Across the entertainment business, a clear trend has emerged: Linear TV and streaming need to be separated apart, and in some cases even spun out, in order to lean into the future.
Warner Bros. Discovery was in the process of splitting itself in two companies before Paramount swooped in to buy the whole thing, but Paramount runs its TV and streaming assets from within two different siloes itself. NBCUniversal spun out most of its linear business into Versant, keeping only a couple of brands (NBC and Bravo) for itself.
Don’t expect Disney to follow suit, at least not anytime soon.
During the company’s fiscal Q2 earnings call, Disney CFO Hugh Johnston explained the company’s thinking on linear vs. streaming, and how it views them all as being connected.
“These networks are better thought of as brands with studios that produce content like The Bear or Shogun, and we monetize that content across multiple distribution platforms,” Johnston said of Disney’s entertainment linear brands like FX and Disney Channel. “Separating those monetization platforms into discrete businesses is highly complex, and in our view, unlikely to create incremental value for shareholders, especially given where networks are valued in today’s marketplace.
“Second, we’re managing a monetization transition of these brands, and we are actually far down that migration path,” he continued. “We’re generating more revenue at Disney Entertainment in streaming than in linear, more than double, if we look at it, in this most recent quarter. So the linear earnings base is becoming smaller and smaller every quarter within our P&L. Finally, yes, linear revenues are declining, but Disney Entertainment as a segment, is growing nicely … So with all the cord cutting pressure, Disney entertainment is actually one of the faster growing media businesses out there, and we’re actually very, very proud of that.”
Sports is a slightly different story, but once again Disney frames the tie-up of streaming and linear as being beneficial, particularly with other streaming platforms like Netflix and Prime Video leaning into sports themselves.
“We view ABC as strategically connected when we think about ESPN and sports in general. Sports is admittedly a separate discussion in that it is much earlier in its monetization transition, having just launched [ESPN] Unlimited last year,” Johnston said. “However, when we look at the marketplace for streaming in our competitive set: Netflix, Prime Video, YouTube, Paramount+, all of them are increasing their position in live sports.
“Sports rights are expensive and can be dilutive without scale, but we have scale in our most important market, the U.S., and the biggest sports media brand in the world, in ESPN,” he continued. “We view sports as a key part of our programming strategy. ESPN as an important contributor to our distribution portfolio. For sure, we have to continue to work through the economic transition for ESPN, while also better leveraging it for our overall business.”
It’s a message that it meant to make it clear to the Street that the company has a strategy in place that includes both linear and streaming, and it is a strategy that seems differentiated when compared to many of its peers, though whether it pays off may depend on how ESPN makes that transition.
Should Disney change its mind, it seems clear that it would be ESPN and ABC that hit the market, with brands like FX and Disney Channel staying in house.
“When it comes to capital allocation, we’re always assessing and looking to maximize shareholder value of our portfolio,” Johnston said. “That is our responsibility to shareholders, and we will continue to do that in the future.”
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