Disney feels the heat

Disney continued to feel the heat from the poor performance of its shares this week as it was hit by a fresh lawsuit from US-based Stourbridge Investments over allegedly misleading investors.

Stourbridge’s allegations include that the company said that Disney shifted some marketing and production costs from streamer Disney+ to the company’s legacy business – as a way of disguising the level of investment associated with the streaming business.

“Defendants repeatedly misled investors about the success of the Disney+ platform by concealing the true costs of the platform, concealing the expense and difficulty of maintaining robust Disney+ subscriber growth, and claiming that the platform was on track to achieve profitability and 230-260 million paid global subscribers by the end of fiscal year 2024. Specifically, Defendants used the newly created DMED [Disney Media and Entertainment Division] to inappropriately shift costs out of the Disney+ platform and onto legacy platforms,” said the complaint.

Disney, at the forefront of the entertainment industry’s pivot towards streaming with its all-or-nothing commitment to Disney+, has suffered alongside other studios from the shine coming off the streaming revolution. The company’s stock has hit a nine-year low amid cost-cutting, layoffs and a re-pivot to a more variegated content distribution strategy.

Falling short on the numbers who should have signed up to the streamer, Disney+ had 146 million subscribers at the end of June, and turned in a US$512 million loss.

Stourbridge essentially claims that the unrealistic nature of Disney’s streaming goals was obvious from an early stage.

It alleges that Disney execs led at the time by Bob Chapek misrepresented the success and costs of the streamer, overlooking the fact that the early success of the platform was underpinned by a low launch price and promotions and the impact of COvID-19.

To conceal the truth that profitability and subscriber figures provided to investors “lacked a reasonable basis in fact”, it alleges, Disney execs “engaged in a fraudulent scheme designed to hide the extent of Disney+ losses and to make the growth trajectory of Disney+ subscribers appear sustainable and 2024 Disney+ targets appear achievable when they were not” by shifting costs onto legacy platforms, notably by debuting series on networks such as the Disney Channel that were really intended for the streamer.

Disney was hit by a similar lawsuit earlier this year and had previously seen off a challenge by activist investor Nelson Peltz when new-old broom Bob Iger restructured and reversed the changes implemented by Chapek.

Disney had earlier accused Peltz of seeming “oblivious to the secular change that had been ongoing in the media industry”.

During the company’s most recent quarterly financial call, Iger spoke about having “overachieved with massive subscriber growth for Disney+ out of the gate” while leaning into “a spending level to fuel subscriber growth, which had been the key measure of success for many”.

Bob Iger

That however all changed with Iger’s return to the helm.

“However, since my return, we’ve reset the whole business around economics designed to deliver significant, sustained profitability,” he said, citing content cuts, a new focus on windowing and advertising and moving towards a single unified streaming app in the US.

Iger rounded off that call with analyst Q&A, during which he admitted that Disney still had a lot to learn, noting that “our streaming business is still actually very young” and that Disney still had a long way to go to deliver the kind of margins enjoyed by Netflix.

He said that Netflix had “figured out how to really carefully balance their investment in programming with their pricing strategy and what they spend in marketing” and added the following mea culpa: “Because we’re new at all of this, we actually have not really achieved the kind of balance we know we need to achieve in terms of cost savings and pricing and money spent on marketing.”

Whether Disney execs deliberately misled investors or simply got their sums wrong will no doubt be subject to ongoing legal wrangling for a while yet. But the outline of the streaming-led future of video is still very cloudy. Whether the future will be radically different from the pay TV past or something rather similar, and how far and fast the streaming-led explosion in content production will subside largely remain unknown, even to the leadership of Disney.