Disney’s stock price hit a nine-year low when it fell below $84 last week which comfortably put it behind Netflix in the ranking of the world’s biggest media companies, but it shouldn’t have come as a surprise.
Over the past few years dark clouds have gathered over two of Disney’s biggest cash cows — its theme park division and Marvel Studios.
During the peak summer season this year, social media was awash with reports of how quiet it was at Walt Disney World in Orlando, Florida. There was so much chatter that CNBC asked Disney’s chief executive Bob Iger about the low crowds which he claimed were due to the high temperatures in the sunshine state.
It wasn’t a one-off as earlier this month Disney announced that “decreases in occupied room nights and attendance” at its Orlando outpost during the third quarter of 2023 was partly responsible for a reduction in operating income across its entire domestic park operations.
The lack of business at Marvel Studios is equally noticeable. It kicked off the year with Ant-Man and the Wasp: Quantumania which grossed less at the box office than almost every other Marvel Studios movie with its takings coming to just $476.1 million. Half of this was retained by theaters with the remainder going to Disney. It was barely enough to cover the pre-production and filming of the movie which came to $193.2 million as we revealed.
The sci-fi flick is set in an alien world, so it is set to have a punchy post-production bill. It didn’t do the trick as the film was derided for having sub-standard visual effects. This contributed to it earning the unfortunate milestone of being Marvel’s lowest-rated sequel on Rotten Tomatoes with a critics score of just 46%.
Its score was low but not as low as the one for the latest instalment in the inter-connected Marvel Cinematic Universe. This came in July when the finale of Secret Invasion scored just 7% on Rotten Tomatoes making it the single lowest-rated episode of any Marvel streaming series.
Secret Invasion cost a staggering $211.6 million to make as its blockbuster budget was born in the days of the pandemic when the world was stuck indoors craving new streaming content. Disney was desperate to add new shows to its platform in a bid to attract more subscribers than its rivals and no expense was spared.
As Disney’s subscriber numbers soared past its initial projections so too did its stock price, hitting a high of $203 in March 2021. The markets endorsed Disney’s strategy, and this set the company up for a fall. It was inevitable that the pandemic would come to an end and in turn, the appetite for streaming would diminish.
It looks like Marvel didn’t see the writing on the wall because as the world began to come out of lockdown, it was commissioning a glut of costly streaming shows, and it is now literally paying the price. Its bloated pipeline puts more pressure on visual effects teams and increases the chance that the end result may not be up to scratch. Testimony to this, Secret Invasion debuted to the second-lowest audience of any Marvel streaming series with just 994,000 viewers tuning in over its first five days according to media analysts Samba TV.
More fundamentally, putting its chips on streaming placed Disney in direct competition with theater chains which are its clients. So the financial gains from streaming come at the expense of revenue from exhibitors.
It’s a particularly pronounced problem as subscribers to the Disney+ streaming platform don’t just get access to all of the studio’s back catalogue but also any new content released during their subscription period. Previously, customers had to pay theaters multiple times to see different movies released by the same studio but one streaming subscription is all it takes now.
This wouldn’t be such a problem if Disney+ had been a profit center but it has been loss-making since it launched in 2019. In Disney’s latest quarterly results, streaming losses hit $512 million and the platform isn’t expected to be in the black until 2024. Addressing this challenge is one of the reasons that Disney asked Iger to cut short his retirement and return to the helm of the company in November last year.
In line with the times, Iger soon signaled a shift towards releasing more new content theatrically rather than streaming it. That was just the start.
He then cut 7,000 jobs and saved $5.5 billion of costs. In February, Iger explained that Disney needs to “reduce costs on everything that we make because, while we’re extremely proud of what’s on the screen, it’s gotten to a point where it’s extraordinarily expensive.”
It prompted Marvel Studios president Kevin Feige to say that “the pace at which we’re putting out the Disney+ shows will change so they can each get a chance to shine.” He added that this means both having more time between projects and putting out fewer each year. Some shows still managed to slip through the net.
Marvel’s upcoming streaming slate includes series based on B-List spinoff characters called Echo and Ironheart. That doesn’t sound like something from a studio that is trimming the fat. If Marvel had scrapped these shows and got a tax write-off it might perhaps not have needed to cut so many jobs.
What’s more, Marvel is still persisting with its inter-connected storylines despite lukewarm receptions to several key instalments, chief of which is Quantumania as it introduced the villain for the Marvel’s upcoming team-up movies. It doesn’t bode well for them given how low the turn-out was for Quantumania.
Inter-connected storytelling across multiple movies is no longer groundbreaking, it’s egotistical world-building for the sake of it. Flogging this horse isn’t just expensive, it’s self-defeating as it means that if viewers miss one movie they might not watch future instalments for fear of not understanding them.
Marvel appears to be well into the third stage of what can be summarized as the Three I’s – Innovation, Institutionalization and Iteration.
Its early movies innovated by grounding their characters in the real world. They dispensed with typical superhero tropes like secret identities and gaudy costumes. Further challenging conventions, Marvel hired a heavyweight cast including Scarlett Johansson and Robert Downey Jr. The studio didn’t even cut corners on voice work with Britain’s Paul Bettany playing an artificial intelligence program.
The movies were a hit with adults as they treated cherished characters from their childhood seriously. In turn, this enabled parents to enjoy the movies with their own children thereby fueling the Marvel Studios machine.
When 2012 team-up movie The Avengers became the first Marvel Studios movie to cross the $1 billion mark, the franchise gained even more importance to Disney. It began a process of institutionalization leading to movies based on characters who appeal to a diverse range of groups to maximize takings.
The past five years alone have seen it introduce Chinese superheroes in Shang-Chi, a deaf superhero in Eternals and a British librarian with the split personality of an American adventurer who moonlights as an Arabic-inspired anti-hero played by Oscar Isaac. It certainly represents a diverse cross-section of society.
Covering all bases means directly targeting kids which is why 20 year-old Iman Vellani took the role of Marvel’s first Muslim superhero Ms. Marvel last year and a young Avengers team is even understood to be on the horizon.
This preponderance of productions shows that Marvel has moved into the third stage of the process which is iterating its format to wring as much money out of it as possible. However, in so doing, it has forgotten that a lot of the hype around the original Star Wars trilogy was fueled by fans having to wait years for the next instalment. The same was true with the original Marvel movies but there are now so many that even devoted fans struggle to keep up with them all. The more movies there are, the more Marvel needs to mine its more fantastical storylines to come up with new plots and the less believable they become. It’s a vicious circle.
Feige, not Iger, is the architect of this model and whilst it was once Disney’s crown jewel, that shine has long since worn off. Marvel doesn’t seem to have moved with the times as the recent ‘Barbenheimer’ phenomenon showed that post-pandemic audiences don’t want more of the same, they want something different.
In a similar way, Disney’s theme park model seems to be stuck in the past. It dates back to the peak of the pandemic when all of Disney’s parks were shuttered. The Mouse used the opportunity to refurbish attractions which were difficult to take out of service when the gates were open. It also carried out a root and branch analysis of how to extract even more money out of visitors and started to implement the changes when the gates swung open again.
Daily housekeeping was dropped at Disney World’s on-site hotels whilst the previously-free wristbands that serve as combination room keys and park passes were priced at $34.99. The brakes were even put on the parking lot trams which generated so many guest complaints that it reached late-night television with Stephen Colbert mocking Disney for not providing the service.
Benefits were even cut from the most expensive annual passes which cost $1,399 and previously included free downloads of photos taken by Disney photographers during meet-and-greets and rides. In 2021, Disney started charging extra for the downloads and even stopped selling annual passes for a period of time. That may sound like a contrarian strategy for a company trying to make more money but it actually reveals how deep Disney’s analysis went.
Annual pass holders are typically locals who visit the parks frequently to hang out. They ride fewer attractions and buy less in the restaurants and shops than typical vacation guests because they live locally. In short, they take up capacity that might otherwise be used by bigger-spending out-of-state visitors so Disney put a cap on them by ceasing the sale of annual passes.
Unsurprisingly, it also raised the prices of standard tickets, hotel rooms, food and merchandise as inflation climbed to record levels in the US. Disney’s trademark Mouse ears reportedly rose 33% to $39.99 whilst the most expensive single-day ticket to Disneyland in California increased 44% to $179 over the five years to 2022.
The theory is that the people who were prepared to travel to a theme park during the pandemic would pay a premium to do so and they were flush with furlough cash so they could afford it. It transformed the positioning of the parks from regular vacation destinations to luxury experiences which customers had to jump through hoops to visit.
The clearest example of this came with the removal of the free Fastpass system which gave guests a specific time to return to rides and cut the queues. At Disneyland and Disney World this was replaced with a smartphone-app called Genie. The basic version is free but guests have to pay to upgrade to Genie+ and then book Lightning Lanes for rides to skip the standby queues which can last for hours.
Genie+ pricing varies and rises up to $29 per guest per day on top of the admission ticket. Certain headline attractions are not even part of Genie+ so Lightning Lane access at those attractions requires an additional purchase which varies in price from $10 to $15.
Then comes the fact that Lightning Lane booking window opens at 7am and sells out fast so guests have to be up at the crack of dawn just to secure their place on their favorite rides. It doesn’t stop there.
Before the pandemic, guests could ‘hop’ from one Disney World park to another as many times as they wanted each day. However, since they re-opened from lockdown, guests have had to reserve their choice of park in advance and could only hop from one to another from 2pm.
In summary, the free and simple Fastpass system has been replaced with one which is complex, costly and time consuming. Even annual passholders paying more than $1,000 can’t drop by any time they want. It’s far from a fairytale for guests and the added stress has led to fights repeatedly breaking out in the parks.
Ostensibly, Disney introduced the system to control crowds during the pandemic but it also reflected a policy shift to fewer guests paying more rather than more guests paying less.
As recently as the first quarter of this year, attendance at Disney World during peak holiday weeks was still capped at nearly 20% below pre-pandemic levels, which the company said improves the guest experience. Revenue at its Parks, Experiences, and Products division rose 21% to $8.7 billion in the quarter and Disney said that the guest spending growth was due to an increase in average per capita ticket revenue driven by Genie+ and Lightning Lane.
Although guests hate this new model, the Street loved the incremental payments that come with it and this is another reason why Disney’s stock soared. However, this actually set Disney up for a fall just as it did when its stock surged on its decision to place its chips on streaming.
It was inevitable that consumers wouldn’t be able to afford the park prices in the long term so attendance would wane. Genie+ and Lightning Lane are great ways of generating revenue in a bull market but when things turn bearish they look like a liability. Given the huge sums that the US government paid out during the pandemic it was crystal clear that inflation would rise and there would be a risk of recession so Genie+ and Lightning Lane weren’t perhaps as smart as they seemed.
Iger wasn’t even Disney’s CEO when they were launched. They were introduced to the world by Josh D’Amaro, chairman of Disney Parks, Experiences and Products. Famous for his sparkling toothy grin, D’Amaro is a regular visitor to the parks and is often stopped for selfies with guests and staff, who are known as Cast Members due to the role they play in a themed environment. D’Amaro himself has 151,000 followers on Instagram, where he posts pictures of himself inside the parks alongside Cast Members, riding roller coasters, brandishing lightsabers and eating soft-serve.
When Genie was announced in 2021, D’Amaro gushed that it “will materially improve the guest experience. What our guests have asked for and what our fans have asked for is simplicity, to be able to plan easier, with more flexibility and this is what we are going to deliver.”
Things worked out somewhat differently and in March this year Iger told a Morgan Stanley media conference that “I think that in our zeal to grow profits, we may have been a little bit too aggressive about some of our pricing. And I think there is a way to continue to grow our business but be smarter about how we price so that we maintain that brand value of accessibility.”
Since Iger returned as CEO, Disneyland has increased the number of the cheapest tickets that it sells and has allowed guests to park hop earlier. Free downloads of ride photos are now offered to all ticketed guests whilst they now come with Genie+ at Disney World. The Orlando outpost has also eliminated parking fees at its onsite hotels and now allows annual pass holders to visit its parks after 2pm without a reservation, except on Saturdays and Sundays at the Magic
MAGIC
The park reservation system will be dropped completely at Disney World from January 9, 2024 whilst housekeeping returned to all of its onsite hotels in January this year. Earlier this month Disney World announced that the parking lot tram service will return to operation at all four of its parks in September so the root and branch changes that boosted Disney’s stock price are gradually being undone. Bearing that in mind it is no surprise that investors are unhappy and the stock is tanking. But why has it not been music to tourists’ ears?
The simple answer to that question is that Lightning Lane and Genie+ still remain despite being the most hated changes of them all. So the restructuring has disenchanted investors whilst fans are still furious. It’s a lose-lose for Disney.
One fan has a simple solution: “lower ticket prices, get rid of Genie, get rid of Lightning Lane, stop nickel and dimeing your guests, bring back Fast Passes.”
Another added “bring back the free fastpass. It kept the lines moving and it kept the overcrowding low. It also made you feel as though you were getting your money’s worth. Now it feels like you’re paying and overpriced cover charge to a carnival where you still have to pay to get on the rides plus food and merchandise.”
Instead of slashing so many jobs, Disney should perhaps have scrapped Marvel’s upcoming shows based on less-known characters, paused its interconnected storytelling and dropped Lightning Lane and Genie+ from the parks. These features present persistent challenges and a perfect storm for Disney. Lightning Lane and Genie+ keep guests away from the parks, which impacts its revenue, whilst the cost of Marvel’s worldbuilding batters its bottom line. That’s before you even get to other headwinds facing the Mouse such as the effect that cord-cutting is having on its ESPN division.
Iger may be Disney’s big cheese but he was not the architect of Marvel’s storytelling structure or the theme park pricing models. Feige and D’Amaro have championed these outdated models and Iger is relying on their input. For investors, the buck should stop with them.
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