The Crisis at Disney: Part 3—Does Disney Still Have a Competitive Edge?

The Crisis at Disney: Part 3—Does Disney Still Have a Competitive Edge?
Disneyland Paris 30th Anniversary celebrations at Disneyland Paris on March 5, 2022. (Handout/Getty Images)

On June 14, multiple business news outlets carried variations of the headline “Disney Loses Streaming Rights for Indian Premier League Cricket.” The coverage within these outlets detailed how a consortium that included Paramount Global outbid current rights owner, the Walt Disney Co., by paying $2.6 billion for the Indian subcontinent streaming rights to the IPL cricket tournament for 2023 through 2027, with many observers insisting this was a misstep for Disney.

These same observers declined to fixate on the fact Disney secured the television rights to broadcast the matches in the Indian subcontinent from 2023 to 2027 for $3 billion, and most of them failed to emphasize that Disney was not aggressively focused on retaining the streaming rights.

In many ways, this epitomizes the problem in trying to determine how Disney competes against its rivals. The company has a history of inventing new playing fields and quickly dominating fields created by others.

But will the current environment demand a bold new game plan for a company that is celebrating its 100th anniversary this year?

From Game-Changer to Game-Usurper

Disney holds the distinction of being the only studio from Hollywood’s Golden Age that was never gobbled up by conglomerates or investors—although it did fend off an unwelcome hostile takeover bid in 1984.

In the years when Walt Disney was in charge, the company created new environments by bringing sounding to cartoons and then stretching the animated shorts into feature-length films. Disney established the nature documentary as a genre within non-fiction filmmaking and embraced television in the 1950s when other studios viewed the medium as a menace.

Disney was not the first film producer to explore product merchandising, but he went forth with an audacity and success rate that was without precedent. The company’s expansion into theme parks and the travel and hospitality sector was also groundbreaking for an entertainment company.

In the years that followed Walt Disney’s passing in 1967, the company would never be the bold entity to create new opportunities. For example, Disney was not the first studio to explore the potential of videocassettes in the home entertainment market—20th Century Fox began licensing their films to the Magnetic Video label in 1977, with Disney following suit later in the decade by licensing some of their titles to DiscoVision for the ill-fated LaserDisc format.

Disney was also later than other companies in arriving on the Internet ( turned up in 1996), in the cable television market (Disney Channel went on the air in 1983), in the app world (DisneyNow debuted in 2017), and in the streaming sector (Disney+ premiered in 2019).

The logo of the U.S. video on demand application Disney+ on the screen of a phone in Paris on May 27, 2020. (Martin Bureau/AFP via Getty Images)
The logo of the U.S. video on demand application Disney+ on the screen of a phone in Paris on May 27, 2020. (Martin Bureau/AFP via Getty Images)
While it quickly played catch-up to take prominence in those spaces, sometimes its tardiness came with a price: in its second-quarter 2022 earnings report, the company acknowledged that it paid more than $1 billion to “a customer to early terminate license agreements for film and television content delivered in previous years.” In translation, it meant it had to fork over a lot of money to regain properties it licensed before getting around to start Disney+.

Still in the Race

Disney’s prominence in the current entertainment industry has its foundation in four key acquisitions during Bob Iger’s term as chief executive: the purchases of Pixar in 2006, Marvel Entertainment in 2009, Lucasfilm in 2012, and 21st Century Fox in 2019. With these acquisitions, the company bulked up its portfolio with a surplus of audience-favorite material that was effectively dispatched to the company’s various platforms and sectors.

In 2021, Disney had four of the year’s top 10 grossing films, more than any studio, with three of the films—“Shang-Chi and the Legend of the 10 Rings,” “Black Widow” and “Eternals”—coming from the Marvel Cinematic Universe while “Free Guy” was the sole original IP production from the 20th Century Studios division, the remnant of the former 21st Century Fox.

For Rebekah Barton, senior entertainment editor for the Inside the Magic blog that focuses on all things Disney, these acquisitions gave the company a degree of muscle to push aside other studios.

“I think they’re still a leader,” Barton said. “I think they’re largely a leader because of things like Marvel and Star Wars that are just so huge and so pervasive from a pop culture standpoint that you can’t deny the success of those franchises. And as they continue to acquire, I think they’re only going to continue to grow and take more of that market share.”

On the theme park front, Disney’s second-quarter earnings report showed nearly $6.7 billion in sales versus $3.1 billion from one year earlier and an operating profit of $1.8 billion versus the $400 million loss from the previous year. How those numbers will stand up this summer amid record-high gas prices and a soaring inflation rate remains to be seen, yet at the moment Barton identified Comcast Corporation’s Universal as Disney’s only potential superior in this sector.

“A lot of people seem to be gravitating toward the Universal parks,” she continued. “Whether that’s because the experience is better or because they’re cheaper, who can say? I don’t think there’s another company that could compete as far as a theme park experience, and I think with Epic Universe coming in the next few years that Universal is making a push to certainly rival Disney as far as the theme park experience goes.”

Disneyland Paris 30th Anniversary celebrations at Disneyland Paris on March 5, 2022. (Handout/Getty Images)
Disneyland Paris 30th Anniversary celebrations at Disneyland Paris on March 5, 2022. (Handout/Getty Images)

On the streaming front, Barton observed that “Disney+ is continuing to grow and former leaders such as Netflix Inc. are declining and struggling to keep up.”

However, Ben Barringer, equity research analyst at Quilter Cheviot, viewed the situation somewhat differently.

“Looking at Disney+ and its subscription numbers, they came in better than expected,” said Barringer in an analyst’s note of the second quarter data, which reported the company added nearly 8 million new subscribers to Disney+ during the quarter.

“However,” Barringer continued, “this was partly driven by the Hotstar service in Asia, and once they were stripped out the growth of Disney+ looks rather underwhelming instead. The business expects the second half to be weaker than previously guided, but we will see the introduction of the advertising-supported service in the United Stats later this year. All eyes will be on this given Netflix’s intentions, and it will be interesting to see if offering a slightly cheaper entry in a time of economic slowdown will help push subscriber numbers up.”

Throwing a Googly

Disney has predicted subscribers to its Hotstar service in India would account for between 30 percent and 40 percent of the Disney+ subscriber base by the end of fiscal 2024. Disney acquired Hotstar as part of the assets of its 2019 purchase of the 21st Century Fox assets—and, as mentioned earlier, this included the Indian subcontinental streaming rights to IPL that Hotstar picked up in 2017 and Disney inherited.

And this is where things become interesting. Last February in the fiscal year, first-quarter earnings call, Disney CEO Bob Chapek surprised many people by insisting the IPL streaming rights were not a must-have goal because the company was focused on generating original content for the South Asia market. Yet having the IPL rights was a crucial strategy in growing Disney’s presence in this market.

Asad Ayaz (L), Disney President of Marketing, Bob Chapek (C), The Walt Disney Company CEO, and Alan Bergman, Disney Studios Content Chairman attend the World Premiere of Disney and Pixar's feature film "Lightyear" at El Capitan Theatre in Hollywood, Calif., on June 8, 2022. (Rich Polk/Getty Images for Disney)
Asad Ayaz (L), Disney President of Marketing, Bob Chapek (C), The Walt Disney Company CEO, and Alan Bergman, Disney Studios Content Chairman attend the World Premiere of Disney and Pixar's feature film "Lightyear" at El Capitan Theatre in Hollywood, Calif., on June 8, 2022. (Rich Polk/Getty Images for Disney)

“While certainly, it’s an important component,” Chapek said, “the local content that we’re developing really will mitigate the impact of this if we were not to win the auction on IPL.”

Morgan Stanley media analyst Benjamin Swinburne saw the loss of the IPL streaming rights as a case of the proverbial half-full/half-empty glass—while the company has 50.1 million subscribers in this market, their subscription fee is a mere 76 cents per month.

“It will likely put downward pressure on Disney+ Hotstar subs and maybe put Disney’s fiscal 2024 guidance at risk,” Swinburne wrote in an analyst’s note. “But the profit potential out of India is minimal in most scenarios and we do not see this materially impacting long-term earnings power.”

Staying in the Race

The references by Barton and Barringer to Netflix deserve extra attention as that company is standing in Disney’s way of taking the lead in the streaming sector.

Netflix is the world’s leading streaming service with 221.64 million subscribers and a first-quarter profit of $1.6 billion in profit on $7.8 billion in quarterly sales, a 10 percent year-over-year revenue spike. But Netflix had forecast the potential for the loss of 2 million subscribers in the second quarter—its next earnings report is slated for July 19.

But Disney, along with rival streamers Apple Inc. and, Inc., might see even greater losses as the year moves ahead. A recent Deloitte survey determined U.S. streaming subscriber churn is 38 percent, with the main reason for cancellations stemming from rising subscription costs. As the current inflationary economy becomes more perilous for many Americans, it is not difficult to imagine that streaming subscriptions will be among the first items to be sacrificed in the name of cost-cutting.

Another survey by the research company Antenna identified Apple TV+ as having the highest U.S. streaming churn rate at roughly 10.4 percent, followed by Comcast’s Peacock at 8.4 percent, Disney+ at 5 percent and Netflix at 2.2 percent. While that’s good news (of sorts) for Disney, it’s even better news for Netflix.

Also, there is a question of public perception of what it will cost the company. Disney’s insistence in keeping a same-sex kiss between two female characters in its new Pixar animated feature “Lightyear” resulted in the film being banned in 14 countries including China and Indonesia, which resulted in lower-than-expected international ticket sales. China has refused to allow Marvel films into its theaters due to negative comments by the Chinese-born “Eternals” director Chloé Zhao and “Shang-Chi” star Simu Liu about the country’s ruling Communist Party leadership; however, other recent Disney titles such as “Death on the Nile” from 20th Century Studios and “Luca” from Pixar have played in China.

And while the politically-tinged brouhaha involving Disney and Florida Gov. Ron DeSantis does not appear to have whacked away Disney audience levels, public adoration of Disney has been diluted. A recent Axios Harris poll measuring public trust of visible brands found Disney ranked at 65 out of 100, down from 37 last year.

“Disney’s about-face shows the reputational hit that comes when the public perceives you as being calculating rather than clear in what you believe in and stand for,” said Harris Poll CEO John Gerzema in announcing the survey results.

But if Disney has an ace up its sleeve, it could be actor/composer Lin-Manuel Miranda. During the summer of 2020 when theaters were closed due to the pandemic, the video recording of Miranda’s Broadway smash “Hamilton” created a seismic reaction when it was streamed on Disney+. In the premiere July 2020 weekend of “Hamilton,” the Disney+ app recorded a 72 percent increase from the previous four weeks’ total while 37 percent of Disney+ subscribers watched the production during its first month of availability. By the end of 2020, “Hamilton” was the second-most-watched streaming, bested only by “Wonder Woman 1984” on HBO Max.

Miranda’s impact was further felt last fall in his song score for the animated feature “Encanto.” His tune, “We Don’t Talk About Bruno," became the first song from a Disney film to reach the No. 1 position on the Billboard Top 100 since “A Whole New World” in 1993, while the film’s soundtrack album topped the Billboard 200 chart for nine weeks.

“The success of ‘Encanto’ is partly tied to the success of Lin-Manuel Miranda’s brand,” observed Eric Kohn, executive editor and vice president of editorial strategy at IndieWire, who added that Miranda’s ability to bring multiculturalism to a wider audience could be a winning formula for Disney’s future endeavors, both in the United Stats and around the world.

“It is notable that with ‘Encanto’ Disney needs to think about representation when it comes to its audiences,” Kohn said. “‘Black Panther’ was obviously a huge win in that respect, and ‘Wakanda Forever’ coming out later this year is an extension of that. But for Hispanic audiences that creates something family-friendly, certainly ‘Encanto’ speaks to that side of things without alienating other audiences. And I think that that’s a crucial part of the equation.”

Part 1 in this series considered Bob Chapek’s leadership as Disney’s chief executive and Part 2 in the series looked at the surplus amount of IP recycling in Disney’s recent content.
By Phil Hall
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