Disney’s Streaming Reorganization Cheers Investors but Confuses Insiders

Walt Disney Studios
Michael Buckner/Variety

The Walt Disney Company’s Monday announcement that it was undertaking a major reorganization of its film and television teams with a goal of bolstering its streaming services was a hit with investors.  Shares of the entertainment giant rose on the news that the company would refocus its operations to produce movies and shows and decide at a later date if they would debut on the big screen, cable or streaming arms Hulu and Disney Plus.

If Disney was hoping that the news would focus Wall Street’s attention on growth in streaming rather than the considerable distress facing its theme parks, the plan worked like a charm. Instead of dwelling on the fact that COVID-19 has depressed attendance at the parks it has been able to open in Asia, Europe and Florida, and left other venues such as Disneyland shuttered indefinitely, the narrative heading into Disney’s next earnings call is all about how they’ve doubled down on efforts to dominate the world of streaming.

“They want to be seen as the Netflix challenger,” said Hal Vogel, a veteran media analyst. “This signals how strongly they’re invested in taking Netflix on.”

Disney shares gained 3.2% to $128.96 in trading Tuesday on the heels of the reorganization. The stock is down about 13% for the year to date, a better performance than most of its media competitors but far off its 52-week high of $153.41. Clearly, investors bought the pitch and the stock responded accordingly.

But internally, employees across the board were left puzzled by both the timing and contents of the announcement. Various power hubs were announced with great fanfare, but it wasn’t immediately clear if the likes of Alan Horn and Alan Bergman, who rule over the company’s film effort; TV chief Peter Rice, who was named chairman of general entertainment content; and sports chief James Pitaro, chairman of ESPN and Sports Content, were being promoted or just playing similar roles with a slightly greater mandate to think more in terms of what’s binge-worthy.

The day’s unarguable star was Kareem Daniel, who was named head of the newly minted media and entertainment distribution group, a catch-all division tasked with monetizing all content. Daniel’s promotion fills some of the void left by Kevin Mayer’s exit in May as chairman of Disney’s Direct to Consumer and International division. Daniel’s distribution group, including Rebecca Campbell, who directly oversees Disney streaming services as well as international operations, will have a big role in determining the strategy and content spending priorities for Disney’s DTC expansion.

Daniel previously served as president of consumer products, games and publishing. The promotion raises his profile considerably. Daniel will report to Chapek, as will Horn and Bergman, Rice and Pitaro.

“This is weird,” one top film executive said simply, puzzled by the news.

With the emphasis on streaming and refocusing the company’s orientation on content creation, many in the industry were surprised at the lack of mention of prominent creative executives in the reorganization, notably Dana Walden, chair of Disney Television Studios and ABC Entertainment, and FX Networks boss John Landgraf.

The reorganization reaffirms the structure that calls for Marvel’s Kevin Feige and Lucasfilm’s Kathleen Kennedy to oversee feature-length and film-related TV series content produced through Horn and Bergman’s unit for Disney Plus. Some have wondered whether Disney Plus would eventually centralize programming and production operations under a single leader. In addition to Marvel, Lucasfilm and Pixar, Walden’s Disney Television Studios and National Geographic produces content for Disney Plus. Walden also oversees original content for Disney’s Hulu.

Also absent from the reorg news was Ricky Strauss, who had served as the president of content and marketing for Disney Plus since 2018.  A well-liked figure among veteran Disney executives, Strauss was not named as a player in either Horn and Bergman’s studios group nor in Rice’s general entertainment team. Variety learned that, subsequently, Strauss has been named head of curation for Hulu and Disney Plus.

In addition to the missing names, numerous people Variety spoke with wondered aloud when 77-year-old Horn intends to retire. He continues his long reign with yet another new title — Chairman, Studios Content — one he shares with Bergman.

Disney’s effort to reorganize its film and TV units around its streaming activity is another indication of how quickly the coronavirus is accelerating Hollywood’s shift from supplying movie theaters and cable boxes to ambitious direct-to-consumer ventures. Disney Plus has been an early success story as old Hollywood tries to shift its business mindset. WarnerMedia and Comcast have undertaken similar efforts to reorganize executive teams and reallocate resources around streaming ventures that promise future growth at a time when traditional sources of profits are under extreme pressure.

These corporations don’t have much of a choice. Many people are scared to go back to theaters when the coronavirus is raging, and with cinemas in places like New York City staying closed, Disney has been pushing one major movie after another into 2021 and beyond with hopes that a vaccine will then be widely available. Clearly, box office isn’t going to be the profit driver it once was.

At the same time, a prolonged recession or even a depression could pressure consumers to find ways to economize. In tough times, cutting the cable cord could become very appealing, potentially endangering the advertising revenue and retransmission fees that Disney has historically pocketed from ESPN, Disney Channel, and the like.

The one consistent bright spot in all this uncertainty has been Disney Plus, which has continued to attract customers and captured the zeitgeist with the release of last summer’s “Hamilton” and Beyonce’s “Black is King.”

“If you look at it from 30,000 feet, this wasn’t the tail wagging the dog, this is the revenue source that was wagging the dog,” said Peter Newman, head of the MBA/MFA program at NYU Tisch School of the Arts “Just as Disney’s stock went up, AMC said they’re going to run out of cash and Regal shut down. The system has been so broken and is so in need of a reconfiguration.”

Given the fractured nature of the theatrical distribution landscape and the wasteland that is the live events business, an industry that has yielded Disney untold riches through everything from cruises to Broadway shows, it’s a very convenient time for the company to emphasize its streaming efforts. The announcement is an indication that for the foreseeable future, Disney would very much like the investment community to treat its financial results like it does those of Netflix — focusing more on its subscriber growth, and less on pesky rubrics like profit margins and revenues by which media conglomerates have traditionally been graded.  It’s that kind of business that’s allowed Netflix’s market capitalization of $244 billion to dwarf that of Disney’s at $233 billion despite the fact that Disney controls the likes of Marvel, Pixar and Lucasfilm.

“The Street loves subscription business models and recurring revenue models ,” says Peter Csathy, chairman of CREATV Media. “Locking consumers into some kind of monthly payment plan is the holy grail for investors.”

In the short run, the announcement is a boon to Dan Loeb. Using his roughly $1 billion stake in Disney, the Third Point hedge fund manager is pushing the company to forgo a dividend and pour the money it would have paid investors into developing more streaming programming. In an interview with Variety, Loeb said he’d like upcoming Disney movies like “Black Widow” to bypass theaters for Disney Plus. He argues that more money can be yielded by adding and retaining subscribers, who will in turn pay monthly fees, than through a one-time ticket sale.

“I don’t think they appreciate the tiger they have by the tail, which is to say the value they can drive by moving into a subscription model, which has been adopted by everyone from Microsoft to Amazon,” Loeb told Variety last week. “It’s so value accretive.”

Loeb seemed enthused by the moves, telling CNBC that he is “pleased to see that Disney is focused on the same opportunity that makes us such enthusiastic shareholders: investing heavily in the DTC business, positioning Disney to thrive in the next era of entertainment.”

Of course, some of the moves that Loeb and others are advocating could hurt in the short term, depriving the company of hundreds of millions of dollars in ticket sales, as well as untold revenues from rentals, licensing, and other ancillary businesses. But COVID-19 is enabling Disney to justify taking these types of risks.

“As far as a theatrical release being shifted to streaming — these are very tough decisions,” said Jason Squire, a professor at USC’s School of Cinematic Arts and editor of “The Movie Business Book.” “They involve sacrificing grosses. But the reality is there are no domestic grosses during coronavirus.”

Rebecca Rubin and Cynthia Littleton contributed to this report.