Super Bowl Streaming, Disney Deep Dive And Why Numbers Don’t Lie

Summary:

• Paramount’s positive Super Bowl streaming numbers. Contextualizing bad press.
• Disney’s recent earnings, ESPN and sports joint venture.
• Disney’s deal with Epic Games shows focused approach to integrating their brands into the popular Fortnite game.

Listen here or on the go via Apple Podcasts or Spotify.

Dan Rayburn talks overall positive Super Bowl streaming numbers (1:00). Contextualizing Paramount’s bad press (3:15). Disney’s recent earnings, ESPN and sports joint venture (10:45). Integration between betting and streaming sports. (45:20).

Transcript

Rena Sherbill: Dan Rayburn, welcome back to Investing Experts Podcast. Welcome back to Seeking Alpha. Always great to get your takes on things. So, welcome back, day after the Super Bowl. Great to have you.

Dan Rayburn: Yeah, thanks for having me. I mean, there’s so much going on lately with the Disney (NYSE:DIS) news, with the JV for sports. Disney put out a lot of news during earnings last week, plus, you mentioned the Super Bowl yesterday, which overall worked really well from a streaming standpoint.

When it comes to streaming, sports is definitely one of the hottest topics out there. One that the majority of users out there want to know what’s taking place because it is so complicated.

RS: It’s so complicated, a little bit disappointing, a little bit frustrating at times, but as you mentioned, some nice news from yesterday’s game. Last time you were on, we were talking sports. So, I think this is a nice addendum to that episode for those that missed it.

A lot of great takes there, but if you would catch listeners up on what happened last night and how you’re seeing things on the NFL side of the sports game?

DR: Sure. So, Paramount (NASDAQ:PARA) had the Super Bowl last night and they did the stream across Paramount+. Overall, it worked really well. There were some users online that were reporting some issues here and there, and I was live blogging the game as well, and I had some issues, but just based from the details that I know, less than 1% of all those viewing the Super Bowl stream had a problem of some kind. So, that’s great, that’s a good number. We always expect in any live event there’s going to be a portion of viewers who have issues for all kinds of different reasons.

I mean, in the home, Wi-Fi, the device, many different reasons. So, less than 1% is definitely good. The Paramount+ live stream was not in 4K. There was a lot of debate about that online, but it was not. It was 1080p, 60 frames per second. Its max bitrate was at 12-megabits per second. And it looked very good. There was a upconverted 4K stream that Paramount gave to basically partners. So someone like YouTube TV and others virtual MVPDs.

So, overall I give it an excellent review in terms of what we saw. There are no numbers out as of yet. I expect we’ll have about 8.5 million, what we call AMA, average minute audience. That’s how we look at live events now. And to put that in perspective, the 2023 Super Bowl by FOX Sports, that was 7 million AMA. So, I expect it will be up a little, but as we all know, with the Super Bowl, the vast majority of people are watching on TV. So, it’s never that large of a game when it comes to the Super Bowl from a streaming standpoint.

RS: Yeah. You talked about that last time also, which I thought was an interesting point, how people consume the Super Bowl. It’s more of a communal experience, less of a one-on-one streaming experience. I’m also interested, speaking of Paramount, and it’s a company that’s gotten a lot of bad press. You were contextualizing a lot of that bad press last time you were on. Since then, there’s been news about a suitor coming out in the form of Warner Brothers (WBD).

What’s your take on, and even those watching on CBS got a lot of Paramount press in between plays, like in the commercials, there was a lot coming out about Paramount and its content. I’m curious how you’re looking at the company? How you’re looking at any expected deal? How are you thinking of Paramount? And how things might look going forward?

DR: It’s a great question. There’s a lot of debate about what’s going to happen with Paramount. So, couple months ago, let’s call it Q4 really of last year, you had a lot of people predicting that Paramount would just merge with Warner Bros. Discovery. They just merged these two. Paramount has bad balance sheet. Like they need to merge or they’ll go under.

That wasn’t based on fact, because if you looked at Paramount’s balance sheet, just as of the end of September 30, they had $1.8 billion in cash, and that was with the additional cash that they were getting from the sale of some of their assets.

So, yes, they had a lot of debt, no doubt, total $15 billion of net debt, but when you break all that down and then you put it with Warner Bros. Discovery and what they have with debt, nobody was really looking at the finances of how such a deal would work. That was really the problem that I saw on the market.

And I don’t know why people thought this idea of like, let’s just take two companies that have lots of debt that are both working to make their DTC streaming profitable and let’s just stick them together. That doesn’t solve the problem of monetizing your content better. That’s not the way to do it.

So, I think most folks have gotten off that track now. And what they’re really talking about is Shari Redstone wanting to basically diversify away from the ownership here. And there’s been talk now of PE firms and others coming in to try and take control of the stock, to take over Paramount. And it looks like it’s a PE play for sure, private equity. That really kind of looks like the way it would work. But the issue here is, stock for stock deals don’t work traditionally with PE because who wants to accept a larger piece of a company, which has huge debt and little upside of guaranteed money?

Well, not many people, not many private equity firms. So, there would have to be something done with the financials for sure, more complex than I can understand. Warner is going to generate $5 billion of free cashflow in last year, or they did, I should say. But you have the impact, if you’re going to merge two companies like that, you have the impact of the distortion to the business over what most, and I mean by most, I mean lawyers, people who understand this stuff would say, it would be over two years that it would have to be reviewed by the DOJ and others.

So, now you’d have uncertainty in the business. What’s your go-to-market messaging? What do your employees think? I also do not think it was a smart move for Paramount to come out and talk about the fact that they’re going to have to lay off employees this year, but then gave no details and no information on when that’s going to happen, to what degree they’re going to have to cut. And to announce that just before the Super Bowl when people are working so hard, I don’t think that would be a smart way to do it.

We also have people saying, oh, well Paramount+ just needs to shut down and merge into Max. That sounds great on paper, but just merging those two is not that easy from a technical standpoint, putting content to a completely different platform. So, there’s a lot of talk and speculation about what might happen, but I think what a lot of people forget is this all comes down to balance sheets. This comes also down to egos.

Who wants to own what percentage of controlling stock? In an all-stock combination of Warner and Paramount, you’re going to yield at least a billion dollar of synergies. So while this would be good if the companies got together for shareholders long-term and whatnot, it’d be terrible for employees. You’d have a lot of people laid off, a lot of uncertainty in the business.

So, unknown right now in terms of what’s really going to happen.

RS: What’s your sense about why they made the layoff announcement right before the game?

DR: I’ll be honest, I don’t know. I thought that was not only — not smart to do, but I thought, frankly, pretty hurtful to employees and not the way to lead by example.

If you’re going to lead your employees, you don’t come out just before the largest event you’re going to do for the entire year, that you’ve invested so much time and money in, and put into employees’ heads that, ‘Hey, we want you to work really, really, really hard on the Super Bowl, but by the way, afterwards, some of you may not be here.” That’s just not smart leadership and uncertainty is the biggest thing that people struggle with in life. Change, many people don’t like change.

So, I think you have the responsibility as a leader that if you’re going to talk about layoffs, or changes in the company, that when you do that, you do it with clarity, consistency, and candor. So, coming out and saying, we’re going to have to lay-off a lot of people. We’re going to be vague as to when, we’re not going to say from what departments or where. We’re not even going to say from what geographic locations. The media is running with the number being a thousand employees. So, we don’t know if that’s true. We don’t know the size of the impact. And then that’s all you say? I don’t think that’s good leadership.

RS: Is there a sense that they’re signaling to a suitor, or a PE Firm? Or is it just bad for morale, bad leadership?

DR: Yeah, I couldn’t tell you. I don’t know what’s in the minds of these folks. And a lot of it is egos at this point. Are they trying to tell a PE firm that, hey, well, we’re going to lay-off employees? Well, I would say no, only because a PE firm, that’s the first thing they always do. So, they’re not concerned with that.

RS: That’s our job.

DR: Right. I mean, that’s a lot of what they do is they look for efficiencies in a business when they take it over. So, maybe Paramount’s saying that just so shareholders understand they’re going to cut costs additionally this year, but we all know the easiest way to cut costs always at any company and by easiest I mean quickest on the balance sheet is lay-off employees.

Let’s look at the impact that once we saw Disney’s earnings from last week. Laying off those 7,000 plus employees last year clearly had an impact on their balance sheet. We know that. So, to me, it was just odd the way Paramount CEO did that. I don’t understand the reasoning for that. To me, it’s not a smart way to run your business.

RS: So, I think you mentioning Disney is a nice segue to get into some of the mainstreaming talk these days after Disney released earnings last week and also how they’re talking about ESPN and how they’re talking about their future. How would you talk about, if we could just isolate ESPN for a second, how would you talk about Disney and ESPN right now vis-à-vis sports?

DR: Sure. So, ESPN is going to have couple different portions of their business, really four. That’s the way to think about isolating it. So, first ESPN has a traditional TV business, as we all know. Disney now breaks out ESPN’s revenue separately. ESPN was profitable.

It’s a profitable business that’s not losing money, which shocks a lot of people because TV is dead and dying and everything in broadcast is dead and a bad business. Well, no, ESPN is still making money from TV.

Now, has that been declining from ESPN? Of course it has, we all know that. But so that’s the first part of their business. Second part of their business is ESPN+. ESPN+, either in the Disney bundle or standalone. That is another core pillar of ESPN. They did put out, naturally, like they do every quarter, gains and losses, subs from all of their streaming services. ESPN lost 800,000 subs in Q4 of last year. So, ESPN+ ended 2023 with 25.2 million subscribers. So, that’s pillar two.

Now pillar three is this new JV that was announced between multiple companies. So, Disney plus Fox plus Warner Bros. Discovery have all announced that they’re going to create a new sports streaming package of some kind that is still unnamed. We don’t know what price point is going to be, and it’s going to include the content from ESPN, Fox, and Warner Bros 14 linear channels. So, it’s going to bring all the linear networks and DDC services from ESPN as well. It’s going to be owned by newly formed company with a new leadership team, which again hasn’t been announced as of yet.

No details on pricing, but I’ve already come out and said, I think it’ll be between $40 to $50. So that’s going to be piece three of ESPN because it’s in this new JV. And then the fourth piece of ESPN is, Disney also announced that they’re going to bring their ESPN direct-to-consumer app, again, unnamed right now, whatever they’re going to call this, but they’re going to bring that to the market in the fall or “late August of 2025.” And the key difference of that compared to ESPN+, as they say, it’ll include integrated fantasy betting, shopping in some form, deeper statistics, more personalization.

To me, it sounds like an ESPN app for somebody who’s really that diehard dedicated sports fan who likes sports across a lot of different sports leagues and genres is into fantasy, is into betting. That’s really what it sounds like it’s going to be, but we don’t have any additional details. So, those are the four different pillars. As of today, keep in mind Disney could change their mind, but those are the four key pillars ESPN going forward.

RS: What’s your sense of that deal? What’s kind of your main takeaway and what do you think isn’t being looked at closely enough?

DR: Well, I think for the most part, people broke down this deal pretty well in the sense that right away they realized, hey, wait a minute, Paramount’s missing. Why isn’t Paramount in here? You’re now missing a lot of football games and all this other content Paramount has, and they’re right.

Now, what I heard back channels was that the reason Paramount was not added, or for instance Comcast (CMCSA) because of Peacock, was that the companies felt the moment they added a fourth content partner, the cost for this now raises the price every month to where consumers wouldn’t pay for it, which would make sense because if you’re throwing in a fourth or fifth content partner, you have to allocate more money to them. You’re going to have to charge more. But the fact that you’re missing additional content partners, you’re not going to have NFL Sunday Night Football.

So, you’re definitely missing content here. And we don’t know how fans are going to react to that. It also won’t have games, NFL games, you know, that show up on NBC, Peacock, Sunday games on CBS are on Paramount, Thursday Night Football obviously they won’t get because that’s on Amazon, but Paramount also has rights to NCAA, PGA, Soccer Champions League, so there’s a lot missing from this JV.

The other thing we don’t know is just naturally how they’ll bundle it. What it will cost. Disney has said you’ll be able to bundle it with Disney services that already exist or with Max services as well, but we also don’t know how they’re going to monetize this. What type of advertising you’re going to do?

Advertising in something like, for instance, Netflix (NFLX) that listeners know on-demand is much easier to do than advertising in a live stream. Advertising in a live stream is very difficult. The other thing I wonder is, yeah, I’m a sports fan, but I only like one team and one type of sport. So, is there enough sports content coming to this platform every single month to keep sports fans on the platform every month at whatever price this is going to be, or for instance, if you’re a baseball fan, you only take this for four months out of the year and then leave.

So, is churn going to be very high? This also will have no RSNs, no regional sports networks. That’s a big problem. We want our local teams. And then finally, there was quite a few people suggesting, well, it’s only the start. They’ll add more content down the line. It’s valid, logical.

You could take that route, except then the next day Fox (FOX) had their earnings. And during their earnings call, Fox CEO, when he was asked, what additional streaming content are you guys going to add to this platform and which additional content partners? He said, “It’s not something we’re considering at this stage.” And when he was asked a second time, he said, “We believe that this service offers people a tremendous amount of content.”

So, they’ve already come out and said, listen, this is the content it’s going to have. We’re not adding others, we’re not adding RSNs, it’s going to increase the cost. So, very curious to see what happens here. You also have some people predicting this is going to get caught up in regulatory issues.

I don’t know enough from a legal standpoint. I’m not a lawyer. I don’t see technically how this violates anything from the DOJ or others because this isn’t companies acquiring one another. It’s simply companies sharing content with one another, but it naturally has a big impact on the local affiliates who I expect to make quite a stink about this. So, there’s a lot of unknowns. And also, they’re saying they’re going to launch this by fall.

I mean, we’re February. If you’re going to launch this by football season, NFL, when does that kick off, September? So, you’re talking, you got to roll this product out in seven months at scale? Wow. That is quite some undertaking.

RS: Do you think as you just kind of alluded to that there’s more questions, that there’s too many questions that need answering, that it’s too early to tell how this works out, or do you see it as a negative and not working out well?

DR: Well, there’s no doubt that there’s not enough information here to make an informed decision as to how well this will go. This isn’t even a product. This is an idea on paper that they’ve started to build, but what does it look like when they actually bring it to market? When does it come to market? What is the price point? Are they going to give this away initially and lose money on it to grow subscribers over time? Will it provide the functionality and user experience that consumers who are signing up for it actually want?

These are all unknowns with any product you launch to the market. In this particular case though, you’re also talking about three companies working together with their content to get it to one platform. So, one of the things I questioned in my blog post after this deal listed out all these questions is, the other thing we don’t know is, who’s building this? Is Disney building this new thing? Is it Warner Brothers? Is it Fox?

Because Disney right now, they’re very busy. Their engineering team between Hulu, between Disney+, Hulu + Live TV, ESPN+, plus they’re working on their own ESPN standalone D2C app. Now, you’re talking about another app of some kind in a JV. There’s only so much engineering resources to go around. The Max team is extremely busy as well, having rebuilt a lot of the platform and rebuilt apps from the ground up for different platforms like Roku (ROKU) and others.

So, my guess is, I don’t know, but my guess is, I don’t know, one of my guesses is, Fox will take the lead here on the tech stack. It just makes sense, but I can’t reinforce enough just how much work is required to launch a service like this to the product that they’re talking about, with the functionality they wanted to have at scale. And it’s live.

Live is a whole different ballgame compared to creating a whole bunch of content in a catalog that you’re going to put up on demand. So, yes, right now there’s not enough information for anybody to judge success or failure until we see what they can do, when they can do it by, and the quality of what they’re going to deliver?

RS: Do you think that the companies involved have, I guess, more knowledge of how this is going to work or do you think this is an announcement, we’ll figure it out as we go?

DR: It’s a fair question, I won’t comment on that. Because I honestly don’t know, right? I’m not in the minds, in the heads of these folks. So, I couldn’t really say. I do think it’s interesting though that just the way the executives talk about some of this is very different.

For instance, the CEO of Paramount when they had earnings, he said, “I have, seen some of the prototypes for the new JV sport streaming service.” What does that mean? You’ve seen some of the prototypes. Well, there’s not a current working example of this, like floating around out there. I happen to know that. Won’t go into why or how I know that. So, what is a prototype? Is that something on paper? Is that something sketched out? Is that something that’s designed? Is that a physical product you’ve gotten hands on with? What does that mean?

So you’ve got one CEO of Fox talking about, oh, we’re not going to add this content or this or this, you got Disney talking about the JV service and this, but also by the way, we’re still going to do our own ESPN thing on the side. You got Paramount’s CEO talking about prototypes.

It’s a lot of different egos, a lot of different executives tied into this. So, where’s the clear, consistent message? I think it’s already getting confusing.

RS: And what are your thoughts about ESPN having a standalone app?

DR: Not really sure to be honest because we don’t know the price point, and we don’t know how they brand it. We don’t know what is the real difference there from a functionality standpoint of that in ESPN+.

If you’re adding more functionality, and functionality consumers want around fantasy embedding, that could be great. I’m not discounting that, but if I take that new app, does that mean, I’m now getting rid of ESPN+? Because if I am, then you’re somewhat subsidizing one business for another. Okay, you might have a higher ARPU at ESPN+ because chances — the new ESPN app, because chances are you charge more for that than ESPN+. But the biggest thing we have to remember in this industry, and almost any industry we could talk about here is, ease of use is what sells.

Can you imagine how confused people are going to be when there’s four different ways you can get ESPN and not all of them are the same? And there are different price points and they provide different functionality? It’s confusing enough of where to go just for the average consumer of where to go to get your streaming of baseball or football or what channel is it on or what is this exclusive?

And oh, by the way, while we’re talking, news leaked out last week that Amazon (AMZN) in 2025 is going to get an exclusive NFL wild card game like we just saw on Peacock. So, the sports streaming market is so confusing for consumers.

So, to think that Amazon’s, sorry, that Disney is going to have four options for ESPN, wow, I mean, I think it’s too many. I personally have one app, and have four different plans in it. You’re going to have silver, gold, or platinum. Here’s a different functionality it gives you. At least it’s now one app.

And of course, I’m sure Disney and others will say, well, this is the young generation, right? This is what they do. They already understand all this. A large portion of your fan base is not the younger generation. And they’re going to be completely confused.

RS: Last time you were on, we talked about the NBA and the Formula 1 deals. Any thoughts in terms of updates there, how you see it playing out, how you’re thinking about it, how the companies are talking about it?

DR: So it’s funny you mentioned that because when the Disney news came out, I thought it was pretty interesting that Warner Bros. Discovery was included because they have no NFL rights. None. Paramount does. Comcast does. But those two were not included.

So, why WBD? I don’t know this, and I said this is totally speculation on my part, and I made it very clear in my blog, I don’t have inside track in this, but I’m guessing that it means that Warner Bros. Discovery has won the new rights to the NBA.

Obviously, they’re already a content partner. Now, I’m thinking that even though the news hasn’t come out, that WBD has already confirmed with the NBA that they’re going to get a certain portion of content in the new rights agreement. And that’s why ESPN and Fox want them in there because the NBA content.

So that’s kind of the only reason I could justify why you would have Warner Bros. Discovery in here because they just don’t have a lot of live sports. It’s not a ton. Yeah, there’s some. I mean, they certainly have some on Max, but not as much as Peacock and Comcast have.

So, you had to pick them for a reason. And we know this JV is all about content. It’s about how you’re bundling the right pieces of content across three different companies. So, that’s just a guess on my part, but other than that, to your question, though, we have not heard any update in the market as far as where the NBA licensing terms are at. And we have not heard anything on Formula 1 yet either.

RS: And to your point in terms of which company or how does it look in terms of building out the content of this JV, do you think that that’s being talked about in real time or do you think that’s something that was quasi fleshed out to begin with?

DR: Again, no insight into what they’re thinking there, but I think they’ve made it very clear based on what they’ve publicly said it now in these earnings calls. This is the content we’re going to have. It’s 14 linear networks. You know what’s on those networks already. You know what type of content it has. We’re not adding more content partners. It sounds like they’ve set in the stone. That’s the content.

RS: So, diving deeper into Disney because it was some really interesting earnings and Disney is a behemoth of a company. And there was some nice kind of points of light for investors in terms of raising dividends, in terms of share buybacks. How are you looking at it broad picture for Disney?

DR: Sure. So, I don’t look at share buybacks or dividends at all. I’m not a shareholder in Disney, never have been. I’m not invested in these stocks that I’m talking about. So, frankly, I don’t care really about that kind of stuff, right? That’s for investors. I’m really looking at the health of the business, short-term and long-term, and the entire business.

You know, it’s interesting how much Disney has changed, and Bob in particular has changed. What has been told to investors over the last call it 16 months, 17 months. Remember they made it very clear, hey maybe traditional linear broadcast, ESPN, ABC, et cetera is no longer important to our business. Maybe we ought to get rid of those portions of our business. He made that very clear that they were looking at that.

And then six months later, all of a sudden it was like, well, actually we looked further at these businesses and they’re actually not doing as bad as we thought. So, maybe we should keep these.

And then interesting that all of a sudden they decided two quarters, three quarters ago, I forget exactly, but recently, let’s break-out ESPN’s financials from the rest of our balance sheet so people can understand what the business is doing.

Now, there’s two reasons to do that. One is to show investors, hey, it’s actually a lot healthier than you might’ve thought. And or two, well, breaking it out actually shows a company acquiring that might be interested in acquiring it, you know, what it looks like, and sharing that with the public.

In Q4, ESPN’s revenue only grew 1%. Not surprising, but it had $255 million in profit. And this is for a business that you ask anybody in the industry, it’d be like, TV? Oh, that’s dead. No one makes money from that. Really?

Well, ESPN did in Q4. So, I think it’s interesting in terms of just how Disney has looked at so much over the last more than a year and has really changed their stance on the business. And then talked about still, and they still mentioned this, that they still want an investor for ESPN. They want to bring in a partner, I should say. Investor is probably not the right word, but a partner of some kind. And then there was a rumor that maybe the NFL would take an investment in ESPN, actually put some money in and become a partner.

So, you have that side of the business. You have everything going on with the India side of the business, which is interesting because it’s been reported that a deal is in place for Disney and Reliance. With Disney selling off their portion of what they’re doing in India, basically it would be a merger, is the proper way to put it. So, apparently there’s a February 15th deadline, which is only a couple days from now when we’re recording.

And the deal that basically has leaked out and continues to be consistent across whoever you talk to is that Reliance would own 60% of the new entity and 40% would be Walt Disney. And that would be interesting as well because one of the things that came out was what Disney’s business was being valued for in India was less than half of what it was originally valued for a couple years ago.

And so that’s interesting as well if all of a sudden now the value of Disney’s assets in that particular region have really declined. And that’s not something you want to see if you’re a Disney shareholder. So, there’s so many moving pieces right now with Disney’s business that I don’t know of another time that I can really think about the last 20 years with a content owner like this, where we’ve had so many different variables taking place across their entire core business. And that includes attendance to the parks, what they’re doing with digital, TV, and Linear channels, starting a new JV.

Also, by the way, they announced a $1.5 billion investment in Epic Games. So, now they’re going to create an entire Disney gaming universe that will live alongside Fortnite. Smart, I think very smart, but now that’s a whole another thing they’re building. When Bob was asked on CNBC, CEO of Disney, okay, when’s this going to launch? He wouldn’t give a date, but when he was pressed, he then said, “A couple of years.” Okay. So that’s a deal you’re making now really for the future.

Again, I think it’s smart. But think about how much Disney has going on right now. And at the same time at the top of this pyramid of uncertainty is, does the CEO stick around, or does he truly find a successor who can run Disney properly, or does he decide to stay on? And that’s something that’s going to come up pretty soon in terms of people really questioning and asking about is, what’s going to take place there?

So, the amount that’s taking place with Disney right now is just, it is truly incredible across their entire line of business, whatever you want to look at, how they are reimagining what does that business look like? I don’t want to say future, because future has an uncertain term to it in terms of number of years, but I would just say in the next one to three years of their business.

What does it look like across all the different vertical markets they are in, especially when you’re also talking about the vesting in one area over here in India, but potentially wanting the NFL to invest in your business in the U.S. with ESPN. That is a lot of spinning wheels at the same time.

RS: Before I ask my next question, can you share with listeners why you’re not a shareholder in these companies?

DR: Sure. So, a lot of companies I write about, I don’t buy stock in because I can’t, especially with the infrastructure stocks when it comes to streaming, I know what they’re doing, I know what contracts they win. Many times I’m the one disclosing in my blog that so-and-so just got a contract to deliver this video with this company. So, I get a lot of information from people who are tied into these deals. I just cannot buy based on the information that I have.

RS: I was going to ask why you think the Epic Game deal is a smart one and what your sense is? A, you’re not a shareholder, but what do you think of Iger and what do you think if he would continue? Should he continue?

A lot of information here, but some speculation as well. It’s kind of how we figure things out, especially from an expert. I think it’s worth asking some of these speculative questions, but interested to hear your thoughts there.

DR: So, I don’t have a comment on Bob, what I think of him personally. I don’t know. So, I can’t comment on that. I don’t have insight in terms of what he’s trying to do here short or long-term as far as his personal, does he stay? Remember he left and then he came back. So, is he planning to stay? Is he not planning to stay? I don’t know. Naturally at some point soon something will have to be disclosed to shareholders about what the succession plan is for him.

That is going to be a very big decision at what I would say is, one of the most crucial times in Disney’s history as of late, because as we talked about, they have so much going on right now in their portfolio across their entire business, that these deals that he is making and laying the groundwork for. Somebody needs to come in if he’s going to truly leave. Someone needs to come in and see those two fruition.

And as we saw with the previous CEO, the Bob that he selected to come in, it didn’t go the way he thought it was going to. Hence why he came back.

So, I don’t know their insight there in terms of what they’re thinking, what the board is thinking. You also have some interesting things going on with the board right now too, and an activist shareholder, right? That’s not helping. All that’s doing is taking focus away from Disney focusing on their business. So that’s not good.

But that adds another layer that we didn’t even, you know, I didn’t even check of the box in terms of another thing Disney has going on. That’s a lot to deal with. So, if I had to bet on this one, I would not be surprised if Bob stayed on longer. But whether or not that’s going to happen, I have no idea.

RS: Do you think it’s a positive that he came back?

DR: I do. I do think it’s a positive. I think what he talked about that he learned once he came back for where he thought the business was going to go and the people that he had put in place in terms of the direction they thought for the company was very different than what he thought.

And yet he was the one who selected that person. So, interesting to sort of see the thought process there of where he wanted Disney to go when he thought he kind of teed it up for the next CEO, and the next CEO really came in and said well okay thanks, but I’m going to take some of the things in a different direction.

At the same time it also just, I think shows to all of us just how much infighting there is and egos that are being dealt with at all these companies. Let’s not make any mistake here. This is all about egos at the top. I forget what news outlet, otherwise I’d credit them, wrote a really long, very, very, very detailed story dealing with like they spoke to like a dozen people inside Disney about just how Bob left, how he came back, and it was like reading a soap opera drama.

It’s just all the amount of stuff of people jockeying and vying for positions and that tends to happen in any business, especially one this size. In any vertical industry, there’s a lot of that, but the downside to that is what? Well, it also disrupts your business. It also is, less focus of the business. You talk to people across ESPN right now, and I’m like, hey, what’s your business in two years? And they’re like, I don’t know. We’re kind of waiting to hear. Are we being sold or we’re not? Are we still in the TV business? What are we doing? How are we licensing? How many apps are we going to have? Uncertainty.

So, however the succession of Disney’s management team is going forward, by going forward I mean the next one to three years, is really going to define what this company looks like 10 years from now. And some of that’s just completely unknown until we know who’s going to be leading the company.

RS: And this Nelson Peltz, the activist investor, the sideshow, maybe shenanigans that are going on, any thoughts there or this is something that investors need to wait and see how it’s going to play out, speaking of egos afoot?

DR: Yeah, I have no insight into that. I don’t get involved in any of that. I don’t try and get any information back channels with the relationships I have. Frankly, I don’t care about that. I understand why investors would.

Bob was asked on CNBC, hey, when was the last time you talked to him? And he said, it’s been, haven’t talked to him in months. But Bob did say something that I thought was true, right? And I’ve seen this from being inside organizations myself, when I used to work for companies in dot-com days and whatnot, inside large organizations running a division.

And what Bob pointed out was, every second we’re spending dealing with and talking about activist investors and having meetings about that internally and what we’re supposed to do and what they want and looking at their proposals, all of that time is being taken away from operating our business.

So, if you’re an activist investor, how is that helping you? How is that helping the business? It’s not. It’s not. And this has been continuing for quite some time. It’s not like this happened for a week and the two got together and was like, all right, we’re going to create a deal. Here’s what you want. This, that, okay, done. Because we’ve seen that before with activist investors.

They come in, they want two board seats. They make a stink. Okay, we’ll give you the two board seats. Done, it’s over. This has been going on and on and on. And there’s no doubt that that takes bandwidth, right? It takes time and effort to deal with that. At a time where Disney, I feel, is in such a unique spot with their business, because they’re making so many decisions about their business overall, maybe outside of the parks. And I don’t see anything in the parks business where they’re just going to completely reinvent, but outside of that, every other piece of their business, they’re about to make a decision on.

So I don’t think the activist investor stuff helps. Shareholders might have a completely different take, which is, hey, that’s fine. Maybe they’re saying, well, that’s what it’s going to take for Disney to really do what they should be doing. Maybe that’s a fair argument, but we also don’t know what the activist investor actually wants from Disney, right, because that’s not been made public in terms of like here’s my proposal. Here’s all the changes I want you doing.

So I stay out of all that. I frankly don’t care about any of that. What I care is if the activist investor is able to force Disney to make changes, potentially that they don’t want to do to their business. And then how does that impact the business short and long-term?

RS: So, how would you articulate back to earlier, their deal with Epic Games? How would you articulate why you think that’s a smart deal?

DR: I love the Epic Games deal for a couple of reasons. So, the fact that Disney put a billion and a half dollars to acquire an equity stake in Epic Games, for Disney to invest a billion and a half dollars in another company is pretty much unheard of. It’s rare they do that.

Yes, they invest a lot of money in projects and properties, or either original content, but to put that into taking equity stake in another company, very interesting. The Fortnite brand is still so strong.

I think also the way it ties into their characters and stories and content between Pixar, Marvel, Star Wars, Disney, Avatar, the fact that you’re going to immerse fans in those brands to create their own stories and experiences directly in Fortnite in a way that Disney clearly understands how those particular brands work with that particular type of customer in terms of demographic, age.

In other words, I think it’s a very focused approach. And that’s what I really like about it is it’s not a shotgun approach, which a lot of companies do when they invest in the company. They know exactly who they’re targeting here, what story they want to tell. They know very clearly what Epic’s games business is. So I think long-term, it’s definitely very good.

Also they already have a relationship together and that’s the other thing I think maybe some people are missing is, this isn’t as if Disney now has to create an entire new relationship with Epic Games and figure out how do these guys run their business. How do we work with them? Well, they’ve already been working with them.

So hundreds of millions of players through Fortnite integrations have already been using Disney properties. Maybe using isn’t the right word. They’ve been engaging with Disney properties. You had Marvel Nexus War, that was one of them where they talked about how many concurrent players they had. Kingdom Hearts III, STAR WARS Jedi: Survivor, right, that was all using Unreal Engine from Epic. There’s also things that are tied to Disney Park attractions where it’s tied into Epic’s technology as well.

So, I think it’s smart. I think it’s combining the future of technology and entertainment together, specifically for Disney’s brands. And the fact that they actually invested in the company to me, shows that they’re really serious about this, as opposed to just saying, all right, we’re going to do a partnership with Epic. Well, you already have one. You already have a partnership with them. Well, now the moment you’re taking an equity stake in them, I think that’s very different.

RS: So speaking of integration, something I think anybody even paying cursory attention to is noting the integration between betting and sports. Any thoughts on how that continues to look in terms of content, betting, partnerships, or the integration of betting within streaming sports? Any thoughts there?

DR: Yeah, that is a great question. And I’ll be honest, I don’t really track the betting side too much. That is just an industry all to its own and is complex. And there are so many rules and regulations about what can and can’t be done. You also then have separate deals that are done specifically with leagues as we’ve seen. You also have the deal where you’ve got espnbet.com, and where ESPN is for the most part really just licensing out their brand and their name.

Right now, we don’t have in-game betting, and I know some people listening will say, yes, I can do that right now. Yes, but let me finish. In-game betting inside a live stream. You can’t do in-game betting during the live stream of Paramount+’s Super Bowl stream or Fox or CBS or whoever you want to pick. And the reason for that is, you have the latency issue. The Super Bowl yesterday had latency of up to 60 seconds. That’s a problem.

So, you also have in-stream betting, any streaming media system that hasn’t come to the market yet at scale. And you have companies that have talked about this. For instance, fuboTV (FUBO), they were going to do in-stream in-game betting, talked about it for a couple years, and then they completely shut down the betting division. And they said, we’re banning this. They said, for starters, we’d have to invent technology to get the latency to where we needed it. We don’t see this being core focus of our business right now.

So, everyone’s also looking at this very differently when it ties into streaming. In terms of what’s going on right now with DraftKings (DKNG) and everything else, I think those businesses are very clear in terms of what they’re doing, but I do not know what ESPN’s strategy is in terms of what they want to do. I think it’s very clear that they want to be in this business to a degree because of the money that’s there, but how that’s going to shake out and what that’s going to look like for their brand, I couldn’t tell you.

RS: Well, I appreciate that. And I appreciate this whole discussion. There’s always so much to chew on talking to you and so many points that we could go down as investors, as observers of the industry.

Kind of ending things or wrapping things up. Anything that you would share with listeners, with investors, with observers, looking at streaming, looking at these media companies, how they might be looking at it differently or summing things up, how they should be thinking about things?

DR: Yeah. I always say to investors, private equity firms, institutional money managers who I talk to a lot, who really are not experts on these topics is, you’ve got to know the numbers. Numbers tell a story, numbers don’t lie.

And it’s incredible how many times, we just had the Super Bowl. So, we’re going to have investors and others running around. I’m sure someone’s going to put out the banking side some sort of note where they’re probably going to upgrade a particular infrastructure company who helped deliver the Super Bowl. Why?

What they don’t understand is, the Super Bowl doesn’t drive a lot of viewers. I’m going to put the number estimated about 8.5 million, average minute audience, last year was 7 million, but when you have 6 or 7 vendors behind the scenes involved, if a particular vendor that’s already doing a couple billion dollars a year in revenue makes an extra $700,000 or $800,000 for that day, it doesn’t move the needle.

So, you have to understand the numbers behind the business. Things like the Super Bowl, Olympics, and other things like that don’t drive a lot of revenue. They just don’t. How do we know that?

Look at the viewership stats. They’re going to be put out by CES in the next few days. So, you really have to look at the balance sheet from a profit and loss standpoint per business. And with Disney, it’s very easy to look at that. Their direct-to-consumer operating losses in Q4 were $216 million. That’s down from just over a billion dollars year-over-year. That’s an incredible improvement.

Now, some might use the argument and they’d be a 100% right, if well, yeah, Dan, it’s easy to improve your balance sheet when you lay off 7,000 people. You’re absolutely right, it is. And they can’t continue to do this every year to get to profitability, but what did they then come out and say? They expect Disney+ core subscriber net additions of between 5.5 million to 6 million subscribers in this quarter Q1, calendar year 2024.

So what they just told you is, they expect the business to grow. Here’s how much we expect it to grow by and we still expect our direct-to-consumer streaming business to be profitable by their fiscal Q4. That’s really important.

The other thing you have to look at is, ARPU, average revenue per user. Far too much focus is always put in the streaming side of, well, how many subs do you have? What’s your net new additions? How many subs? I would rather have fewer subs as Disney, but maybe making more money per subscriber. I think we all would. Hulu + Live TV, the average person, subscriber was paying $90.08 in Q3 last year. In Q4, the average subscriber was paying $93.61. That’s a big deal. You jumped over $2 per subscriber per month going forward. Why? Because you raised pricing.

Now, when you raise pricing, did you lose any subscribers? Well, we don’t know exactly churn or loss up and down, but they did tell us that they had 4.6 million subscribers to Hulu + Live TV in Q3, and they had 4.6 million subscribers in Q4. So, even though you raised pricing, overall it didn’t impact your number to any large degree. You might’ve had some that left and then new people that came on. There’s some churn there naturally. But that’s what investors have to look at is, what are consumers paying per month for these services, and how does that number continue to go up? Because you might have fewer subscribers, but make more money, because you’re charging more every month and that’s why ARPU, average revenue per user or what Netflix calls ARM, A-R-M, average revenue per member. That’s really what you have to look at as an investor.

So, I always tell investors, to wrap up your question there, you have to look at the numbers, don’t focus so much on a lot of the rumors and this and that and like, oh, someone could do this or that, do that. Like, the balance sheet tells it all and then read the filings because the press release by itself is not enough. Listen to the earnings calls. That really gives you a good indication of where the company is headed. And I think ESPN is the best example because for so many years, everyone said, Disney’s got to get rid of ESPN. They’re losing carriage fees, right? They’re losing rights, sorry, not rights, they’re losing fees that they’re getting from the cable operators. It’s a terrible business to be in. And then when they broke out the revenue, it was like, okay, it’s declining, we know that, but this is still a healthy, profitable business. And by the way, that content is fueling your streaming services. So you got to take emotions out of the equation decision and look at the numbers.

RS: Good advice, good advice. Dan, appreciate this conversation, as I do all of our conversations. Thanks for taking the time again.

DR: Thank you. Appreciate being here.

---

---