How lethal is that to the movie theater sector, AMC-- you name it?

RICH GREENFIELD: Look, this is one of the reasons we have a sell rating on AMC. I know that the Reddit and Wall Street Bets mob is continuing to buy the stock like there's no tomorrow. But the reality is, the fundamental business is changing. I mean, AMC is now dramatically more expensive than where the stock was pre-pandemic. And what you're seeing from the studios is they're changing their business model. Windows used to be 75 to buy it online, 90 days to rent it. Now you're getting to 45 days. And I think it won't be buying it at 45 days anymore.

My guess is you're going to see it on Disney Plus. You're going to see it on HBO Max. You're going to see movies get to streaming at no incremental cost very quickly after they're in theaters. And you could say, oh, 45 days is great for AMC, great for the studio business. It's not because if you know a movie is going to be-- a month and a half later, movies are going to be available in your home at no incremental cost, some percentage of people are not going to go. They're going to wait. It's going to make the bar.

You're only going to go see in the theaters great movies. You're not going to see the OK movies. And sure, you may still see "Black Widow" in the theaters. You may see the next "Avengers" type movie in the theaters or the next "Batman" in the theaters. But there's going to be a lot of movies where you just say, you know what? I'll wait and see it at home. And the movie theater business economically, it's just means they're going to make less money. So they're going to make less money than they made pre-pandemic.

And a stock like AMC is trading dramatically-- I mean, literally crazy multiples. I mean, you're trading at multiples that we've never seen in the movie theater business in the entire history of the movie theater business ever trade at. You would think the movie theater business is the best business you've ever seen. In fact, it's in secular decline. And the secular decline is getting worse because studios like Disney are realizing you need to get movies sooner to streaming like Disney Plus to drive subs.

JULIE HYMAN: Right, and of course, the secular decline was happening pre-pandemic, Rich. So it's clear who you think the loser from the streaming wars is going to be, right? AMC. So to take a step back--

RICH GREENFIELD: Movie theaters are going to be a tough place.

JULIE HYMAN: So let's look at who the winner is. When you look among the different streaming services, who's the one that you think is best positioned?

RICH GREENFIELD: Well, look, I think you have to look at Netflix, just given-- it's funny. So many people just look at sort of, hey, Disney has 100 million subscribers in 18 months or whatever, 15 months. Look how fast they've done this. Netflix is at 200 million subs, and they've been at this for a decade plus. But that doesn't really tell the whole story. What people miss is that Netflix has a $12 a month RPU and Disney has an under $4 a month RPU. In most of Asia, Disney actually just gives Disney Plus away.

And so I think Netflix is the big winner. They have such scale. The revenue scale dwarfs. I mean, yes, they have two times the subs, but they have five to six times the revenue. That gives them a tremendous amount of power to acquire content, to invest in content. And so, I think what you saw from Disney today is just how hard the streaming wars are. We've seen this from Peacock and NBC and others. Streaming is really, really hard. I think investors are going to start giving Netflix a lot more credit for the success they've had and how well-positioned they are going forward.

Look, I think Disney is in a very good position relative to other media companies. But I do think that Netflix ends up being a meaningful winner when you look at their positioning now.

MYLES UDLAND: All right, great stuff as always. Rich Greenfield, partner at LightShed Partners. Rich, appreciate the time this morning. Hope to talk soon.