Disney Needs to Do More With Less on Streaming

 

Robert Iger is rightly focused on streaming profit, but Disney’s marquee franchises can’t be serviced on the cheap

By guest author Dan Gallagher from the Wall Street Journal

Robert Iger CEO of Disney

Robert Iger is wasting little time undoing the work of his predecessor. But those moves will prove easy compared with the challenges he faces with Walt Disney DIS -2.11%decrease; red down pointing triangle‘s streaming business, where he must find a way to make do with less.

Two weeks into Mr. Iger’s return to the Mouse House’s corner office, investors remain optimistic. As of Friday’s close, Disney ‘s shares are up 8 % since the Nov. 20 announcement—more than double the S&P 500’s gains in that time. His first order of business involves walking back some of the major organisational changes made by previous Chief Executive Bob Chapek, which were unpopular with much of the company’s creative executive core from the start. The fact that Mr. Chapek had McKinsey consultants running around to push those changes didn’t seem to help his case internally. At the end of the day, even Chief Financial Officer Christine McCarthy turned on him, according to The Wall Street Journal’s reporting.

Other changes will prove more difficult, and streaming may be the biggest challenge. In a companywide meeting last week, Mr. Iger suggested a new approach for the business that he himself launched in 2019. “We have to start chasing profitability,” Mr. Iger said, according to the Journal’s report on the meeting.

It is a familiar tune being sung across the media landscape. And it is a poignant one for Disney, whose streaming business generated a whopping operating loss of a little over $4 billion for the fiscal year ended in September. Disney+ added more than 46 million subscribers in that time—growth of 40% compared with 4% for streaming leader Netflix over the same period. But chasing subscribers at any cost is no longer en vogue with investors, and the scale of recent streaming losses that piled up under Mr. Chapek—and his poor job of addressing those losses with Wall Street—proved another nail in his coffin.

Mr. Iger does have some room to maneuver. Some analysts expect him to take a scalpel to the ambitious target Mr. Chapek set, which has Disney+ hitting 260 million subscribers by the end of fiscal 2024—about 100 million more than the service has now. Other moves by Mr. Chapek may still prove useful, though. This week will bring the launch of an ad-supported tier for Disney+ that he announced earlier this year. This will include a notable price increase for the ad-free version of the service. Analysts project that average revenue per user in the key domestic market for Disney+ will jump 20% in the current fiscal year, according to consensus estimates from Visible Alpha.

But even a lowered subscriber target still leaves Disney with the need to build a profitable streaming business on the back of its marquee franchises such as Star Wars, Marvel and Pixar that aren’t exactly cheap to produce for. Disney launched four live-action Marvel series and three Star Wars series on Disney+ during the last fiscal year. The company hasn’t disclosed production costs for those, but the Hollywood Reporter reported in late 2019 that the company was spending as much as USD 25 million an episode for its first three Marvel series.

Scaling back on the number of blockbuster-budget shows could help drive Mr. Iger’s new bottom-line focused approach. It could also help offset the risk of Disney over-tapping its prime content well, especially given the unrelenting pace of Marvel movies and TV shows over the past few years. Michael Morris of Guggenheim Securities wrote to clients that Disney needs to bring a “disciplined focus on value maximization,” which he defines as “investing in creative content and delighting consumers, but not in over-serving the customer base.”

Still, Mr. Iger’s team will need to green light enough marquee content to keep subscribers engaged—especially since they now have plenty of other streaming options. And he seems to understand that he can’t fully turn back the clock on streaming; Mr. Iger told the Code Conference in September that “linear TV and satellite is marching toward a great precipice and it will be pushed off.” In a report Friday, MoffettNathanson estimated that the total number of cable subscribers fell 6.2 % year over year in the third quarter, the worst quarter on record for so-called cord-cutting.

Disney no longer gets a blank check from Wall Street for streaming. But the company will still have to write some pretty big checks on its own. Mr. Iger’s job will be making sure it gets enough bang for the buck.

www.wsj.com