In this Motley Fool Money podcast segment, host Chris Hill, Million Dollar Portfolio's Jason Moser and Matt Argersinger, and Total Income's Ron Gross dig into the revelations from Bob Iger about his plans for Disney's (NYSE:DIS) future. In an era when more and more video is being consumed via streaming services, and cord-cutting is slowly but steadily nibbling away at the cable base that supports its expensive ESPN fees, did the House of Mouse really have any other choice than the one it made? Perhaps not -- but the timing of this announcement was still interesting.
A full transcript follows the video.
This video was recorded on Aug. 11, 2017.
Chris Hill: We start with the Magic Kingdom this week. Walt Disney's third-quarter results were overshadowed by the announcement of two new streaming services that Disney will launch, one early next year for ESPN, and the other involves pulling the company's movies from Netflix in 2019. Matty, both Disney and Netflix (NASDAQ:NFLX) shares down this week. The two companies are in active discussions to keep Marvel and Star Wars films in the Netflix universe. So some of this is very much in flux. But this was kind of a big move by Disney.
Matt Argersinger: This was a big move. I think all of us probably had a sense that this was inevitable, to a certain degree. Disney has been, for decades, a creator of wonderful content. But outside of its theme parks, it's mostly relied on others to distribute that content. And I think Bob Iger, as a very smart CEO, knows that the viewer behavior has changed. We are in the Internet TV age. Linear TV, even with sports, is changing. I think the surprising thing to me was the timing, because making this very public, that you're booting Netflix off in 2019, that you're buying a majority stake in BAMTech, that you're making this big move now ... I mean, the Netflix contract was already set to expire at the end of 2018. So I think this is just Bob Iger making this public, and I'm wondering if it's the fact that he sees the accelerating decline in ESPN and the network, and he knows, "I've got two years left to my contract, this is what I'm going to be doing for the next two years. I'm going to set this company up -- at least I think -- to be in the digital internet TV age. And let's be bold and aggressive about it for the next two years."
Hill: And Jason, 5% of this decision may have been Bob Iger saying, "You know what? I'm really sick of going on the quarterly conference call and having the first 10 questions be about ESPN and cord-cutting."
Jason Moser: Sure. And I mean, I think those questions are all very fairly warranted. I think, at the end of the day, this is a move that is about taking control of your own destiny. Disney could very well just sit back and let Netflix continue to license that content in perpetuity. They could do that, and they would probably earn a handsome sum of money year in and year out doing it. But I think Iger is very clever to recognize that this is not just a short-term event. This is a long-term trend, the internet streaming age. So it's taking one of their biggest strengths in that IP, and a vast amount of it, and really developing an offering for not only consumers of this generation, but for many generations to come. I think the tough part for them is going to be nailing the tech side, the experience side. Because yeah, getting that BAMTech backbone is important, but let's not forget, really, Netflix brought this space to where it is today because they developed such a good experience. We've seen Amazon kind of copy that experience, and I think that's why they're doing well. So Disney is going to have to really nail the experience side of this.
Ron Gross: I think it's an interesting lesson for investors, because for years, one of the most exciting things about owning a Disney stock was ESPN. And then it turned into the linchpin of owning the stock, and that became the problem. So it's interesting, and that's why you have to keep an eye on your companies and understand how companies make money and what drives earnings and what drives stock prices. This is an attempt to stem that tide and stop the bleeding, let's call it, of ESPN. I'm not sure it actually gets it done, from what I'm hearing that the ESPN streaming offer will be. I think we have to wait to see what the pricing is and what the actual content that they will offer, what they will have. But, it is the first step in trying to rightsize that business.
Hill: I think, Matty, that goes to your point about how far in advance of these things being rolled out that Iger announced this. And oh, by the way, the theme parks division is up 12% year over year, just completely lost in all of this.
Moser: But let's not talk about that.
Argersinger: Right. Disney has so many moving parts to it, and a lot of those parts are doing just fine. Even the networks business -- it was down 5% year over year. This is not a business that's imploding. But I think the fact that they're getting ahead of it, and I think Ron's point is a good one, it's unclear right now if the rollout of these apps is really going to replace, to a large degree, the amount of revenue and especially operating profits they get from their networks business. It's going to take some time and a lot of investment.