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Disney CEO On Rising Operating Costs, Activist Investor Dan Loeb

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Following are excerpts from the unofficial transcript of a CNBC exclusive interview with Walt Disney Co (NYSE:DIS) CEO Bob Chapek on CNBC’s “Squawk on the Street” (M-F, 9AM-11AM ET) today, Thursday, September 15th.

Disney CEO Bob Chapek On Rising Operating Costs, Activist Investor Dan Loeb

Disney CEO Bob Chapek: ESPN Will Not Be Your Father’s Old Sports Experience

Part I

DAVID FABER: Yeah, it was an interesting conversation with Bob Chapek. Obviously, it came after his appearance at the Communacopia event not far from here where any number of both tech and media CEOs were speaking or at least questioned.

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You know, guys, we haven't had a chance to catch up with Mr. Chapek since Dan Loeb’s letter of a number of weeks ago, where he outlined a number of different things he felt the company at least would be smart to take a look at.

The thing that jumped out at me in some ways was the was the idea of cost cutting and so that's kind of where some of our discussion went when I asked him how that letter resonated.

BOB CHAPEK: We welcomed the input from all of our shareholders and I think all the things that were in that letter are things that we either have talked about, are talking about, or even engaging more in the future.

There's, you know, whether it's, you know, the integration of Hulu, which we would love to do tomorrow if we could, obviously it takes a willing partner on the other side, at least before ‘24. But that's imminent anyway, whether it's ESPN, which we just talked about, whether it's, you know, share buybacks or dividends, those types of things, we've already said that.

FABER: What about SG&A because, you know, I have to admit, I mean, I followed the company closely for years, but that was one area I thought, you know, and I looked more closely into it. I mean, you're SG&A costs I'm told excluding parks were about three and a quarter billion. You know, the only company significantly higher is Warner Brothers Discovery.

Your annualized SG&A for Disney across the business has grown from 13 and a half billion in calendar, second quarter 19 to 16.4 billion in the last quarter, this despite 3 billion of cost synergies. Your CFO Christine recently said we're very very focused on SG&A. Is there an opportunity there?

CHAPEK: Oh, there's absolutely an opportunity there, an opportunity that's been underway for several months as we've now come out of the pandemic because remember, Disney was one of the companies is probably the hardest hit by the pandemic and restarting the business was the focal point.

But now that the business has restarted and restarted so strongly with the strength not only of streaming but of parks as well, we are now focused on the maintenance of the business, the running of our business and we're asking ourselves a lot of hard questions coming on to the pandemic is, what does this SG&A world have to look like?

Not relative to what it used to be, but in the modern era, what and so Christine and I are, as I said in the conference, arms locked on going and making big progress against that.

Part II

FABER: Guys, the other area that a lot of people have questions about, as you know we've talked about is ESPN. Certainly Jim has asked plenty of important questions there in terms of what is the future for that given that they said no, we're not interested in separating it from the company through to a sale or perhaps a spin, whatever it might be.

Chapek has made it very clear we want to keep ESPN and so I did ask him, you know, well give us a little more here in terms of why you want to keep it and what you believe you can do to create a different growth trajectory than the one it clearly is on as a cable network.

CHAPEK: I like to look at almost every one of our businesses through the eyes of the ultimate consumer because I believe if you do that, then you can't go wrong. And I think that's the way we're looking at ESPN. Take those sports fans, what do they want? One of the things they want is the ability to have a frictionless sports betting potential with not having to have four screens in front of you.

We as ESPN have the ability to do that. Now we're going to need a partner to do that because we're never going to be a book that's never in the cards for the Walt Disney Company, but at the same time to be able to partner with a well-respected third party that can do that for us, that can have the advantage of, you know, creating a seamless integration of the experience with our guests without having to necessarily go out and go to another device. I think would be seen as a benefit.

FABER: Alright so sports betting certainly one idea or one area that it would seem gives you a new growth, growth, growth trajectory for this business. Is there something else? When are you going to fill us in here in terms of what actually you're thinking about?

CHAPEK: We're hard at work in our offices, both on the East Coast and the West Coast, figuring out how we make a more friction free sports environment for our, our viewers.

And obviously, some of these things take the cooperation of a lot of the people in the ecosystem, whether they be the leagues, whether they be other broadcast partners, but we foresee a world where ESPN.

Even more than ever, is the pinnacle of all your broadcast needs and we're excited to continue working on that and at some point, when we're all fully baked, we'll come and—

FABER: When do you think that'll be? When do you think that’ll be at some point? I mean, how long do you wait until we sort of have a real sense of what the plan is?

CHAPEK: Yeah. Well, we don't have an exact timetable right now because it depends how fast these things evolve.

But we're really pleased with some of the conversations that we've had throughout the industry in terms of what's the future of sports and how do we have a step function in the consumer experience so that it's not just sort of your father's old sports experience, but something that's bigger and greater.

You know, we talk about next gen storytelling, we talk about sports betting, we talk about things like Peyton and Eli those curated, custom, customized ways to experience sports and it's all about how do you use technology, not for technology at sake, but to advance the storytelling, advance the integration so that instead of it being a lean back experience, it's a lean forward experience where you’re integrated and you're involved in the way that you want to be whether it's got to do with fantasy sports, sports, betting, or whatever else is on the horizon.

FABER: Right, so I mean, maybe we're in the metaverse here to somehow with with, I don't know in the middle of a football game.

CHAPEK: Well, that essentially is what we're referring to when we talk next gen storytelling. Typically we don't use the metaverse name for it because we believe that we've got a unique take on it as a Walt Disney Company. But that is exactly what it is. It's that seamless integration of being able to not only consume the game, but actually impact your version of the game whatever that is.

FABER: But you feel confident that these ideas which are not fully formed as yet but you're clearly working on will sort of create a new growth trajectory for a great cash flow producing asset but one obviously that well, you said it's part of the melting ice cube that's cable.

CHAPEK: And we certainly know the tailwinds that we have, you know, with these new ideas so we feel confident in them. But we also know that there's headwinds in terms of that melting ice cube of the cable universe and we believe that, you know, ESPN can become something as great as it's ever been and more than we ever conceived of.

Part III

FABER: Well, we are back here in California in fact. Yesterday I had a chance to sit down late in the day with Bob Chapek of course the CEO of Disney. This was right after he presented at the Communacopia conference Goldman's annual conference this year they combined both media telecomm and technology companies all under one roof.

Obviously a lot of focus on what is going to be the rollout of an ad-tier on Disney+. 7.99 will be the price there, relatively small ad load, maybe four minutes but you know, we started off part of our conversation talking about just how much they spend on content for direct-to-consumer at Disney and whether they're getting their money's worth.

We don't know what you guys spent specifically on content for DTC but some estimate it could be as much as 16 billion. Is that a number that sounds right?

CHAPEK: You're in the ballpark?

FABER: Okay. Well, you're generating about 20 billion of annual revenue from direct-to-consumer. Netflix is at 30 billion. Is there now it's not apples to apples because you can monetize these titles but am I seeing something there that's an opportunity still for the company?

CHAPEK: Well, as you were recall, when we first launched Disney+, we way underestimated how much fuel the beast was going to need in order to, you know, be what it can be. And you know, that we're very thrilled with where we're at less than three years into this.

But the learnings are that it's going to take more content and the good news is now that theatrical business is at least for blockbuster returning, which is where, you know, the bulk of our business kind of comes from and linear networks doing fairly well right now that we've got lots of ways to amortize those costs.

And with our flexible distribution model system which we've been doing for a long time, we know that some of that content will go direct to theatrical and live a life there maybe a shorter window than we've ever had before.

But then being able to strike while the iron is hot in the streaming business at the same time with the very same content, although some content will go straight to straight to the streaming services, some content that was in linear distribution on channel in the channel world, like “Dancing with the Stars” is coming over to streaming.

And so what we're doing is moving the chess pieces around, trying to figure out what's the best combination for all the distribution channels, but knowing ultimately, that, you know, the king pin is going to be our streaming business.

FABER: Well, of course, you know, investors are concerned as this world is maturing, what's the return going to be? What's the ultimate content span and what am I getting? What are you getting in terms of natural return? We still don't seem to fully understand it yet.

CHAPEK: I think what you know was that back in 2020 in December, we said that we would achieve profitability within 2024 and we've reaffirmed that guidance over and over and over again.

So despite the dramatic increases in content expenditure, which is the fuel for all of our business for the entire Walt Disney Company, we're still committed to that. And so it's it's not that far off, and we have a firm vision for how we're going to get there and when we're going to get there.

FABER: Is the new ad tier going to help with that? I mean, you talked about it being at the very least I think margin neutral and you obviously talked about the original price of Disney+ being pretty absurd in terms of the value proposition. Being pretty absurd as in low.

CHAPEK: Well, everyone is focused on the big price increase we took both on ESPN+ and Disney+. But I think if you look at it from a relative standpoint, which is what I'm suggesting, we're still priced well below where our competitors are even though our content is arguably the best in the business in terms of things that people really, really want to watch.

So we've made this huge content investment on arguably, you know, low price relative to value established so the value keeps going up. The price is trailed and I think we have the opportunity as identified by the step function increase in price to, you know, now monetize that price value relationship and the tremendous affinity that people have for our platform.

FABER: What do you think the ad tier is going to look like in terms of subs and, you know, it's funny, there was a journal report today that Netflix is thinking they may have as many as 40 million by the end of 2023 on their ad, on their ad tier.

CHAPEK: Right. We're not going to give any guidance in terms of the percent that we see but with the assurance that it should be marginal, neutral, margin neutral at the worst, we're pretty confident that you know if anything that gives us some upside.

FABER: So the more there is, the better potentially.

CHAPEK: That’s right.

FABER: You mentioned Hulu and, you know, I thought it was interesting because you did say you just said as well, you'd love to get to that point earlier even earlier than 2024 in terms of full control because it would let you for example, create the hard bundle that you talk about, frictionless.

Any chance, you know, Brian Roberts is not far from here. I don't know if you guys want to try and figure something out quicker. Any chance you can get there with them and perhaps have even sort of started to think about talking or talking?

CHAPEK: Well, I think as you know, ‘24 becomes more and more imminent probably the chances of a hail mary pass coming in that, you know, enables all of us to kind of come to an earlier resolution of this is probably less and less.

I would like nothing more than to come up with that solution for an early agreement. But you know, that takes two parties to come up with something is mutually agreeable and I hope and I'm an optimist, so who knows.

FABER: You never know. But it would I mean, the deal requires like a third party basically to to come up with a value that would be a value if Hulu were sold right? So there's going to be a control premium in that overall value?

CHAPEK: Yeah and there's a floor price too which, you know, wasn't even relevant in the, you know, 18 months ago, when there's still frothiness in the streaming business, but now that things have kind of calmed down a lot, that floor value looks a lot more realistic.

FABER: It does but that would be saying that Hulu should be valued in the same way Netflix is but in a sale process, you get a different number sometimes.

CHAPEK: Certainly, certainly. It's a, it's a relevant data point how about that.

FABER: A relevant data point, okay. But you seem to be prepared to potentially pay up if you had to.

CHAPEK: I, you know, I'm not gonna let you put those words in my mouth but at the same time, we're reasonable people.

FABER: Got it. You know, Bob, I did want to come back to, to sort of what you've learned as a CEO now, and you said recently, Disney is a place that unifies people. I think it was one of the interview you gave around D23.

But you know, the experience you had in Florida, the spat you had with the governor there, where you were acting in part it would seem on the viewpoint of your employees and trying to please them.

How do you navigate this world with the culture wars going on right now and maintain Disney as a place that unifies people while trying to please your own employees or make sure that they're happy?

CHAPEK: Well, as you know, we have 100 years of history of storytelling that's at the center of everything we do. And when we tell stories, we like to reflect the viewpoints of people, the lives of people, the viewpoints and lives of our fans.

But also, the viewpoints and lives of our cast members and our creators who actually make the content that everyone gets to celebrate. We certainly don't want to alienate everybody but what we want to do is bring them together. And I think there's a world where Disney can be the great unifier.

FABER: You do? And was there anything you learned from that experience? Anything you took away from that, you know, because a lot of CEOs in the current world we live in trying to understand when do I speak up and when am I better off not speaking up?

CHAPEK: It's certainly tough for any CEO to weigh that balance of when you speak up and when you don't speak up. I think when it's a brand like Disney, which not only has the greatest equity in the world, but also probably the greatest click through rate in terms of being newsworthy, not only for us, but for different interest groups that you know, want to use Disney to get attention.

I think the stakes are even higher, but you know, we love our brand. Our consumers love our brand. Our employees love our employment proposition and it's a high-class problem to have a great brand like Disney.

FABER: And finally Bob, as a guy that has already been in the job a couple of years and signed a new three year deal I'm just curious, is it is it what you expected? Are there things about it that perhaps I did not anticipate this?

CHAPEK: Well certainly Covid. I didn't expect, you know, within a week or two of getting the job that we’d have to shut down the Walt Disney Company like we did. You know, I ran parks for about seven or eight years and a shutdown meant closing a park for one day because of the threat of a hurricane or redirecting a cruise ship.

That was the worst case scenario in our minds. So there's a lot of things that I did not anticipate, but I will tell you that the energy, the enthusiasm for the future in this company as we turn 100 looking at the great wealth of content that we had a D23, the enthusiasm of our employees, our cast members, our content creators, leads me to believe that the next 100 years is going to be every bit as great if not greater than the first 100.