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Yesterday’s earnings results from Disney and Warner Bros. Discovery did not offer positive stories to investors. After the calls, Disney’s stock dipped 6% and Warner Bros. Discovery’s dipped over 12%.
Recent The Medium essays have been focused on the inevitable crumbling of the walled garden model and its implications. So, what exactly did these earnings calls revealed about the strength of each company’s walled gardens?
The growth of the attention economy—where user attention seems to be increasingly fragmenting across distribution channels and media formats—means consumers are more sentimental about the intellectual property of media companies than they are for the TV series and movie formats. Or, they are not sentimental at all, as hundreds of millions of consumers are now hyper-served creator content by algorithms from YouTube and TikTok, or are personally recommended new, original content from around the world on Netflix.
Both earnings calls implied that this is not a reality that either management team is willing to concede. Disney seems to believe its intellectual property (“IP”). is better off behind walled gardens in the long run and is investing accordingly, including $60 billion in its theme parks over the next decade. Warner Bros. Discovery also believes it is better off as a consolidated public company”—despite Wall Street's arguments to the contrary—and is reportedly willing to sell a stake in Warner’s video games business.
But, what if the IP is not better off behind walled gardens? Then what should they do?
Surprisingly, both earnings calls opened the door to a path ahead.
Key Takeaway
The question is whether Disney are licensing their IP to enough partners. If the only two future business models for these two conglomerates are blockbuster and niche, they should be talking more about how to monetize the latter via licensing.
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Weakening Demand
To date, both companies have turned to third-party content licensing revenue as the salve for disappointing streaming results.
Warner Bros. Discovery reported content revenue in its Direct-to-Consumer segment was down 70% year-over-year—from $410 million in Q2 2023 to “primarily driven by lower volume of third-party licensing deals.” Disney reported higher TV/VOD distribution licensing revenues year-over-year for the quarter—up 17% to $670 million from $572 million in FY Q3 2023. However, it also reported lower TV/VOD distribution licensing revenues for the previous nine months—down 20% from $2.1 billion to $1.7 billion—due to “lower sales of episodic content.”
Even though there is a nuanced difference in their accounting—Warner Bros. Discovery breaks out licensing for its Direct-to-Consumer whereas Disney does not—the takeaway is the same: The value of their respective content libraries is decaying within the walls of the streaming services—both of which had flat (Disney) or negative (WBD) domestic growth year-over-year —and their perceived value is declining elsewhere in the marketplace.
Netflix’s earlier Q2 2024 letter to shareholders confirmed this: “Premium content” generates “relatively small viewing” on competitors’ streaming services. Therefore, it is not valuable to Netflix or any other possible buyers (e.g., Amazon, Apple), either.
Questioning The Flywheel
Disney reported theme parks revenue growth and operating income were negatively impacted by “moderation of consumer demand towards the end of the third quarter that exceeded our previous expectations.” The slowdown “could impact the next few quarters.”
Surprisingly, its much-celebrated and envied flywheel model may be in trouble. The Experiences business—which includes theme parks and cruises—sits at the financial heart of this flywheel. It was responsible for 70% of Disney’s operating income in 2023, and 64% of its operating income for the past nine months. In FY Q3 2024, it was only 52% of Disney’s operating income, down from 64% in FY Q3 2023.
Although Airbnb reported a similar slowdown in consumer travel spending— it is "seeing shorter booking lead times globally and some signs of slowing demand from U.S. guests”— a reasonable question is whether this is also a bearish signal about Disney’s intellectual property drawing visitors to theme parks in the long term. Because, if so, it is worth asking the question that analyst Kannan Venkateshwar with Barclays asked: “what kind of growth impact" does Disney expect from its long-term $60 billion capital expenditures plan?
Disney CFO Hugh Johnston answered that management “wouldn't be making capital investments in an accelerated way if we didn't expect to accelerate growth out of those businesses”. However, he added the caveat that “the lead time on investments in this business are multiple years.”
If the flat year-over-year growth of Disney+ correlates to the decline in consumer demand for theme parks, investors may not want to wait that long.
Is Blockbuster *and* Niche Possible?
The investment hypothesis that The Chernin Group founder Peter Chernin has successfully tested in both media and investing for the past two decades—"Content will aggregate at two extremes: the big blockbuster hits and niche products”—suggests Hollywood blockbusters and creator-led niches will be the only two models that will succeed in media. The rest of the models, what Chernin calls the “bland middle”, will be “gone, and gone forever.”
Both Disney and Warner Bros. Discovery management seem to share the belief investors want them to be in the business of blockbusters, only, because of that their “strong” line-ups of movies and TV series. Disney movies have generated over $3 billion in revenue from “Inside Out 2” and “Deadpool & Wolverine”, and Warner Bros. Discovery has grossed over $1.2 billion with “Dune 2” and “Godzilla x Kong: The New Empire”.
Disney has had recent hits with Hulu’s “The Bear” and “Shogun”. On its call, Warner Bros. Discovery trumpeted the successes of HBO’s “House of the Dragon” and Apple TV+’s “Presumed Innocent”.
The uncomfortable question for both companies is, so what?
Neither company’s streaming services are growing significantly year-over-year and their linear businesses are in secular decline. The total titles in their libraries are in the thousands, and yet the new titles they are bringing to market each year tend to be in the low double-digits.
Following Chernin’s logic, that is a mistake. If the conglomerates can only deliver a few movie and TV blockbusters annually, then the thousands of unused IP titles may be best monetized instead by millions of niche creators and publishers. This could be via smaller TV shows and movies, or via “Back to the People” business models.
Either way, the "walled garden" has more downside than upside.
A Signal In The Noise
Zaslav opened the door to licensing IP to third parties in response to a question about the games business:
“We have 11 studios here and we have a lot of IP, and there's also a lot of interest among others in coming to take advantage of some of that IP for gaming, which we're looking at. Because as JB said, we need to get bigger, and the IP that we own and the value that it has in the gaming space, is something we're looking to take advantage of.”
Disney also talked up its gaming licensing business in its Executive Commentary for its earnings call:
“Disney’s licensing games business is the largest in the world, and through our collaboration with Epic Games, we are leaning into this area even more, capitalizing on a transformative industry-wide shift toward converged gaming ecosystems.”
The question is whether Warner Bros. Discovery and Disney are licensing their IP to enough partners. If the only two future business models for these two conglomerates are blockbuster and niche, they should be talking more about how to monetize the latter.
The opportunity may be in licensing the IP to millions of creators hungrier to succeed with the IP than existing management teams. Talking up the quality of their IP ignores the fact that their licensing partners and consumers increasingly value those outputs less. Whereas, millions of creators may deliver lower quality but they can also a long tail of greater volume and higher licensing revenues.
In the spirit of the Season 1 finale of "The Bear", why shouldn't Disney and Warner Bros. Discovery license their least-monetized IP to an emerging generation of talented creators and tell them to "let it rip"?