Streaming-Only ESPN Coming When It’s ‘Good’ for Shareholders: Chapek

Disney’s linear networks are “huge cash generators for us,” said CEO Bob Chapek, responding to a question on a fiscal Q2 earnings call Wednesday about what’s holding him back from converting ESPN to a streaming-only service. The U.S. launch of the Disney+ ad-supported subscription tier (see 2203040042) is on track for later in calendar 2022, he said.

The hesitancy at Disney "to move too fast away" from its linear-network offerings, including ESPN, "is really a cash flow" consideration, said Chapek. "We're doing a really good job of chopping down some of the debt that we've had to accumulate due to either acquisition or through the COVID challenge," he said. “At the same time, we're very conscious of our ability to go more aggressively" into the direct-to-consumer (DTC) "area of ESPN,” he said. He described the current ESPN thinking at Disney as akin to “putting one foot on the dock,” keeping the other “on the boat.”

Disney knows “that at some point, when it's going to be good for our shareholders, we'll be able to fully go into an ESPN DTC offering,” said Chapek. “We fully believe that there is a business model there for us.” Disney is “not ready to share the specifics of our model,” he said. “We're only going to do it if it's accretive to our shareholder value, when it comes time to actually pull the trigger.” When a streaming-only ESPN service eventually does happen, he said, “I can tell you that it will be the ultimate fan offering that will appeal to super fans that really love sports.”

The Disney+ ad tier coming to the U.S. by the end of calendar 2022 will enable Disney to reach even broader audiences as it expands the service across “multiple price points,” said Chapek. Disney+ recorded 7.9 million paid net additions in fiscal Q2 ended April 2, “keeping us on track” to reach 230 million to 260 million by fiscal 2024, he said.

Based on Disney’s experience with Hulu and ESPN+, “we can see the additive nature of an ad-driven service that enables us to keep the price lower,” said Chapek. “That's made up for by the additional revenue that we would get per user on the advertising spending.” Disney believes it will be able to “cascade up our net price over time” for the Disney+ ad tier, “given the tremendous value that we started with and the increased price-value relationship of all the new content,” he said. “We're pretty bullish about that.”

Chapek expects “a very positive reaction from advertisers overall” to the introduction of the Disney+ ad tier, he said. “They have been asking for this for years.” The “value proposition” of Disney+ “is only enhanced with our addition of an ad-supported tier,” he said. “We believe it's good for the consumer because it's going to give us another entry price point, but it's also going to be great for the advertisers.” Ad buyers “increasingly are looking for multiple platforms” for a broader audience reach, he said.

Disney is in “really good shape” in being able “to meet our timing with our Disney+ ad tier,” said Chapek. “We think that our current advertising capabilities really substantially prepare us” for the debut, he said. “There's nothing that we need to go acquire,” he said. “That's due to the ongoing investments in technology that we've made over time to increasingly automate much of this process.” The teams at Disney have been “looking forward to this for a while,” he said. “This is something that's well-greased.”

The company has deep “confidence” in its Disney+ paid-subscriber guidance because of the “tremendous amount of data” that it collects from all its DTC platforms, said Chapek. Studying “the first view that somebody watches when they first come on to our platform,” for example, can serve as “a pretty good proxy for maybe why they signed up,” he said. “There's also the amount of time spent, the engagement scores and then, of course, the churn.” Disney is “extraordinarily pleased with the low churn that we see” on Disney+, he said.

A “little over half” of the Disney+ paid net adds in the quarter came from growth of the Disney+ Hotstar service in India, Indonesia, Malaysia and Thailand, said Chief Financial Officer Christine McCarthy. Net Disney+ adds of about 1.5 million in the U.S. reflected “in part the success of tentpole content releases,” including the Pixar feature film Turning Red and the Marvel Studios miniseries Moon Knight, she said.

McCarthy bluntly turned aside questions seeking comment about the average revenue per user (ARPU) potential of the Disney+ ad tier and other financial metrics. “We haven't announced a price point for it, so we're not going to do that today, but we will continue to evaluate what makes sense for the service in terms of pricing,” said the CFO. Based on Disney’s experience with Hulu and its ad-supported tier, “we believe that this will contribute to ARPU,” she said.