Analysis: Can Disney Plus rescue the House of Mouse?
Disney last night laid bare the extent of the damage from the coronavirus crisis, which has sent shockwaves through all parts of the entertainment giant’s business.
Chairman Bob Iger warned of “unprecedented challenges” as the company reported a $1.4bn (£1.3bn) hit to first-quarter operating income.
With lockdown shutting down its theme parks, cruises and its film and TV production, even the behemoth of Disney is not immune to the pandemic.
Overall, the outlook is uncertain for the House of Mouse. However, it’s clear that Covid-19 has given a huge boost to its Disney Plus streaming service and stands the firm in good stead to challenge the might of Netflix.
Where streams come true
Disney could not have known what was to come when it launched its new streaming service last year, but the timing was uncanny.
In the UK, Disney Plus launched the day after Prime Minister Boris Johnson announced that the country was going into lockdown.
The results are clear to see. Disney Plus had 54.5m paying subscribers as of 4 May, with subscriber numbers doubling between February and April.
The rapid surge in uptake means the company is well ahead of its target of reaching between 60m and 90m subscribers by the end of 2024.
It’s still some way behind rival Netflix, which now has 167m subscribers and Amazon Prime, which has more than 150m.
However, the speed at which Disney has made up ground on its competitors will raise hopes for its prospects in the coming years when it can ramp up releases of original content.
Nicholas Hyett, equity analyst at Hargreaves Lansdown, said the launch “couldn’t have been better timed”.
“Disney’s answer to Netflix has been able to capitalise on the huge swathes of the global population confined to their couches to grow the paying subscriber base to a whopping 50m+ in a matter of months,” he said. “It’s testament to the quality of Disney’s back catalogue.”
Hulu, the other US streaming service owned by Disney, has also increased its subscriber base 27 per cent in the last year to more than 32m.
Corona chaos
The streaming success has bolstered Disney’s direct to consumer division, where revenue rose from $1.1bn to $4.1bn in the first quarter. However, the firm is still pumping large amounts of cash into the ventures, and the loss from the unit was $812m.
More concerning, however, is the impact of Covid-19 on the rest of the business.
In January the company closed its Disneyland sites in Shanghai and Hong Kong as a result of the pandemic. By mid-March the remainder of its theme parks were closed and all cruise departures had been suspended.
Cinema closures have scuppered theatrical releases in its studios division, while all TV and film productions have been put on hold. ESPN has been left with no major sports events to broadcast.
David Madden, market analyst at CMC Markets, said the pandemic had caused “chaos” for the group.
The road to recovery
Disney chief executive Bob Chapek, who is just a few months into his new role, was last night insistent the company could withstand the crisis.
“Disney has repeatedly shown that it is exceptionally resilient, bolstered by the quality of our storytelling and the strong affinity consumers have for our brands,” he said.
It has taken drastic measures to cut costs, including scrapping its planned dividend payment. Roughly 120,000 employees have been furloughed, while executives have taken a pay cut.
Disney’s debt pile has mounted after recent debt raises, as well as its $71bn acquisition of 21st Century Fox from Rupert Murdoch’s empire, which completed last year.
However, the company has a strong cash position and a hefty underlying asset base.
“As we have seen, cash is king at the moment and Disney’s strength prior to this will still likely stand the business in good stead to weather the storm, at least for some time,” said Alec Dafferner, partner at GP Bullhound.
Hopes for the future will be pinned on Disney Plus, but the most pressing concern will be on when lockdowns are lifted and its live entertainment divisions can get back to business.
Chapek last night said Disneyland Shanghai will reopen on 11 May, albeit with reduced visitor numbers and stringent social distancing measures.
The chief executive also maintained the 24 July release date for the live-action version of Mulan — Disney’s first major release of the year — suggesting optimism about cinema reopenings.
“Disney’s share price performance, as with so many other businesses, will be closely linked to the speed with which the economy can reopen safely,” said Lewis Grant, senior global equities portfolio manager at Federated Hermes.
“Disneyland Shanghai is due to open imminently with new safety precautions and a significantly reduced capacity. Investors will be watching closely to see whether these measures reassure consumers and can be replicated elsewhere.”
Chapek has suggested that there will be pent-up demand for theme parks when lockdown measures are lifted, and more optimistic investors will be hoping for a boom from Disney’s backlog of film releases.
Ben Barringer, equity research analyst at Quilter Cheviot, said he was “reassured that Disney is testing the water and reviving some operations on a trial basis”.
But the road ahead could be a long one. Barringer forecast earnings improvement from next year and stabilisation in 2022.