The biggest problem for Disney is that their ability to think and act long-term is inextricably tied to U.S. pay-TV. This comment, from Iger on the Q2 call, does a good job of summarizing their difficult position: “We're seeing sub declines and advertising weakness, and it's created a worrisome circumstance for us because it's obviously having such a negative impact on the economics of that business. And that's forcing us to take a look at the cost structure of those channels, which ultimately comes down to spending on programming more than anything… The declines put even more pressure on us to turn DTC into a profitable growth business.”

In 1H FY23, Disney’s Linear Channels business reported a 6% decline in revenues and a 29% decline in operating profits. As a reminder, the Linear Networks segment generated $8.5 billion of operating income in FY22. This is a big business for Disney, and it’s an important source of funding for the DTC transition. In the case of ESPN, they’ve been working at this for five years (ESPN+ launched in April 2018). The business has come a long way, with total viewership up more than 50% in 2022 and with run rate revenues now up to ~$1.8 billion – but that’s a still drop in the bucket compared to the roughly $12 - $13 billion a year brought in from the U.S. linear sports networks (primarily ESPN). If the pay-TV sub declines continue, which I believe they will, that leaves Disney in a difficult position (the same goes for anybody who licensed pricey sports rights who hasn’t built a way to effectively monetize them outside of the pay-TV bundle). The clearest answer is further DTC (and affiliate fee) price increases. To put some numbers on it, if there’s still ~75 million households paying $70+ per month for linear TV, Disney needs to convince a large number of these consumers that their DTC bundle is worth significantly more than ~$13 per month; in my view, that particularly applies to sports fans who have access to a growing slate of content through ESPN+. (For some content, Netflix ARPU’s in the U.S. and Canada, or UCAN, are above $16 per month.)