Disney's Issues Run Deeper Than Its CEO
It's a difficult moment for corporate icons. Mark Zuckerberg must miss being called a fiendish genius now that he has been downgraded to obstinate cash furnace. His $Meta Platforms, Inc.(META)$ is down by two-thirds from its peak in just over a year, amid rampant spending on a cartoon fever dream called the metaverse.
Elon Musk has been owning the libs on Twitter, and they've been rethinking their ownership of $Tesla Motors(TSLA)$
Iger's main challenge will be that streaming is still a metaverse-level money loser, and Disney (DIS) is all in. But timing-wise, at least, his return is executive Jedi stuff. There's a pair of black loafers still sitting on Main Street in the Magic Kingdom where ousted chief Bob Chapek recently stood. A trolley car is speeding away, and I could swear that I saw Iger ringing its bell.
Consider: Chapek will go down as the guy who presided over a plunge in Disney stock from a peak of just over $200 in March 2021 to a recent price of just under $100. But he took over in February 2020, when the stock was $128. Barely two weeks later, Covid-19 shut down Disney's parks and cruise businesses.
If Chapek's tenure should be defined by anything, it's returning Disney parks to record profitability in less than three years through changes ranging from tough but fair to borderline Pixar villain -- say, Lots-o'-Huggin' Bear from Toy Story 3.
For example, visitors who pay up for Disney World's own hotels used to skip the Orlando airport baggage carousel, stroll straight onto the free Mickey Mouse bus, and have their bags appear later in their rooms. Now, they schlep their things to the rental-car lot or Uber pickup like any ordinary SeaWorlder.
Park tickets used to include a handful of free line-skipping opportunities per day. Now, ticket prices are way up, and there's an upcharge for line-skipping privileges, plus another that covers the most popular rides. Visitors who don't pay can face lines that are blown out by -- you guessed it -- all of the paid line-skipping.
Iger can now gently dial back one or two of the least popular changes and come out the hero, while keeping most of the margin improvement.
Then there's the stock, brought down by three main things. First, it had gotten expensive. Second, interest rates shot higher, giving savers alternatives to stocks and souring them on companies with big money-losing businesses. Third, Disney is one of those companies.
Disney+ was supposed to break even by fiscal 2024. But Disney just reported a fiscal-2022 loss of $4 billion in its streaming division. A year ago, that business was expected to earn more than $1 billion in the current fiscal year. Now, Wall Street predicts another $3 billion loss.
Chapek's fault? Partly. But it was Iger who launched Disney+ in November 2019, eight months after completing a purchase of film and TV assets from Fox (FOXA) for more than $71 billion. In comparison, he paid about $15 billion combined for Pixar in 2006, Marvel in 2009, and Lucasfilm in 2012. Barring a heck of a revival for The Simpsons, that price could come to look too steep. And the fallout for it hit on Chapek's watch.
Disney didn't respond to a request to speak with Iger.
If interest rates peak soon and then subside, and the stock market resumes its long-term climb, we might look back on Nov. 10 as a turning point. That's when the U.S. Bureau of Labor Statistics released its consumer-price-index data for October, which offered the first convincing evidence that the worst has passed for inflation -- the cause of those rising interest rates. On that day, the 10-year Treasury yield abruptly fell by more than a quarter-point, and the S&P 500 index shot 5% higher. Ten days later, Disney announced that Iger was back in charge, and Chapek was out.
Remarkably, Chapek could be remembered as the "go woke, go broke" guy for his run-in with Florida Gov. Ron DeSantis. Now, let me preface this by saying that on culture war matters, I'm a conscientious objector. I have a long history of not joining things. Back in the late 1980s, I spoke out against both sides in the Miller Lite "tastes great/less filling" standoff. I've had multiple conversations with both Disney Bobs, and both strike me as centrists who keep their personal political views just that -- personal. But if Chapek is to the left of Iger, there's no evidence for it. How he ended up in the politics penalty box, while Iger has skated around it, is one for business-school case studies.
As favorable as Iger's timing appears, don't expect Disney stock to bounce back to $200 soon. Its current market value of $180 billion looks fair next to the nearly $10 billion in free cash that Disney generated in peak fiscal 2018, but high relative to the $4.6 billion it's expected to clear this year.
Cost-cutting can help. Disney racks up $2 billion more in yearly noncontent spending on streaming than Netflix (NFLX), despite having $10 billion less in streaming revenue. But longer-term, the fact that Netflix has been streaming for 15 years and produces only a trickle of free cash suggests that the new era of big-budget shows and vast consumer choice is structurally less profitable than TV in the cable-bundle age.
For that to change, streaming platforms will need to consolidate more and pile on the advertising, while persuading subscribers to pay more for less. If Iger can fix all of that on a two-year contract, it will be his biggest achievement yet. Then, all he'll have to do is find a successor who's not worried about getting Chapeked.
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