Editor's note: As of the end of 2023, Disney (NYSE: DIS) officially celebrated its 100th birthday.
Reviewing Disney's century long development path, early well-known IPs such as Mickey Mouse and Snow White greatly enriched the content library and provided continuous cash flow for it in the following decades; The media network business can broadcast its works and authorized third-party works to users on media platforms, and this business basically corresponds to the development and changes of traditional media. From radio stations to cable TV, and then to internet streaming, Disney has timely responded to the trend of changes in user consumption habits; Offline theme parks not only increase the monetization channels of their IP, but also become another pillar of Disney's business.
It is not difficult to see that Disney is already a giant company covering the entire film and entertainment industry chain, covering content production and distribution upstream, as well as downstream channels and derivative businesses. In 2005, after Robert Egger took over as CEO, Disney made multiple acquisitions in content production, channels, and other areas. While expanding its IP, this further strengthened its advantages in distribution and channels. Especially in the past decade, Disney has become a highly representative flag of Hollywood.
However, after the arrival of the COVID-19, the performance of this "century old store" has shrunk significantly. Its annual net profit for the fiscal years 2020-2022 also dropped to below 4 billion US dollars, while its net profit for the fiscal year 2023 (October 2, 2022 to September 30, 2023) was 3.39 billion US dollars. However, in multiple fiscal years before the pandemic, its net profit was mostly over 10 billion US dollars; Meanwhile, Disney's net profit margin has hovered below 5% in the past three fiscal years, but from 2006 to 2019, this financial indicator remained above 10%.
One of the main reasons for its declining profitability is Disney's streaming business. According to Disney's financial reports for the first to third quarters of fiscal year 2023 (corresponding to the fourth quarter of 2022 to the second quarter of 2023), the streaming business has accumulated operating losses of up to 2.224 billion US dollars, especially since its establishment in 2019, the business has accumulated losses exceeding 10 billion US dollars.
It is worth noting that in the 2023 fiscal year financial report, Disney adjusted its business structure by merging ESPN, which originally belonged to wired networks, ESPN+, which belonged to streaming media, and Star in India into a sports business, separately classified as a department on the same level as entertainment and experience (i.e. the original theme park and product sales business). This also means that the original media network business and content distribution business are divided into two.
One of the main reasons why Disney has been able to survive and grow in the past hundred years is that it has always been able to discover stable and growing businesses, such as early animation, theme parks from the 1960s to 1970s, media network business from the 1980s to the beginning of this century, and content distribution business in the past two decades. Now, at this special moment of being established for a hundred years, can this "transformation" help Disney get out of trouble? Can the promising but continuously losing streaming business become a new engine for Disney's growth again?
1. Pillar
The "decomposition" of the pillars of the entertainment empire
Prior to the release of its fiscal year 2023 performance report, Disney's business was primarily divided into two parts: media networking and entertainment content distribution, and theme park and merchandise sales. Among them, media networks and entertainment content distribution can be further divided into content sales and authorization, wired networks, and streaming media. Further subdivided, the content sales and authorization include Disney Studios, Marvel, Lucasfilm, Pixar Studios, 20th Century Fox, etc; Cable networks include ABC Radio and Television, Disney Channel, ESPN, National Geographic Channel, etc; Streaming media includes Disney+, ESPN+, Hulu, Star, and more. From this, it can also be seen that the media network and entertainment content distribution business is essentially responsible for the production, distribution, and distribution of Disney films.
From the development history of the past century, Disney started with "content manufacturing".
In 2005, Robert Egger became the CEO of Disney and not only repaired his relationship with Apple founder Steve Jobs, but also bought Pixar Animation Studios for $7.4 billion the following year. Since then, Disney's path of external acquisitions has been unstoppable. In 2009, Disney spent $4.24 billion to acquire Marvel, thereby acquiring the copyrights of over 5000 characters under Marvel; In 2012, he acquired Lucas for $4.05 billion and acquired all copyrights of Star Wars; In 2018, it acquired most of Fox's assets for a sky high price of 71.3 billion US dollars, including 20th Century Fox movies, 20th Century Fox TV, FX cable network, National Geographic Channel, 30% of Hulu shares and 39% of European SkyTV shares, Indian Star TV, and Asian pay TV network Starry Media. Famous IPs such as X-Men, Avatar, and Simpson under Fox were also acquired by Disney.
With the addition of externally purchased IPs, especially the hero character IPs that Disney lacked in the past, Marvel, Lucas, Fox and others have made Disney's film revenue continue to perform strongly, breaking through the product cycle attributes of a content driven model and possessing the trend style of a growing company. From the previous Academy Awards for animated feature films and the top grossing films, it can be seen that many of the studios behind them actually come from Disney's outsourced studios. After the significant expansion of the content library, it has also brought benefits to Disney's downstream media network business.
Disney's media network business refers to the type of business that broadcasts its works and authorized third-party works to users on television, radio and other media platforms (similar to television, long video and other work playback platforms). Corresponding to the development iteration of traditional media, from radio stations to cable TV, and then to internet streaming, Disney has timely responded to the trend of changes in user consumption habits. Since Eisner's acquisition of ABC Television Company, media network revenue has gradually expanded into Disney's largest business.
Media networks can be further divided into two categories: traditional wired networks and streaming media. Streaming media is an inevitable product of the development of the Internet to a certain stage. Compared to cable TV media and radio stations, its advantage is very obvious - its price is cheap. However, influenced by cultural habits, the user base of offline television media has always been large in the US domestic market. From Disney's 2023 fiscal year performance report, it can also be seen that the profit pillars are still parks, consumer goods, and cable networks. The first two belong to the experience business sector, which was previously the theme park and product sales business. The latter can be said to be the pillar of Disney's former media network and entertainment content distribution business, and now Disney's entertainment business.
However, this pillar has shown signs of loosening in recent years, until it began to "decompose" at the centenary of its establishment. Firstly, in terms of content production, Disney has not seen any box office hits since the release of Avengers 4 in 2019. In fact, since the release of "The Lion King" in 1994, Disney has been facing difficulties in independently creating classic animations and films. The vast majority of its popular content since then has come from outsourced studios, including Marvel, Lucasfilm, Pixar, and 20th Century Fox. However, in recent years, these outsourcing studios have also started to "mute". According to financial report data, starting from the second quarter of the 2022 fiscal year, the operating profit margin of Disney's content sales began to decline, and there were even multiple quarters with negative results.
Secondly, the trend of decline in traditional channels such as cable networks is irreversible. The view that "streaming is the future" has been reached in the industry, and cable television only has rigid demand in certain areas, such as political advertising during the US election and sports event advertising that is partially copyrighted by cable operators. Nielsen data shows that since the beginning of 2023, the share of time spent by cable TV users on cable TV channels has continued to show a trend of decline. In the medium to long term, the advertising revenue of cable TV will continue to be under pressure.
In addition, from the second quarter of fiscal year 2022 to present, the operating profit margin of Disney Cable Network has decreased from 46.6% to 30.6%. To make matters worse, ESPN, which focuses on sports content, will be separated from wired networks, and this downward trend will be more pronounced.
2. Dilemma
Streaming dilemma
After signs of decline in content sales and wired network business, how has the streaming media business, which is widely regarded as a future trend in the industry, performed? Can we shoulder the banner of Disney's future growth?
Compared to Netflix, Disney entered the streaming industry relatively late. Since the completion of the acquisition of 21st Century Fox's film and television business units in 2018, Disney has undergone four internal organizational restructuring. In addition to integrating and increasing collaboration with related businesses, the biggest change is to separate internet media (streaming media) into a primary sector, which is equivalent to elevating the strategic position of streaming media.
In 2020, after Disney's restructuring, it made streaming the core of its media network and entertainment content distribution business, and launched the live action movie Mulan on the streaming platform Disney+for $29.99, becoming Disney's first online blockbuster. Under the catalysis of the epidemic factors, users have gradually developed the habit of watching movies online, and the growth of streaming media users in the past two years has been very considerable. As of September 30, 2023, Disney+has 150 million subscribers, ESPN+26 million, and Hulu 50 million, with a total of 226 million subscribers. Since entering the streaming industry in 2019, it has only taken about 3 years for Disney's subscription users to break through the 200 million mark. As a comparison, the giant Netflix, which focuses on streaming media business, launched its online platform in 2007 and only surpassed 200 million paying users by 2020.
But behind this rapid growth is a large amount of capital investment and losses.
According to multiple foreign media reports, previous superhero dramas such as "Rocky," "The Falcon and the Winter Soldier," "Wanda Vision," and "Hawkeye," which were only released by Disney+, had a quarterly investment of $150 million to $200 million. On average, the production cost for each episode is as high as $25 million. Even HBO's "House of Cards" and Amazon's "Lord of the Rings" series, known for burning money, have a production cost of only $15-20 million per episode.
Meanwhile, Disney's streaming business has been in a loss making state. Data shows that since the first quarter of fiscal year 2022, Disney's streaming business has had a negative operating profit margin, with this indicator even reaching as high as -31% in the fourth quarter of fiscal year 2022.
So in November 2022, Robert Egger returned to Disney and became CEO again, and his company's business goal was to achieve profitability while transitioning to streaming.
According to financial reports and statistical reports from third-party organizations, Disney's streaming business operating profit margin has significantly improved since Robert Egger's return, narrowing to -14% in the fourth quarter of fiscal year 2023.
For the streaming media business, in addition to losses, another issue facing Disney is how to handle the relationship between streaming media and cinema channels well.
"This is a rather contradictory matter," said a person from a domestic cinema company, In mainland China, even on top long video platforms like iQiyi, movies they invest in and shoot will first be screened in theaters until the key expires or the potential for box office growth is basically exhausted before they are launched on the platform. However, in the past few years, some Hollywood companies have chosen to release movies in sync with streaming in theaters, or stream them shortly after they are released in theaters. As a result, streaming is bound to For the audience in the diversion channel of the cinema, there will inevitably be losses for the cooperating cinema
According to multiple foreign media reports, as early as 2020, when Disney streamed Mulan, several cinema companies protested by tearing up posters and burning offline promotional materials. In 2021, shortly after Disney's investment in the superhero film "Black Widow" was released in offline theaters overseas, it was released on Disney+. This caused dissatisfaction among the film's lead actress, Johnson Scarlett, who filed a lawsuit in the Los Angeles High Court accusing Disney of violating the contract. The movie "Black Widow" was broadcasted online on Disney+while it was released in theaters, Causing her an estimated huge loss of over 50 million US dollars (equivalent to 320 million yuan).
"In Hollywood, many actors often reach box office sharing agreements with the 'Big Six' (usually referring to Disney, 20th Century Fox, Warner Bros., Paramount, Universal Pictures, Sony Columbia Pictures). This means that in addition to the basic remuneration, a portion of the box office revenue will also be distributed to some actors." Jin Yan (pseudonym), a film producer, told reporters, If streaming media is launched online, it means that the number of offline viewers is likely to decrease, leading to a decrease in box office revenue and affecting the subsequent income of actors. This is not only a contradiction between streaming media and traditional channels, but also one of the main sources of labor disputes in the American film and television industry in recent years. During the more than 100 day strike in Hollywood this year, one of the protests made by the actors union and screenwriters union is that the online streaming of films reduces the number of actors "The income of creators such as screenwriters."
The reporter learned that after the rise of streaming media, there has been a strong promotion of the on-demand mode where users can choose to watch on their own. And on-demand has fundamentally eliminated traditional standards for measuring film and television popularity such as ratings and replay rounds, and streaming platforms have also taken advantage of this by eliminating residual fees based on past commercial efficiency logic. Public information shows that the remaining fee is an additional fee given to screenwriters and actors when the copyright of film and television content is traded between different television stations. This is an important income for content creators who have participated in the creation of well-known works. The remaining fee can be understood as an extension of the remuneration, where when a film or television work is replayed on a television station, the screenwriters and actors can receive an additional income.
Before this year's Hollywood strike, creators would receive fixed compensation from streaming platforms when dealing with them, but no longer pay the remaining fees from the past. As an alternative, streaming media will pay a fixed distribution revenue in the form of annual packages, but will not disclose specific on-demand volume numbers. So, in the eyes of many creators, the rules of streaming are like a black box, and they cannot quantify long-term returns in detail.
But for all platforms, including Netflix and Amazon streaming, real playback data is a trade secret. At the same time, it is also difficult for streaming platforms to pay more money to the creative team after paying a buyout fee significantly higher than the TV station's copyright fee. This also means that there have been disagreements between the two sides in terms of business models.
Fortunately, the Hollywood strike came to a complete end in early November this year, and the American Federation of Motion Picture and Television Producers and the American Federation of Television and Broadcasters publicly announced an agreement, one of which includes residual compensation for streaming. However, when the reporter consulted the websites of the American Federation of Motion Picture and Television Producers, the American Federation of Television and Broadcasts Artists, the American Writers Guild, and the financial reports of several major listed companies in Hollywood, no specific agreements regarding streaming media were found.
3. "Addition and subtraction"
The "addition and subtraction method" of reducing costs and increasing efficiency
In the final quarter of fiscal year 2023, Disney continued to implement its "profit first" strategy, and after some operations, its internal profitability improved significantly year-on-year. Among them, the changes were not related to streaming media business, and the operating profit margin decreased from -31% in the same period last year to -14%.
According to financial reports, Disney has undergone significant restructuring by integrating its media network and entertainment content distribution, main parks, and product sales business into three major business segments: entertainment, sports, and experience. The sports business line, mainly consisting of ESPN channels and ESPN+, has been repeatedly mentioned and favored by Disney in the past two years. It has been separated from cable networks and streaming media, which reflects Disney's management's emphasis and the company's future development direction. On the other hand, it integrates cable networks, streaming media, content production and sales into entertainment, and further strengthens the connection between content and distribution channels The idea of solving the problem of distributing the same content through different channels from the source. But whether this can solve the above contradictions remains to be seen.
In addition, the turnaround of streaming media also requires maintaining and enhancing user stickiness.
"For streaming media, the user stickiness brought by dramas is generally higher than that of movies. Disney has many high-quality movies, although there have been high-quality dramas such as" Rocky "," The Falcon and the Winter Soldier ", and" Wanda Vision "in recent years, Disney may still need to continue to strengthen in terms of dramas," said a spokesperson from the aforementioned cinema company, "One path currently being explored by overseas streaming media is to release a director's edited version of a movie on a streaming platform after it has been released in theaters for a period of time. It is unknown whether Disney is following this approach."
From the perspective of Disney's streaming business losses, the key is still the contraction of internal costs and expenses. Disney's actual optimization scale for expenditure in the 2023 fiscal year was $7.5 billion, higher than the original plan of $5.5 billion.
In fact, whether it is domestic long video platforms such as iQiyi, Tencent Video, Youku, or international streaming giants such as Netflix, Disney+, and HBOMAX, cost reduction and efficiency improvement have been measures adopted by these companies in recent years.
Over the past year, several adjustments to Disney's business have revolved around cost reduction. In terms of efficiency enhancement, Disney's first strategy is to raise prices. In August of this year, Disney announced that the monthly fee for the ad free version of Disney+service would increase from $10.99 to $13.99, an increase of over 27%; The monthly fee for the ad free version of Hulu will increase from $14.99 to $17.99, an increase of approximately 20%. And this is already Disney streaming