Foreign What's up Guys and welcome back to Wall Street Millennial On this channel, we cover everything related to socks and investing with almost 100. Years of History Disney is perhaps the single most influential media organization not only in the US but the entire world. In the 1920s, they invented modern animation with their groundbreaking Steamboat Willie short film, and to this day they have been at the Forefront of both live action and animated filmmaking. Their success in the box office has also translated to success in the stock market.

Since going public on the New York's Stock Exchange in 1983, Disney's share price increased 134-fold at its peak in early 2021. However, in recent months, the company's fortunes have taken a dramatic turn for the worse. Since the peak last year, the share price has lost half its value as losses in their Disney plus streaming business continue to explode. They were also saddled with a huge amount of debt, both from their recent acquisition of Fox's media assets and the negative impact of Covid lockdowns on their theme park and Cruise Line businesses.

In the summer of this year, the billionaire hedge fund manager Daniel Lowe bought a billion dollar stake in Disney. He sent a letter to CEO Bob Chapek saying the company needed to drastically cut costs and spin off their ESPN sports business. A few months later, after Disney reported disastrous quarterly earnings, Jpeg was fired as CEO to a casual Observer It's not obvious why Disney is facing so many problems. Their streaming service Disney Plus has exceeded all expectations, reaching more than 160 million paying subscribers in less than three years after launch and after coveted restrictions were lifted, their theme parks are seeing record attendance in this video.

We'll take a deep dive into Disney's recent financial troubles and look at why CEO Bob Chapek Had to go to understand Disney's problems today. we must first understand their business model. For decades, the company's main revenue streams revolved around movie theater releases and linear televisions. They would invest tens or even hundreds of millions of dollars to produce a single movie.

That movie would be shown in movie theaters where they'd make hundreds of millions and in some cases, even a billion dollars in ticket sales over time. They also built up a large catalog of cable TV channels including the Sports network ESPN as well as original kids content with their Disney Channel. Because of the massive following that they had with their movies and TV shows, they were able to generate Revenue by licensing their Disney characters to toy companies who would sell the toys to Big Box retailers. And finally, they created their Disney theme parks where parents can take their kids to see their favorite Disney scenes in real life and the Disney Cruise Line where families can buy a kid-friendly vacation experience.

All of their revenue streams relied on people remaining interested in Disney content. If people watch Disney movies and Disney TV shows, they will gain a connection to the brand and buy Disney branded toys for their kids. Etc and for most of the last 50 years, this business model worked brilliantly. Most households across the Developed world had subscriptions to cable television where they could watch Disney TV shows.

This allowed Disney to generate billions of dollars of Revenue directly from the cable companies, while also building brand awareness for their toys and vacation experiences. Tens of millions of people would religiously watch Disney movies at cinemas as this provided a great family experience for an affordable price. Throughout the 2000s and early 2010s, they doubled down on this strategy, making successful Acquisitions of Pixar Marvel and Lucasfilm. This made them an unparalleled Powerhouse in the box office, with many of their Marvel and Star Wars movies grossing in excess of 1 billion dollars.

But all this changed when Netflix came along. Now, people could access huge quantities of high quality content for just ten dollars a month, a fraction of the cost of cable TV which typically costs in excess of sixty dollars per month. Because Netflix has such a better value proposition to Consumers tens of millions of consumers started canceling their cable subscriptions. This was an existential threat to their cable TV business as the less people subscribed to cable television, the less money the cable companies could pay them for the Disney channel.

ESPN Etc At first, they thought they could co-exist with Netflix. In 2012, they signed a deal where they would sell their old movies and TV shows with a streaming service. However, this would not be a sustainable solution because they would always be beholden to Netflix who held most of the negotiating. Leverage So in 2019, they launched their own Online subscription service called Disney Plus, which would be a direct competitor to Netflix.

However, there was a problem: Disney owned some of the world's most iconic brands from their animated Disney movies to the Marvel superhero universe and Star Wars. However, they did not have nearly the Quasi or breadth of content that Netflix had over the previous decade. Netflix had built up a Content Library of tens of thousands of hours worth of movies and TV shows both their own original creations and Motion Pictures licensed from other media companies. If Disney Plus wanted to be a credible competitor to Netflix, they needed a lot more content then CEO Bob Iger recognized this problem.

So in 2019 he acquired rival Media Company 21st Century Fox for 52 billion dollars plus assuming 14 billion dollars of Vox's debt. This gave Disney control of TV channels including National Geographic as well as movie franchises including Avatar. The deal did not include Fox's namesake Fox News Channel or sports channels. These were excluded as they could potentially draw Anti-Trust concerns given Disney already owned ABC News and ESPN after the 21st Century Fox acquisition, Bob Iger felt that he had put Disney in a strong enough position that he could finally retire after leading the company for the past 15 years.

so he passed on his CEO position to his hand-picked Protege Bob Chapek, who was previously in charge of the theme park in Cruise Line businesses. Then, the coveted pandemic hit, which was a massive disaster for Disney. The most immediate impact was from their theme park in Cruises, where Revenue fell to zero almost overnight as covid lockdowns forced them to shut down their cable. TV business also suffered as advertisers pulled back on their ad budgets and ESPN was negatively impacted by the cancellation of sporting events.

Even their movie business was impacted as Cinemas were forced to shut down and their ability to create new movies was greatly inhibited by social distancing requirements. This was perhaps the worst possible hand that Chapic could have been dealt as a new CEO at no fault of his own. Given the dire financial situation, he was forced to Issue 11 billion dollars of new debt just to keep the company afloat. This was on top of the debt that the company already took on related to their Fox acquisition a year prior.

This gave the company a debt balance of almost 55 billion dollars, the highest debt load they had faced in their almost 100 Year history with all their traditional businesses. Under Pressure Jpeg started to double down on Disney plus within a few months they were able to start filming movies and TV shows, some of which became Mega hits. For example, the Mandalorian season 2 garnered over 8 billion minutes of watch time, smashing previous records. The massive success of their Star Wars and Marvel shows, as well as their good old-fashioned animated content called skyrocketing popularity for their streaming services.

At the beginning of 2020, Disney Plus had less than 30 million subscribers. Today, that number has grown to over 160 million, putting them in second place in the streaming wars only behind Netflix In 2021, coveted restrictions were lifted in most parts of the world. Pent-up demand caused attendance at their theme parks to Skyrocket bringing in billions in revenue for the company, and you can see this in the numbers. After taking a dip in early 2020, their revenue recovered to pre-pandemic Levels by the end of 2021, helped in large part by the growing Disney Plus subscription Revenue Despite the strong Revenue performance, the stock price has been cut in half since its peak and currently sits well below its pre-covered level.

So what gives? After making large losses at the peak of Covid, they were able to return to profitability in 2021. However, even today, their profits are still far below 2019 levels, and in the most recent quarter, they barely managed to break even. Film Production is expensive and to attract the 160 million Disney plus subscribers, they had to spend a lot of money. In 2022, they spent a record 33 billion dollars on original content 4 billion dollars more than in 2019, which was already a record spending year at the time.

In order to grow their subscriber count to almost 200 million, they needed to invest these tens of billions of dollars into original content available only on Disney plus. if the movies and TV shows are exclusive to Disney Plus, they can't generate Revenue in the traditional box office or cable television direct to. Consumer Offerings like Disney Plus generate far less Revenue per end user than traditional forms of media like cable television. and Cinemas The original idea is that you can make up for this by having a massive amount of subscribers.

Even if the revenue per end user is low, there are so many more people viewing your content that you'll generate more Revenue in total. That was the calculus that CEO Bob Chapek made with his decision to go all in on streaming. The problem was Disney wasn't the first one to think this way, and they certainly weren't the last. Almost all the big media companies have created their own streaming platforms, including Netflix Peacock, Amazon Prime Video, HBO Max and many others.

While consumers might be willing to pay for two or three services, they aren't willing to pay for 10.. in light of so much competition, the only way that Disney Plus had was to create a huge amount of Premium content and the subscription Revenue has not been enough to cover the costs. In 2021, Jpeg made the decision to dual release many of their Marvel movies including Black Widow. This means that it was available on Disney Plus at the same time they were being shown in theaters.

Many Disney Plus subscribers failed to watch the movie in the cinema. As a result, Black Widow Actress Scarlett Johansson sued Disney claiming that this decreased the box office revenue. She felt that this unfairly decreased her salary as part of it was based off box office performance. While Disney Plus subscribers had to pay an extra 30 to watch the movie while I was in theaters, the fact that it was available online made it far easier for pirates to screen record the film on their laptops.

The easier a film is to Pirate the less people will pay to view it in theaters. Jpeg thought that the increased subscribers for Disney Plus would more than offset the unfavorable impact on box office performance, but it appears that he was wrong, at least in the short term. In the third quarter of 2022, Disney reported a 91 decline in operating income for their Media Entertainment distribution segment, which includes Disney Plus. This is despite the fact that the streaming service reported record subscriber numbers.

By this point, it became clear that Bob Chapek's strategy was failing and at this rate, the company may never recover the pre-covered levels of profitability. So in November of 2022, the Board of Directors fired Jpeg, replacing him with his immediate predecessor Bob Iger. At the time of making this video, Iyer has not yet outlined what changes he plans to make, but it's safe to assume that he will drastically change the strategy around Disney plus. The main reason Chapic was fired is because of his failure to bring the company's net income back to pre-covered levels within a timely manner.

Realistically, the only way to do this in the short term is by scaling back Disney plus Investments and focusing more on the traditional box office. This will likely mean less spending on Disney plus original content and a return to movie theater exclusivity for their High budget films. This will increase profitability in the short term, but it will also decrease the value proposition for Disney plus and decrease their subscriber growth. It may also give an opening for their competitors like Netflix and HBO Max to gain market share at Disney's expense, traditional forms of media distribution are indisputably on the decline, and streaming Wars have become more competitive than most people had imagined.

Just replacing the CEO is not going to solve this fundamental problem, and with the stock price having been cut in half already, Bob Iger certainly has an uphill battle ahead of him. All right guys, that wraps it up for this video. what do you think about Disney Let us know in the comments section below. as always, thank you so much for watching and we'll see you in the next one.

Wall Street Millennial Signing out.