Robert Iger returned as Disney CEO this week. Under his defenestrated predecessor, Bob Chapek, Disney stock was a Tower of Terror — plunging about 40% within two months of his taking over; then popping 121% to an all-time high of $197 in March 2021; before free falling 52% — punctuating his short tenure as CEO on Monday.
Chapek’s short-tenure and abrupt departure resulted from his political tone-deafness. He alienated Disney’s creative folks by taking away their power to determine whether movies would appear in a theater or on Disney+; he botched the company’s response to Florida’s Don’t Say Gay bill; and he failed to cultivate Iger’s support for his initiatives, according to the Wall Street Journal.
The last thing that may have triggered Disney chair Susan Arnold to replace Chapek with Iger was a disastrous November 8 analyst meeting. Ignoring the advice of Disney’s CFO, Chapek tried to gloss over a gloomy earnings report that fell short of investor revenue and profit expectations. His upbeat tone and positive outlook gave the impression that he was out of touch with reality, noted the Journal.
Can Iger — a more beloved figure within Disney — do anything in the next two years to set Disney on a path to expectations-beating growth and profitability?
Since he has two years to find a successor, I think Iger should set up a competition among the top CEO candidates. The winner of this tournament will be the one who best solves a core problem inhibiting Disney’s profitable growth.
While I don’t know the answer, here are four problems Iger could challenge his successor candidates to solve:
- Can Disney boost the revenue and profit it generates from its massive investment in “content”?
- Can Disney raise the fees it charges consumers and advertisers on its declining cable-TV networks without losing too many subscribers?
- Can Disney increase revenues at its theme parks?
- Can Disney sustain the growth and boost the profitability of its streaming services?
Disney’s Disappointing Q4 Earnings
Chapek presided over a Q4 earnings call that disappointed investors. As the Journal noted, lowlights included:
- Disney’s $1.47 billion streaming loss was worse than expected and more than twice the year-before loss.
- Disney’s best performing division, theme parks, suffered margin erosion; and
- Disney announced that its goal of Streaming profitability by September 2024 could slip out of reach if the economy gets worse.
What irked Disney’s CFO, Christine McCarthy, was Chapek’s optimism on what she felt was a disappointing earnings call, according to the Journal.
He told investors, “We believe we are on a path to profitable streaming business that generates shareholder value long into the future.”
Having spoken with many public company CEOs about their company’s financial performance and prospects, such optimism strikes me as par for the course. However, perhaps Disney’s board was irked by the disconnect between his sunny words to investors and the 13% drop in its stock the day after the report.
Iger is widely admired within Disney after a successful 15 year run that quintupled Disney’s market capitalization from $50 billion to $250 billion. He also enjoys the confidence of Disney’s employees and board of directors.
But that is not enough to bringing back the value lost under Chapek’s leadership. For that, I think Iger must challenge his potential successors to do the hard work of developing effective solutions to the four problems I introduced earlier.
Raise Return on Content Creation Investment
Disney spent some $30 billion on creating new content this year. Can Disney boost its return on this investment?
If I were Iger, I would challenge one or more of my potential successors with getting to yes on this question. Here are some ideas that could help boost Disney’s return on content creation investment:
- Enhance the lifetime value of Disney’s streaming customers — possibly by producing segment-specific content bundles and raising prices — while increasing Disney’s perceived value compared to competing services
- Maximize revenue by giving Disney content creators the tools to make the best decisions about how to release, sell or license content
- Adjust bonus systems to reward return on content investment
- Expand promotional partnerships with distribution networks — such as Verizon and others
- Go global by partnering to produce and distribute live content, movies, and series in populous nations such as India, China, Japan, and Africa
- Find the best practices of Disney’s most productive content creators and use them to guide its entire creative community
- Cut out non-value added costs from the content creation process while accelerating time to market
To be fair, Disney faces intense competition and there are no easy solutions. However, Disney does have a powerful hold on families and children. Decades ago my children dragged us to Walt Disney World in Orlando where we paid outrageously high prices to wait in long lines. The children loved it and we were happy when they outgrew their love of Disney.
That is Disney’s magic power — and while there is probably a limit to how high Disney can raise its prices, its ability to boost content creation productivity depends on its ability to tell stories and deliver experiences that tap into that power.
Who is that core Disney customer group? As Trip Miller, a Disney investor and managing partner at hedge fund Gullane Capital Partners, told CNN Business, “This consumer is family-friendly, global and multi-generational. That’s the beauty of Disney, right? It’s not just kids, it’s not just adults. When it’s working, it can be everybody.”
The CEO candidates who boost Disney’s return on content investment deserve a strong shot at succeeding Iger.
Harvest Network And Studio Entertainment Businesses
The viewers who watch Disney’s media networks and the advertisers who pay to reach them have more options than the people who visit its theme parks. As CNN Money reported, Disney’s media networks are struggling with people cancelling their cable subscriptions and “outlets liked ESPN” shed viewers.
I look at consumers who continue to pay cable bills as being analogous to those who insist on reading a printed newspaper every morning.
Simply put, older, wealthier people who are set in their ways and will grudgingly pay higher prices to avoid having to switch their routines at this late stage in their lives. Disney can offset the pain that shedding viewers causes its shareholders by raising prices at double-digit rates.
While the pandemic wreaked havoc on Disney’s studio entertainment business, people are still happy to go back to their pre-pandemic habits of spending hours in a crowded theater watching previews and movies.
It’s still a business that depends on whether Disney can produce “tent poles” that support all the other smaller selling films. In 2019, seven Disney films made over $1 billion in global box office. By contrast only two Disney movies hit that target in 2022, according to Comscore
If its Pixar, Marvel and Lucasfilm brands can keep churning out such films, Disney may best maximize its revenues through a careful blend of theatrical and streaming releases.
Making this decision strikes me as very challenging. As the Journal reported, analysts concluded that Hocus Pocus 2 — a Halloween film sequel which was available only on Disney+ — would have generated more revenue if it had been released in theaters. Meanwhile, a Toy Story sequel — Lightyear — drew smaller than expected audiences when it was released this summer in theaters.
If an aspiring CEO can harvest Disney’s legacy networks and studio entertainment businesses more effectively, they could be a compelling candidate to succeed Iger.
Boost Theme Park Revenue Growth
Disney theme parks are doing well now. According to its fourth quarter report, Disney Parks, Experiences, and Products enjoyed 36% revenue growth to $7.4 billion while its operating income soared 137% to $1.5 billion — representing a 20% operating margin.
To be sure, that rapid growth has much to do with the sharp fall off of park attendance during the pandemic. I expect that despite the relatively high rate of inflation and rising interest rates, people will continue to flood Disney theme parks to celebrate their ability to move freely about the world as the pandemic wanes.
As someone who was dragged to Disney World when prices were much lower than they are today, I suspect that Disney can keep jacking up its prices and fees at its theme parks and people will continue to take their families there while complaining loudly to the delight of their offspring.
Because of Chapek’s short and rocky tenure as CEO, I would not expect Iger to choose a successor from the management of its theme parks.
Accelerate Streaming Revenue Growth And Profitability
Online streaming pioneer Netflix demonstrated that investors were eager to buy stock in a company that could achieve consistent growth in the number of subscribers — regardless of how much money was lost along the way.
Disney was among the incumbents that eventually decided to follow in the subscriber-growth-at-all-costs strategy. This April, investors soured on Netflix when it reported a loss of 200,000 subscribers — beating down the share price of rivals like Disney who were copying its strategy.
To be fair, before retiring the first time in February 2020,Iger introduced the idea of a streaming service and left Chapek to pull it off. He rolled out ESPN+, Hulu, and Disney+ — which grew to 100 million subscribers in a mere 16 months.
Disney’s streaming platform now controls more subscribers than any of its rivals. As the Journal reported, “in the three years since its inception, Disney+ amassed over 164 million subscribers, about three-quarters of Netflix’s current subscriber base of 223.1 million.” Add in ESPN+ and its 70% stake in Hulu and Disney “boasts more streaming subscribers globally than any other company,” noted the Journal.
While Disney’s subscriber growth exceeded expectations in the fourth quarter, its $1.5 billion loss was shockingly bad news to investors. Other bad news included a rise in the number of new Hulu, Disney+ and ESPN+ subscribers who cancel after one month, according to Antenna, as has its rate of monthly customer churn.
One marketing strategy — charging $20 a month for a bundle of Disney+, ESPN+ and Hulu — “helped mitigate some customer churn and increased the long-term subscriber value, [while weighing down Disney’s] average revenue per user,” according to the Journal.
Before his departure, Chapek planned to raise prices. Specifically, on December 8, Disney planned to boost by 38% the fee for Disney+ to $10.99 a month; launch an ad-supported service for $7.99 a month, and increased by 43% the monthly price of ESPN+ to $9.99 a month.
For its streaming business to grow profitably, a CEO aspirant taking the lead on this business must answer questions such as:
- Will Disney stick with these price increases now that Iger is back in charge?
- If so, will they be sufficient to reduce the operating losses or will they boost customer churn rates and increase the number of people who subscribe for a month and then cancel?
- Can Disney boost the lifetime value of customers by producing more excellent scripted content?
- Should Disney go forward with its ad-supported service? If so, will it generate sufficient subscribers and revenue to be profitable?
- If so, how much higher will its content creation costs rise?
Getting the right answers to all of these questions will make the most difference in whether Disney can reignite its stock price. The CEO aspirant can do that deserves to be Iger’s replacement.