Ian Whittaker has been a City analyst for more than two decades, and what he doesn’t know about media, advertising and the creative services industry isn’t worth knowing. Here’s his latest monthly column for City A.M.
Disney’s shares fell over 7 per cent the day after it published poorly received full year results (Disney’s financial year ended on October 2).
The biggest focus was on its Disney+ streaming service which missed analyst consensus expectations on subscriber numbers, reaching just over 118m subscribers by the end of Q4 as opposed to 125.4m expectations. However, it was not just streaming where Disney disappointed.
It missed on revenue and earnings expectations and management’s commentary that next year’s growth would be heavily weighted to its fiscal second half – not just in Disney+ net additions but also in theme parks – also didn’t help. Add in a dash of extra long-term content costs for Disney+ and the market reaction becomes more understandable.
One immediate thing to point out is that it is very easy to become focused on the Disney+ story, given its “glamour”, but to miss more important businesses.
Theme parks generated around 40 per cent of operating profits in the fourth quarter and, while it was only 6 per cent for the full year, that figure will rise as things return (slowly) to normal. Within its Media and Entertainment segment, the other part of Disney, over half of Disney’s revenues came from its ‘old-fashioned’ TV businesses, although streaming revenues are now catching up. Theatrical revenues will also recover, as the pandemic abates.
However, Disney has hitched itself to the streaming bandwagon, at least publicly, and so that will be the benchmark against which it will be judged. Disney’s shares have underperformed Netflix over the past year (15 per cent plus vs 40 per cent plus for Netflix) and, while a significant part is due to the impact on its theme parks, the news that subscriber growth at Disney+ over the next two quarters was likely to be subdued has raised questions over the Disney+ strategy, despite Disney+’s reiteration of the 230m-260m subscriber target by fiscal 2024.
In some ways, the share price reaction reflects the markets’ short-term thinking. In the panic over Q4’s performance, it has been forgotten that, in the previous quarter, Disney+’s subscriber performance handsomely beat expectations. Disney’s management were right to point out that they are running the business for the long-term, not quarter on quarter.
However, there are wider questions around the strategy behind Disney+. One concern is around content. That may seem bizarre given Disney is a content powerhouse. However, Disney may have rested on its laurels, believing it could rely on its in-house content to drive growth while Netflix has branched out into international and / or non-English-language content to drive growth. The global success of “Squid Game” follows on from non-US hits such as “Bridgeton” and “Lupin”. Disney’s announcement that it is spending more on content generally with a greater focus on local content suggests a realisation that it needs to move quicker and harder in this direction. There are other concerns over the Hotstar+ business, which is focused on SE Asia, and its ability to grow subscribers and ARPU, together with lingering doubts over whether the ESPN franchise is unsuited to today’s streaming battle royale.
Disney is a well-known and long-established company with significant free cash flow (it still generated nearly $2 billion last year despite over $3.5bn investment in its theme parks, resorts and other businesses) and very strong intellectual property, not only with its classic Disney franchises but also Star Wars, Marvel, Pixar amongst others. Moreover, there are also some very promising developments coming out around its parks, where Disney has used the crisis to reimagine both the cost and revenue side of things. Its comments that 1/3 of visitors to Disney World are paying $15 per day per guest for the Genie+ app has the potential to be a game changer given the high drop-through of revenues to profits. The idea Disney is heading for the rocks is fanciful.
Perhaps a more pressing worry though is that the streaming tail is wagging the Disney dog. The Direct to Consumer (D2C) side of Disney lost around $1.7bn in the full financial year yet Disney stated losses for the streaming service are now expected to peak in fiscal 2022, not 2021.
While a lot of that reflects timing, it also reflects increased investment, not just around content but also marketing and related costs. The focus on streaming has also had other costs (for example, by keeping its content for its own streaming service, Disney loses out on revenues that were previously generated by selling content) and has muddied its response to the theatrical business which, ultimately, then feeds into the theme parks side of the equation. Perhaps Disney should focus more on the bigger picture than necessarily going down the streaming rabbit hole.