THB #253: Disney Q4 Results

Undeniably unimpressive.

But the drama!!!

Investors on Wall Street are obviously smart. But it is amazing how stupid they can be sometimes. They are like comic book characters, set off in a positive or negative direction by the slightest of things, throwing aside all fundamentals on a mood… a whim.

As anyone who reads this newsletter on the regular knows, I think Bob Chapek has made some terrible choices. But nothing fundemental changed about Disney this week.

Bob Chapek told the world that streaming would not be profitable in 2022 or 2023… but somehow this is a major disappointment.

For years, as people screamed for the legacy media companies to switch to streaming faster… FASTER!… I wrote about what was obvious then and remains obvious… the revenues from legacy media platforms were bigger than streaming revenues will be anytime in the next 30 years. That is why they ALL dragged their feet.

Yes, the legacy companies can behave like Luddites. But you have to put a gun to the head of an industry to make it change from a more profitable paradigm to a less profitable paradigm. And Wall Street’s objectively insane pricing of Netflix stock, the gun manifested.

The next GIANT problem has been the perception that a streamer needs to spend the same way the library-free Netflix did in order to compete. This was and is insane. Netflix has its own set of issues. Instead of using the decades of experience in programming to consumers very successfully, some companies followed like lemmings (as debunked metaphor… but you know what I mean) and others seem to have gone into denial, as though they could keep programming as they had for broadcast like nothing at all had changed.

Disney is a weird combination of strategies. And in many cases, I am not critical of those strategies or experimentation done to figure out where things are going.

Normally, I would be getting into the nitty gritty of these numbers. But it really feels like there is really no point right now. All the streamers have had really mediocre or slightly positive or slightly negative results this last quarter. Advertising is coming to all of their bottom lines in the next months and we’ll find out how well ads work as a revenue stream. But we are still, basically, in stasis.

More broadly, Disney has failed in streaming in a number of ways that I don’t hear getting discussed much.

1. They have not been able to maintain the content pipeline for Disney+, meaning in this case 15 - 25 8-episode Disney+ series a year that people are interested in watching. Not talking about the endless waterfall of Netflix product. I mean, the last episode we saw of The Mandalorian landed in December 2020. The next one will, allegedly, land February 2023. More than 2 years to get from Season Two to Season Three? Seriously?

Streaming is television. 200 episodes a year at, say, $10 million an episode, is $2 billion. $15 million an episode? $3 billion. It’s not falling off a log, but come on, already. Disney is spending more that they need to, yet they are not getting the consistent content stream they need.

So far, between drama, comedy, and animation, the channel has delivered 283 new episodes of content in 3 years. That’s less than half the pace they have needed.

The studio has taken to burning very expensive theatrical content in order to make up for a lack of content. So much so that Chapek has convinced himself that this is a good strategy. It is not.

2. As just noted, Disney has abandoned the theatrical business except for large scale IP-driven movies. They have 7 such movies on their schedule for 2023 (not counting The Haunted Mansion as large scale). I guess we will find out how this works for them.

Chapek was quoted today at the Paley Center for Media in New York… quoted in The Hollywood Reporter.

When asked if theatrical films are poised for a comeback, Chapek replied that “it’s hard to have an answer yet, but from our observation the tentpole, big, blockbuster films are certainly back. Beyond that it gets sketchy.”

“That’s good for us, by the way, because most of our box office films are those blockbusters, and whether they’re Lucas and Marvel and Pixar or Disney that’s where we play,” he said. “The other genres, the other demographics are a bit more challenged. And the question of will they ever come back in a in a significant way, is, I think, to be seen, and that’s why one of our distribution strategies is always flexibility.”

“If they come back, we will be more than glad to go back to theaters because we’ve had a long successful history of playing in more than one revenue stream, but if it doesn’t, the good news is we’ve now got a very large streaming business that we can go ahead and redirect that content towards those channels,” he added.

They aren’t going to come back unless there is actually enough such releases for some percentage of them to become “unexpected” hits… sir.

What Chapek has not gotten the memo on is that his strategy for only big IP will contribute to the reduction of theatrical overall and within a few years, could erode the number of theaters, which would directly damage the box office potential of his giant IP movies.

But also, a full release schedule offers balance through the year, even in quarters like Q4, which are consistently soft for Disney.

3. Domestic growth is not a thing. Netflix is at a 2 year standstill domestically. As others get over 50 million domestic subs, they too will start to fully stall out.

The future of streaming growth is international. Almost completely. And Wall Street knows almost nothing about these companies building their streamers internationally.

The market demanding that Netflix start making some money after a decade of streaming (the 2nd 5 years of which have been pretty stable) is not the same thing as expecting Disney to be in streaming profit 3 years in when Disney was very clear from the start that it would take at least 4 years. Warner Bros Discovery? They have been pretty clear that the ground will be unstable until next summer.

Disney doesn’t need to raise the price of D+ more dramatically than the coming increase. They need to get everyone on The Disney Bundle with an ARPU of over $14 a month per customer. The strategy was to lead with D+ and then to draw existing subs into The Bundle. We will have a better sense of how that is working next quarter, particularly when combined with new ad opportunities.

Meanwhile, Disney Linear is still netting more than the whole of Netflix. Disney Parks, Experiences and Products is netting $60 million less a quarter than the whole of Netflix. Content Sales/Licensing and Other, which includes theatrical, is about to get a massive boost from Wakanda Forever and Avatar: The Way of Water.

And yes… streaming is still losing money… as expected.

Again… not a great quarter. Not really a good quarter.

But was it a quarter that called for a 13% drop in the stock value of Disney? While Netflix stock is on the rise? Not even close.

Until tomorrow…