Bob Iger hatched a costly new plan to turn around Disneys loss-making streaming businessgutting content.
The launch of Disney+ three and a half years ago sought to insulate the media giant from declining profits at its traditional cable business as more consumers cut the cord.
To give it the best chances of success against entrenched incumbents like Netflix, he wanted to flood the new service with as much content as possible to lure subscribers.
We realized that we made a lot of content that is not necessarily driving sub growth, and were getting much more surgical about what it is we make, he told his investors during the companys second-quarter earnings call on Wednesday.
This led to content costs ballooning to nearly $30 billion in the last fiscal year.
While almost a third of that is related to sports, such as distribution rights, Iger aims to lower spending by $3 billion over the next few years as part of a restructuring plan first revealed in February.
Now that Disney is beginning to better understand what kind of programming drives subscriber growth, the Mouse House is going to take a more aggressive approach to thin out or curating what films and TV series are offered on its Direct-To-Consumer (DTC) divisioneven if it results in additional headwinds of close to $2 billion.
Its critical we rationalize the volume of content were creating and what were spending to produce our content, said Iger.
Shares in Disney are expected to open nearly 6% lower after fiscal Q2 numbers revealed its flagship Disney+ service actually lost 4 million subscribers in the past three months amid expectations it would add more than 1 million through the introduction of a new lower-priced offer partly financed through advertisements.
Heavy writedown for removing content
Finance chief Christine McCarthy said the company had launched a review of what was offered across its various DTC platforms like Disney+ and Hulu in line with the new strategy of culling content.
Exactly what that means is unclear.
In theory, this could entail everything from letting unfavorable deals to license third-party movies and series expire, to even removing some of Disneys own proprietary content made by its Pixar, Marvel or Lucasfilm studios.
There are infrastructure costs related to keeping anything in the cloud.
This move will not come cheap, however.
We will be removing certain content from our streaming platforms and currently expect to take an impairment charge of approximately of $1.5-$1.8 billion.
The writedown will primarily be booked in the third quarter once Disney finishes deleting whatever films, specials and TV series from the libraries of its streaming apps it no longer wants to host on its platforms.
The company will treat this effectively as a one-off item that wont flow through its segment results.
This has the nice side-effect that it spares itself ugly headlines of uncontrolled red ink at DTC again.
In talks with Comcast over its Hulu stake
Reported Q2 operating losses at its streaming business narrowed to $659 million, its lowest level in five quarters.
This was flattered in part due to spending on some projects being pushed back by a few months.
As a result, DTC losses are expected to widen by roughly $100 million into the current fiscal third quarter.
Going forward we intend to produce lower volumes of content in alignment with this strategic shift, McCarthy assured investors.
Iger was hopeful however that substantial growth in digital ad spending at next weeks so-called upfront presentation to advertisers will help him turn around Disney+ more swiftly, especially now that he is actively and intentionally pushing more premium subscribers to downgrade their service.
A higher number of lower-paying ad-tier subscribers counterintuitively will drive average revenue per user thanks to all the money he expects to make as companies compete to buy up available ad time on his streaming services.
He also revealed he was in exploratory talks with Hulu minority owner Comcast to buy its one-third stake in the platform.
