Walt Disney's (NYSE:DIS) third-quarter earnings report earlier this month made headlines when, alongside its quarterly results, the company announced plans for direct-to-consumer streaming services. Investors are still digesting the report -- and what these new services mean for Disney's long-term potential.
While Disney's third-quarter earnings report did a good job of breaking down Disney's financial performance, management's earnings call with analysts proved to be the more interesting event when earnings were released. During the call, management gave investors a closer look at its streaming plans, talked about its upbeat performance in Shanghai, and more.
Disney-branded streaming: a global opportunity
In Disney's streaming service announcement, the company noted that when its Disney-branded service launches in 2019, it will come to the U.S. But management emphasized during Disney's earnings call that investors should think of the streaming service as a global product, despite its initial localized launch.
Disney CEO Bob Iger explained:
Well, one of the beauties of the Disney brand is just how global it is and how strong the fan base of Disney is globally. ... We'll also roll out the service in multiple markets outside the United States, but it will vary from market to market based on existing distribution agreements and different market dynamics. But I think you have to think about a Disney-branded direct-to- consumer subscription service as a global product, even though we're being more specific today about launching a domestic product in the latter part of 2019.
If a Disney-branded streaming service really does become a global streaming service, this will go one step beyond Netflix. As Disney management noted during the earnings call, Netflix did not have global rights to Disney movies, but rather strategically bought rights in markets where it believed it had the best opportunities.
ESPN streaming service: an offensive move
During ESPN's earnings call, one analyst pressed Disney management on whether there's opportunity to increase per-user revenue for ESPN with the launch of a direct-to-consumer service. Specifically, he asked whether ESPN is currently undervalued as part of a cable bundle today, and if incremental value could be unlocked when Disney takes ESPN directly to the consumer.
While Iger didn't respond with a direct answer, he implied that there may be a greater revenue opportunity for ESPN when it becomes its own product:
One of the reasons that we're doing this is because of the trends [in digital technology and new forms of media consumption] that we're seeing. But another reason that we're doing it is because of the strength of the brand and the opportunity that this technology and the consumer trends that the technology has created are providing. It's not just a defensive move; it's an offensive move.
Iger's confidence in ESPN as a streaming service should be considered carefully by Disney investors, as an ESPN-branded streaming service is more immediately applicable to investors than the company's plans for a Disney-branded streaming service; Disney is planning to launch its ESPN streaming service in early 2018, well before its Disney-branded service.
Shanghai Disneyland: more profitable than expected
One of the biggest highlights from Disney's third quarter was the success of its parks and resorts segment. Revenue and operating income for the segment climbed 12% and 18% year over year, respectively. And management said the segment's impressive growth in operating income was primarily due to international operations. Shanghai Disney, in particular, has proved to be a better-than-expected contributor for the company.
"On the Shanghai front, when we opened the park, we were confident that we had built a great product, but we didn't know exactly how the market would react," Iger explained during the earnings call. "And then now, over a year of operation, the market has reacted really well."
Iger went on to note that guest satisfaction at the resort is "extremely high," and customers' length of stay per visit is proving to be a couple hours longer than management was anticipating. Further, Iger noted that two-thirds of Shanghai Disney's visitors are from outside the Shanghai area, highlighting how the resort has become a national tourist destination.
Iger concluded, "And so the overall effect of great guest satisfaction and substantially greater visitation is an operation that in its first 14 months of service is more profitable than we anticipated."