Disney’s new CEO may need to cut costs to restore profits as money is lost on streaming

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Bob Iger will have to show Wall Street a new side of his character when he returns to lead Walt Disney, cutting costs and restoring profits in just two years after spending big bucks on acquisitions and a streaming business last time out would have.

The entertainment giant shocked investors late Sunday night by announcing the ouster of Chief Executive Bob Chapek and the appointment of Iger, 71, to a two-year deal to help get the company back on track for growth.

The move prompted other return commitments, such as Steve Jobs’ return to Apple and Howard Schultz’s return to Starbucks in times of crisis.

“The bold move (Iger’s return) might feel like the right one. However, the company is in a different phase of growth,” said Paolo Pescatore, an analyst at PP Foresight, adding that short-term measures could include curbing some operations.

The most immediate target could be Disney+, the streaming service that Iger helped launch in 2019. The unit’s losses more than doubled to US$1.5 billion (nearly Rs.1,220 million) in the most recent reporting quarter.

The deal has become a drag on earnings as Disney spends heavily on content to attract subscribers, testing investors’ patience and helping its shares fall 40 percent so far this year.

“Disney+…could probably fare better with fewer end-state subscribers, made up of superfans willing to pay high RPU (rates per user), which would generate much higher margins,” analysts at MoffettNathanson said.

They also pointed to ESPN as another target for deep cost-cutting, including a review of all upcoming sports rights, as the network loses cable subscribers.

Activist investor Dan Loeb’s Third Point had also pushed a potential spinoff from ESPN when it bought a stake in the company in August, though it later backed down from the idea.

Some brokerage firms have also raised concerns whether the two-year period Iger has agreed to return for would be enough to transform the business and find a successor.

“The problem is that Iger can’t stay forever. He screwed up the move to Tom Staggs back in 2016 and now (Bob) Chapek,” Rosenblatt Securities said.

Still, Disney shares were up 10 percent in premarket trading Monday, a sign of confidence in the executive who has led the company for 15 years.

© Thomson Reuters 2022

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