Disney scrambling for growth drivers with WBD bundle: Analyst

Disney (DIS) and Warner Bros. Discovery (WBD) will launch a new streaming service bundle including Disney+, Hulu, and Max in one package. The bundle is set to launch sometime in the summer and will mark the first cross-company partnership in streaming.

CFRA Research Director of Equity Research Ken Leon and Third Bridge Sector Analyst Jamie Lumley join Market Domination to discuss the advent of a Warner Bros. Discovery and Disney partnership and how it can impact the streaming landscape.

Lumley comments on Disney's profitability and search for growth with this deal: "They are now at profitability in their entertainment streaming segment... they are roughly on schedule for the profitability metrics they set out when they launched Disney+ back in 2019. But they're definitely scrambling for growth drivers here. If you look at the subscriber additions they had, there were 6 million core Disney+ subscribers added. But a lot of that is attributed to the Charter Communications (CHTR) deal, which was set up last year. And there could be some softness going forward."

Leon offers this insight on the streaming landscape as a whole: "I think they're all de-risking. They're reducing capital, and they're going to say, 'gee, Netflix (NFLX) is a winner, large technology companies can play here. What can we do for two things?' One, try to grow subscribers, and two, try to get advertising revenue. So that's where bundle comes in. But it's only going to be maybe a number 3 or 4. There's going to be a lot of players that are really not going to make it in this game, because it's just not as attractive as before. "

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Nicholas Jacobino

Video transcript

You know, I heard um Rich Greenfield over, you know, long time media analyst at Lights Shed and he said something interesting, Ken, I want to get your take on this, which is that.

He said he thinks a lot of companies now have a bad case of what he called bundle itis.

And I think what rich was getting at, I'm hopefully I'm not mischaracterizing rich.

But if I am, he'll definitely let me know.

I, I think what rich was saying was, you know, a lot of companies now seem to believe if I just bundle my services together, you know, that really is sort of the answer to a lot of my problems when it comes to churn or engagement.

And I, I think what rich was getting at, Ken is he was kind of disagreeing with that.

It really isn't.

Rich was saying really you wanna, you wanna answer these questions and these challenge of churn and engagement.

Well, you know, the answer to that is great content, but you gotta invest in that.

What is sort of your reaction to that, Ken?

I, I think when you look at the bigger picture, it's really a lot of these media companies trying to figure out how can they be profitable.

So the first step was reducing programming and content spending.

The second was de risking because they have no control really of the customer, unlike wireless uh or even cable TV, decades ago, you had one or two year contract.

So churn is very high, they will never release that.

Um And also uh if you look at where entertainment has moved to events, to live sports, so none of these managements will say uh that they can get to a 20% operating margin on this business, nor a 50% ebita margin like wireless.

So it's not a business and I think they're all de risking, they're reducing capital and they're gonna say Gee Netflix is a winner, large technology companies can play here.

What can we do for two things?

One try to grow subscribers and two try to get advertising revenue.

So that's where bundle comes in.

But it's only gonna be maybe a number three or four.

There's gonna be a lot of players that are really not going to make it in this game because it's just not as attractive as before.

So I guess there's sort of two questions here, then there's which bundle is most compelling to customers and then which of the individual streaming companies is most compelling to investors, which is maybe those are the same question.

I don't know, Ken, but those seem to me to be the two most pertinent questions here.

Well, they are and, and, and they're mostly more US or North America centric outside of the US.

It's a very different game where the average revenue is much lower.

And if you don't have an Agile technology platform like Netflix, you're way behind uh both for trying to get subscribers and keeping them and programming.

So when you talk about bundling again, this is a defensive move by these companies and they're looking to reduce their path capital in this business because it's just not as attractive as it was before.

Uh for anyone like the CFO of Disney to opine that three or five years out that this is gonna be a great business.

They are not showing a case example of the profitability of streaming.

It's a very difficult business.

It's technology agile and subscribers can watch House of Dragons on Mac and then go somewhere else, Jamie, I wanna bring you back in here because we were talking before Disney reported earnings and, and we were talking about the streaming business and your big question, Jamie, correct me if I'm wrong was really beyond this quarter.

Really?

You're like a long term question still about what exactly both growth and profitability looks like for that streaming segment.

What do you, what's your current thoughts on that?

Well, certainly, if we look at what Disney just reported, they definitely had some key positives in the most recent quarter.

They are now at profitability in their entertainment streaming segment.

Bear in mind that they have some software expectations for next quarter.

They are roughly on schedule for the profitability metrics.

They set out when they launched Disney Plus back in 2019, but they're definitely scrambling for growth drivers here.

If you look at the subscriber editions they had, there are 6 million Core Disney Plus subscribers added.

Um but a lot of that is attributed to the Charter Communications deal, which was set up last year and there could be some softness going forward.

And what was really interesting to see is they cited.

Netflix is really the example here to follow when it comes to cracking down on password sharing as really this business is looking for ways to grow and they increasingly have to be creative to find out what the best way is to tap subscriber growth.

Because ultimately, while they are focused on profitability, they still really want to see this be a full transition away from a legacy linear business and be a new, not just uh you know, barely profitable but strong resilient business with strong fundamentals.