Disney Turns a Corner in Streaming, but Market Is Unimpressed
You can just imagine what Disney CEO Bob Iger was thinking today: If it’s not one thing, it’s another. Disney surprised the market by reporting that its streaming services all but broke even in the March quarter, a notable achievement given that it was wallowing in red ink just a few quarters ago. But the pesky worrywarts of the stock market chose to worry about Disney’s forecast of a slowdown in its theme park business in the June quarter. Disney stock dropped 9%, its lowest point since early February, before Disney’s publicity campaign aimed at fighting activist investors sparked a rally. Hopefully Nelson Peltz, who waged a losing battle for board seats, sold his stock at a high. Otherwise he may start a new campaign!
To be sure, the market is right to fret (the market is always right, isn’t it?). For one thing, theme parks have kept Disney healthy the past couple of years, as it was suffocating from streaming losses and the slow death of cable TV. And now, while Iger may have plugged the red ink flowing out of streaming, the TV networks’ business deteriorated markedly in the quarter. That makes any slowdown in theme parks less than ideal.
And let’s face it, the improvement in streaming isn’t necessarily as good as it might appear to be. The profitability metric Disney reports for its individual business segments is operating income (or lack thereof), not free cash flow. A streaming service reporting an operating profit isn’t necessarily generating cash. We learned that from Netflix, which burned billions in cash for years while it was reporting operating profits. That’s because its cash flow statement reflected the immediate impact of its lavish spending on programming, but on the profit and loss statement, that spending is spread out over a period of years, allowing its profits to look healthier than they were.
Still, even with that qualifier, Iger has scored a notable success in putting the streaming business in a much healthier position, through cost cutting, price hikes and subscriber growth. Now comes an equally hard task: making streaming a decently (and truly) profitable business.