Disney’s Post-Strike Roadmap Revolves Around These Key Areas

Summary:

• While Disney continues to help negotiate a way out of the industry’s labor strife, it’s also keeping an eye on what a post-strike world will look like.
• Three of the more key and pressing areas are plans for streaming, broadcast and theatrical – none of these are “new” problems, but they will take on a new reality.
• With streaming, the biggest question is around Hulu. But given the legalities of the contract, Disney buying out Comcast’s shares is more a “if” then “when” – and that’s OK.
• Buying Hulu isn’t cheap, and many are wondering if Disney will sell its linear broadcast channels to cover costs, but its rumored India exit may help with that financial situation.
• While streaming and linear are top of mind, Disney also can’t forget about its theatrical business, which is slowly re-gaining traction, but still needs attention and protection.

While we aren’t out of the woods with just yet with Hollywood’s labor disputes, there’s been enough of a clearing that investors should begin to keep an eye on what happens next for many of the key industry players. Chief of them is Disney (NYSE:DIS), which has been one of the studios most closely associated with the strikes and working on a resolution.

When CEO Bob Iger hasn’t been negotiating with the unions, he and his team have been plotting out the direction for the company. From streaming to broadcast to theatrical and beyond there’s no shortage of areas that are facing key questions.

So what does that roadmap look like and what are the various questions in play?

First as always, some background.

In this case I can keep this section brief as there shouldn’t be any surprises here. All of the questions Iger and team are grappling with were top of mind pre-strike, but now they take on a new sense of importance and urgency when everything is finally revolved.

While there are multiple areas being discussed, for simplicity let’s stick to three of the most pressing.

Streaming

To be specific this is less about their streaming strategy overall and more about their streaming strategy pertaining to Hulu. It will soon be decision time regarding their plans to buy out Comcast (CMCSA) for the remaining shares of Hulu, and while it seems to be moving in the “buy” direction, investors still want clarity.

Honestly though investors need to get comfortable with the notion this is going to happen and get over any concerns – largely because they don’t have a choice. Regardless of how the board – or specific members – may feel, this deal was carefully structured to force each side to go through with the deal. It’s legally binding that Comcast has to sell and Disney has to buy.

The only “out” for Disney is if they can find a buyer to replace them in the deal, but short of that happening the company will likely take over full ownership of Hulu – and that’s OK.

Yes, it’s a lot of money, but Disney has gone full streaming in the past few years and Hulu allows them to have a truly diversified platform. Remember Disney buying 20th Century Fox was largely around gaining the ability to buy/distribute movies that were not family friendly. It’s the same thing here – you aren’t going to see The Handmaid’s Tale or Only Murders In The Building on Disney+, but Disney wanted an avenue to invest in them and others like it.

Enter Hulu.

Yes, it’s a heavy price but they have had time to prepare the company and investors to be ready. Hulu, whether planned or not, has become a support network. It is in some ways the glue that builds the Disney bundle and that can’t be overlooked. Add in its live TV/sports element and its appeal among consumers looks poised to grow.

And if you need another sign the deal is happening – look at India where Disney is in talks to sell its stake in the region. You can take an educated guess where the bulk of that money is likely going.

Broadcast

And that takes us to broadcast.

So now that we’ve established Hulu should be retained and Disney could look to pay for that by exiting India – the question becomes does cutting ABC and the linear cable channels loose make up more of the cost? Or did Disney choose its expanded domestic broadcast business as one to keep?

While it would be a nice cash infusion, it also would be a short-sighted one.

You can make the “linear is dead” argument but you can’t underscore the value it still brings to the table – specifically for Disney in a massively important area.

Disney’s rights to the NFL’s Monday Night Football have proven to be profitable and a cornerstone for ESPN. However, given the strikes, the simulcasts on ABC has proven to be a bonus. And that’s the point…having a broadcast network that can effectively double your audience for programming (that’s among the most-watched on TV) is a win.

Sports are still the most bankable content on TV and it’s that ESPN connection to the NFL that’s eventually giving ABC its first Super Bowl since 2005. That turn in the rotation will come in 2027 and I’d be fascinated to see what happens if ABC and ESPN aren’t still siblings at that point… but that’s a story for another day.

For now Iger and team have begun to trot out more and more support of ESPN… going so far as to reveal its financials to underscore its perceived value (present and future). The move is designed just to shore up support from investors and its board, but also to lay the groundwork for a potential partner to come on for a percent of the network and an additional influx of cash.

Some have argued Disney could be better off without ESPN but that argument undervalues how important sports are to today’s media players. Yes, the rights are costly, but they are live and force audiences into the moment. There’s no need for +7 or +30 numbers here… advertisers want to see an immediate return and this achieves that goal.

Keep in mind this also goes beyond sports. The synergy machine that fuels Disney is very real and between Good Morning America, Jimmy Kimmel Live!, Live With Kelly & Mark and The View (among others) that’s a big lever to be able to pull to promote sister content… and we know it works.

Given Paramount has CBS and Comcast has NBC, Disney retaining ABC takes on more importance to help it keep pace. Just as Hulu is a connector to the Disney+ bundle, ABC is a connector to the large Disney brand and its content.

Theatrical

Speaking of content, some of the highest profile content tends to be from theatrical which is the third area Disney must figure out post strike. The biggest problems here have largely been self-inflicted. Take the “woke” argument off the board for a minute and the main issue is that Disney has re-trained audiences to know its movies will move from theaters to Disney+ in a matter of months – so there’s less of a rush to see them opening weekend.

The switch has been noticeable.

Pixar has been the most impacted by the shift as most of its movies the past few years have been moved direct to platform. From Soul to Luca to Seeing Red it had been a while since a Pixar pic has seen a theater, so when this year’s Elemental was given a theatrical release the bar was set unrealistically high. And as such the movie was destined to under-perform opening weekend, which did happen. It was a self-fulfilling prophecy that left many to wonder if that was a sign Pixar was losing its touch.

The short version is no – it hasn’t.

In reality, it was a result of Disney’s pandemic scheduling shifts and audience’s changing habits. Elemental (aka “what if elements had feelings?”) may not have over-indexed with its opening, but it did sustain itself for longer than anyone initially imagined and by the end of its run it did put up more Pixar-like numbers. It also built a nice word-of-mouth with consumers so that when it debuted Disney+ subscribers were more immediately interested.

It may take another film or two but eventually audiences will return to larger numbers and while that may not be the case for all studios, it’s truer for Disney given its core audience. At some point families always will look to the theater to escape a rainy day or placate a bored child. Yet summer has become harder post-pandemic as more people want to be outside – winter should be a different story.

This fall’s Wish will be a big test for that theory as Disney looks to mimic the approach it took with Encanto. The film will hit around Thanksgiving and then if history repeats itself quickly shift to Disney+ by around Christmas to help give the streamer a holiday gifting push.

While that may seem like a quick turnaround, remember Encanto left theaters with close to $100 million domestically (and $250+ million globally) so it already was a modest success, but then saw a tremendous second life on streaming. Basically this is an example of theatrical priming the pump for streaming which for many may take some getting used to given how different it is from past patterns.

That type of middle-ground could prove to be a new normal in the post-window box office world of today.

So that’s where we are at – Hulu, ABC and theatrical planning are among the biggest question for the House of Mouse for 2024. Of course, the many physical Houses of Mouse (i.e. theme parks) still factor into the mix but we’re still far away from any new big openings and at the moment the resorts aren’t where shareholders are focused. They know Disney is going to spend big there and for the moment they are buying into that strategy.

These other areas are more short term and when the strike does end will quickly become the new big questions for investors.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours.

Business relationship disclosure: I am not receiving compensation to write this article. I do have a business relationship in a separate area.

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