Macquarie Senior Media Tech Analyst Tim Nollen joins Yahoo Finance Live to discuss the demand for streaming, competition, and the outlook for Disney’s streaming service.
AKIKO FUJITA: Well, Disney, Warner Brothers, Discovery, Paramount, and Fox all hit with price-target cuts by Macquarie as media stocks face some turbulence in 2023 with a weakening advertising market.
Here to discuss, we have Tim Nollen, Macquarie senior media tech analyst. Tim, good to talk to you this morning.
I realize all these companies have their own narratives going, but I’m curious if we can start on the demand picture because we have heard this over and over, questions about reaching a saturation point. Are we continuing to see the demand for this type of content even if consumers are saying I’m willing to go with a cheaper ad-supported tier?
TIM NOLLEN: Yeah, I think demand is still high, but there’s so much competition now. You know, we’ve been talking about the streaming wars for two or three years already now. All of the major TV network groups have shifted toward direct-to-consumer streaming, and a lot of them are going after that same audience.
So in a slowing economy, consumers are looking at their wallets, and they’re choosing to be more selective in which subscription services they are paying for. So you get this sort of constant churn on and off and on and off different services as you watch one show on Netflix. Drop that. Watch a show on Amazon Prime. Drop that, et cetera. So it’s a much more competitive landscape.
It doesn’t mean that demand is going down. I just think there’s so much more availability of programming now. Consumers have just been spoiled for choice, and now they’re just going to be looking more carefully at what they choose to pay for.
RACHELLE AKUFFO: And unlike Netflix, if you’re a Disney or an Amazon, you have other business entities that you can rely on, you know, under your umbrella then. So let’s start with Disney then. In terms of Bob Iger’s return, how much of a difference do you think that’s going to make to Disney’s story?
TIM NOLLEN: Yeah, well, we’ve thought for a long time that Disney will– and it’s certainly proven to be the case– be one of the winners in this whole multiyear transition from traditional, linear TV viewership to streaming. I mean, Disney has obviously the brand presence globally. They’ve got the depth of content. They’ve got all of the, you know, popular content still being introduced in new form– so new Star Wars series, new Marvel series, et cetera, on the streaming platform. So we think the opportunity is vast for Disney, and they’ve certainly demonstrated that thus far.
They have, as most of– really, as all of their peers have, invested very, very heavily in the content base, and that’s just been a necessity given the competition. In Disney’s case, it looks like calendar year ’22 might have been the worst of times in terms of the operating performance of the streaming service. They’ve signaled quite strong that they intend to get that service toward profitability over the next eight quarters, so sometime during fiscal year ’24. So as soon as four to six quarters from now, you could have the DTC, the Direct to Consumer, streaming services– which is Disney+, Hulu, and ESPN+– moving into at least break-even status in the next year and a half or so. That would be taken very, very positively, I think, by investors, and, you know, it hopefully will be a stepwise trend to get to that.
Now what Bob Iger brings coming back to Disney is, you know, hopefully we– you know, investors are certainly hoping more of that magic that he brought over so many years– the employee relations, the external communications, the fans. I don’t know if there are major, major strategic shifts coming, but if he can just bring that magic touch back to Disney, I think the stock can rebound.
AKIKO FUJITA: And, Tim, you’ve highlighted in terms of revenue drivers for Disney+, you know, that ad-supported tier that was launched last year could be a big revenue driver in the amount of $800 million, but I’m more curious about the two overhangs we always talk about when it comes to Disney. It’s the future of Hulu but also ESPN. Increasingly, a lot of analysts have pointed to the fact that they believe ESPN could be spun off. Is that a move that would make sense for you?
TIM NOLLEN: Yeah, it’s been a topic of debate for some time. I think Disney sees great value in ESPN and is trying to find a way to move that into a fully over-the-top streaming service. Now, this has been a big discussion point for a long time, and it’s very contentious because, you know, as we’ve discussed for many years, that could be the move that really breaks the pay TV bundle. If you can get ESPN completely over the top without subscribing to a pay TV service, then why would you have pay TV at all? And so it’s a huge change that is going to come eventually, and one of the things we’re wondering is if this is maybe the biggest issue that Bob Iger will have to wrestle with during his act two here at Disney.
It’s a tough question because there is a lot of money still being made on the linear bundle side. For all the talk about cord cutting and the declines there, the operating margins are still high, so it’s very cash generative.
Now, one catalyst for this move could be the upcoming NBA-rights renewal. The new contract is due to start in 2025, so there’s a couple of years to go, a few years to go, but these negotiations usually take place a couple of years beforehand. So it could very well be that 2023 is the year that the NBA is negotiating with ESPN and with Turner networks over at Warner Brothers Discovery to actually renew this contract. There will be a big price increase, and my estimate is ESPN can handle that if they can wrap in a lot more streaming availability of that content. So it could be an important step toward getting ESPN to a completely over-the-top service.
AKIKO FUJITA: Yeah, really fascinating to see some of those negotiations play out there. Tim Nollen, Macquarie senior media tech analyst, appreciate your time.
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