Disney's Reorganization Raises More Questions for Investors

Cinderella Castle At Walt Disney World
David Roark/Disney Resorts via Getty Images

The change may be "less transformative" than first thought, notes LightShed Partners analyst Richard Greenfield.

Walt Disney's late Monday news that it has decided to reorganize with a focus on streaming drew much Wall Street reaction on Tuesday as some experts said it creates new questions for investors. Disney's stock was up more than 4 percent in early trading.

The shake-up, unveiled less than a week after activist investor Dan Loeb sent a letter to the Hollywood powerhouse and its CEO, Bob Chapek, to urge it to permanently suspend its $3 billion dividend and invest the additional cash in streaming content, took most by surprise.

Loeb and his Third Point commented to The Hollywood Reporter about the company's announcement: "We are pleased to see that Disney is focused on the same opportunity that makes us such enthusiastic shareholders: investing heavily in the direct-to-consumer business, positioning Disney to thrive in the next era of entertainment."

Morgan Stanley's Benjamin Swinburne called the changes "more than a 'reorg'," explaining: "Reorganizations typically move reporting lines around, create new leadership opportunities, or might even combine businesses under a single management structure. This reorganization is next-level in its scale, motivations, and complexity of execution. In effect, Disney has taken its entire content business — from its film and TV studios, its broadcast and cable networks, and its emerging streaming assets — and combined them into a single business."

Importantly, by "removing distribution and monetization responsibilities from the three content engines, the probability Disney throws out legacy models in pursuit of new approaches increases substantially," Swinburne added. "If successful, this approach should significantly accelerate Disney's transition from traditional media to direct-to-consumer streaming." And he argued it could bring more content to Disney+, Hulu, and Star in India more quickly.

However, Swinburne also highlighted major challenges. "The complexity of this new structure and need for organizational buy-in should not be underestimated," he explained. "Turning its film and TV studios and network programming teams into cost centers is a massive change to how these businesses have been run historically. In simple terms, the goal of these businesses for decades has been to maximize and grow earnings. This reorganization removes that traditional incentive structure across major assets, including Walt Disney Studios, Pixar, Marvel, Lucasfilm, ESPN, ABC, FX, Disney Channel and more. For executives that have reached the top of these organizations executing the decades-old media playbook, this is a major shift in operating model. Disney's senior management team will need to sell the organization on this new approach."

While Disney will likely continue to distribute films theatrically, "historical film windows are likely to be thrown out the … window," Swinburne also suggested in a pun. And he, like others, thinks that Disney could bring sports, in the form of ESPN+, into its direct-to-consumer portfolio sooner than previously expected.

MoffettNathanson analyst Michael Nathanson shared the view that the reorganization will be "accelerating [the company's] pivot to direct-to-consumer" and likely mean changes to traditional release strategies.

"We would assume that Disney will seek to collapse film release windows to monetize both in-theater and at-home direct-to-consumer demand while shortening home video windows," he wrote in a report. "Disney’s interest in shifting additional content more quickly to Disney+ is a significant risk to theater owners and other non-vertically integrated film studio owners."

Nathanson also sounded optimistic about the longer-term outlook for Disney. "Those who can look out a few years can envision a company with pre-COVID theme park attendance and a global Disney+ business that is second only to Netflix, which is valued at $253 billion versus the entire Walt Disney Co. at $275 billion," he concluded. "Yet, we are consistent in our view that Netflix is overvalued and, with that said, Disney’s direct-to-consumer operations are still a long way away from Netflix. Will this reorganization help Disney close the gap quicker?"

LightShed Partners analyst Richard Greenfield has long urged the Hollywood giant to do just that. In a Tuesday report, he called Disney’s restructuring "less transformative than we thought."

He explained: "Our initial interpretation, bolstered by what we thought we heard Disney CEO Bob Chapek say on CNBC, is that the creative teams simply make the content now, with all distribution decisions and monetization functions centralized under a new team, led by Kareem Daniel. ... This was intriguing to us, because it meant you had a dispassionate point person/team who could make hard decisions that would be able to trade short-intermediate term economics to build long-term value in streaming — effectively accelerating Disney going all-in on streaming."

But the analyst went on to say that "unfortunately, we now believe this is not what is happening. In fact, it is more like the opposite."

Said Greenfield: "Creatives run Disney and are by far their most valuable resource. The creative heavyweights Alan Horn and Alan Bergman (film studio), Peter Rice (TV studio) and Jimmy Pitaro (sports) did not like that streaming content decisions were being made away from them or that decision-making was even being shared. As part of the restructuring, those core creative teams are now in charge of what content gets made for all of Disney’s platforms."

The analyst concluded that this will be "empowering the creatives to make the right decisions for the content they create, but will they make the decisions investors want?" Greenfield said that this will be the question "that needs to be answered at Disney’s Dec. 10 investor day."