For all his criticism of Disney, Peltz and Iger probably agree: streaming needs fixing

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Good news: Nelson Peltz did a slide show about me, says no CEO ever existed. But perhaps Walt Disney’s Bob Iger had mixed feelings about the 35-pager that was released last week.

On the one hand, he says he wasted billions on the 2019 Fox deal; that he botched succession planning; that current streaming costs are inflated; that the Disney parks are rushing visitors and workers; and that Igers’ past salary was exaggerated.

On the other hand, Peltz wants Iger to stay; some of the things above can be pinned on late CEO Bob Chapek; interest from activists provides cover for cost reductions; and the 3.6% boost Peltz gave Disney shares on Thursday goes back to Igers’ record.

Unfortunately, Peltz PowerPoint roasts don’t work cumulatively, a few dozen more won’t bring Disney (ticker: DIS) stocks back from their recent $100 to their March 2021 high of $203. This could require a delicate industry-wide shift in spending and pricing. For media stocks to start working again, streaming probably has to become a worse business for customers.

Peltz, for those who don’t know him, is the son of a lower Manhattan food distributor, which explains his taste for turnaround: his offerings include Wendys, Heinz, Danone, PepsiCo and Dominos Pizza. He snatched Snapple from Quaker Oats in 1997 for $300 million and flipped it to Cadbury Schweppes three years later for $1.5 billion. In 2005 he co-founded Trian Partners to take stakes in larger companies, including in non-food industries. From 2016 to last year, he bought Procter & Gamble (PG), worked his way up to the board, helped rationalize, parted ways on friendly terms and sold profitably .

One approach of Peltz is to create a deck of slides, show it to management, apply for a seat on the board, and based on the response, decide to make their slides public. Those at Disney say Trian spoke with Chapek in November and asked for a seat. Chapek was ousted later that month and Trian was voted out, in his story, after a short call with management and no hearing from us.

The rest of the game, titled Restoring the Magic, is mostly story, with some significant current grievances, but not much through blueprint.

Among Igers’ many accomplishments at Disney include three acquisitions Marvel in 2009 for $4 billion, Pixar in 2006 for $7.4 billion, and Lucasfilm in 2012 for $4.1 billion that generated a box office for ages, and endless merchandise and theme park ties. Its more recent purchase of film and television assets from Fox for $53 billion, net of acquired cash and resulting divestments, appears less successful.

Peltz argues that Disney’s adjusted show business profits should have risen from $9.4 billion before the Fox deal to $13.3 billion with the promised synergies, but instead fell to $3.1 billion. dollars, or $7.1 billion not including streaming losses. Is there a major Fox writedown on the horizon? ask for his report. The debt is up, the dividend is gone and the stock stinks. As Peltz puts it, Disney has spent $162 billion since 2018 on transactions, content, and capital investments, and the result is a halving of earnings per share.

Only most of it is right. Disney’s costly push into streaming was forced by the rise of Netflix (NFLX) and the resulting drop in cable TV subscriptions. When Netflix’s stock market value surpassed Disney’s, it was clear that investors were valuing new streaming customers over cash flow. So Disney responded, and investors cheered. Then, rates rose and investor preference reversed. By then, more and more companies had gotten into streaming, leading to lower prices and content wars.

Now companies are raising prices, adding ads, or both, while cutting production budgets, especially as box office sales have not recovered from the pandemic. Peltz writes that Disney has taken an out-of-the-box approach to streaming, moving it too quickly from a niche to the center of content distribution. Maybe so, but that’s what investors insisted they wanted.

Peltz points out that Netflix, which generates more streaming revenue than Disney, has lower non-content spend, which translates into better streaming margins, a sign that Disney lacks cost discipline. Disney+ will undoubtedly feature prominently in what Iger promised to carefully consider the costs. But it’s worth remembering that the service has been online for just over three years, while Netflix has been streaming since 2007.

I’m with Peltz in the parks, where he says Disney earns too much to make up for streaming losses. On a family trip to Disney World in August, costs and hassles were up, and fun seemed to be down, compared to pre-pandemic travel. But part of this judgment is full of bias. Saturday Night Live producer Lorne Michaels said that when people tell him the show peaked in such-and-such a decade, what they’re really saying is that they were young. I don’t want to be one of those oddballs who confuses his kids growing up with the parks coming down and pissing off the experience for young families.

Chapek said last year that customer satisfaction scores were consistently high. Since Igers’ return, Disney has gradually reversed some of the major annoyances by restoring free parking for guests at Disney World hotels, for example.

The problem with Disney’s stock is that although it’s been priced in half, it doesn’t feel excessively cheap. Free cash flow is pegged at $4.6 billion in this fiscal year ending September. The market value is nearly 40 times that figure. Consensus estimates call for free cash flow to rebound to $10.1 billion by fiscal year ending September 2025, which is a multiple of 18. But the S&P 500 is trading at 18 times higher close to the free cash flow consensus for the next few years.

Ultimately, whether or not Peltz gets his seat on the board, Disney seems likely to get the costs under control. But what it and its streaming rivals will need in the long run is to figure out how to charge more for less, without chasing subscribers who never had more entertainment choices, or an easier time to switch between. them. No easy task.

Write to Jack Hough at [email protected]

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