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Searching for streaming profit, Disney cuts $5.5 billion in costs

Feb. 8, 2023 Updated Wed., Feb. 8, 2023 at 6:01 p.m.

Disney has repeatedly said that its flagship Disney+ service will be profitable by October 2024 – and did so again Wednesday – but Wall Street has been skeptical.  (Tiffany Hagler-Geard/Bloomberg)
Disney has repeatedly said that its flagship Disney+ service will be profitable by October 2024 – and did so again Wednesday – but Wall Street has been skeptical. (Tiffany Hagler-Geard/Bloomberg)
By Brooks Barnes New York Times

Robert Iger gave Disney’s corporate critics the equivalent of a punch in the mouth on Wednesday.

In his first earnings report since he came out of retirement to retake the reins of a troubled Disney, Iger unveiled a new operating structure for the company – one designed to galvanize Disney’s film and television studios while drastically cutting costs. Content production and distribution, including streaming, will be housed in a single division (instead of two, which were sometimes at odds), with the exception of sports.

To that end, ESPN and its streaming offshoot will become a stand-alone unit for the first time, a move that will be interpreted as making the sports behemoth easier to spin off or sell, should Disney decide to pursue such action.

As part of the restructuring, Disney expects to cut costs by $5.5 billion and lay off roughly 7,000 employees, or about 4% of its global workforce. The organizational changes, which will go into effect immediately, were designed with astonishing speed; Iger only returned to the company in late November.

Iger also disclosed quarterly profit and revenue that exceeded Wall Street’s expectations. Losses abated in Disney’s streaming division by $400 million compared with the previous quarter; investors had been braced for half as much. Despite a weakening economy, Disney’s theme parks in the United States delivered a fat $2.1 billion in operating profit, an increase of 36% from a year earlier.

In a statement, Iger said the restructuring would “lead to sustained growth and profitability for our streaming businesses, better position us to weather future disruption and global economic challenges, and deliver value for our shareholders.” In late November, the Disney board fired Bob Chapek as CEO and reinstated Iger, who ran the company from late 2005 to early 2020.

Among other things, Disney is trying to fend off Nelson Peltz, the corporate raider turned activist investor. Peltz, who is fighting a proxy battle for a board seat for himself or his son, wants the world’s largest entertainment company to revamp its streaming business, refocus on profit growth, cut costs, reinstate its dividend (suspended during the early part of the coronavirus pandemic, when much of Disney was closed) and do a much better job at succession planning. Peltz’s Trian Partners has amassed roughly $1 billion in Disney stock.

Iger said Wednesday that Disney’s board would restore the company’s dividend by the end of the year.

Disney shares rose as much as 9% in after-hours trading. After a sharp decline in 2022, Disney’s stock price has increased 26% this year.

Underscoring the importance of streaming to Disney’s future, operating profit from traditional television (the ABC broadcast network and 15 cable channels, led by ESPN) totaled $1.3 billion in the quarter, a 16% decrease from a year earlier. Revenue fell 5%, to $7.3 billion. Disney attributed the declines to lower advertising revenue, reflecting a drop-off in viewership, especially overseas.

Disney’s cable portfolio has held up better than those owned by some rival companies, but people have been cutting the cable cord at an alarming pace – total hookups in the United States declined by a record 6.2% from October to December.

A decade ago, ESPN had more than 90 million subscribers. The number is now closer to 75 million. Disney has been able to maintain ESPN’s profitability by raising prices. For every subscriber, ESPN collects a monthly fee from cable providers of more than $8, by far the highest for any channel. But that era is ending: Analysts say that revenue from subscriber fees will decline in 2023 for the first time.

As a result, after a period in which they pushed companies like Disney to chase streaming subscribers at any cost, investors have shifted to a new mindset: Show us the profits. Disney has repeatedly said that its flagship Disney+ service will be profitable by October 2024 – and did so again Wednesday – but Wall Street has been skeptical. Losses in Disney’s streaming division totaled $1.1 billion in the quarter that ended in late December.

Disney had 234.7 million subscriptions across Disney+, Hulu and ESPN+ in the quarter, down from 235.7 million in early October. (To compare, Netflix has roughly 231 million subscribers worldwide after adding 7.7 million in the fourth quarter, well beyond its forecast of about 4.5 million.)

Disney+ lost about 2.4 million subscribers worldwide, for a new total of 161.8 million. All the decline came from a low-priced version of Disney+ in India. (Last year, Disney lost a bid to renew the expensive rights to Indian Premier League cricket matches.) Hulu, which does not operate overseas, recorded a 2% increase in subscribers. The sports-oriented ESPN+ also added to its count by 2%.

Disney’s streaming division generated $5.3 billion in revenue, a 13% increase from a year earlier. On Dec. 8, Disney began charging $11 for a monthly subscription to the ad-free version of Disney+, up from $8, a 38% increase. The company also introduced a new, ad-supported option that remained $8.

In the restructuring, Iger gave oversight of streaming to a pair of lieutenants: Alan Bergman, previously Disney’s top movie executive; and Dana Waldman, the company’s entertainment and news television chief. They will jointly run a division called Disney Entertainment. Each will be viewed outside the company as a potential successor to Iger, whose contract expires in December 2024.

Operating profit at Disney Parks, Experiences and Products totaled $3 billion, a 25% increase from a year earlier. Revenue in the parks and consumer products division climbed 21%, to $8.7 billion. The jump in profitability reflected growth in guest spending at Walt Disney World, in particular for line-shortening passes; better results at Disney Cruise Line; and higher returns from parks in France and Japan.

In total, Disney generated $23.5 billion in revenue in the quarter, an 8% increase from a year earlier. Analysts had expected slightly less. Excluding items affecting comparisons, per-share profit for the most recent quarter was 99 cents, a 7% decrease from a year earlier. Analysts had been expecting 79 cents.This article originally appeared in The New York Times.

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