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Earlier this summer after Disney’s (NYSE:DIS) Lightyear failed to get off the launching pad many critics were quick to argue this was “go woke, go broke” scenario that would haunt the company for the foreseeable future.
Well, so much for that theory.
In the weeks since then Disney saw strong returns on its latest Thor movie, snared an impressive number of Emmy nominations across its vast portfolio of networks and pulled off another strong earnings quarter.
You’d think that would be enough.
Instead, more have come out of the woodwork to give Disney advice and suggestions on what it has to do next to continue to succeed – because it’s not like the company has built a decades long record of success right?
Chief among those is activist investor Daniel Loeb, who has a long history of tangling with the Mouse. His latest “suggestions” seem to continue to run counter to the calculated and steady approach Disney has successfully implemented in streaming and in many ways are representative of why maybe it is time for everyone to let Disney just be Disney.
First as always, some background.
I’ve written in the past about the Lightyear problem, the success of Thor and the Emmy haul so I don’t really need to recap that here, but suffice it to say there were a few beats investors were aware of leading into earnings.
And that’s just internally driven news.
The larger narrative about the demise of streaming (whose death continues to be greatly exaggerated) has been growing since Netflix (NFLX) went off a cliff earlier this year. As I’ve also written about before the Netflix situation is one of Netflix’s own creation – it wasn’t a sign of the times.
Netflix is in the position it is in because it got overly set in its ways and wasn’t interested in what was going on outside of its bubble.
Disney doesn’t have that problem.
Unlike Netflix, Disney is a company with multiple divisions and various sub-divisions each feeding into the larger eco-system. In other words, if Disney puts out a flop, another “something” is there to help make up that revenue.
Netflix is just Netflix and that’s one of the reasons why it has experienced such a rocky 2022.
Obviously Disney’s investors are aware and don’t want to see the company go down that same path, but there is a level of over-reaction there as well. Netflix gave off multiple signs that it was in trouble before the collapse, many of which were overlooked by shareholders.
That’s not the case here.
And that bring us back to Loeb who laid out a series of “suggestions” that he as a larger shareholder has the right to make – but Disney doesn’t necessarily have to directly address.
This is not the first time Loeb has made his voice heard and it won’t be the last either, but to me Loeb also has missed the mark a bit in the past, which is why the company takes his ideas with a grain of salt (and skepticism).
During his last round of comments we were deep into the pandemic and Hollywood was just beginning to find its way back to whatever normalcy may be for the moment. Loeb suggested that Disney cut its dividend and use that money to fuel more content for Disney+ to help it continue to compete and grow.
Now in most cases Loeb’s suggestions have a kernel of truth to them and he was right about the need to fuel Disney+ and that is exactly what Disney would do. Granted it seems like most of those of changes were already in the works so Disney topper Bob Chapek may have just been playing nice in his response.
While Loeb was right about the idea, to me, he was wrong on the execution. He wanted Disney to take it a step further and suggested that Disney essentially do what AT&T/WB did and siphon off some of its big titles from screen to stream.
He theorized that by moving big-ticket movies from the Star Wars and Marvel universes to Disney+ it would boost subscriptions and give the streamer an edge but he knew the executive board was not on board with the idea.
The Black Widow debacle aside, Disney’s leadership largely recognized the problem with that theory and smartly pivoted approaches. What Disney did instead was build out the Star Wars and Marvel universes by giving their characters standalone series on Disney+, which not only had the same effect of driving subscriptions, but didn’t further antagonize the theater chains that were already struggling.
And the only reason why Black Widow was given a hybrid release was because it was the first in a series of dominos for the larger Marvel universe. The strategy required such specific timing that it was no longer possible to hold back the water so to speak. If Disney didn’t open the gates the backlog of projects would become untenable.
And while the approach could have been handled better – and the subsequent lawsuit could have been avoided – it didn’t take Disney that long to course-correct.
So what was Loeb’s grand plan this time?
Well, the crux of it was three-fold – fold Hulu into Disney+, spin-off ESPN and “refresh” the board of directors.
That last one being a not so veiled commentary on what Loeb thinks about the people in charge.
Again, though in some cases there is a kernel of truth in Loeb’s logic and he’s right about the need to fold Hulu into Disney+, but as before, I believe the execution is off. Loeb knows why Hulu can’t be folded in quickly – namely because Comcast still owns 33% of Hulu. What Loeb wanted was for Disney to move up the timetable on when Disney will buy them out.
That date is set for 2024, but Loeb wants Disney to do that now even if it costs them a premium price because he thinks the value is there long-term. That’s where I disagree – we are already in the tail end of 2022 and any type of buy-back would likely not happen until 2023 meaning that it probably is more financially responsible to just wait it out.
There’s no need to over-spend when things are going well.
The expectation is Disney will eventually buy-out Comcast (NASDAQ:CMCSA) just as the expectation is Hulu will eventually become a part of Disney+, but it doesn’t need to happen tomorrow.
That’s just Loeb’s penchant for aggressive maneuvers coming out again, but as it will eventually happen it is really a non-issue at the moment (as is the board refresh, which I don’t see happening).
However, it was the ESPN comment that has drawn the most comments mainly because his logic is flawed in my opinion.
Loeb suggested that by spinning off ESPN it would create more value for the network and open it up to other revenue streams.
The issue there though is that currently ESPN is the most expensive cable channel on the market and Disney forces carriers to include it (and pay the fee attached to do so) if they want Disney’s other popular channels. That is a lot of monthly revenue coming into Disney that it doesn’t make sense to give up.
While at one time ESPN was an albatross around the Mouse’s neck, those days are gone. Having ESPN in its portfolio is now a huge feather in the cap for Disney as the sports network (and by association Disney) is the only one to have deals with all the major leagues for games and content – which gives them a competitive advantage among both linear and streaming rivals.
Loeb had also said that by separating ESPN from Disney it would allow the network to explore deals within the lucrative gambling space, which it can’t do under the family friendly Disney banner.
Although in reality – it can.
It’s that statement that has really confounded a number of analysts as Disney at its core may be a family brand but it’s also the same parent of more adult fare like The Handmaid’s Tale, Big Sky, Only Murders In The Building, Atlanta and Grey’s Anatomy.
Disney has a full scope of programming and over the years it has smartly bought other conduits for that adult content separate from its traditional channels. The 20th Century Fox deal was specifically done to give them a new studio and network (FX) that specifically trades in more mature fare.
There is nothing stopping Disney or ESPN from pursuing any type of deal with a betting site.
To me the biggest reason though for staying as is and keeping the steady hand approach is that Disney is very self-aware as a company. When it oversteps, it steps back, when it sees success, it doubles-down and when it reaches a big milestone it (mostly) knows what to tout.
Outside of a one-off to announce it has crossed the 100 million subscriptions mark – which came back to bite them the next earnings period – Disney is very careful what it puts out tied to data and users. The last earnings report is a great example as it was there the company revealed it now globally had the most streaming subscribers of anyone in the space.
However, Disney is also well aware that carries an asterisk.
That statement is true but only when you count all its services combined (Disney+, ESPN+, Hulu and Hotstar) and in many cases there’s some double-counting going on due to bundles. As a result, Disney acknowledged the news and what it meant, but then moved on – it knows it still has a little way to go to catch Netflix on apples-to-apples level.
That’s also a very achievable goal and one it should be on track to meet in the not-so-distant future, which should be enough of a sign to leave Disney be.
If only it was that easy.
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