Morning Blast: Iger’s Plan for Disney: Be Like Netflix

If, as the saying goes, imitation is the sincerest form of flattery, Netflix co-founder and Executive Chair Reed Hastings should be sending Disney CEO Robert Iger a thank-you note. After reporting fiscal third-quarter results after U.S. markets closed Wednesday, all Iger could talk about was Netflix. (These are the worst business ideas in America.)

In response to a question from Wells Fargo Securities analyst Steven Cahall, Iger said that Disney would “love to have the margins Netflix has.” Who wouldn’t? Disney’s gross margin for the June quarter was 11.8%. Netflix posted a gross margin of 42.9% in its June quarter.

Then Iger praises Netflix for figuring out “how to really carefully balance their investment in programming with their pricing strategy and what they spend in marketing.” That’s what executive management is supposed to do, Bob.

Then the soft-pedaling begins:

Because we’re new at all of this, we actually have not really achieved the kind of balance we know we need to achieve in terms of cost savings and pricing and money spent on marketing.

By balance, Iger means that Disney is not charging customers enough for its streaming services (or DTC—direct-to-consumer—as the company identifies them). The way to fix that, of course, is to raise prices, and that is what Iger and Disney will do. A subscription to ad-free Hulu will increase by 20%, and a subscription to ad-free Disney+ will jump by 27%.

All this is an effort to drive subscribers to Disney’s about-to-be-launched ad-supported tiers for Hulu and Disney+. It worked for Netflix, it will work for Disney. At least that’s Iger’s plan. On the conference call, Iger said:

[T]he advertising marketplace for streaming is picking up. It’s more healthy than the advertising marketplace for linear television [i.e., cable TV]. We believe in the future of advertising on our streaming platforms, both Disney+ and Hulu.

Beginning in mid-October, Hulu’s ad-free subscription rate will rise from $15 to $18, and the Disney+ rate will rise from $11 to $14. And Disney plans to crack down on password sharing, ala Netflix.

Next month, Disney will offer a new Duo Premium subscription plan that includes Disney+ and Hulu but excludes ESPN+ for a monthly cost of $20. Subscribers to ad-supported Hulu or Disney+ will still pay $8 a month. The cost of the current Hulu-Disney+ ad-supported plan Duo will remain at $10 a month.

We got another sample of Iger’s plan on Wednesday when Disney announced a new deal with online sports betting operator Penn Entertainment. While cable subscriptions continue to dwindle, Iger pointed out, ESPN’s ratings continue to improve. What does that prove exactly? Hard-core sports fans’ numbers are not going up, but their percentages are.

One last thing to remember about Hulu: Disney has a put/call agreement with Comcast/NBCUniversal that allows either company to force the other to sell Comcast’s one-third stake in Hulu to Disney. The agreement goes live in January and will cost Disney a minimum of $9.2 billion, one-third of Hulu’s floor value of $27.5 billion. In 2021, Comcast thought Hulu was worth “north of $70 billion,” meaning its piece was worth around $22 billion. This will not be simple to iron out.

As for liner/cable, Iger said:

While linear remains highly profitable for Disney today, the trends being fueled by cord-cutting are unmistakable. And as I’ve stated before, we are thinking expansively and considering a variety of strategic options. However, we’re fortunate to have an array of extremely productive television studios that we will rely on to continue providing exceptional content for audiences well into the future.

The writers’ strike is currently putting a kink in Iger’s plans here, but his “deep respect and appreciation for all those who are vital to the extraordinary creative engine that drives this company and our industry” gives him “hope that we quickly find solutions to the issues that have kept us apart these past few months.”

So, the plan is to figure out a way to get rid of the cable business, get people to place their bets on ESPN Bets, clamp down on password sharing, raise prices on the company’s growth driver, and be more like Netflix.

Disney’s stock traded up about 1.7% in Thursday’s premarket session. Not exactly a ringing endorsement of either the quarterly results or the plan going forward.

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