David Joyce : All right. Thank you.
Operator: Thank you. We’ll take our next question from Kannan Venkateshwar with Barclays. Please go ahead.
Kannan Venkateshwar: Thank you. One on the JV. When you think about the Disney JV with Hulu and Disney+, is there an opportunity maybe to add other services? Does this become kind of an anchor? And are you viewing this long-term as an opportunity to maybe bring other services into the fold as well? And is there also a role for some degree of exclusivity in the sense that, when you go to market with AP on a standalone or Max on a standalone basis and a bundle, obviously the price difference has to be attractive enough for consumers to go towards the bundle. So is there any kind of a different approach as you think about what kind of content becomes available across the bundle and the individual services? And maybe one on advertising.
I mean, your advertising increases or year-over-year change in DTC is now starting to become meaningful enough to offset bigger and bigger portion of the declines in linear. I think it was about 30% offset this quarter. Is there a point over the course of maybe next year, year and a half, where you see this becoming a big enough driver to offset a big part of your linear ad declines? Thank you.
David Zaslav: Thanks, Kannan. On your first question, look, we think this proposition of Disney+, Hulu, and Max is incredibly robust and compelling. You’ve got truly, when we think about a lot of what’s happened, as I said earlier, around people trying to figure out whether every individual company could invest sufficiently to deliver something great for everyone in the household, the reality is we’ve, I think, all learned somewhat painfully that the expense and frankly the excess of content from a consumer standpoint was way too much and this allows us to come back. And when you see that package together, you have the greatest offering of kids and family content, the greatest offering of adult fair, the greatest offering of scripted and non-scripted content.
So we don’t think we need anybody else in that package to make it incredibly compelling. When you see the dynamics of the existing landscape, obviously Amazon and Netflix are both incredibly compelling, have great offerings, and have become sort of utilities. You sort of look at people saying, I need that plus one other package at a very attractive price. Those two, our bundle plus one or two of those other services, pretty much I think can make up the entertainment experience for most consumers very happily. I think it’ll put more pressure probably on independent services from a churn perspective, because they’ll see likely more and more serial churners, people who come in and out on a much more ad hoc basis. And so we do think this package can be an anchor tenant of every household’s entertainment experience and we don’t think there’s a need at this point for anything more to it.
Gunnar Wiedenfels: Yeah look, I mean in terms of replacing linear ad sales, again one important point that I want to reiterate, and we’ve made this a couple of times before. I think it’s too simplistic to just look at, okay, we’re doing whatever, $7 billion of linear advertising today, and that’s going to transition elsewhere, because the viewership is transitioning elsewhere. I do believe that we’re going to see a very, very long period of coexistence, and the feedback we’re getting from the marketplace and the success we’re seeing in our ad sales go-to-market I think supports that. So those environments are going to coexist. But as I said before, we are seeing significant acceleration on the streaming side. We’ve gone through the CPM benefits that we’re getting with a more targeted and more direct advertising approach.
And we’re seeing that there is a long runway for inventory growth on the streaming side as well. Again, two years ago, everybody thought that this was going to be an ad-free environment. I think we can clearly conclude that that’s not the case and we’re still in the early innings. If you just compare the penetration of ad-like subscribers as a percentage of the total subscriber base, it’s growing, but still from a lower starting point. If you look at ad loads and a lot of the offerings, by the way specifically for HBO, which for years has had zero advertising embedded, and we’re taking very careful steps still to increase that, yet we’re already seeing pretty significant.
David Zaslav: We’re only doing a 30-second spot or a 60-second spot. And for those that are purchasing ad-like, I think there’s an expectation that there would be more advertising than that. It wouldn’t be approaching any kind of significant density, but you could easily go up to two or three minutes, which would be double or triple of what we’re doing now.
A – Gunnar Wiedenfels: And if you look at the combined company, as we said in our prepared remarks, I mean the combined company advertising trend is still down obviously with what we’re seeing in linear, but it’s gone from down 10% to down 7% and that’s really driven by some of that support we’re seeing in the streaming world.
Kannan Venkateshwar: Thank you.
Operator: Thank you. We’ll take our next question from Rich Greenfield with LightShed Partners. Please go ahead.
Rich Greenfield : Hi, thanks for taking the question. I wanted to follow-up on JB. You mentioned the buy flows and sort of how this will work from both of you adding it into those buy flows, but how about the marketing? When you walk through, I’m sure everyone on this call has walked through JFK, you’ve seen the massive Disney Hulu advertising. Are they going to be marketing House of the Dragon this summer when this launches? And conversely, when things like Moana 2 hit Disney+, is Max going to be promoting the overall content offering among not just your services, but theirs as well? I’m just trying to understand how this will functionally work. And then just because it’s obviously topical, it doesn’t look like Paramount Plus is going to exist much longer.
I think probably most people now sort of realize that if that content is up for grabs, how interested are you in licensing a wide swath of kind of Paramount sports content, entertainment content, anything you could talk about would be great.
Gunnar Wiedenfels: Thanks Rich. On the marketing question for the bundle, look, both parties will continue to market clearly their offerings. And obviously, if you think about the majority of the marketing spend, it’s really related to content marketing, so each of us will still have responsibility and will continue to market our content from our individual companies, and those will be attributed to the Mac service or the Disney Plus service or the Hulu service. In the performance side of the house, I think you will see a heavy lean in on the bundle, and it will be at launch and then we’ll do obviously more heavier lean in’s periodically throughout the year. But my point about the buy flows Rich, is that even if we’re individually marketing our services or our content, I should say, the reality is once you get to that landing page, once you get to the top of the fold on our buy flows, the bundle, this bundle will be prominently positioned such that people will see it every time they go in through the buy flows.
And so whether it’s marketing of individual content pieces, marketing of individual services or marketing of the bundle, you won’t be able to not see this offer as part of the buy flow, whether you’re coming in through Max, Hulu or Disney Plus, which is the prominence that we think is really important and visibility to help drive more, obviously not just awareness, but ultimately subscriber growth from it.
David Zaslav: And look, we’re always looking for good content. We structured a deal a while back for South Park, which has been a great product for us. When NASCAR came available for the summer, we bought some NASCAR. We have Hockey, which we’ve done and which we added in the last few years. We’re having a lot of success with. So any content company that we bought a movie output deal with A24, anytime there’s an opportunity to buy content that we think will enhance our offering, whether it’s a specific piece of content or whether it’s a broad swath of content. If we think it can provide a better consumer experience and strengthen our offering, we’re always looking at opportunities.
Rich Greenfield : Thank you.
Operator: Thank you. And we will take our final question from Steven Cahall with Wells Fargo. Please go ahead.
Steven Cahall : Thank you. So, David and Gunnar, with a continuous improvement mindset, it seems like you have some tools that could help reaccelerate EBITDA. And then I think there’s some concern about what you might be willing to do to match on the NBA, right? So I’m just wondering if we can think about these things being tied together. Do you think you can find enough cost improvement that strengthens your hand as you think about a more aggressive matching offer to retain some of those rights? And then David, you said the churn is still above your target, and I think this new Disney Hulu bundle should certainly help that. I think you’ve also maybe got a bundle that’s rolling off towards the end of this year with AT&T. Can you just help us think about some of the churn benefits you get from bundles and then some of the ARPU dilution, which usually hits and on a net-net basis, do you think that these improve the value of DTC earnings over time? Thank you.
David Zaslav: Thanks. Look, the churn is the – you need to have a great product, you need to have great content, but the churn is just a killer in this business and so we have been hyper-focused on it. It’s not one simple answer, but the churn is down dramatically and we measure it daily, weekly, from when we launched this business. It’s not at our target, because our target is that it should be extremely low in the – with a two-handle. That would be – that’s when your business starts to be really healthy, when you are below three. And so JB, why don’t you talk? We have very specific initiatives on churn. Certainly, bundling is a big helper. A lot of these deals that we’re talking about with players in Latin America and in Europe, where you are working with an existing distributor that you have a relationship with, that’s hard bundling in many cases with users, have different characteristics that are quite attractive, but we need to go at this as like an attack mode.
JB?
JB Perrette : Yeah, well I think Steven, to David’s point, the fact that up until we launched in LATAM, our Ad Light offering and SKU was only in the United States for HBO Max, is a good example of where, as we look to partner with all sorts of distributors across the world, oftentimes you are right, there is pressure to do it at a price point that is more attractive and less costly to the partner. And so launching that SKU across Latin America in a number of markets in Europe, not only ultimately helps us go after a new customer segment that’s more price sensitive at the lower end of the price points, but also allows us to work with partners who are more price sensitive in those partnerships, and find a way to make it more affordable for them to get into business with us, while at the same time not seeing ARPU dilution, because that SKU in success is our highest ARPU SKU.
And so we get the benefits of new distribution from new customers and better partnership opportunities by getting that SKU out into markets and into partnerships with new players. And the LTV, I would say which is obviously the other metric that we track very closely, our bundled partnerships generally do have some of the highest LTVs we see. And so obviously, we evaluate every deal on its own merits. We make sure that we’re making the right tradeoffs, but we look at both ARPU and LTV as the core metrics when we think about the values of those partnerships.
David Zaslav: This change of working with existing distributors is really meaningful, because these distributors, cable operators, broadband players across Europe, with the innovative deal that Chris did, what they are basically saying is that they want to take part. They want to be part of the content opportunity and the content economics in the new world. And so when you are working with an existing distributor where we have all these economics against our cable business with distributors in 180, 200 countries around the world, they don’t want to see that relationship go away when people start consuming through broadband, on app, more contemporary products. And so they are starting to really recognize that there’s a real opportunity for them as well in recapturing those economics through broadband product.
Why should they stand by and let somebody else get the revenue share on viewership of quality content that we have – that we’re transitioning over a period of time from free-to-air and cable to more contemporary app products. So, the fact that we’re working with broad distributors and they are starting to recognize the value for them to be hard bundling, marketing, driving this to recapture that younger consumer, is a very, very good trend for us and for the industry.
Gunnar Wiedenfels: And then Steve, on the continuous improvement mindset, again, I think it’s important to take a step back. The large part of this company and maybe the entire industry just was never very focused on financial discipline. We have dramatically changed that. We have a completely different mindset across the entire management team now and that starts from the creatives who know that the creative stories need to be great, but we’re also running a business and we have so many different processes in place now and some of those pay dividends over time. Again, I mentioned the content workflow systems in my opening remarks here. If you designed Warner Brothers Discovery today, you would not create 12 different content systems, 14 different teams.
