With The Walt Disney Co. drowning in red ink at its direct-to-consumer business, CEO Bob Iger admitted he’s envious of the profit margins posted by streaming leader Netflix.
On Disney’s third-quarter earnings call with analysts Wednesday, Iger was asked what is the company’s long-term expectation for direct-to-consumer sales in terms of profit margins, given that Netflix was more profitable when its streaming business was at about the same revenue level as Disney’s.
For the quarter ended in June, Netflix had $8.187 billion in revenue and operating income of $1.827 billion, for a 22.3% operating margin.
Disney had $5.25 billion in direct-to-consumer revenue but posted a loss of $512 million in the quarter. (The loss was half the size of the $1.06 billion loss posted a year ago.)
Iger noted that Disney was, relatively speaking, just getting started in the streaming business.
“Our streaming business is still actually very young,“ he said. “In fact, it’s not even four years old. It launched in November 2019. And we love to have the margins that Netflix has.”
Netflix lost money as it built its streaming business. And Iger noted that Netflix has built those margins over the years they’ve been in the business.
“They've done so because they figured out how to really carefully balance their investment and programming with their pricing strategy, and what they spend in marketing,” Iger said.
“Because we're new at all of this, we actually have not really achieved the kind of balance we know we need to achieve in terms of cost savings and pricing, and money spent on marketing, and of course all the other things that we're looking at from a technological perspective that grows engagement with our customers,” Iger said.
Iger said that having a recommendation engine could help increase consumption and improve performance.
“I can't emphasize enough the time we’ve put in managing cost,“ Iger said. “And we've done a tremendous job in a short period of time, exceeding the cost reductions we said we were going to achieve. And that’s obviously a major step in the direction of improving our margins.”
Disney will be raising prices on the ad-free versions of its services, implementing controls over password-sharing and growing its advertising business in order to make streaming more profitable, he added.
“I’m reasonably optimistic and hopeful that we will be improving our margins in this business significantly over the next few years,” he said. “I’m not going to make any further predictions on that, except the good news is we know how much work we have to do.”
During the call, Iger took umbrage when an analyst asked about a report speculating Disney could be acquired by a big tech company.
“I’m not going to speculate about the potential for Disney to be acquired by any company, whether it’s a technology company or not,” he said. “Obviously, anyone who wants to speculate about such things would have to immediately consider the global regulatory environment. I'll say no more than that. It’s not something that we obsess about.”
