- After a run of acquisitions during his first tour as Disney CEO, Bob Iger is looking to shrink the company.
- He’s looking to Disney’s IP-driven parks, streaming, and film studios to drive growth.
- Here’s how a smaller Disney could work and what the pitfalls are to his streamlining strategy.
A year after returning to Disney for his second tour as CEO, Bob Iger has begun to lay out his plan for the media giant: He’s put a for-sale sign on its TV group, which includes ABC and cable networks like FX and National Geographic. Iger has also said he’s seeking content or distribution partners to help ESPN go direct to consumer.
“Moving forward, I believe three businesses will drive the greatest growth and value creation over the next five years,” he said on the company’s August 9 earnings call. “They are our film studios, our parks business, and streaming, all of which are inextricably linked to our brands and franchises.”
Wall Street has pushed for Disney to get smaller ever since Iger returned for his second tour as CEO in November. Wells Fargo analyst Steven Cahall made the case for Disney to spin off ESPN and ABC in December, and on the August earnings call, MoffettNathanson’s Michael Nathanson floated the idea of splitting Disney into two companies — with one centered on parks, consumer products, Disney+, and the studio IP that drives that flywheel, and another housing everything else.
For years, the conventional wisdom has been that media companies need to bulk up to compete with the likes of Google and Netflix. It’s why Warner Bros. sold to Discovery and why there are constant rumors that a Warner Bros. Discovery and Comcast merger will be next. Iger’s first tour as CEO was defined by the big acquisitions he made, scooping up Marvel, Pixar, and more, moves that helped quintuple the company’s market cap.
But a lot of the drivers that were supposed to propel big media aren’t panning out. Streaming is bleeding red ink, the box office (Barbenheimer aside) is weak, and the ad market is soft, and the twin Hollywood strikes that have paralyzed production are dampening optimism and deal flow across the industry. Meanwhile, Wall Street is pouring on the pressure for streaming to get profitable. Disney’s share price has fallen more than half from its peak, to below $90.
Some think that by dumping the networks, Iger’s endgame is to strip down Disney to the parts that would be most attractive to a seller — with Apple seen by analysts as the most obvious acquirer, particularly for an asset like ESPN.
But stripping down Disney isn’t so simple, and Iger doesn’t have the goodwill he once boasted on Wall Street (as well as inside the company, where people were caught off guard and demoralized by sale talk and layoffs earlier this year). He hasn’t laid out the specifics investors want, and there are too many uncertainties about how the future will play out.
“It used to be, every time Bob Iger got on the line, everything was OK again,” Macquarie analyst Tim Nollen told Insider. “Now with the state of the TV industry, everything is not OK. It’s not as easy a company to manage.”
Here’s the opportunity top industry analysts see for a leaner Disney and where the streamlining strategy could go wrong.
Selling the TV networks to focus on growth businesses
In theory, selling its linear TV business would free up cash and energy to let Disney focus on theme parks and experiences and the studios whose IP feeds them.
To Doug Shapiro, a senior advisor at BCG and former strategy head at Turner Broadcasting System, getting rid of declining businesses can free management of distractions to drill down on the growth parts of the business.
Disney’s parks and IP businesses enjoy scarcity that makes them valuable, and in a time of content overload, the company’s beloved franchise-driven output can become more valuable as people gravitate to the familiar, he told Insider. Shapiro thinks Disney could find new ways to monetize its franchises, through tech like NFTs, the metaverse, and Apple’s Vision Pro headset (which Disney is already developing for) that give people new ways to experience them.
But new business lines come with risks, and selling the networks may not be simple or as lucrative as Disney and Wall Street might hope. As non-growth businesses, Disney’s TV networks, which account for about a third of its revenue, might not get the price Disney wants.
It’ll also be tough to disentangle them from the rest of the company. Linear content like FX feeds Hulu, for example, and ABC and ESPN benefit from each other in negotiating for sports rights and selling ads.
Iger said on the earnings call that any sale of the TV networks would seek to ensure Disney continues to get content to fuel its streaming business, while acknowledging there’s “obviously complexity” when it comes to separating ESPN from the linear TV business. While it’s true that Disney could work out an arrangement with a buyer to keep content flowing to its streamers, that could come at the expense of the sale price, Shapiro told Insider.
Finding a partner and new revenue streams for ESPN
Speaking of ESPN, which has gone from one of Disney’s most profitable businesses to one of its most problematic, its fate is even more uncertain — with partnerships, growth, and even a sale on the table.
Iger said he’s in discussions with potential partners to help ESPN go DTC. And after saying during his previous tenure that he didn’t want to associate family-friendly Disney with gambling, he just struck a $2 billion deal with second-tier betting company Penn Entertainment to benefit from the explosion of sports betting, a sign to some of how desperate Disney’s become.
It’s a low-risk way for Disney to get into online gambling, but in a hyper-competitive industry, Penn has to differentiate its app and attract significant share as new markets open up to pay off for ESPN, said Joel Simkins, managing director covering gaming at Houlihan Lokey’s Global Technology Group.
More important, ESPN needs scale, and fast, to offset the high fixed costs of sports rights and help it drive advertising revenue as it shifts to a DTC model, Stratechery’s Ben Thompson wrote in an August 16 analysis. Thompson suggested the most obvious partners to help Disney do that are the big tech companies, with their control of phones and TV set top boxes; Roku; and cable providers that could distribute a DTC ESPN.
But gaming revenue won’t offset the higher sports licensing fees and declining revenue ESPN will face as it makes that transition to streaming, LightShed Partners wrote Aug. 17.
Another solution is to sell ESPN. While Iger has said he wants to maintain control of the network, his comments about seeking options for Disney’s core assets have led to analyst speculation that Apple could buy ESPN to fuel its Apple TV+ service, which has added live sports to its offering. (Not only would Wall Street approve, there’s cultural history behind such thinking — Iger himself mused in his memoir about combining Disney with Apple.)
Building streaming into a profitable business
Disney and other legacy media giants shoveled their content onto streaming services, in the rush to copy Netflix, hastening the demise of the cable bundle. The problem is that streaming hasn’t made up for cable’s decline; Disney has lost more than $10 billion in its DTC business, although those losses have narrowed, to $512 million in the third quarter.
Disney has promised to make streaming profitable by the end of its 2024 fiscal year. With the ability to produce hits and international awareness, it’s in a good position to have one of a handful of must-have streamers. But to get to streaming profitability, Disney has to grow both users and revenue while also keeping churn down — all operational and marketing challenges that are somewhat in conflict with one another. Flagship streamer Disney+ just lost domestic subscribers for the second quarter in a row.
So Disney is following the Netflix playbook by cracking down on password sharing and hiking the price of its ad-free tiers to push people to its ad-supported product — which has the most potential to scale and can reduce churn by keeping the subscription price low. Come October, it’ll cost $13.99 a month to get Disney+ without ads, twice what the service launched at in 2019. The ads tier, meanwhile, will remain at $7.99 a month.
Netflix’s experience has been encouraging; Netflix with Ads has generated more revenue per user than its standard ad-free tier, and signups soared after the password crackdown took effect. Fully 43% of Disney+ sign-ups in the second quarter of 2023 were to ad-supported plans, subscription-measurement firm Antenna reported.
Still, the ad-tier subscriber base for both services remains too small to be a meaningful advertiser buy — yet. Streamers have looked to tap new audiences by expanding internationally, but to do that they’ll have to invest heavily in local-language content, which is costly; and revenue per user is generally lower outside the US. Iger has already said Disney would be more selective about which overseas markets it prioritizes.
2024 will bring some clarity to Disney’s streaming business. That’s when the company is expected to acquire Comcast’s minority share of Hulu, which some analysts believe could help Disney’s streaming business from a content, marketing, and ad revenue perspective.
Iger has affirmed he’s committed to fully owning Hulu. On the other hand, rather than pay the minimum $9 billion for Comcast’s stake, some analysts have argued, Disney might be better off offloading Hulu than doubling down on the costly battle of trying to match Netflix in streaming.
Disney’s interim CFO Kevin Lansberry said on the August earnings call that Disney is well set up to do the deal, with $11.5 billion of cash, about $10.5 billion in debt instruments, plus future cash flow.
In short, there are a lot of questions about how Disney will get to that streamlined place.
“I’m not at all negative on Disney succeeding in the long run,” Nollen said. “The streaming business with ESPN going direct to consumer can generate a lot of subscriptions and hopefully be a positive earnings contributor. And a strong parks and consumer business fueling it, that’s a pretty powerful combination. But there’s a lot of uncertainty.”
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