Daniel Loeb is calling on the Walt Disney Company to suspend its dividend and reinvest the money in acquiring and producing new content for its streaming services. Doing so, he argues, would double the company’s spending on tentpole films and series to highlight on its Netflix challengers.
At the same time, the Third Point hedge fund chief argues that Disney should place more of its upcoming blockbusters on Disney Plus, suggesting that streaming services, and not theatrical exhibition, represent the future of movies
“Just this week, Regal Cinemas shuttered all its U.S. operations and physical theaters. While we all share a certain sadness and nostalgia for this eventuality, I am sure that people felt similar emotions about horse-drawn carriages when the automobile was first introduced,” Loeb writes in a letter to Disney CEO Robert Chapek. “Every Hollywood executive has been able to enjoy first run films in the comfort of their home theaters for years. We urge you to democratize this experience and to continue to embrace the future of home entertainment with the utmost urgency in executing the company’s digital transformation.”
Third Point invested in Disney in 2020 when the company’s shares were being battered by the toll that coronavirus was taking on its theme park operations. It owns roughly 5.5 million shares in the conglomerate, as of June 30.
The tone of the letter is more measured and supportive than some of Loeb’s previous missives directed at Hollywood companies — he previously waged a protracted effort to get Sony to curb its spending on movies and spin off its entertainment division. In this case, Loeb suggests that Disney needs to position itself for the future, even if that means taking a temporary hit to its bottom line.
“We understand that a more aggressive investment strategy may pressure short-term earnings on the path to creating long-term value,” Loeb writes. “Lest there be reservation about making such a trade-off and any potential shareholder concerns, we highlight an observation from Warren Buffet: ‘companies get the shareholders they deserve.’ Disney deserves growth-minded, long-term oriented investors, and we believe that a strategy centered around using Disney’s many resources to drive growth in the DTC business will further attract them.”
Loeb goes on to speculate that Disney’s more aggressive spending on shows and movies will broaden the gulf between its streaming offerings such as Disney Plus, Hulu and ESPN Plus, and the services being hawked by rivals such as AT&T, Comcast and ViacomCBS. He even predicts that it will leave Netflix, the most feared player in the space, sweating because of Disney’s ownership of Marvel, Pixar, Lucasfilm and other iconic brands.
“With Disney’s superior tentpole franchises and production capabilities, we believe that the company can exceed the subscriber base of the industry leader, Netflix, in just a few years,” Loeb writes. “But time is of the essence and the company should consider significant additional investments in content both through production and acquisitions here and abroad.”
Loeb also used the letter to weigh in on Disney’s recent experiment with “Mulan.” The company opted to forgo a traditional theatrical release for the film in the U.S., where many theaters are closed due to COVID-19 in favor of allowing Disney Plus customers to buy it for $29.99. Wall Street analysts believe the results were not compelling. Loeb says he thinks Disney should try a different approach moving forward.
“While some pundits have described the ‘Mulan’ release as a ‘debacle’ due to the $29.99 cost for a VOD download, we see this as a valuable learning experience, expect stumbles on the way to greatness, and believe this will drive a faster decision to make all content available to subscribers for a simple subscription fee,” Loeb writes.
In the past, Disney has benefitted greatly from cable re-transmission fees and ticket sales. Loeb thinks the subscriber revenues on Disney’s streaming services could become a more meaningful source of profits.
“We are confident that Disney can build a DTC business that will meaningfully exceed its current cable TV and box office revenue streams, but only if the company leans into this opportunity and invests more aggressively,” he writes.