Kudos to Walt Disney (DIS +0.30%). The company topped last quarter's earnings estimates, and then told investors everything they wanted to hear during last Wednesday evening's earnings call. Shares soared to the tune of 11% the next day. The market is cheering what could be considered the beginning of a much-needed turnaround.
Just don't be too quick to jump on the bullish bandwagon. Disney CEO Bob Iger seems to know what's wrong, but fixing these problems is easier said than done. He doesn't have a whole lot of time to fix these issues either. Activist investor Nelson Peltz is still putting pressure on Iger, and if the market doesn't see results soon enough, shareholders may renew their revolt.
To this end, here are the top three things Walt Disney needs to fix -- and fast.
1. Streaming needs to balance marketability with profitability
Walt Disney did make bottom-line progress with its direct-to-consumer services last quarter. All told, streaming revenue grew from $4.8 billion to $5.5 billion, while the operating loss dropped from just over $1 billion down to $138 million. The trend could push the operation out of the red and into the black in the very near future.
But there are a couple of footnotes worth reading here regarding those results. The profit-growth trend may not be sustainable simply because Disney's streaming subscriber growth has hit a wall. While Hulu and Disney+ Hotstar saw slight customer growth last quarter, both the international and domestic version of Disney+ lost even more customers.
Although no longer counted as part of its direct-to-consumer arm (it's now in Disney's "Sports" division), ESPN+ also lost subscribers during the three-month stretch ended in December, underscoring the challenge of keeping paying customers interested in a highly competitive streaming market.
Data source: Walt Disney. Chart by author. Figures are in millions.
And the other footnote? Keep in mind that while Hollywood's writer strike may be over, the impact of it lingers. The media giant spent much less on content and production last quarter than it might have otherwise. With less money going out, the bottom line looks bigger.
It's a double-edged sword, of course. Spending less on films and shows saves money, but a lack of new films and shows may be a big part of the reason Disney's streaming subscriber growth has been anemic for a couple of quarters now. To rekindle customer growth, it may need to ramp up its spending again, dragging its profitability down again.
2. Disney's studios need fewer duds and more blockbusters
Obviously, a film studio only wants to make hits and not waste time -- or money -- filming flops. However, this is easier said than done. Just take last quarter's release of The Marvels and Wish as an example. Disney had high hopes for both, yet when all was said and done Disney Studios lost $224 million after both movies failed to resonate with audiences.
The thing is, last quarter's weak box office sales aren't exactly a new phenomenon. The entirety of last year was subpar for Disney's movie studios even if better than 2022's box office take.
Data source: The Numbers. Chart by author. Figures are in millions.
There's important context to add here. The company is making fewer movies than before the COVID-19 pandemic took hold. Before 2020, it wasn't unheard of for Disney to release 20 or more films in a single year. Last year, it only made 12 movies, topping 2022's count of nine. It's giving itself fewer chances to cash in on a blockbuster.
Nevertheless, it's a studio's job to come up with quantity as well as quality at a total cost that makes sense. Underscoring Disney's struggle to find this balance is the fact that even with hits like Black Panther: Wakanda Forever and Avatar: The Way of Water, Disney's movie business didn't even quite break for the calendar fourth quarter of 2022.
In retrospect, it's arguable that the studio became too reliant on splashy franchises like Star Wars and The Avengers.
3. Disney needs to be decisive about ESPN, and soon
Last but not least, Iger needs to start making some bold decisions about what's next for Disney's sports-centric cable channel ESPN. And he can't wait much longer.
Simply put, the ESPN brand is losing value. In 2014, Forbes estimated the sports channel was worth on the order of $50 billion, were Disney interested in selling it. Bank of America now indicates it's only worth $24 billion to a potential suitor. And interestingly, Disney has been shopping pieces of ESPN around.
It's reportedly been in discussions with several professional sports leagues for months now, testing the waters of selling stakes that would make these leagues part-owners in addition to being partners. So far, no league has taken Disney up on the offer that most any of them would have snapped up a decade ago.
What gives? A cord-cutting movement that's already claimed over 25 million now-former U.S. cable customers during that time is certainly one culprit.
It would be naïve, however, to not also point out that overall interest in sports is just waning. Professional leagues have a big enough challenge ahead in reviving this interest. They're not likely interested in taking on the additional risk and headache of co-owning a stagnant sports cable channel.
This argument bears out in the numbers. Despite the gradual resumption of professional sports since the pandemic, Disney's sports business isn't driving much more revenue or generating much more operating income now than it was two years ago.
Data source: Walt Disney. Chart by author. Figures are in millions.
Disney is responding. It's planning to launch a stand-alone streaming version of ESPN in the latter half of next year, for example, and in the meantime will co-launch a sports-fan-friendly streaming bundle that includes Fox's cable channels FOX, FS1, and FS2 as well as Warner Bros. Discovery's TNT and TBS. Of course, the package also includes Disney's ESPN, ESPN+, and more. These moves might rekindle the sports-media brand's growth.
The launch of these platforms, however, will also test Disney's already-tenuous, sometimes-contentious relationship with cable companies, as they will now be forced to directly compete many of their content providers.
Cable TV platforms may well decide to drop ESPN (and other cable channels) from their lineups altogether so they can dial back their programming costs, and perhaps even lower their prices. That's a potential problem for Disney simply because most of ESPN's revenue still comes from cable carriage fees, and there's no assurance that every future cord-cutter will sign up for either of these two sports-minded alternatives.
Indeed, many of them likely won't. Although live sports may be the most-cited reason cable customers stick with their service, numbers from CableTV.com indicate that only about 20% of cable customers name it as the top reason they're not cutting the cord. That's not a huge proportion of the 72 million U.S. residents Leichtman Research Group says are still paying for cable. The remainder may only be marginally interested in paying for ESPN if given the choice.
Many consumers may even find themselves overwhelmed -- perhaps even frustrated -- by all the different ways they'll be able to purchase access to the sports channel.
It's a complicated matter to be sure. Iger and his team will want to proceed carefully, perhaps with a less spaghetti-on-the-wall, everything-but-the-kitchen-sink approach. Walt Disney will also want to move faster on this front. You can bet other sports-centric television alliances are already in the works while ESPN's reach, stature, and value all continue to deteriorate.
Disney stock is, of course, a tough one to own until these three challenges start getting clearly sorted out.
