Disney Executives Expect Most Disney+ Subs to Choose Ad-Supported Option

With Disney planning to launch a less-expensive, ad-supported subscription option for Disney+ later this year, questions about the pending plan featured prominently May 18 for Disney CFO Christine McCarthy and Rita Ferro, president of Disney advertising sales and partnerships, at the MoffettNathanson Annual Media & Communications Summit.

With Disney expecting to operate its branded SVOD platform in 150 markets by the yearend, McCarthy reiterated management confidence that Disney+ could reach 230 million to 260 million global subscribers by the end of fiscal-year 2024. The service ended the most-recent quarter with almost 138 million subs — up from nearly 104 million subs in the previous-year period.

Christine McCarthy

“We still expect a strong second half [2022] of subscribers, because we have two things going on: We have a lot of great content coming [to the platform] … and we were also launching in several new international markets,” McCarthy said.

Ferro, who has been tasked with mining incremental revenue from pending Disney+ ad-supported subscribers, said the company internally has been strategizing about an ad-supported option since the SVOD platform launched in late 2019. To help sort through the challenges of an ad-supported plan, Ferro said the company looked no further than Hulu, which Disney owns and operates, with Comcast as a minority stake holder.

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“Hulu was the first … AVOD platform. They had 14 years’ experience in this space,” Ferro said. “Since we took operational control of Hulu, we’ve doubled the ad revenue, [and] we’ve doubled the number of advertisers.”

Rita Ferro

Hulu ended the fiscal period with 41.4 million SVOD subs, of which upwards of 66% subscribe to the ad-supported $6.99 monthly plan, with the rest opting for the $12.99 ad-free plan, according to Ferro.

Disney has not disclosed pricing for the ad-supported Disney+ option.

“We expect about the same percentage [of ad-supported subs] for both Disney+ and Hulu, just based on the experience curve that we’ve witnessed,” Ferro said. “We do expect there to be a premium from that [Disney+] advertising that will enhance the [average revenue per user]. So, we feel really feel good about this opportunity.”

Ferro said the Disney+ ad-supported plan would include about four minutes of commercials per hour (which is less than on Hulu) and include children’s programming, although the user data among that demo would not be collected, unlike other age groups. Targeted ads would differ between episodic content and feature-length movies.

“We know that the movies are the reasons people come to the platform and movies have a different ad load … and different ad breaks,” Ferro said. “We want to start slow, and so we’re not going to just start with 15-second and 30-second spots, but we’ll evolve to a full suite of ad products as we learn and understand how people come online and use the platform.”

Disney: Ad-Supported Disney+ Could Mirror Hulu Pricing

Disney’s pending launch of a cheaper, ad-supported option for Disney+ has no price point or launch date. But that didn’t stop Wall Street analysts from calling out Disney senior management for further details on the subscriber option SVOD rival Netflix is looking to emulate in the fourth quarter.

Speaking on the May 11 fiscal call, CFO Christine McCarthy and CEO Bob Chapek both reiterated that an ad-supported Disney+ option is coveted by marketers as well as a way to attract incremental subscribers.

Christine McCarthy

“We will continue to evaluate what makes sense for the service in terms of pricing,” McCarthy said. “And I will say that you can look to our experience with Hulu and [its] ad-supported tier. We believe that this will contribute to ARPU. And we look at it as certainly something additive that will work towards achieving our long-term profitability goals.”

Hulu charges $6.99 monthly for access with advertising, and $12.99 monthly for ad-free access. Disney+ currently costs $7.99 monthly, but Chapek hinted a price hike was in play in part to pay for upwards $32 billion in multiplatform content production across Disney properties.

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“As we increase our content investment, we believe that that’s going to give us the ability to adjust our price,” Chapek said. “We are bullish about our future content going forward, not only in terms of quality but also in terms of quantity. And that’s really what’s driving our bullishness, for what we might see as the pricing power that we would have going forward.”

The executive said the company remained in “good shape” in terms of being able to meet an internal deadline for rollout of the Disney+ ad tier.

“That’s largely because we’re already doing it,” Chapek said. “The combination of our ESPN+ streaming tech stack, and our experience in Hulu and the software, we think that our current advertising capabilities really substantially prepare us to already bring this tier into operations.”

He said Disney doesn’t need to acquire additional assets or develop anything new internally since it acquired IT backend engine BAMTech in 2017.

“We’ve been looking forward to the [Disney+ ad-tier option] for a while,” Chapek said. “So, this is something that’s well-greased, if you will. And our teams are hard at work at making that become a reality.”

CFO McCarthy: Disney+ Doesn’t Need Advertising to Reach Profitability

On the heels of Disney’s decision to incorporate a less-expensive ad-supported subscription plan for Disney+, CFO Christine McCarthy said the move was not a Hail Mary attempt by management to ensure that the SVOD reaches a previously stated goal of 230 million to 260 million subscribers, as well as profitability for the media giant’s direct-to-consumer business by 2024.

Speaking March 7 at the Morgan Stanley Technology, Media & Telecom confab, McCarthy said the ad-supported option is designed to incorporate consumers who couldn’t afford the standard ad-free $7.99 plan, in addition to advertisers eager to access the platform.

“This was not a Hail Mary,” McCarty said of the ad-supported plan. “This is something we don’t need to make … to make our guidance.”

The executive said the new pricing injects the right kind of company “tension” to help manage the business as it attempts to reach subscriber and financial goals.

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“[Disney+ is] barely 2-and-a-half years old,” McCarthy said. “We’re learning a lot about this business.”

That knowledge includes subscriber data, McCarthy says helps Disney navigate content decisions regarding who is watching, how often and how long.

“Those are the kind of data we never had before,” she said. “We were always going through intermediaries. Once we had that, we really incorporate that into our planning, our content — why something works, and if it doesn’t, why it doesn’t work.”

With upwards of 38% (45.9 million) of Disney’s 130 million Disney+ subs originating out of India, Disney and its local Hotstar streaming brand are dependent upon exclusive streaming rights to professional cricket and other sports. With distribution rights to that sport coming up for renewal, McCarthy stressed that while live sports programming is important, general Disney content is drawing Indian subs as well.

“In 2021, of the Top 15 viewed series on direct-to-consumer [platforms in India], nine of those came from Disney+ Hotstar,” McCarthy said. “Sports is a very popular content to consume, but [subs] also consume other types of content, including Disney+ Hotstar originals.”

Disney Extends CFO Christine McCarthy’s Employment Contract Into 2024

The Walt Disney Co. Dec. 21 announced it has extended CFO Christine McCarthy’s contract through June 30, 2024. McCarthy is a 22-year veteran of the company and has served as CFO since 2015.

“Christine’s leadership has been indispensable during this time of disruption and transformation, and her impact reaches well beyond our balance sheet,” CEO Bob Chapek said in a statement. “She has been instrumental to Disney’s growth and helped us navigate the most difficult days of the pandemic.”

As CFO, McCarthy oversees Disney’s worldwide finance organization, which includes brand and franchise management, corporate alliances and partnerships, corporate real estate, corporate strategy and business development, enterprise controllership, enterprise technology, financial planning and analysis, global product and labor standards, investor relations, risk management, tax and treasury.

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McCarthy joined Disney in 2000, and prior to becoming CFO she was EVP of corporate real estate, alliances and treasurer. She currently serves on the board of directors of The Procter & Gamble Company and FM Global, and is a trustee of Carnegie Institution for Science. She has received numerous awards and has been named multiple times to Treasury & Risk’s “100 Most Influential People in Finance,” the Top 100 Irish American Business Leaders, and Business Insider’s “The 15 Most Influential Women in Finance.” In 2015, she was the recipient of Treasury Today’s Adam Smith “Woman of the Year” award. In 2016, she received Los Angeles Business Journal’s “Executive of the Year” award and was honored as one of the Entertainment Diversity Council’s “Top 50 Most Powerful Women in Entertainment.”

CFO McCarthy: Disney Bullish on SVOD Despite Headwinds

When Disney announced that its branded SVOD platform Disney+ had topped 103 million subscribers through the second fiscal quarter ended April 3, the tally fell below company and Wall Street projections of 108 million to 110 million, respectively.

Speaking on the May 13 fiscal call, CFO Christine McCarthy put a positive spin on the setback, saying Disney+ added subs at a faster pace in the last month of the second quarter than it did in the first two months.

“And that was despite no major market launches, a price increase in [Europe and the Middle East] and a domestic price increase towards the end of the quarter,” McCarthy said.

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She said Disney’s combined direct-to-consumer portfolio of Disney+, Hulu, Hulu with Live TV, ESPN+, Disney+ Hotstar and pending general entertainment site Star+, remains on track to achieve company guidance of 230 million to 260 million subscribers by the end of fiscal 2024.

That said, Disney is facing increased OTT headwinds going forward, including the fact that its market-leading online TV service, Hulu with Live TV, lost 200,000 subs in the quarter — a decline McCarthy attributed to seasonality of content and a $10 monthly price hike.

While Disney+ has added 30 million subs in the first half of the fiscal year, sub growth is expected to cool in the second half, due in part to ongoing COVID-19 issues in India — which accounts for a third of all Disney+ subscribers. The platform has exclusive streaming rights to Indian Premier League cricket, a sport now sidelined in the world’s second most-populous country due to the pandemic.

McCarthy said about half of the 60 IPL matches that were expected to be played this season have already taken place. The remaining 30 matches on schedule have been canceled, but negotiations are underway to relocate the fields of play outside India.

“If they were able to successfully relocate the tournament, we would hopefully see an impact, especially on advertising,” McCarthy said. “It would be better than if there were no rescheduled matches. So let’s hope they are able to relocate [the tournament].”

In addition, Disney pushed back to Aug. 31  the launch of the Star+ Latin America launch. At the same time, rollouts of Disney+ in Malaysia and Thailand remain on track for June 1 and June 30, respectively. The company expects the pending launch of “Loki” on June 9, starring Tom Hiddleston, to be a strong streaming driver.

“We remain very optimistic about our [streaming] future,” McCarthy said.

Disney CFO Takes High Road in ‘Mulan’ Film Credits Controversy

In the highly partisan political landscape, a growing controversy has emerged regarding locations and local authorities in China where some of Disney’s live-action Mulan was filmed.

With the $200 million budget movie set to open in Chinese theaters, in addition to the current Premier Access on Disney+ in the U.S. and other territories, human-rights activists have raised questions about Disney’s cooperation with local authorities in China’s Xinjiang region, where allegations of abuse and re-education internments against ethnic Muslim Uighur minorities originate.

In response, there have been growing calls on social media to boycott Mulan over the issues.

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Mulan is a patriot but she shouldn’t be placed in Xinjiang because patriotism has been forbidden in Xinjiang,” Abduweli Ayup, a Norway-based Uyghur activist, wrote in a post. “In China, patriotism is loving the Chinese Communist Party.”

Sen. Josh Hawley (R-MO) weighed in on the matter, accusing Disney of “whitewashing genocide” by allegedly cooperating with Chinese police working at the camps.

“Your decision to put profit over principle, to not just ignore the CCP’s genocide and other atrocities, but to aid and abet them, is an affront to American values,” Hawley wrote in Sept. 9 letter to Disney.

Liu Yifei, the lead actress in Mulan, added fuel to the controversy when she tweeted support for police crackdowns on pro-democracy protesters in Hong Kong.

Speaking Sept. 10 on the Bank of America Securities Virtual Media, Communications & Entertainment Conference, Disney CFO Christine McCarthy said she had no interest in discussing international politics. Instead, the executive reiterated that production on Mulan involved numerous international locations — most notably in New Zealand.

“The real facts of Mulan [are] that it was primarily shot in — almost the entirety in New Zealand. And in an effort to accurately depict some of the unique landscape and geography of the country of China for this historical period piece drama, we filmed scenery in 20 different locations in China,” McCarthy said.

The CFO said it is standard procedure that when filming in China or any foreign country, that permits must be obtained. And in China, that permission comes from the central government in Beijing. McCarthy added that it is also common practice in Hollywood to acknowledge the appropriate agencies, authorities and governments in a movie’s credits.

For Mulan, Disney reportedly thanks eight government entities in Xinjiang, including security in the city of Turpan, where the government allegedly operates the camps. Disney also credits the publicity department of CPC Xinjiang Uighur Autonomy Region Committee, an agency that reportedly produces state propaganda.

McCarthy said it is common practice in movies to also acknowledge  national and local governments, which for Mulan included both China as well as New Zealand.

“I would just leave it at that,” she said. “But that’s generated a lot of issues for us.”

Disney CFO on ‘Mulan’ Bypassing Theaters: ‘Would a Family Go? Probably Not’

Calling the unprecedented decision to launch $200 million live-action movie Mulan direct-to-consumer via premium video-on-demand “not an easy decision,” Disney CFO Christine McCarthy told a virtual Wall Street event that a lot of factors played into the release strategy.

Speaking Sept. 9 online at the Citi 2020 Global Technology Conference, McCarthy said the decision to release Mulan as a $29.99 “Premier Access” title to Disney+ subscribers on Sept. 4 revolved around the fact that just 68% of theaters were re-opened for business, and internal data suggested consumers were hesitant to return to the cineplex during the coronavirus pandemic.

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“We know what the statistics are on consumer behavior when people are asked, ‘Would you go to a theater?'” McCarthy said. “It’s gone up a bit in the last month, but a lot of that has to do with what demographic you’re in.”

McCarthy said the pandemic has taught management to “take the opportunity that this crisis is presenting,” and re-evaluate how the business units operate. For example, when internal data showed that just 40% of typical moviegoers would frequent screens at the moment, with older consumers less likely to return and younger audiences, whom McCarthy characterized as more likely doing non-approved activities such as social gatherings and partying, more likely to return to the theater — the move toward PVOD became more clear.

“Would a family with young kids go [to the theater]? Probably not,” McCarthy said.

The executive said Disney would release Mulan on Disney+ (without Premier Access) in select markets will soon have access to the SVOD platform. McCarthy said financial results for the film would be disclosed on the next fiscal call in November, adding the film’s  exclusivity on Disney+ contributed to increased subscriber growth, which pleased senior management.

“But that wasn’t the driving force [for PVOD],” McCarthy said.

She said theme parks, movie and TV production return to normalcy remains on a slow path — with much dependent on the rate of COVID-19 infections and development of a vaccine.

“These are unprecedented times. We’ll have to ebb and flow as the rate of infection hopefully will stay low, but if it creeps back up, we may have to adjust accordingly,” McCarthy said.

Bob Iger: Hulu Taking Backseat to Disney+ Global Launch

Disney is moving ahead with plans to launch the Disney+ streaming service in Europe and India (co-branded with Disney-owned Hotstar) next month. Hulu will have to wait its turn. That’s the portfolio of riches CEO Bob Iger has to deal with.

Despite Hulu having more than 30 million subscribers and being a household name in the United States, Disney is putting marketing muscle behind Disney+ with hopes of generating upwards of 90 million subscribers by 2024. The SVOD service ended Feb.3 with 28.6 million subs.

London-based Goldmedia contends up to 7.6 million consumers in the U.K. have indicated a desire to use Disney+ when it launches there on March 24th.

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“We are working up a plan to take Hulu internationally. We actually have a lot of specifics around it. But we’ve decided that the priority needs to be Disney+,” Iger said on the company’s Feb. 4 fiscal call.

Indeed, following the Disney+ launch in India on March 29, the service will expand globally, including Latin America, through 2021.

“We feel that we need to concentrate on those launches, in the marketing and the creation of product for those and then come in with Hulu right after or soon after that,” Iger said.

With rival Netflix’s first-mover status touting 167 million global subscribers worldwide, Disney is spending lavishly to bridge the SVOD divide.

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CFO Christine McCarthy said the company’s Direct-to-Consumer & International segment (which includes Disney+, Hulu and home entertainment) is expected to generate about $900 million in operating losses for the current second quarter (ending March 31).

“We expect the continued investment in our DTC services, specifically Disney+, and the consolidation of Hulu to drive an adverse impact on the year-over-year change in operating income of our DTC businesses of approximately $520 million,” McCarthy said.

Regardless, the change in focus contributed to Hulu CEO Randy Freer’s previously-announced departure as Disney revamps the service’s management.


Disney’s 20th Century Fox Film Purchase Continues to Underwhelm Financially

Less than six months into Disney’s protracted $71.3 billion acquisition of 20th Century Fox Film and related assets, including Fox’s Hulu stake, the mega transaction continues to underwhelm on the bottom line.

Fox Studios generated a $120 million loss for Disney in the most recent fiscal quarter — driven by box office disappointments Ad Astra, Dark Phoenix and The Art of Racing in the Rain, according to CFO Christine McCarthy.

“The loss from the Fox Studio business was $100 million higher than the loss we estimate the business generated on Q4 last year,” McCarthy said on the Nov. 7 fiscal call.

The CFO attributed consolidation of Hulu’s operating losses (about $1.5 billion for fiscal year) and inter-segment eliminations that resulted in an adverse impact to segment operating income of about $170 million.

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“We estimate the acquisition of [20th Century Fox] and the impact of taking full operational control of Hulu had a total dilutive impact on our Q4 [earnings per share] before purchase accounting of $0.47 per share,” McCarthy said.

Indeed, Fox generated about $260 million in combined ticket sales from six movies halfway through 2019, which was $100 million less than just the opening weekend of Disney/Marvel’s Avengers: Endgame.

Dark Phoenix had the lowest box office of any “X-Men” franchise movie, which resulted in Disney taking an impairment charge on the film.

The results continue what CEO Bob Iger lamented in the previous quarter about Fox’s performance being “well below where it had been, and well below where we hoped it would be when we made the acquisition.”

And the outlook isn’t getting better anytime soon.

McCarthy expects an operating loss in the current first quarter (ending Dec. 31) of about $60 million at the Fox studio, compared with about $30 million operating income in the previous-year period.

“We estimate the acquisition of Fox and the impact of taking full operational control of Hulu will have a dilutive impact on our Q1 earnings per share before purchase accounting of about $0.30 per share,” she said.

McCarthy remains hopeful the Fox acquisition will be accretive to EPS before purchase accounting for fiscal 2021.


Disney Brass Surprised at Fox Studio Underperformance

Back when Rupert Murdoch weighed in on 21st Century Fox fiscal calls, the senior media mogul was quick to praise the success of movies such as Avatar and Planet of the Apes. He was also quick to dismiss box office misses as part of a studio’s rollercoaster existence.

The fickle nature of theatrical releases in an age of over-the-top video, ultimately, is one of the reasons Murdoch put Fox Studio up for sale along with other media assets.

Disney’s $71.3 billion acquisition of 20th Century Fox Film Corp. was in part for the studio’s catalog, majority ownership of Hulu and future box office releases.

Apparently, Disney CEO Bob Iger and CFO Christine McCarthy weren’t prepared for a fiscal downturn at Fox Studio so soon after completion of the acquisition earlier this year.

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On the Aug. 6 fiscal call McCarthy disclosed that Fox posted a third-quarter (ended June 29) operating loss of $170 million — the opposite of a projected $180 million operating profit.

“One of the biggest issues we faced in the quarter was the performance of the Fox film business,” Iger said. “It was well below what it had been and well below what we thought it would be when we did the acquisition.”

Disney was quick to lay the blame on Dark Phoenix, whose reported $200 million production budget dwarfed its $65.8 million domestic box office. The film did generate more than $252 million internationally.

“I know what happens when a company gets bought,” Iger said, “Typically, operations and decision making comes to a halt. We avoided that when we acquired Pixar and Lucasfilm, but this was a very different position for Fox.”

Indeed, Disney announced the Fox deal in 2018, but the transaction wasn’t finalized until this March. While Fox will likely bounce back theatrically (Iger has high hopes for Ford vs. Ferrari), in the meantime, Disney’s theatrical prowess shows no sign of slowing.

With Marvel, Pixar and Lucasfilm content overperforming, Disney has generated a record $8 billion at the box office thus far in 2019.