Disney (DIS -0.55%) is the 800-pound gorilla of the media sector, with a collection of assets that are, to understate things, uniquely impressive. That alone might tempt investors to buy the stock now that it has fallen around 45% from its 2021 peak. But there's a lot more going on here than meets the eye, and one problem, in particular, will probably be particularly tough to solve.
Passing the baton
Disney recently introduced a new CEO, Bob Iger. Anyone who knows Disney at all knows that he was the CEO until a few years ago when he handed off the reins to Bob Chapek. Chapek was hand-picked by Iger, but his tenure as CEO was difficult. There was a timing issue because he took over just before the coronavirus pandemic led to the closure of non-essential businesses. But there were also self-imposed mistakes that resulted in the board of directors losing faith in his leadership and patrons of the company's amusement parks effectively blaming him directly for rides that had temporarily broken down.
Image source: Getty Images.
The easy answer was to bring back the previous CEO, the much-loved Bob Iger. And that's exactly what Disney's board did, with the expectation that he would again try to find his own replacement. Although Iger didn't exactly change everything, he has been fairly clear that creative types would be leading the media company's story with him at the helm. That's the good news, and there is probably a lot that this directional shift can achieve.
The longer-term problem, however, is that one of the company's most important media industry businesses isn't going to be simple to get back on track. Actually, you could argue, it will be a challenge to get on track at all.
Streaming troubles
The problem child that will likely be most vexing for Iger is Disney+ and the company's other streaming businesses. Disney has grown its subscriber base very quickly, but in fiscal 2022 the division, dubbed direct-to-consumer, lost $4 billion. That red ink is largely being driven by content creation costs.
Luckily, Disney's old-school media operations, such as its cable channels, are quite profitable and made more than enough to offset the streaming hit. And then there's the fact that the parks are open, and movie theaters are drawing sizable crowds again, and there's no particular reason to think streaming is a make-or-break issue right now.
Longer term, this is a business that Disney needs to get right if it wants to retain its place among the media industry's leading names.
To be fair, Disney isn't alone in dealing with shockingly high expenses in the streaming space. Netflix (NFLX -0.08%), arguably the leader in the business, breaks out the "cost of revenue" (basically content) from marketing, technology, and administrative costs on its financial statements. In fiscal year 2022, it spent roughly $19 billion on "cost of revenue." The company as a whole was profitable, but content alone ate up roughly 60% of revenue.
For comparison purposes, Disney had an income of roughly $19.6 billion in its direct-to-consumer division in fiscal 2022 with a loss of roughly $4 billion, so it probably spent in the same ballpark as Netflix, if not more. That's a huge ongoing expense and is really no different from the story at Amazon (AMZN 1.49%) with its Prime streaming business. Amazon intertwines technology and content to create a nearly $41 billion cost center through the first nine months of 2022.
Simply put, it costs a lot of money to make video content that subscribers want to pay to watch. This problem isn't going away for Disney or any of its closest peers in the streaming space. The easy fix is to raise the price of a subscription, which is a trend that's taking shape. However, there are competitive issues when you do so since financially stretched consumers could eventually pick between the services instead of paying for multiple services.
At the other end of the spectrum is cost cutting, which also makes sense. However, cut too deeply, and Disney's streaming offering may not match its peers. Creating less content also increases the risk that a single show that just doesn't resonate with consumers hurts the business in a very big way. So neither of these two obvious directions is a clear win.
Still, Iger has to do something because bleeding red ink in the streaming division is not a viable long-term strategy. That's particularly notable because streaming is increasingly becoming the choice over traditional media such as cable.
A Disney/Not Disney Problem
In Iger's defense, the cost of content in the streaming space is not unique to Disney. However, that doesn't change the fact that he has to deal with it if he wants to get the company back into Wall Street's good graces again. There's no easy fix, but this is one division that investors need to be watching very closely as they judge Iger's success.
