- Disney acknowledges misalignment with public and consumer tastes. Facing risks due to evolving preferences and competition.
- Need to bolster properties as fair values decline. Potential retooling or sale of streaming and ESPN.
- Short-term profitability challenges expected for new offerings, including Disney+. Uncertain future as losses mount in the streaming wars.
For everyone wildly speculating on the roller coaster that is Disney, there is plenty to dissect in the recent disclosures in their Securities and Exchange Commission (SEC) filings. Stashed away in this yearly disclosure are plenty of crucial nuggets of information to judge their long-term strategy as they stagger from loss to loss. Released as part of all businesses’ obligation to transparency to the financial watchdogs and investors, the following quotes are straight from The Mouse’s mouth, or his CPAs’ mouths, rather.
Most in the media were obsessed only with the biggest detail in the report, the admission that Walt Disney “face[d] risks relating to misalignment with public and consumer tastes and preferences.” Yet, if you continue further, you can unearth more pressing information sure to interest shareholders and casual Disney fans alike. It is the nearest we’ll ever see to a mea culpa for how out of touch the company has grown with its customers. Take it as a distress signal or a glimpse of things to come. Either way, we’re getting a peak inside Bob Iger’s head, even if the public documents are sometimes at odds with some of the statements he’s publicly made.
As a simple clarification, The Walt Disney Company is segmented into three units: ESPN (referring to their American sports-broadcasting brand), Parks, Experiences & Products, and finally Entertainment (applying to their films and TV streaming service and other media-related IP). Each one faced its fair share of difficulties in the years after the onset of the COVID-19 epidemic.
Glossing over their profit revenue and risks, it’s the line on page 19 referring to “consumers’ perceptions” of the company’s “environmental and social goals” that stood out most when it was initially released to the press. This might be as close to the word “woke” as you’ll ever see printed in SEC paperwork. For all intents and purposes, that is what they are going on about. All the ranting about The Little Mermaid and Snow White is making an impact after all.
However, under the heading listing the “the most significant factors affecting our business,” the document also addresses the rise in competition, loss of streamers, and dipping revenue from loss of advertisements and dying theater ticket sales. We hate to say we told you so, but it is obvious Disney knew all along too. They couldn’t say it until now, implicitly admitting that Disney+ wasn’t worth the subscription fee.
Stemming the Bleeding
There is an emphasis on a lot of issues, from the loss of revenue from Russia to piracy, but the filing skates around the bigger issue. They drastically need to bolster some of their properties, and fast. If you don’t understand what goodwill impairment is, don’t fret. All it means is that they are losing money by making poor investments, Disney declaring that “the fair values of our media and entertainment businesses have generally declined.” While not precisely the same as market price, Disney is acknowledging that the value of several of their endeavors, most likely streaming and ESPN, are not as profitable as they once were and stand to be retooled or even sold.
Despite the cautious warning, Iger is going all in on the ESPN streaming deal and a push for more park attractions, per Deadline in late November of this year, clearly feeling bullish on those two sections. Rumors of ESPN’s sale seem less credible than they did six months ago, but if Disney did put the sports networks up for auction, the sale would net somewhere in the neighborhood of twenty-four billion according to Reuters in November. Something to keep in mind.
If they harbor a fear of pirating, sports is the one industry behemoth that is the most immune to illegal transmission or downturns in the economy. Talk has already speculated on a deal with the NBA and NFL buying a chunk of the ESPN brand just in the last month. The sale would reshape the family of sports channels as a cooperative entity, with various sports leagues owning minority shares. Disney sees ESPN as a long-term potential cash cow, inaugurating the rise of the ESPN Bet gambling app this year. As tempting as a sale sounds, they need ESPN.
Is Disney Ready to Fail?
It’s fair to consider 2023 Disney’s annus horribilis, releasing bombs in rapid succession and shuttering costly hotels as their streaming arm sputters out of control. Unfortunately for them, it’s probably not going to get better. Disney goes so far as to speculate: “Even if our strategies are effective in the long term, our new offerings will generally not be profitable in the short term,” despite Iger insisting that Disney+ will soon pull a profit.
Buried in that filing is a reference to the lapsing copyright of its Mickey Mouse character, and the bizarre consequences that will ensue. “As copyrights expire, we expect that revenues generated from such IP will be negatively impacted to some extent.” They’re talking about their signature character. A fraction of their Mickey merch sales will likely be cut off as the counterfeiters legally move into their territory, as the character enters the public domain.
We’re left with the resounding truth that most of what Disney has engineered over the past few years simply didn’t pan out, and in some cases damaged their brand. Deep in the SEC filing, the company recognizes the need to “write down” (as opposed to a complete “write off”) some of their theme parks and attractions, specifically noting the financial disaster that was the Star Wars: Galactic Starcruiser. Whether that means they will actually restructure Disney+ or do something even more drastic is impossible to venture a guess yet.
However, with Disney execs throwing office pizza parties to commemorate a mere loss of only $387 million from its streaming service, don’t be surprised if Disney surrenders in the streaming wars, abandoning Disney+ in the near future as the losses mount with nothing to bait old subscribers back into the fold, at the same time removing shows from the service as Star Wars and Marvel properties like Ahsoka and Ms. Marvel display lackluster appeal to wider audiences.
Fresh disasters aside, 2024 could be a bigger nightmare for Disney, and they are all too aware of it. However, it’s worth keeping in mind that Disney has been in similar peril before, always self-correcting enough to keep itself afloat amid financial storms.