Should Disney Get Out Of Streaming, Or Double Down On Distribution?

A Wells Fargo analyst suggests Disney exit the streaming business, arguing it could boost share prices by 40% and unlock billions in content licensing revenue. Steven Cahall believes Disney should return to its core strength of producing content rather than distributing it, simplifying its business model. However, internal reports indicate Disney is exploring opposite strategies, including embracing live-TV bundles, offering content on rival platforms, and even free tiers. CEO Josh D’Amaro faces pressure to redefine Disney's strategy, as streaming has been costly and hasn't significantly improved stock performance, unlike past activist investor interventions. The broader streaming market is challenging, with declining engagement and consumer cost concerns pushing companies like Disney to consider radical alternatives.

A Wells Fargo analyst suggests that, seven years after aggressively jumping into the streaming-video business, Disney should get out of the business. Long-stalled share prices might revive as much as 40 percent, Steven Cahall suggests.

Meanwhile, reports within Disney suggest it might actually go the opposite direction, embracing bundles of live-TV channels and even putting some of its programming for free on competing services.

Retreating to Disney’s “old biz model of producing vs. distributing” could unlock much stronger share prices while focusing Disney’s new leadership on creating and managing its vast stores of intellectual property.

What, for instance, would Disney’s many movies be worth in the “pay-1” distribution window for home entertainment, given that Sony, for comparison, pulls in $1 billion? Now, those movies go to Disney’s own pay-1 window, i.e., streaming services Disney+ and/or Hulu. Put 'em in the market and they might be worth $4 billion a year, and feed into a broader, unlocked distribution ladder, Cahall wrote in his research note, and Disney could pull in $15 billion a year of its new and library films and series.

“Investors would benefit from a de-risked biz model w/ DIS focused purely on content vs. distribution," Cahall wrote.

Certainly, recently installed CEO Josh D’Amaro must be considering a wide range of options for the biggest of Hollywood’s legacy media companies.

“If you look at the last five years, the main catalyst (for share-price growth) has been activism,” said Joe Terranova, chief market strategist for Virtus Investment Services, during a round-table discussion on CNBC about Cahall’s call.

Terranova was referring to the notable spike Disney shares took when activist shareholder Nelson Peltz twice took substantial positions in the company to push changes. Each time, share prices leaped north of $120, still well below the post-pandemic September 2021 peak of $183, but way above today’s close at $96, up as much as 1.75% in early trading after the report.

Cahall’s proposal is certainly provocative, perhaps no more so than last year’s suggestion that Disney dump its broadcast licenses amid the politically charged controversy and threats by FCC chairman Brendan Carr over comments by Jimmy Kimmel, host of Disney’s ABC late-night show, in the wake of the murder of Charlie Kirk.

In both cases, dumping out of distribution simplifies some things, for a company with an enormously complicated collection of entertainment and “experiences” (resorts, theme parks, cruise ships) offerings.

It also would be quite the about-face for D’Amaro, who took over in May for long-time CEO Bob Iger, who launched Disney+ in November 2019 after realizing that licensing Disney shows to Netflix was something like “giving atomic weapons to Third World villagers.”

In the nearly seven years since, Disney finished acquiring through several multi-billion-dollar transactions the 70 percent of streaming service that it didn’t own. It also launched the full-bodied streaming app version of ESPN, after years of offering a hamstrung ESPN+ service with little of the top-tier sports programming the cable network long has controlled.

So, jumping out of streaming’s challenges and headaches would be a big step, at a time when Terranova said “people are trying to figure out what this company is going to be.”

He said he’d bought shares of the company in late April at $103, which has been a loser for the investment ETF he runs.

“They’re spending more money, but not really making any strides in streaming,” Terranova said. “They’re just sitting, spinning their wheels.”

In fact, wheel-spinning has been afflicting more than Disney’s streaming operations, which at least make money. Comcast-owned Peacock still isn’t consistently profitable.

Emmy king HBO Max is part of the vast collection of assets that Paramount Skydance hopes to buy for a stunning $111 billion (a group of state attorneys general filed suit Monday to block the deal, which mostly has been approved by other regulators).

And Netflix, long the streaming leader, no longer can reliably claim that crown. Even combined, according to Nielsen numbers, viewership of Disney and Netflix streaming operations still draws a smaller share of viewership than Alphabet-owned YouTube.

And recent data analysis suggests Netflix, Disney and others are challenged to get viewers to come back for subsequent seasons of their biggest hits. Long delays between seasons and the oppressive plenitude of other options mean many viewers have long ago glommed onto the next show, or more likely YouTube video or vertical short drama.

Both Disney and Netflix, therefore are casting about for new ways to get their subscribers more fully stuck into their sites.

Among the considerations, bundling streaming services with competitors. Both companies have largely avoided that approach.

A third option reported lately is Disney consideration of getting more aggressively into live TV bundles, effectively virtual versions of the MVPD business. The company has had Hulu + Live TV for some time, and last fall surprised the industry by settling an antitrust lawsuit by vMVPD Fubo with a purchase of 70% of the company.

Hulu + Live TV and Fubo have since been merged, and beginning to offer a range of more nuanced bundles of cable and broadcast networks. To emphasize how important the seemingly little-noticed transaction might be, Alisa Bowen moved from her position at Disney+ president to become CEO of Fubo. Bowen also previously had top executive roles with Hulu, showing she’s a trusted hand with streaming for Disney and D’Amaro.

Those live-TV bundles can become many things, including a place to carry the streaming channels of competitors, but also to blunt the competitive threat from free-TV providers such as Roku TV, Tubi and DirecTV’s relatively new online-streaming offering, which includes dozens of free channels of programming.

Offering some free programming, even on non-Disney services, would be a big step. But it also would be a way to keep subscribers in the Disney universe, not just for its movies and TV shows but also all those resorts, theme parks, cruise ships and licensed merchandise. The experiences side of the business, where D’Amaro spent much of his career, generates about two-thirds of Disney revenue.

As a new report from Hub Entertainment Research suggests consumers are getting ever more anxious about the cost of, well, everything. Rapid price increases across streaming have forced many households to get more aggressive about what they’ll actually pay for. Offering free, ad-supported assets is one way to keep those people around, while still generating ad dollars and user data.

That two of the biggest and most successful entertainment companies in streaming are considering many options and even radical alternatives shows how complicated the business is right now. It also suggests even more trouble for smaller, less-successful streaming services not called Netflix or Disney.