Take-aways from the latest interview of Disney CEO

Bob Chapek, the CEO of Walt Disney, attended Credit Suisse 23rd Annual Communications Conference and had some interesting comments on the business. If you are interested in the company or its competitors, it’s really worth a read. Here are a few highlights.

In response to the interviewer’s question on the investments on the experience side in the next 5 years, Bob’s answer was, as follows:

Sure. Sure. Well, we’ve got ambitious plans to expand our business. I had just mentioned Avengers Campus a second ago, and we’re encouraged by the great response we have there, but we’re not stopping there because, as you know, we’ve been undergoing a massive transformation of our Epcot park at Walt Disney World in Orlando. And we’ve got a Ratatouille attraction that we’re bringing in that first premiered in France. We’ve got a new nighttime show Harmonious that will be on the water there at Epcot, and it will be a huge guest pleaser. And then we’ve got our Guardians of the Galaxy: Cosmic Rewind attraction or coaster that will give us our ability to bring that whole Marvel franchise into the park. Internationally, we’re thrilled to bring Zootopia into Shanghai Disney Resort. You mentioned Shanghai.

That’s obviously a property that did extraordinarily well in the box office when Zootopia came out. So that will be a big hit in Shanghai. We’ve got Frozen installations coming into Hong Kong Disneyland. At Disneyland Paris, we’ve got the [indiscernible] of its own Avengers Campus taking off from where Anaheim has. It just recently launched Avengers Campus, and we’ve also got the Art of Marvel Hotel that we’re putting in. We’re installing Tokyo Disney Resort. We’ve got the 8-themed port over at Tokyo DisneySea.

We’ve got 2 new hotels and attractions going in for Frozen, Tangled and Peter Pan. And then we’ve got 3 new ships and a second island destination. So we certainly have a plethora of new things coming, and that’s really mining all the work that we had done prior to the pandemic and kept working on during the pandemic so that we would not have any sort of glitch in our supply chain of new attractions and experiences for our guests, so we can keep that growth engine of parks going.

Source: Credit Suisse 23rd Annual Communications Conference

That’s an impressive pipeline of investments both in depth and breadth. The company has different types of physical attractions under different brands and themes ranging from hotels, resorts to cruise lines and theme parks, from Frozen, Peter Pan to Disney & Marvel. Despite being badly hit by the pandemic, Disney’s traditional cash cow, their Parks business, is likely going to make up for lost time & money, now that folks are increasingly vaccinated and restrictions are lifted. These assets are difficult to replicate. First of all, they are expensive. Any company that wants to emulate Disney needs to ready their check books for a huge sum of money for initial constructions and yearly maintenance. Second of all, Disney competitors need to also build up a library of themes & characters that relate to consumers and entice them to visit the physical attractions. Disney has spent decades of creating, marketing and distributing content. Their brand name is known and loved by generations of consumers. Even if a competitor has the required resources to invest in content, those resources cannot buy the timeless reputation and name that Disney has.

Netflix is trying to take a page from Disney’s book. It’s building Netflix Shop where merchandise related to their originals is sold. This is the first piece of the puzzle. Netflix is popular among viewers around the world and it has some great originals. Hence, it makes sense for the streaming service to start making inroads into the retail side. However, having an online shop is very different from building giant physical attractions that represent huge fixed costs. It will take a lot more from Netflix to build an empire like Disney’s, but everything has to start somewhere.

Second, when asked about how much IP is there to mine, Bob Chapek had this to say:

Well, I’ve always learned not to underestimate our creative teams, particularly our Marvel creative teams. We’ve got 8,000 characters that we have to mine. And you say, well, 8,000 characters, who knows what these 8,000 characters are. But remember that all of our Avengers, for example, our Avengers characters, when we made the acquisition, weren’t exactly household names. Take Loki, for example. Loki was the most watched season premier ever on Disney+ during its opening week. And no one knew who Loki was even when we got started on this journey on Marvel. No one knew who Iron Man was or Wanda or Vision or Falcon or the Winter Soldier. Black Widow, Shang-Chi, nobody knew who these characters were.

Source: Credit Suisse 23rd Annual Communications Conference

I didn’t grow up reading Marvel comics. Years ago, when characters like The Hulk, Iron Man, Thor or Captain America debuted, I barely knew them, yet they are now some of my favorite. I suspect that many casual viewers will first get to know the likes of Shang Chi and others among 8,000 characters from movies or series by Disney. The ability to build characters and tell engaging stories, especially interconnected ones, over a long period of time is a creative competitive advantage that is hard to match. The last 12 years from the first Iron Man movie to End Game is evidence of such an enduring output of creativity. Does it guarantee future success and repeat of the past? No. But it’s much more assuring than records of many competitors.

Next, when the interviewer asked whether Disney would add an ads-supported plan to Disney+, Bob ruled that possibility out at least in the near future.

Yes. We’re always reevaluating how we go to market across the world, but we’ve got no such plans now to do that. We’re happy with the models that we’ve got. But again, we won’t limit ourselves and say no to anything. But right now, we have no such plans for that.

I support this position by Disney. The flagship streamer, Disney+, is already on the cheap end among streamers with the latest reporting ARPU standing at $3.99. The addition of an ads-supported plan would like drive down ARPU even more. Plus, nobody likes to have their streaming experience tainted with ads. Netflix goes to great lengths and invests a lot of resources to make sure that their viewers have the best streaming experience possible on their platform. Disney is wise to do the same if it hopes to compete with its rival. If the company wants to make money from ads, it has its own media channels to do so.

On what “new content on Disney+ every week” means:

Yes. Our plan is to do — hit that cadence this year in terms of a new product every week. And what we mean by that is a new movie or a series, meaning, a new production or library add every week. And that’s not counting new episodes, if you will, but does count new seasons. So we count new seasons. We don’t count new episodes in that. And something new can be a new movie or a new piece of content or something new added to the library. So that’s how we’re defining that. And that’s the plan right now.

Because Disney+ subscriber base is sufficiently big now, it enables the company to spread the fixed content investments across more than 103 million viewers, giving Disney a cost advantage over other streamers, except Netflix. Additionally, new content helps the company acquire more subscribers who will, in turn, add to the economics advantage mentioned above. What I am unclear about is whether a new weekly content is purely originals or whether it includes licensed IP. If it’s the former, it will be great news for Disney stock bulls, a gift to subscribers and ominous signal to competitors.

Last but not least, Bob Chapek touched upon the impact of price increases on churn:

Yes. In terms of, I guess, an objective way to look at the price value relationship, the growth rate that we’ve experienced on Disney+ sort of stands out as the headline there. But you’re right, we did launch at a very attractive price value opening point. And the first price point — or our first price increase that you mentioned in the first 16 months happened recently, and we’ve seen no significantly higher churn as a result of that. In Europe, as a matter of fact, we took a price increase twice as high as we took domestically more or less. And we — that was with — commensurate with the integration of the Star brand as the sixth brand tile. But our churn actually improved, right? So we took an even higher price increase and our churn improved because we added more content. And I think that investment in the content at attractive price point gets you strong retention, and strong retention, obviously, is one of the key factors towards overall platform growth. And — but that doesn’t mean that in the future as we continue to add more and more great content that we wouldn’t necessarily reflect that in the value that we add and then price it accordingly.

While it’s encouraging to see the current price inelasticity of Disney+, it’s equally important to understand that we don’t have a lot of context here. Disney+ had a low price at launch and even a 3-year bundle at one point. Because the starting point was low and the increase here is not significant in absolute ($1 in the US.), even though customer reception towards the latest price increase was positive, it doesn’t guarantee the same outcome for the next raise. They could plow millions of dollars into content, raise prices yet get spurned by consumers. Furthermore, since we don’t have information on the previous churn, it’s tough to conclude whether the current churn is good. Yes, there was an improvement, but for all I know, it could be upgraded from “disastrous” to “concerning”.

In short, Disney has a lot of great assets and great things going on for them. As the world is gradually opening up with an increasing vaccination rate, it will turbocharge the recovery of a business whose cash cow was terribly affected. On the streaming side, the pandemic was a boost in what I consider largely a two-horse race between Disney and Netflix. Each company has its won advantages and strengths. It’ll be super interesting to see how the market will be in the near future.

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