It's been a rough few years for Disney (DIS -0.12%).
Despite the stock market boom during the first half of the year, shares are trading near their 52-week lows, and the stock is below where it was before the pandemic even as the broad market has gained substantially since then.
In fact, Disney has underperformed the market over any time frame over the last 10 years, and it's no secret why. The company has struggled with the transition from linear TV to streaming, which was hastened by the pandemic.
While Disney may be best known for its namesake family entertainment and theme parks, the company also owns ABC, ESPN, and a host of other cable networks thanks to its acquisition of Fox's entertainment assets in 2019, a deal that's looking increasingly like a mistake.
After retiring in early 2020, CEO Bob Iger has returned to the helm in order to put the company back on track, but thus far his efforts, which include layoffs, cost cuts, and a restructuring, have yielded little fruit.
Iger surprised the market with another announcement just last week, telling CNBC that its traditional TV networks "may not be core to Disney," leaving the door open to a potential sale of assets like ABC. As for ESPN, Iger said the company may search for a strategic partner for its sports media empire, which could include a joint venture or selling an ownership stake.
Iger earned a reputation as Hollywood's consummate dealmaker, acquiring Pixar, Marvel, and LucasFilm/Star Wars, a hit list of brands chock-full of intellectual property that has paid off handsomely for Disney. The deal with Fox was his most expensive acquisition, but the verdict is still out on that one.
Now, his pivot to possibly unwinding Disney's assets shows how much things have changed for the entertainment giant and for Iger.
Disney CEO Bob Iger. Image source: Disney.
When a bad business meets a good manager
When he left Disney in 2020, Iger said he had characterized the future of traditional TV as "very pessimistic" and now believes it's gotten even worse.
Several streaming services, launched during the pandemic as demand for at-home entertainment soared. This supported Disney+ and its other streaming services, but also dealt a blow to Disney's box-office releases, live sports coverage, and its theme parks.
Following that shift, it's clear that linear TV is on a permanent decline as audiences and advertisers move to streaming channels. But Iger's problems don't end there.
Disney's streaming business is predicted to lose roughly $800 million in the quarter that just ended, and the economics of streaming has proven to be dismal thus far nearly across the board. Disney and its legacy peers like Warner Bros. Discovery, Paramount Global, and Comcast as well tech companies like Amazon and Apple are all losing money on streaming, or believed to be.
Even Netflix, the streaming pioneer, though profitable, burned billions in cash annually for years in an effort to build a membership base of more than 200 million that allows it to turn a profit.
And the lack of profits in the streaming industry isn't the only problem. After a boom during the pandemic, subscriber growth has nearly ground to a halt.
At Disney, North American Disney+ subscribers fell by 300,000 in the most recent quarter due in part to a price hike, and its Disney+ core subscriber base, which excludes the Hotstar tie-up in India, rose just 1%, or 600,000, to 104.9 million. Hulu also experienced flat growth, while ESPN+ subscribers rose by a modest 2%, or 400,000, to 25.3 million. Netflix and its peers have also put up similarly middling growth numbers
A business with no growth and wide losses is a recipe for disaster, and that's the conundrum that Iger is trying to solve. One nugget of wisdom from Warren Buffett shows why even Hollywood's most respected chief may not be up to the task.
The Berkshire Hathaway CEO is known for saying, "When a manager with a reputation for brilliance tackles a business with a reputation for bad economics, the reputation of the business remains intact."
What it means for Disney stock
As Buffett observes, for Iger, there's no silver bullet here. The streaming industry has overspent on content and will need a significant correction in order for these companies to generate a profit in online media.
The writers' and actors' strike could hasten progress toward that goal, but the process of balancing spending with revenue in streaming is likely to take years to play out. This is reminiscent of what happened to print publications in the early days of the internet with many decimated by the new media channel.
Disney has an unbeatable trove of intellectual property, and the company should find its way to the other side of this morass. Meanwhile, Iger's contract recently was extended through 2026, showing Disney's board has confidence.
Selling off the traditional TV assets will put even more pressure on the streaming division, and Disney doesn't expect streaming to be profitable until the end of fiscal 2024 or next fall. However, those thinking that the stock is a bargain just because the price is low may have a long wait until it rebounds.
