Disney (NYSE:DIS) recently reported its fiscal first-quarter earnings, beating analyst expectations on profits, but missing on revenue. But the real news was in what's ahead: This was the first earnings call since the company announced its agreement to acquire Fox (NASDAQ: FOX) (NASDAQ: FOXA), and CEO Bob Iger provided several key insights into Disney's future. Most important from an investor perspective are the company's upcoming direct-to-consumer services for Disney, ESPN, and Hulu. Here's the lowdown on these important building blocks of the company's future media-networks division.
1. ESPN Direct
The most immediate change will come in Disney's biggest problem area: ESPN. The sports giant has been a drag on Disney's earnings in recent years, as cord-cutting has gripped America, and ESPN happens to be the most expensive channel in the traditional bundle. In addition, NFL viewership has been declining, which could lead to pressure on ad rates.
Disney isn't wasting any time in 2018, as it will unveil a totally revamped ESPN app this spring. According to Iger: "The changes will be dramatic, with more compelling visuals as well as an easy, intuitive interface and exceptional video and sound quality. Users will also enjoy an increasingly personalized experience as the app blends explicit choices with implicit behavior to curate a unique mix of specific, relevant content tailored to the taste of each individual user."
The new app will feature up-to-the-minute scores across many different sports, podcasts, and live-streams of ESPN's networks. It will even have cricket -- yes, you heard me. Even. Cricket.
Disney will also unveil a paid ESPN Plus subscription, giving users access to even more games and leagues than the regular ESPN app, along with access to ESPN's acclaimed "30 for 30" films, and ESPN will invest in even more high-quality original programming for ESPN Plus. The service will cost $4.99 per month, and is likely to be a must-have for the true sports fanatic.
I think it's a savvy strategy. The problem with cord-cutting is that those who aren't sports fans can opt out of ESPN, whereas before they had to buy the entire bundle like everyone else. ESPN Plus should help generate more incremental revenue from true sports fans, as the modest $4.99 price isn't likely to deter them from signing up. Hopefully, the extra boost will be enough to offset the effects of cord-cutting, and then some.
2. Disney Direct
As previously announced, Disney will also launch a new Disney-branded direct-to-consumer streaming service, with content from Disney, Pixar, Marvel, and Lucasfilm. Iger said the service would be ready by late 2019, as Disney still has its second-pay-window deal with Netflix (NASDAQ:NFLX), which won't end until then.
One of the more interesting tidbits from the call is that Iger believes Disney can be more efficient with its content than Netflix. When an analyst asked how Disney could compete with Netflix's huge spending budget, Iger replied: "[W]e have this unique brand proposition. And the demand for those brands, we believe, will give us the ability to spend less on volume."
As has been the (highly successful) practice at Disney Studios, the content push is likely to be fewer, but bigger and bolder, offerings. For instance, I hope you like Star Wars, because there will be a lot more coming. In addition to the current trilogy being written and directed by Rian Johnson, Iger announced the company had signed Game of Thrones creators David Benioff and D.B. Weiss for yet another series of Star Wars films after that.
3. What about Hulu/Fox?
By acquiring Fox, Disney will also obtain ownership of Fox's studio output. The rub here is that these films are not completely branded, as the Disney films are, so it will be interesting to see whether or not the Fox films will become part of the Disney service.
It appears management isn't sure, either, with Iger saying, "Hulu is a possibility," but that Fox also has a second-pay-window deal with HBO that actually lasts longer than Disney's Netflix deal, so there won't need to be any decisions on that front for a while.
Since Disney won't officially be a majority owner of Fox or Hulu until the Fox deal closes, Disney doesn't have majority sway over Hulu's decisions. Upon closing, it will be interesting to see what Disney does with Hulu -- whether it will be the company's third direct-to-consumer channel, or whether Hulu and Fox will eventually be bundled with the Disney/Pixar/Marvel/Star Wars offering.
Though the parks and resorts segment is gaining, media networks is still Disney's biggest division. As you can see, it's in for a big transformation, so stay tuned!