I’m on a text chain with a couple executive friends at Disney, so the three of us decided to live-chat yesterday’s much-anticipated earnings reveal. I’ll spare you most of the dumb jokes and poop emojis; it’s safe to say it got pretty cynical, pretty fast.
When reporters started tweeting that Disney+ added 7.9 million subscribers in the second quarter, beating estimates and avoiding the dreaded Netflix loss, the messages began flying: “We’re saved!” one of them wrote, following up with that gif of Elaine from Seinfeld dancing wildly in Jerry’s apartment. “Streaming is hard,” the other wrote when I texted a trade headline noting that Disney took a $900 million hit on its direct-to-consumer efforts, triple the loss in the segment a year ago. “Pam n tommy alert!” the same friend wrote when C.E.O. Bob Chapek shouted out the Hulu hit, almost certainly the first time a piece of content featuring a talking penis was plugged on a Disney earnings call. Then, toward the end (or when the three of us started losing interest), the most biting text of all: “Dammit chapek didn’t eff up.”
My friend was joking, but only half so. His wish, which actually mirrors what I’ve heard from others in and around the company, is that the faster the embattled Chapek shovels himself a hole inescapably deep, the faster the Disney board will remove him, the faster a new C.E.O. with content experience and media savvy can be installed, and the faster the company will begin to recover. After all, the Disney share price seemingly sinks to a new two-year low every day, down to $102 today. It was at $156 at the start of January, when Bob Iger, Chapek’s predecessor, left the board—not that anyone’s comparing the two men.
Yes, the entire market is melting down, and inflation and interest rates are hitting Disney harder than many companies, but Chapek’s problems go beyond the stock. Republican politicians are stomping all over him, with Sen. Josh Hawley now trying to strip Disney of its valuable copyrights. Geoff Morrell, Chapek’s handpicked chief corporate affairs officer and an architect of the Florida strategy, was forced to resign after alienating dozens of colleagues. (Morrell is now apparently telling friends in D.C. about the “many millions” he was paid to go away.) And rank-and-file employees continue to seethe over the initial refusal to oppose “Don’t Say Gay,” the company’s disruptive re-org, and the sense that short-sighted business interests are trumping long-term creative health. If corporations held company-wide no-confidence votes, it’s doubtful Chapek would survive.
But hey, those sub numbers went up! Netflix has 220 million paying members, and Disney now has 205 million, if you count Disney+ (137.7 million), Hulu (45.6 million) and ESPN+ (22.3 million). (Tallying bundle subscribers separately is fair, but it’s worth noting you can’t sign up for Netflix three separate times.) Despite the Wall Street freakout on slowing growth, and Chapek’s own C.F.O. Christine McCarthy warning of lower gains in the near future, he’s sticking to the projection of 230 million to 260 million Disney+ subscribers by 2024. “Very achievable,” he said. That growth narrative probably did buy Chapek more time, or at least quell the loudest critics.
But a narrative is not nearly enough anymore. The market, fixated for so many years solely on subscriber growth, now wants a path to profits, or at least a real business rationale for all that streaming spending. So even as he was promising to add 100 million subscribers in two years, and keep up the pace of fresh content, Chapek also proclaimed that “Disney+ will achieve profitability in fiscal 2024.” That’s… aggressive. He seems to be trying to have his subscriber cake and eat the profits too, and there’s increasing evidence that Disney can’t really have both at true scale—or at least not on that super-ambitious timetable.
Why? First and foremost, there’s that dreaded Disney+ ARPU—average revenue per user—which continues to lag far behind just about everyone else in streaming. It grew slightly to $6.32 last quarter in the U.S., but Netflix generates $14.92 per subscriber in North America—and, more importantly, investors are paying waaay more attention to those numbers. Chapek, an M.B.A. guy himself, knows this is now a huge problem; his people continue to complain that Iger & Co. left them a ticking time bomb by pricing D+ so low at launch and basically giving it away to Verizon customers. The move led to instant growth, favorable comparisons to Netflix, and amazing personal press for Iger. But it left the actual monetization question for later, and now Wall Street is demanding answers.
Everyone cites India, of course, which is responsible for about 50 million Disney+ subscribers and half of this quarter’s member growth as the cricket season began, and where the average user now pays just 76 cents a month. Not great, Bob! India has been a quagmire for nearly all Western media companies—including Netlix, incidentally—but re-upping the Indian Premier League cricket rights this summer could cost $5 billion, according to the Journal, and it’s unclear what return Disney would get on that investment.
There’s a vocal contingent inside Disney that believes the company should let Amazon or Sony overpay for those lower value customers, even if it means missing its 2024 subscriber goal. Those voices have become louder in recent days, I’m told, thanks to the new focus on business metrics rather than simply the overall subscriber count. That’s probably why Chapek has been telling people that Disney+ will be fine with or without cricket. Fine? Sure, and the ARPU would almost certainly go up—but likely at the expense of the scale he has promised. “I think it’s a victory if they said ‘Hey, we’re not gonna make our targets, but we’re not gonna lose $1 billion a year on cricket,” Michael Nathanson, the media analyst, told me today. “That would be a huge win for investors.”
But the pricing issue isn’t India-specific. Disney+ is relatively cheap everywhere. Chapek can raise prices, of course, which most insiders expect him to do when the D+ advertising tier launches later this year. But higher prices would also threaten those rosy 2024 growth projections, unless the cheaper ad tier leads to a rush of sign-ups. And if it does, at what cost? Customers like me, who are actually willing to pay more for D+, might end up flocking to the less expensive option just because they can. Chapek better hope Disney can monetize the crap out of them with ads, because the worst-case scenario is the ad tier further sabotages his best chance to raise that ARPU.
The other option is just spending less, of course, which Chapek has suggested the company is already doing. “We’re very carefully watching our content cost growth,” he said, and McCarthy noted that the overall Disney outlay this year will be $32 billion, not the previously reported $33 billion. (About a third of that is sports rights.) All of a sudden everyone is cost conscious—again, following Wall Street’s skepticism—and $1 billion is not nothing. But to me, it matters more what Disney is spending on rather than simply how much it spends.
For instance, if you accept the premise that most families and Marvel/Star Wars fans are already signed up for Disney+, maybe you only need a few of those a year to keep them from churning out—and the quality to not suffer. The best bang/buck ratio might be for content that brings in new people; the general entertainment stuff, as Chapek has touted, most of which has been kept on Hulu in the U.S. And then for the Marvel shows that Disney+ does make, maybe spend a little more to make them great. Marvel’s Kevin Feige still pays staffed writers guild scale on series (though there are one-time bonuses that aim to reward experienced talent), and agents know not to steer their most coveted clients to Marvel because the opportunities for bigger paydays are elsewhere. Feige could fix that with one Thanos snap.
Talent frugality is a Disney-wide problem, as I’ve written, but if you look at the limited metrics available for Disney+, it’s still the Marvel and Star Wars shows that are driving viewership. So creator investment there makes sense—and might be especially needed now. Disney+ launched its Marvel originals with four shows based on characters from the Avengers movies, and then one show, Moon Knight, that isn’t. Here’s the total hours viewed in the first week, according to Nielsen:
Hawkeye: 14.2 million
Loki: 12.2 million
Falcon and the Winter Soldier: 8.3 million
WandaVision: 7.2 million
Moon Knight: 7.0 million
So Moon Knight generated about half the initial viewership as Hawkeye (though two episodes of Hawkeye were available), and many fans seem to dislike it intensely. I recently discussed the question of whether Marvel has a creative problem on my podcast, The Town, but even from a purely business perspective, Marvel needs to figure out how to generate Avenger-level interest from non-Avenger properties. The upcoming She-Hulk is supposedly a mess, I’ve heard (even with Mark Ruffalo in a small role), and Ms. Marvel is another big test for fans. Nobody’s saying Marvel’s TV output is in trouble, but it’s something to keep an eye on. On the other hand, Lucasfilm’s Star Wars movies might be dormant, but Obi-Wan Kenobi, with Ewan McGregor, will almost certainly be huge this May and June.
And while we’re talking about bang for buck, how much longer can Chapek justify dropping Pixar movies like Turning Red directly on Disney+ when most analysts believe he left $300 million to $400 million in global box office on the table? The movie likely would have still been huge on Disney+ after a 45 day window, just like Encanto was (though that movie only got 30 days). In the new era where actual revenue must be balanced against those coveted streaming subs, I doubt another Pixar title goes straight to the service.
All of these pressures have combined to saddle Chapek with incredible scrutiny ahead of the board’s decision regarding whether to extend him beyond Feb 2023. Will-they-or-won’t-they is the No. 1 topic of discussion in Hollywood, followed closely by Who-will-replace-him, of course. Some, like the Lightshed analysts, have posited that Chapek needs a big-ticket, transformational deal to prove he has a vision and to change the narrative. They even suggested this week that Disney specifically buy Netflix or the Roblox game platform.
Netflix’s enterprise value is now down to $90 billion, compared to $250 billion for Disney. Raising money from selling Hulu could make that happen, if the government allowed it (a big if). And Roblox, now with $11 billion in enterprise value after declining more than 80 percent in six months, would be even cheaper, and would make Disney a games player after years of failed efforts like Club Penguin and Playdom. According to sources, Chapek has tasked Disney’s creative leaders with figuring out the company’s role in the metaverse and how its content pipelines can feed it. Roblox “is a deal that would clearly define the ‘Chapek-era’ as distinct from the ‘Iger-era,’” Lightshed wrote in a post Wednesday.
Maybe so, but doesn’t that seem desperate? Like, Chapek would be looking to an Iger-style hail mary deal to save himself. And that’s if the board would approve a transaction with Chapek’s own status remaining such an open question. Pixar was a no-brainer acquisition when Iger took over Disney in 2005. In fact, the question wasn’t whether Disney should buy the studio, which was already making movies for Disney, the issue was whether Steve Jobs, who hated Michael Eisner, could be swayed to part with the asset. Iger made that happen.
It’s not clear what the 2022 version of that coup would be for Chapek, but it’s probably not a big acquisition, especially not in this economic environment, with a recession likely on the horizon and the sharks already out for his blood. It might even be temperance and fiscal prudence. “I’d be happy if they walked away from their subscriber target,” Nathanson, the analyst, told me. “It would show real sanity.”
But I don’t think that will happen. Chapek seems to be in survival mode—battling Wall Street, politicians, and, if my text chain is to be believed, his own employees. So by promising that big, big things like profitability and scale will both happen by 2024—two things that might be at odds with each other—perhaps his only real goal is to ensure he’ll still be in the job when it’s time to hold him accountable.