Disney faces digital dilemma despite streaming success

The Walt Disney Company, in its 97th year, decided its television future lay in diffusion. But what is happening to his past?

Disney Plus was a runaway success, registration more than 70 million subscribers in its first year to solidify the Mickey Mouse empire as a serious competitor to Netflix, which boss Reed Hastings expected his new rival to “best” secure 20 million customers.

As the group reinvents itself around video streaming, giving up lucrative license revenues, it must also deal with the decline of its aging TV channels and movie studios. Long-term, Bob Iger, executive chairman and former chief executive, recently told friends that once-powerful Disney-owned channels like ABC were “done” and Disney’s future was streaming and theme parks.

But unlike Disney Plus, these networks bring in billions of dollars a year.

The situation is gone Disney with an uneven strategy for TV channels such as the ESPN sports network and the entertainment networks that power Hulu, the US streaming service Disney took majority control last year. It also reveals that even for the world’s best-positioned traditional media company, the transition to streaming will be bumpy and financially uncertain.

Despite a terrible 2020 in which the pandemic took $ 7 billion from Disney’s operating profit, its stock is up 3%, mostly on the promise of streaming. Shareholders will seek the company to strengthen its commitment during an investor presentation on Thursday, dedicating even more money popular content.

“Why do not The single person premiere on Hulu? Lightshed Research Group Partner Rich Greenfield said referring to ABC’s hit dating show. “The question is: how much does the world of television have to decline before deciding to start moving high-level content? It would rewrite their entire economic livelihood. ”

Disney’s dilemma is that any options to accelerate its digital ambitions come with financial risks and practical challenges.

Two years ago, when Mr. Iger and top executive Kevin Mayer were shaping Disney’s streaming plans, internal research predicted that Disney Plus’s offering with Hulu would attract the most subscribers.

But they didn’t want to leave behind ESPN Plus, the sports video streaming service that launched in April 2018 and which had gained little in popularity, according to people familiar with the plans. And so the big Disney streaming launch last year offered a bundle of Disney Plus, ESPN Plus, and Hulu for $ 13 a month.

Since then, however, ESPN Plus has served more as a place of reservation for the future than an active product, with most premium content exclusively reserved for cable TV. The resounding success of Disney Plus has diminished the company’s interest in Hulu, according to current and former executives.

Cable channel ESPN has been losing viewers for years, with registered customers down to 80 million on average this year from 90 million in 2016, according to data group Kagan. Last year, MM. Iger and Mayer discussed moving some of ESPN’s popular sports programming to its streaming service as early as 2022, after license agreements expiring that require the games to air on ESPN’s cable channel, according to reports. people familiar with the discussions.

Adapting sports to streaming is particularly damaging as media companies have to pay hundreds of millions of dollars every few years for the rights to broadcast games. Prices rose as broadcasters such as Fox and NBC sought to compete with ESPN, locking the network into an expensive and rigid business model that would be difficult to convert.

“When they made these deals, they didn’t anticipate ESPN would go from 95 million submarines to 80 million,” said a former senior Disney executive. “In the long run this has created a real question about how profitable ESPN can be.”

To match its cable profits, ESPN Plus would need to be billed between $ 40 and $ 45 per month, according to the former managing director of a streaming service who warned that “there is no spreadsheet in it. universe that gives you savings similar to pay TV. “. In the last quarter, ESPN Plus reached 10 million subscribers who paid an average of just $ 4.54 per month.

Cannibalizing ESPN would only make matters worse with cutting cable channels such as A&E, which is jointly owned by Disney and Hearst. In 2019, bankers devised options for Disney to sell A&E networks and Freeform, a young adult entertainment channel, according to people familiar with the matter.

The effort did not advance and the cable only deteriorated further. Networks are now in decline of assets that would be difficult to sell, according to industry bankers.

Instead, Nat Geo was incorporated into Disney Plus, and FX, a more forward-thinking entertainment channel, received a digital “lifeboat” via Hulu. Disney has shut down Disney Channel in the UK and is extorting money from A&E by selling license rights to Discovery for its upcoming streaming service.

But while in secular decline, these channels bring in a significant amount of money. For the year ending Oct. 3, Disney made $ 6 billion in operating income from its cable channels.

In Mr. Iger’s opinion, Disney’s biggest problem is cash. This is the first time he’s had to run the business with limited capital, he told associates in recent months, as theme park and movie theater revenues evaporate.

Disney on Thursday cut about 100 employees in its television and film divisions, including several senior ABC executives, according to reports – the latest round of job losses as the company restructures for a streaming world.

With leadership focused on protecting Disney’s balance sheet and armed with a shiny object to please Wall Street with Disney Plus, Hulu and ESPN Plus have become lower priority.

This year, Disney has abandoned ambitious plans for a global rollout of Hulu, according to people familiar with the matter.

Executives expected the cost of bolstering the 37 million subscriber platform with local language programming for overseas expansion to be more than $ 5 billion, the people said. A deal to buy Comcast’s remaining stake in Hulu in 2024, meanwhile, means Disney will have to pay billions more if its valuation rises.

Instead, Disney announced in August that it would expand Star, the Asian pay-TV network bought from Rupert Murdoch, as a streaming service to Europe and the rest of the world.

Potential buyers have expressed interest in Hulu, but Disney is yet to engage in conversations, according to people familiar with the matter. Verizon Media would be interested, and potentially Bill Ackman’s special purpose acquisition vehicle, media bankers say.

This week, all eyes will be on Bob Chapek, who took over as Managing Director in February a few weeks before the pandemic hit the companies that keep Disney’s financial strength.

Mr Chapek is moving forward with the streaming strategy, perhaps with even more enthusiasm than his predecessor. But just as important, he began to promote vital allies within Disney as he began to assert his authority over an organization for which Mr. Iger was the prime contractor.

In October, Disney gave Kareem Daniel, former chief of staff to Mr. Chapek, a powerful new position overseeing the distribution of all of Disney’s creative content – what a colleague described as “the biggest P&L in Hollywood” .

Mr. Iger told his friends the recent Disney reorganization was not the precise approach he could have taken. He has played a more secondary role in recent months. Relations between Mr. Iger and Mr. Chapek were strained by a New York Times report in May suggesting that Mr. Iger “had indeed returned to the management of the company,” according to people familiar with the matter.

But Mr Iger remains publicly supportive of his successor, telling Bloomberg recently that while he was “there for him” during the worst of the pandemic, it was still Mr Chapek “who ran the business.” Mr. Chapek’s allies, in turn, say he’s never the type to be “shy or careful” in setting his own agenda.

“What Chapek is doing today is not laying the foundations for Disney’s future. He actually takes control of the Disney organization from Bob Iger, ”said another person who has worked closely with the two. “Chapek is going to change the company and the scale of the change will only accelerate once normalcy returns and Iger moves away.”