Welcome back to In The Room, my biweekly private email on the inner workings of the media industry. In tonight’s issue, my conversation with Puck streaming columnist and Parrot Analytics director of strategy Julia Alexander—one of the foremost authorities on the hidden data behind how so many decisions are made in Hollywood these days—about whether Apple will buy Disney, why MLB needs Netflix, and more.

First, Hollywood’s talking point du jour: Disney, and Bob Iger’s semi-triumphant return to the Magic Kingdom. There’s a lot of speculation that he’s come back to position the company for some grand new deal. On The Town, our partner Matt Belloni’s podcast, former ESPN chief John Skipper floated a rumor about Apple acquiring Disney. I have it on good authority that that’s not on the table right now. The regulatory climate makes it impossible, of course, and Apple doesn’t want to be in the theme parks/cruise business anyway, much less manage the inexorable decline of the linear assets. But despite the rumor mill, it seems like Iger has a lot more immediate issues facing him before he can even begin to think about M&A, and most notably when it comes to the future of Hulu and the growth of Disney+. What do you make of Iger’s current predicament, and what can we expect him to do in the D.T.C. space in the months and years ahead?

Julia Alexander: Iger’s biggest problem, really, is expectations. Disney+ has seen significant growth since it launched three years ago, but so have the costs of the business. Before he left, Iger promised between 60 and 90 million subscribers by fiscal 2024. Bob Chapek, watching streaming adoption accelerate during the pandemic, increased those projections by 3-4x, vowing to onboard 230-260 million subscribers in the same period. That massive change to guidance—which was completely unnecessary when you consider that Wall Street cares far more about whether goals are hit, revenue is continuous, and costs are managed—was a sword over Chapek’s head with each subsequent earnings call, especially as subscriber growth started to slow across the industry and churn rates increased. And he hung it there himself!

Now, of course, the focus has shifted industry-wide to average revenue per user, not just growth, and even this comes with a bunch of asterisks that Iger will have to explain to shareholders and analysts. For example, the bundle. It’s a core facet of Disney’s streaming approach domestically, but we don’t really know how revenue breaks down per user. If, as Chapek said, 40 percent of new customers are choosing the bundle as Chapek said, which is great for inflating ESPN+ and Hulu numbers, the consequential question becomes simple: is the average revenue stronger or weaker than individual subscriptions, and how does that affect Disney’s overall D.T.C. bottom line?

To your point, one of the big buys on the horizon is Comcast’s stake in Hulu. That’s an easy $9 billion purchase, but it has divided analysts. Personally, I’ve argued that it’s an essential part of Disney’s bigger plan to reduce churn and increase perceived value amongst customers. Hulu with Live TV is growing as customers find their way back to live programming and it’s also a strong ad business for Disney. To be clear: Iger’s biggest advantage (outside of being the guy who ran the company for 15 years) is having the ability to watch from the outside, talk to others, listen, learn, and plan for a better approach to Disney streaming, which Chapek seemingly didn’t have the time or interest in doing.

But I feel like we can’t talk about Disney’s future streaming plans without talking about ESPN, an area you know very well. I’m curious to get your take on what may happen with ESPN and, more broadly, with sports in general, including at Warner Bros. Discovery, NBCUniversal, Paramount, and newcomer giants like Amazon and Apple.

Dylan: Live sports rights really are the great X factor in this whole equation. The declining linear business is being kept aloft by sports—mainly the NFL and college football, which account for the most-watched programs every single week in the fall. But it’s such a shitty deal for the broadcasters because the leagues have all the leverage. So they have to spend increasingly astronomical sums to rent—rent!—content that they almost never recoup. Of course, football has always been a loss leader. Mediacos pay for the rights on Sunday so they can market a week’s worth of programming and pick up the revenue there. But those economics are becoming less favorable for legacy broadcasters as the audience for primetime sitcoms and morning TV shrinks. But what can they do!? They’ve never needed sports more.

The companies that can afford to pay sky-high prices for sports are, of course, the big tech firms. So with each new round of rights negotiations we’re going to see Apple, Amazon, and Google take a greater slice of the pie while legacy mediacos get boxed out. You mentioned ESPN; the current bidding war for NFL Sunday Ticket is a perfect example of an area where they just can’t compete anymore, because they can’t justify the expense. I’m now told that Apple, once seen as a frontrunner for the rights, has also backed out of those negotiations—not because they can’t afford it, but because they don’t see the logic. So it’s down to Amazon and Google, and there’s certainly a logic there for both companies: Amazon can use it to drive Prime subscriptions; Google can use it to fuel its YouTube TV business.

So, where does ESPN fit into all this? As I reported a few months back, Chapek decided to keep ESPN in the Disney portfolio after exploring the rationale for a spin-off. I anticipate Iger sees the logic in keeping it as well. It’s an incredibly powerful brand and it drives massive revenue for Disney at a time when the company really needs revenue. Nevertheless, they need to get more aggressive on the streaming side and increase the value proposition behind ESPN+, because that’s obviously the future for most consumers. But I’m really not sure how they do that given the linear commitments. And even potential growth areas like Major League Soccer are now becoming exclusive to Apple, with Fox as a broadcast partner. So there really aren’t any easy answers here.

But you’ve written some very smart pieces about sports streaming in recent weeks. What do you think?

Julia: It’s a great opportunity for the leagues more than anyone else. Access to the major American sports leagues—the NFL, NBA, MLB, and NHL—are growing in demand as social video platforms create year-round interest instead of relying on seasonal peaks. While the linear networks (and their parentcos) will continue to ensure they have the ability to simulcast the games and matches that they own the rights to (ESPN games airing on ESPN+, NBC games airing on Peacock, etc.), you’ll also see more of an effort to push exclusive games to streaming services. The best way to onboard new customers is to have something they need to watch. If there’s Tom Brady facing off against Aaron Rodgers, I’ll pay for whatever streaming service I need.

That increased level of demand for live sports, alongside an accelerated pace of cord cutting heading into 2023, has allowed the leagues to make the most of their content with partners. Look at MLB—some games go to YouTube, some games are on Apple TV+, some games are on ESPN, and so on. That can become frustrating for consumers. But if there are new ways to split up packages of games and train audiences on where to find them, the leagues have an opportunity to expand their audience, even as it’s fragmenting.

This isn’t something that the networks are going to want. Even with Amazon taking Thursday Night Football, it’s not like the NFL is going to go game by game and divvy up its titles. The NFL doesn’t need that. But other sports leagues can take advantage of meeting a wider spectrum of fans across platforms to create more interest in the league both on TV screens and in arenas or stadiums.

I also expect to see way, way more attempts to create year-round entertainment based on the leagues and the players that isn’t beholden to the season calendar. F1 rights jumped from $15 million in 2019 to $75 million in 2022 because of heightened interest—driven in large part by the massive success of F1: Drive to Survive on Netflix. It also creates a new inventory for advertising when the leagues are out of session.

Dylan: This, in my mind, is actually one of the most fascinating aspects of the sports-media equation: how do you build sustained interest across the year and off the field, or outside of the arena? This is really a marketing question, and despite the proliferation of documentary series like Hard Knocks and All Or Nothing, it still seems like there’s a long way to go here.

Football will certainly take care of itself, but there are less popular sports whose fates depend heavily on the marketing piece. You mentioned baseball. It may be our national pastime, but it’s withering on the vine right now, with a mostly older audience. I know the league is sort of perpetually considering rule changes, often ill-advised, to speed up the game. But what they really need to do is tell stories and establish characters who capture the national imagination. You know, there’s a case to be made that the best athlete in the world right now isn’t Brady or Messi or LeBron, but Shohei Ohtani. And yet the vast majority of Americans wouldn’t know him from Adam.

I’m also very interested in Major League Soccer’s growth potential, and curious to see how Apple harnesses the growing infusion of international talent into the league—Messi to Miami, perhaps?—to market its new asset.

Julia: This year was a big moment in advertising for streamers. Netflix and Disney+ debuted advertising tiers, following HBO Max’s move in 2021. It’s a key, pivotal period as Wall Street looks more at revenue and eventual profit instead of pure subscriber growth. What’s your take on the streamers trying to break into the ad market space, especially against competitors with strong advertising relationships including NBCUniversal’s Peacock and Paramount’s Paramount+?

Dylan: It feels like a waving of the white flag, doesn’t it? How many years did Reed Hastings offer an emphatic “No” when asked if Netflix would introduce advertising? But of course it makes total sense. A cheaper, ad supported tier significantly expands the subscriber base and provides much-needed revenue. Advertisers spent a projected $65-70 billion on TV ads this year, and will probably spend more next year. No one—certainly not Netflix, not Disney—is in a position to turn down that money.

As for the advertiser relationships? Sure, NBCUniversal and Paramount have greased a lot of palms over the years. But, advertisers go where the eyeballs are. So, I’d rather be Reed Hastings than Jeff Shell.

Speaking of Hastings, you wrote a very smart piece recently on the Netflix hit factory paradox, and the streamer’s need to create more experimental and global programming to raise engagement outside of its core audience. Do you get the sense that the folks there are aware of that challenge?

Julia: I do. Netflix had one of its biggest years on record for hits—nearly 60 percent of the top 11 English-speaking debuts premiered in 2022—but subscriber growth turned into a subscriber slump. Guidance for Q4 is also about half of what the company saw in Q4 2021. It’s a pivotal moment for the company. Big hits like Wednesday and Monster: The Jeffrey Dahmer Story are crucial for Netflix’s global branding and maintaining those cultural zeitgeist elements. They’re also crucial from a pure engagement standpoint now that advertising is becoming a core value for the company.

But as Netflix focuses its attentions on global growth, including hyper localized hits for emerging regions, trying to scale international hits with strong travelability features (like South Korea’s Extraordinary Attorney Woo or Spain’s Elite) is increasingly important. Not only do these shows cost a fraction of a Ryan Murphy overall deal or the marketing spend on Wednesday, but they can tap into audiences that Netflix isn’t already serving. It’s a complex issue. While Netflix needs and wants more Stranger Things and Squid Games, the company also needs its smaller fare to engage high risk churn subscribers and appeal to “taste clusters” in the 200+ countries that it operates in.

Way easier said than done, but unlike others in the industry, I think if any company is in the right position to pull it off, it’s Netflix. I often think about how crucial YouTube was in helping to make anime popular stateside because people had access to large swaths of content outside of the few series licensed to American networks. YouTube also helped grow K-Pop and Latin American music in the U.S. and globally. These native efforts took years to produce a global effect. Already, Netflix is quickly seeing incremental growth in consumption of its international series. I suspect that will only continue to grow.