The Disney (DIS 0.04%) that investors know and love today could look considerably different in the future. That's the hint CEO Bob Iger dropped on Thursday anyway, speaking to CNBC's David Faber at Allen & Co.'s annual media and technology investor conference. Specifically, the company may put some or all of its linear television networks like ABC, The Disney Channel, National Geographic, and FX, up for sale, with Iger suggesting "they may not be core to Disney." As for ESPN, the company's looking for a strategic partner.
Fair enough. No one knows the inner workings of a corporation quite as well as its chief executive. It's his call to make regarding what pieces of the company stay or go.
The prospect raises a key question though: Just how "non-core" is the television operation to Disney? Let's just say Iger might want to rethink the prospect of a sale, or at least clarify his comments.
Breaking down Walt Disney's business
First, take Iger's comments with a grain of salt. Sometimes, CEOs say things that only partially reflect an idea that's being half-entertained by their organization. They're not always referring to actual plans, and the ideas may never be put into action.
On the other hand, Iger talked extensively about his concern with Disney's television efforts, adding:
The creativity and content they create is core to Disney, but the distribution model, the business model that forms the underpinning of that business, and that has delivered great profits over the years, is definitely broken. And we have to call it like it is. That's part of the transformative work that we're doing.
Those aren't the words of a man who hasn't given the matter much thought.
But linear television is actually tied for first place among Disney's businesses in terms of revenue generation, and is nearly its biggest in terms of operating income. Linear TV out-earns streaming, films, and branded products, and it can give the theme parks unit the occasional run for its money on profitability. In fact, the company's domestic TV arm alone accounts for roughly a third of the company's usual operating income, led by ABC and ESPN.
The graphic below puts things in perspective, laying out each business's top and bottom lines through the first six months of fiscal 2023 (which has been a fairly typical year so far).
Data source: Walt Disney Corporation's fiscal 2023 Q1 and Q2 earnings reports. Chart by author.
Linear TV (domestic and international channels) made up 43% of the company's operating income for the period, so if TV isn't core to the company, then what is?
It's complicated
It's not easy to say what's really going on in Iger's head, mostly because Disney as a company is more complicated than it seems to be on the surface.
Take Marvel as an example. The comic book brand's history is legendary, and Disney's 2009 acquisition of it was savvy in that it brought lots of highly marketable superheroes into the fold. This intellectual property hasn't always been used quite as wisely as it could have been, however.
As Iger pointed out in his interview with Faber, writing stories for these characters works well on the big screen, but things change when they're appearing in an episodic series created for Disney+ or for linear television. To this end, Disney's chief executive wants to dial back the company's total output of Marvel content, as well as its Star Wars content, which has faced similar dilutive challenges; some Marvel content also airs on cable.
And yet, Marvel and Star Wars are arguably the biggest draws to the company's still-unprofitable streaming platform. Reducing the volume of new content available could sap the appeal of its Disney+ streaming service in an environment where consumers are already overwhelmed with a surplus of choices and soaring costs.
Then, there are consumer products like toys and games. Although they don't drive a great deal of Disney's revenue at 5.6% of the top line, they're highly profitable and account for an outsized 21.4% of Disney's total operating profit. Without television and movie content featuring these characters -- think Grogu (aka "baby Yoda") from The Mandalorian or any Marvel hero -- there's likely to be less demand for toys, games, and other Disney-branded consumer goods.
Other complexities: Disney doesn't fully own streaming service Hulu. It co-owns it with Comcast, and Hulu features a heck of a lot of content from ABC's vault. Disney doesn't own the entirety of ESPN either. Hearst Communications quietly owns 20% of the powerhouse sports channel. It will have some say in the matter of the network's future as well.
In short, Disney's a complicated business with a lot of interrelated moving parts. Removing some or all of its TV channels would have impacts across the entire operation.
More to worry about than to like (for now, anyway)
Iger, of course, knows that selling cable channels, the ABC network, or even the company's entire TV business wouldn't be a simple matter. He floated the idea anyway, knowing it would raise all the questions it has already raised.
And that's perhaps the biggest red flag of all for current or prospective shareholders. One has to wonder if this ultimately was a subtle hint that Disney needs to raise some cash. The company's already sitting on $49 billion of debt, yet its trailing-12-month net income was just $4.1 billion due to some major investments in its loss-making streaming business. That's not exactly a reasonable balance of debt versus profits.
Or, perhaps he's trying to position flagship ESPN to a paying partner while there's still a hefty value to it. It may be the market's top sports channel, but it's losing viewership in step with the broad cord-cutting movement. Indeed, without offering any other details on the matter, Iger told Faber he has a time frame in mind for when ESPN might become a stand-alone streaming product. That effectively starts the clock on its transition from being a cable-centric product -- assuming a strategic partner wants the same.
Bottom line? Given all the unknowns and uncertainties, Disney stock may be best avoided for now, while the company figures out what it wants to be. It might eventually navigate its way back to its former greatness. In the meantime, though, it's just too much of a transformation project.
