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Disney: ESPN the ‘most important issue for Bob Iger,’ analyst says

Macquarie Senior Media Tech Analyst Tim Nollen joins Yahoo Finance Live to discuss Disney earnings, subscriber growth for its streaming division, Bob Iger’s return as CEO, and the outlook for ESPN.

Video transcript

- Let's continue this conversation with Disney earnings on tap. Our next guest looking ahead to Bob Iger's second act with a priority of doubling down on profitability as the number one priority there. Macquarie Senior Media Tech Analyst, Tim Nollen, joins us now. Tim, great to have you here with us this morning. How much of what has been said in the latest activist campaign towards Disney do you think is lighting a fire under the management team there?

TIM NOLLEN: Well, first off, thanks for having me back again. I think it's addressing issues that investors have been concerned about for some time, mainly really just about getting back into a more profitable outlook. The direct to consumer investments have been so heavy bringing that business down to losses of $4 billion or so last year that I think investors, not just in Disney, but in terms of other streaming services all are losing money.

And so what used to be an atmosphere of looking for subscriber growth now over the last 12 months has shifted very firmly into an atmosphere of looking for earnings growth. And Disney, I think, fortunately is in the right spot now. I think timing may be on its side here, where it should be on an upward path into better profitability. Let's say getting to profitability, as you mentioned the last segment, by fiscal '24. So like six quarters or so from now, Disney aims to have its DTC, direct-to-consumer, businesses in profitability.

If they demonstrate in the quarter that they're moving in that direction now already, which I think they will, then I think they've got a little bit of tailwind. So I'm not sure what the activist proposal is or how they expect Disney to do things better than what Iger basically has a mandate to come and do already.

- But Tim, wouldn't a Nelson Peltz on Disney board just speed up that sense of urgency perhaps?

TIM NOLLEN: I don't know. I think there's probably an urgency on the board here. Look, they made a major CEO change, going back to Bob Iger just a couple of months ago. That's a pretty dramatic move. And of course, part of the concept there is to get a permanent successor coming after him supposedly in two years time. So I don't know having one activist investor voice on the board necessarily accelerates the board's urgency to get things done. I think it's pretty clear what Disney wants to do, what investors are pushing it to do in general and what I think it will move towards.

- In terms of what it will move towards and what investors want it to do, one of the outstanding items has to do with ESPN. So I wonder what you think strategically is going to happen on that front? And if any changes are coming, when they might happen?

TIM NOLLEN: For sure. Well, ESPN, we've written recently we think this may be the most important issue for Bob Iger to deal with in his tenure now. I think goal number one, as I just said, is getting direct to consumer toward a more profitable sustainable path. Goal number two, which is really an extension of that, I think is getting ESPN decided. What are they going to do with it? There's been pressure on Disney to potentially divest ESPN. We've heard that from several sides.

I don't think that's what Disney wants to do. I think Disney sees a future for ESPN in streaming. And we believe actually the next stepping stone toward getting there could be the new NBA rights contract, which is up for renewal after the 2025 season I believe. Now, these rights usually start to get negotiated as much as two to three years in advance. That's what the NFL did already a couple of years ago ahead of its rights renewal starting this coming fall.

So if the NBA contract is being discussed this year, I'm quite sure that will include a lot of streaming capabilities within that. Remember, the two main holders of this, two holders of the NBA rights, are ESPN and Warner Brothers Discovery's Turner networks. Both of these companies have vibrant streaming businesses. Disney's been doing a lot of work with ESPN for many years with ESPN Plus. But it's still not a completely over-the-top service.

The NBA rights could be a more important stepping stone to work more streaming into that. And we'll see if there's eventually-- I don't think right away this year-- but within a couple of years, maybe we have more of a clear plan as to ESPN becoming a fully over-the-top streaming service. I think that is Bob Iger's main legacy from this time around.

- Even beyond sports, do you believe that there's the opportunity, or at least based on the "Bloomberg" report, the likelihood that we might see Disney try to tap an old strategy they had in licensing some of their content to other streaming platforms?

TIM NOLLEN: Part of the goal of getting into better profitability, of course, is both reducing costs, which is where I think Disney will be focusing now, whether it's staff reductions, whether it's more operating efficiencies, whether it's just less content investment step ups. And the other side, of course, of that is driving better revenues. And so as Disney over the last three years has just been plowing content resources into Disney Plus into Hulu, maybe there's a bit more of an effort now into, how can we make more revenue, more money off of this?

One is the ad tier that we see coming out of Disney Plus now for a couple of months. Very much looking forward to commentary on the call this week. And then two would be just, what other ways can they drive revenues? One may be if there's more licensing of content to be done, whether it's the old fashioned way, back out to TV network groups, whether it's selling it to other streaming services, some of these fast services. So I think Disney will certainly be looking at that lever to pull as well.

- Tim Nollen, Macquarie Senior Media Tech analyst, good to see you. Good luck on the earnings day this week.

TIM NOLLEN: Thank you.