When CEO Bob Iger ceded the helm of Walt Disney (DIS 1.19%) to Bob Chapek in early 2020, he went out on a high note. The House of Mouse made box office history in 2019, generating a record-breaking $11.1 billion in worldwide ticket sales. The company also shattered the previously held record for the most movies to surpass $1 billion in worldwide box office in a single year.
Iger also presided over the launch of streaming service Disney+, notching nearly 29 million subscribers in its first three months of operation. Disney closed out fiscal 2019 (ended Sep. 28, 2019) with revenue that grew by $10 billion or 17%.
When Iger took back the reins in late 2022, he returned to a very different company. In the wake of a global pandemic, theater closures, and the worst economic downturn in over a decade, Disney was a company in free fall. The once-booming business had slowed to a crawl, and the stock had fallen more than 44% from its peak.
Iger was brought back in hopes that his Midas touch could restore Disney to its former glory. But the veteran has recently announced three moves that could backfire and spell trouble for the storied company.
Image source: Disney.
1. Selling a partial stake in ESPN
Last month, Iger said Disney was considering selling an equity stake in ESPN, one of Disney's most reliable moneymakers. In an interview on CNBC, the chief executive spelled out his reasoning:
The challenges are greater than I had anticipated. The disruption of the traditional TV business is most notable. If anything, the disruption of that business has happened to a greater extent than even I was aware.
Iger said he's considering "strategic partners that could either help us with distribution or content," aiming to transition ESPN to a direct-to-consumer (DTC) network. The company has reportedly held initial talks with several major sports leagues, including the National Basketball Association (NBA), National Football League (NFL), and Major League Baseball (MLB).
The rise of streaming services and the secular decline of cable have weighed on ESPN. The cable sports network is still a cash cow for Disney, but at risk of becoming irrelevant. For the nine months ended July 1, Disney's linear network segment still brought in nearly $5 billion in operating income -- nearly half the company total -- but that was down 27% year over year.
There may not be an easy answer to the ESPN conundrum. In the first quarter, the major pay-TV providers, including cable and satellite, shed more than 2.2 million subscribers, more than in any previous quarter, according to data compiled by Leichtman Research. This secular trend will only get worse, but Iger is putting $5 billion in profits at risk.
2. Price hikes for Disney+, Hulu, and ESPN+
To bring its streaming platforms closer to profitability, Disney announced plans to increase the price of the company's streaming offerings.
Effective Oct. 12, Disney+ with no ads will increase to $13.99 monthly from $10.99, up 27%. Hulu without ads will jump to $17.99 monthly from $14.99, up 20%. The company is also introducing an ad-free bundle that includes Disney+ and Hulu, a combination previously not available, for $19.99 per month.
The move comes at a curious time since Disney is losing viewers hand over fist. While subs at Hulu were essentially flat year over year, Disney+ lost nearly 12 million subscribers over the past year although subscriber losses in the U.S. clocked in at just 1%. If some viewers were unwilling to pay up for its streaming services at a lower cost, these price hikes will likely accelerate customer defections.
Iger should take a lesson from Netflix, which learned its lesson about price hikes the hard way. In early 2022, the company raised subscription prices, marking the sixth increase in seven years for its standard plan. In the quarters that followed, Netflix reported subscriber losses for the first time in a decade, shedding nearly 1.2 million paying customers. It probably isn't a coincidence that this happened right after the price increases.
This is a lesson Iger should take to heart.
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Key Data Points
3. A password-sharing crackdown
On the conference call to discuss the results of Disney's fiscal 2023 third quarter (ended July 1), Iger announced he was instituting a password-sharing crackdown, saying, "Later this year, we will begin to update our subscriber agreements with additional terms on our sharing policies, and we will roll out tactics to drive monetization sometime in 2024."
Iger has good reason to believe this plan will work. Netflix announced that it added nearly 6 million subscribers in the second quarter, up from 1.75 million in Q2. Much of the increase was attributed to the company's paid-sharing plan, which allowed those sharing their password to pay up for users not living in their households.
While that seems great in theory, Disney is operating from a position of weakness, with another price increase on the way and fading subscriber numbers. Some in Disney's audience might cancel their subscription rather than paying an even higher cost.
Risky gambits
To be clear, Bob Iger has a stellar track record of making brilliant business decisions. In this case, however, it isn't clear if these moves are genius or merely downright risky.
As a longtime Disney shareholder, I'm willing to give Iger the benefit of the doubt -- he's earned it. But investors should be watching very closely to see if this trifecta of plans has the desired effect or lands Disney in hot water.
