NFL should ‘be careful’ about streaming deals with Apple, Amazon: Analyst

Jessica Reif Ehrlich, senior U.S. media and entertainment analyst at BofA Securities, joins Yahoo Finance Live to discuss Disney earnings, advertising in the streaming space, and Amazon and Apple looking to offer sports streaming with the NBA and NFL.

Video transcript

AKIKO FUJITA: Let's turn our attention now to Disney shares-- still in rally mode. That stock up more than 6% after reporting a magical quarter driven by parks revenue. The magic also sprinkling over its streaming business, and the media giant saw an addition of 14.4 million Disney+ subscribers in the third quarter. But it lowered its subscriber expectations for the fiscal year 2024.

Let's bring in Jessica Reif Ehrlich. She is Bank of America Securities Senior US Media and Entertainment Analyst. We've also got our very own Ali Canal joining in on the conversation. Good to have you on today. I mean, you certainly felt good about the results yesterday, you're now looking at a price target of $144. Talk to me about what stood out to you the most.

JESSICA REIF EHRLICH: Yes, thank you for having me on. The numbers were really good across the board. The streaming numbers were better than expected at 14.4 million subscribers, which was a big relief. And we're really thrilled that they changed guidance-- that they brought the sub guidance down for fiscal '24, and I'll come back to that.

But the other part of the earnings that were phenomenal were theme parks. They blew away our numbers by over $500 million in operating income. And the outlook is just as strong. They also launched a cruise ship. So theor two most important businesses are doing extremely well.

ALI CANAL: And, Jessica, in your note, you said, quote, "we see an eventual path to profitability as cash content spending stabilizes in the coming years." But Disney's CFO Christine McCarthy, she did say that higher production cost, that's going to be a significant headwind throughout the rest of this year-- Disney+, Hulu, ESPN+ also reported a $1.1 billion loss in the quarter. So how do they reach that profitability target, especially since we're seeing a more fickle consumer?

JESSICA REIF EHRLICH: Well, the other thing that Disney announced last night was big price increases-- I mean, really big, almost 40% increase for Disney+. So the subscription service will go up about 38%, technically, in December, at the same time they launched the AVOD, or the lowest subscription price with advertising service. And so the AVOD service will be the current subscription price, $7.99.

But the RPU, the advertising revenue per month per user, is likely to be in that same zone as the subscription service because there's very strong demand. So there's a big price increase there. There are price increases already announced for both Hulu and ESPN+. And the content spend is already a given, and it will level off as we go forward.

So we did increase our losses for DTC, direct to consumer, business to roughly $4 billion this year, $2.5 billion next year. They'll reach break-even in fiscal '24, but likely not be profitable on a full-year basis. But there's a path to profitability and that's what's so important.

And the fact that they brought their sub numbers down, because the IPL-- the new IPL contract does not give Disney digital rights in the next contract. So they brought their Disney+ Hotstar or their India subs down, which is, financially, it's really not that significant. Those subs pay $0.50 to $0.70 per sub per month, so much less than the rest of the world.

AKIKO FUJITA: Jessica, you mentioned average revenue per user for Disney+. We saw that number for Hulu come down for yet another quarter. And I wonder how you think we should be looking at that as we hear from other streaming services who are adding their ad-supported model. I mean, this also comes at a time when we've seen a big pullback in ad spend broadly.

JESSICA REIF EHRLICH: But the streaming companies are jumping in with two feet. Comcast with Peacock actually sort of started with this strategy. Discovery+ has done a phenomenal job. And now that Warner Brothers Discovery is combined, that will be a much bigger part of their offer.

It's a way for the traditional media companies, which is their bread and butter business-- they've been in advertising forever-- it's a way for them to claw back some of the money that's been lost to some of the digital companies. And it's a way to make it more affordable. So the TAM, or the total addressable market, will increase when it's not just subscription, but some form of either subscription plus advertising or, in the case of these FAST or free advertising supported-- there's a lot of acronyms here-- but advertising will help fund a lot of the content and a lot of the affordability for consumers.

ALI CANAL: And, Jessica, everyone seems to be hating on Netflix after this Disney report. I'm curious to get your thoughts on Netflix and its role as a streaming leader. Because these are two very different companies. And it's kind of hard to make that apple to apple comparison, because the parks business, as you mentioned earlier, is still incredibly vital to Disney's bottom line.

JESSICA REIF EHRLICH: Well, let's put it another way. What the studios, including Disney, and Warner Brothers Discovery, and BCU Paramount-- the advantage they have versus the FAANG companies, which, obviously, include Netflix, Apple, Amazon-- is that they have studios, they have other assets, they have other networks, where they can amortize the content over multiple platforms. They can promote the shows from various-- from different sides.

They can also go into their libraries-- they have deep IP that consumers are familiar with. So there are multiple advantages that traditional media companies have that only now are becoming apparent.

AKIKO FUJITA: Jessica, let's switch over to talking about ESPN. You know, obviously, they face a lot of competition, and this is something we've been talking about a lot on this show, with names like Amazon and Apple really moving aggressively on sports content. I realize ESPN is still a leader in that space, but as we have these players, who, by the way, have a lot of cash on hand try to bid more aggressively, how do you think that affects ESPN? And how big of a threat is that?

JESSICA REIF EHRLICH: You can absolutely see that ESPN is being much more selective in what they buy. So they did not pay up for IPL and lost it to a consortium that includes Paramount, and reliance, and some others in India. They may walk away from some of the college football, but they still have plenty of others. So they're being a little bit more selective.

They clearly have a lot of sports. But it's the biggest brand name. So with the FAANG companies, again, they have huge balance sheets, very hard to compete. But they don't have the experience. They don't have the reach.

And so the leagues-- the NFL, NBA-- have to be careful about the deals that they do, because they don't want to lose their fan base. You lose your fan base, it's very hard to get that back. So there's a toe in the water.

Amazon will get "Thursday Night Football," but they don't have all of the weekend-- the key games and the key times. So it's a little here, a little there. Maybe it expands over time, but reach is critical. And again, traditional media companies have not only cable networks, but they have broadcast networks.

And so it's unlikely that they will lose key sports for a very, very, very long time. The other thing about ESPN that I think is super interesting is that they have yet to announce a sports betting agreement-- licensing deal-- some form of-- they have a great brand name in sports. And they haven't really capitalized on that. And that's something we would expect in the next year or so-- a low-risk way for Disney to get some benefit out of the ESPN name in the sports betting universe.

ALI CANAL: And, Jessica, the stock up 6%-- do you think investors are being too bullish? Because there are a lot of external factors that could cause the company to lower that subscriber guidance once again. A recession could impact the parks business. Was there any part of this report or on the earnings call that you were a little bearish on? Because I felt after the earnings call, I still had a lot of questions about their longer term growth strategy.

JESSICA REIF EHRLICH: I mean, there are a lot of puts and takes. There's a lot of moving pieces here. Of course, the parks are susceptible or have exposure to a recession. But we're in a very unusual period.

If this was a normal time with inflation, recession, some of the concerns that we have, obviously COVID, we would be much less bullish. But there's a combination of pent-up demand, new attractions, international visitation picking up again that will drive parks for the foreseeable future. Disney also launched a new cruise ship in July, and that's their highest return on invested capital business. And this is their fifth cruise ship with two more coming.

So there are a lot of positives in the stock, because when theme parks turn-- they've never been closed more than a few days because of weather. And when they turn, they tend to turn for five-plus years. So there's a pretty long runway for growth. We're seeing massive margin increases. And the streaming business has a path to profitability.

On the negative side, we are seeing a pullback in content that they're licensing to third parties, the pay-tv universe is contracting, which is really their cash cow right now. Disney still has to buy Comcast out of Hulu. So that's a big payment that will be coming up. But positive for Disney is that the valuations for streaming companies has gone down. So whatever they negotiate will probably be a lot less than they would have a year or two ago.

AKIKO FUJITA: Yeah.

JESSICA REIF EHRLICH: And Disney has yet to reinstate their dividend. So as I said, there's a lot of moving pieces.

AKIKO FUJITA: Yeah, I mean, a lot more to get into-- unfortunately, we're out of time. But, Jessica, I appreciate you stopping by today. Jessica Reif Ehrlich, Bank of America Securities Senior US Media and Entertainment Analyst-- and our thanks to Ali Canal as well.