The COVID-19 pandemic has been terrible for many businesses, but it has been especially bad for Walt Disney (NYSE:DIS). Theme parks are closed, movie theaters have been shuttered, production of TV shows has been halted, and sports broadcasts have been delayed or canceled. In other words, all of the company's business lines have been negatively impacted.
With all the uncertainty and chaos, what can investors expect from the company when this crisis ends? Let's take a closer look at the segments that make up Disney's revenue generators and see if we can find some answers.
Theme parks: Long-term attendance declines likely
Disney's theme parks and experiences segment is its most unique revenue generator. Millions, if not billions of people around the world have had the unique experience of visiting a Disney park in North America, Europe, or Asia. However, for health reasons, the parks have been shuttered until further notice.
First, Disney Shanghai was closed in January, and then additional locations were closed as the virus spread. Disney's cruise ships have ceased to operate, and its retail stores have also closed.
It is unclear when the theme parks will re-open or when its cruise ships will embark again. In reality, it will depend on regional factors, such as how badly the pandemic impacted the local community and the local government's position on restarting the economy. In China, Disney Shanghai has already started to open up stores surrounding the park, but it has kept the actual theme park closed. Hypothetically, we could see Disneyland in California re-open before Disneyland in Paris given the lower infection rate in California vs. other parts of the U.S. and Europe.
Even when Disney's theme parks do re-open, it is a fair question to ask how eager people will be to return. Attendance is likely to be negatively impacted for a prolonged period until people feel safe, and that probably means when an effective treatment for coronavirus is available. It took Disney approximately two years to see attendance fully recover after the Sept. 11, 2001, terrorist attacks. The attacks are very different from the current pandemic, but they had a similar impact on people's willingness to travel and gather in large social settings.
Film division: Production delays will have a cascading effect
Disney's studio entertainment segment has a problem similar to its theme parks. Movie theaters are closed around the world. The real question is whether the film division will ever be able to fully recover, even when the pandemic is under control.
There are real questions regarding the viability of the movie theater business model going forward. Movie theaters have seen stagnant to declining audiences for decades and have raised ticket prices to offset smaller crowds as former regulars opt for other forms of entertainment. The COVID-19 pandemic may end up putting some theater chains out of business entirely. For instance, theater chain AMC is reportedly considering a bankruptcy filing. Fewer screens mean fewer ticket sales and less revenue for Disney's movie studios going forward.
Another issue is that production has been halted for most films and TV shows. Halting production is very expensive because it will take resources to reconstitute the sets and the production teams who were taken off their projects. It will also hold up future release schedules and could result in an uneven film-release schedule over the next few years.
One thing Disney has been able to do is delay releases. For example, the theatrical release of the live-action Mulan film was pushed back from March to July, and the next Indiana Jones movie is being pushed from 2021 to 2022. Disney is also releasing some content directly to its new streaming service, Disney+. Originally slated for a theatrical release, Artemis Fowl will go directly to Disney+ as have the animated films Frozen 2 and Onward (which did get limited theatrical release just before the lockdowns began in earnest).
The ultimate financial impact on the studio entertainment segment is unknown, but it will be large. Like theme parks, movie theaters will probably not re-open right away, and audiences could be slow to return even when they do. It is also possible that the segment may never surpass its 2019 results if theaters close or the medium continues to decline in popularity.
TV broadcasting: Lack of live events has been costly
One would think that stay-at-home orders would be a good thing for Disney's TV broadcasting business, but this segment also faces challenges.
The most acute issue is that a large chunk of Disney's TV business revenue comes from its ESPN sports broadcasting networks. Since all sporting events are canceled or postponed, there are no live sporting events to broadcast. ESPN has resorted to airing reruns of old sports matches, a few new documentaries, and content from the Ocho. Before the pandemic, the network would have broadcast March Madness and the NBA playoffs. It is safe to say that ESPN has lost significant advertising revenue as a result.
The disruption has not been quite as problematic at Disney's other TV networks, which include ABC, Freeform, FX, National Geographic, and Disney Channels. It is still able to run talk shows and the news, which have attracted greater viewing at this time of global crisis. Much of the other programming was pre-recorded months ago, and audiences are OK watching reruns of some of the popular sitcoms.
A more existential problem with the TV segment is the question of whether a recession will accelerate cord-cutting. The number of TV subscribers has already been declining at a fairly steady rate; it is entirely possible that more people will cut their cable bills this year in order to save money due to lost wages. Cable companies pay a portion of their subscriber revenue directly to the cable networks they carry, so fewer cable subscribers are a direct financial hit to Disney. Also, if cable audiences decline, it will put further downward pressure on ratings and the amount of advertising spend those ratings generate, which is also likely to take a hit due to the recession.
Streaming: the one bright spot
The one bright spot in Disney's portfolio is its streaming business. Disney+ was launched in the fall of 2019 as a direct-to-consumer service priced at $6.99 per month. The service is now starting to be introduced internationally and has already been launched in Western Europe, India, Australia, and New Zealand.
Disney+ has seen impressive adoption. In February 2020, the company reported having 28 million subscribers; just two months later, it surpassed 50 million subscribers. Disney+ isn't yet available in many countries, so it should only continue to grow from here.
Disney also has a majority stake in streaming service, Hulu, which has over 30 million subscribers. In addition, it manages ESPN+, a sports-streaming package with nearly 8 million subscribers. ESPN+ had just 2 million subscribers when it launched in 2018, so the growth there has also been encouraging.
Streaming is very much part of Disney's future as it decouples the company's media strategy from movie theaters, which have declining attendance, and cable TV, which has declining subscribers. However, the company's streaming efforts are not yet profitable, so the division will not do much to ease the financial pain being felt in other parts of the business.