Disney and CEO Bob Iger (who returned in November 2022) had a challenging 2023, including battles with Florida’s Governor and activist investor Nelson Peltz, a poor film slate and burnt-out studio group, the writers/actors strikes, an advertising recession, the rate of decline in the industry has now steepened to -7% year-over-year (according to the company), higher interest expense and sports rights costs, and a massive turn by investors and the financial markets on the streaming industry (where Netflix is viewed to have won the “streaming wars” and the remaining need to show profits, consolidate, or shutter).
As such, Iger must have felt great to report a good set of figures for Q4 2023 while also being able to present a way forward for ESPN to go directly to consumers. We'll get into some thoughts about Disney in 2024 and beyond shortly; however, to cut to the chase for what are the implications for commercial real estate, retail, and consumer expenditures, resolving ESPN and Disney+ challenges allows for the company to focus more on content. More focus and dollars on Disney content (including Disney, Marvel, and Pixar) means more Disney magic and passion, which is what fuels all of Disney’s consumer touch points. However, Disney’s movies take two-plus years to create and release. As such, Disney’s consumer touch points are not really going to be “enjoyed” until late 2025. And so, touch points (retailers, nearby operators to the Parks, movie theaters, etc.) are going to have to “make do” until we get to that happier time.
As it relates to the Disney's parks, California saw an increase in visits while Florida saw a decrease down. “Florida was so 2021 and 2022,” plus they are anniversarying Disney World’s 50th Anniversary when admission revenue was up over +20% and attendance up mid-teens for the quarter. On this week's earnings call, management indicated no recent lapse in consumer demand for the parks; moreover, Placer’s Travel & Tourism Report shows an improvement in demand for Orlando in October/November compared to pace in Q3 2023 (below). We’ve written about Disney’s ambition to substantially expand its parks backed by more than +$60B in capital expenditures. On that initiative, management shared that over $42B will be spent on new parks and attractions; Iger noted that new parks will "be all over, meaning every single one of our locations will be the beneficiary of increased investment and thus increased capacity, including on the high seas (3 more ships)...we'll start opening in 2025, and there'll be a cadence every year of additional investment and increased capacity.”
As it relates to the studios and release slate, Iger highlighted Moana 2 (November 2024), Planet of the Apes, Mufasa: The Lion King, Inside Out 2, Deadpool 3, and Alien: Romulus for this year and Captain America, Fantastic Four, Pixar’s Elo, Zootopia 2, and Avatar 3 for 2025. The next from Lucus and Star Wars won’t be until 2026. On his sense for the studios and their output, Iger said the following:
"And I think given the environment and given what it takes to get people out of their homes to see a film, doing that, leaning on franchises that are familiar is actually a smart thing. So we've got work to do still. We're not resting on our laurels or sitting on our hands. We're working hard at it, but I feel quite good about the trajectory...One of the things that I've been saying before is that volume sometimes can be detrimental to quality. In our zeal to greatly increase volume, partially tied to wanting to chase more global subs for our streaming platform, some of our studios lost a little focus. The first step that we've taken is that we've reduced volume. We've reduced output, particularly in Marvel. When you fix or when you address these issues in movies, you do three things. You get aggressive at making sure the films you're making can be even better. Sometimes you kill projects you don't believe in. And of course, you put new things in the pipeline that you do believe in, that you have much more confidence in...I've also observed over the years that managing creativity sometimes is best done with great partnerships. And I have established great partnerships with the people at our company that really manage creativity, Alan Bergman with the studio, Dana Walden on the television side, Jimmy Pitaro at ESPN. And the partnership that Alan and I have is a strong one, and we believe that the time that I'm now devoting to this and the attention that the two of us are giving this business not only will bear fruit, but it's already starting to. We're very bullish about the films coming out. We mentioned Insight Out 2, and we talked about Deadpool and the Planet of the Apes film. We feel good about that. Obviously, the end of the calendar year, we've got Mufasa, prequel to Lion King. We are very excited about the addition of Moana, which was the #1 streamed movie across all streamers in the U.S. in 2023 and is at over 1 billion hours of consumption on Disney+. And that's now going to be released in November. And then I mentioned what we're doing after that. I'd say we're leaning a little bit more into sequels and franchises, some that we feel great about, like Toy Story for instance, obviously, Star Wars. Avatar, we've talked about. Marvel is starting to focus on some of its stronger franchises going forward, but I'll leave it at that."
As it relates to ESPN and Disney+, the tie-up between ESPN, Fox, and Warner Bros Discovery shifts the “puck, ball, wicket, whatever” onto someone else’s plate and off of Iger’s. A “proven and seasoned” executive is to lead the business. We would not be surprised if wasn’t publicly listed at some point or if some stub of Paramount (CBS) joined the party. “Off of Iger’s plate” means that an executive with some other skill set (beyond sports entertainment) can be considered for the Disney CEO role, one that is more focused on scripted entertainment and experiences. The tie-up package will launch this fall and the “full-line” ESPN (standalone), including fantasy sports and betting, is expected to be offered DTC in the fall of 2025. This is the full ESPN package versus the separate ESPN+; we get, and they likely get, that this is too many permutations of ESPN for consumers. The economics of the joint venture are fairly straightforward as they look like any other streaming/network service with the JV paying a fee to ABC, ESPN, Fox, and Turner for re-transmitting their programming. The services price is expected be around $40 per month. Lastly, Iger spoke of the benefits they are getting from bundling Hulu and ESPN+ with Disney+. Churn is the nemesis of all subscription businesses, that’s why bundling came around the first time, and what is likely behind Fox and Warner’s inclusion. On the joint venture package Iger said:
"We're doing it in a more modern way. Rather than cable and satellite in this case, it's app based. And that's a big step for us because we know that there are a number of people who have never signed up for multichannel television. This gives them a chance to do so at a price point that will be obviously more attractive than the big fat bundle...there are people who have left that ecosystem because they didn't want all those channels or that cost. And this is a way of basically preserving a relationship or creating one with those that are no longer part of the multichannel ecosystem. The next step after this, and we announced today that we'll launch it in probably August of 2025, is to bring out ESPN flagship. I say on its own, but it will be bundled ultimately with Hulu and Disney+. And that will be a very, very immersive, very obviously sports-centric app, which will have features that this combination with FOX and with Time Warner Discovery will not have such as integrated betting, integrated fantasy, likely to have some sales arm or merchandise capabilities, obviously, deep dive into stats and high degree of customization and personalization.”
As it relates to Disney+, landing the rights to Taylor Swift's 'Eras Tour' allows Disney+ to bolster its Q1 domestic sub counts. As it relates to the superstar, Disney’s 46M domestic subscribers are only 58% of Netflix’s. As such, Disney must have paid more than what Netflix bid, offered more in downstream programming support (including additional concerts and tours), or she was more enamored with the Disney brand. Disney’s streaming business is on the path to profits with losses of around -$260M for the fiscal year compared to -$2.5B last year; the June quarter is expected to be the last one of losses. Getting Disney+ to solid profitability (double-digit margins is the benchmark) would remove a milestone off of Iger’s neck; moreover, it is likely the “mark” for Iger to pass the day-to-day off to some future named “President of The Walt Disney Company” who would eventually be the CEO.
