Is This Peak Disney? Entering 2020, There Could Be a Financial "Hangover"

Mickey Mouse and Bob Iger - November 27, 2017- Getty- H 2019
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Bob Iger warns that $2.5 billion earmarked for content for its streaming service and billions lost in licensing fees will add to the pain felt by no 'Star Wars,' 'Avatar' or 'Avengers' team-up films next year.

Conventional wisdom may hold that the Walt Disney Co. has been firing on all cylinders, with its $71.3 billion partial merger with 21st Century Fox closed, streaming service Disney+ on pace to launch Nov. 12 and Avengers: Endgame rewriting the record books. But there are signs that a perfect storm of (gasp!) mediocrity for the $240 billion conglomerate may be on the way thanks to digital investments and the film calendar — at least for the short term.

Disney CFO Christine McCarthy disclosed May 8 that the creation of Disney+ and ramp-up of ESPN+ will dent operating income to the tune of about $460 million in the current quarter alone. The company intends on spending about $2.5 billion on original and licensed content for Disney+ in fiscal 2020, rising annually to $4.5 billion in fiscal 2024. Peak operating losses for the upcoming streamer are expected from 2020 to 2022 before it hits profitability in 2024. Oh, and its $400 million investment in Vice Media is essentially worthless.

These digital expenditures will occur as Disney services its debt load, which swelled to $57 billion post-Fox, and as its TV business suffers from 2 percent annual cord-cutting (operating income at Disney Media Networks fell 3 percent in fiscal 2018). Plus, CEO Bob Iger has hinted he'd like to own 100 percent of Hulu, which would require Disney to shell out about $5 billion to purchase Comcast's one-third stake in that streamer.

"The costs are definitely making their way to the financial statements," says Moody's lead analyst Neil Begley. "I'd say Disney is entering a high-scale investment cycle, and they'll eventually feel a hangover." And Disney may also have to contend with a (relatively!) soft 2020 film slate, with Avatar 2 pushed a year to Dec. 17, 2021, while the next Star Wars movie won't debut until Dec. 16, 2022.

On the Marvel front, Fox's X-Men entry New Mutants bows April 3, 2020, but the oft-delayed film likely will have a tough time hitting $960 million at the global box office, which Disney says was the average of the most recent 18 Marvel titles before Endgame (that has exceeded $2.3 billion since opening April 26).

Another X-Men movie, Gambit, originally scheduled for 2020, has been removed from the calendar. Iger wouldn't reveal details of untitled Marvel movies scheduled in 2020 for May 1 and Nov. 6, but speculation centers on the Scarlett Johansson Black Widow film and Angelina Jolie's Eternals, both of which will likely pale in comparison to Endgame.

Comps, in fact, are already an issue, given Disney reported that the studio's revenue sank 15 percent in the second quarter — while operating income was off 39 percent — in part because Captain Marvel couldn't compete with the tandem of Star Wars: The Last Jedi and Black Panther in the same frame a year earlier.

"But tough comps are a high-class problem to have," notes Begley, adding that the first thing Disney will shun as it ramps up spending is share repurchases. "Their free-cash flow and EBITDA are about to take a hit, but Disney is doing all the right things for the long term, and we think its competitors should do likewise."

Comcast’s NBCUniversal and AT&T’s WarnerMedia, will, in fact, be emulating the Disney+ model when each launches a streamer, as will Apple. While the competition will get increasingly fierce, various surveys suggest most Americans are willing to pay for at least three different streamers. Disney thinks Disney+ will have 90 million subscribers by the end of its fiscal 2024 year, with one-third of them in the U.S.

Of course, Disney also will forgo a big chunk of the estimated $8 billion it gets annually from licensing content to third parties so that it can stock Disney+ and Hulu. Iger said May 8 he has already "managed to buy back" some content, "and there's still some out there that we're exploring."

Todd Juenger of Bernstein expects Disney's direct-to-consumer business to lose $2.9 billion in 2019, another $4.3 billion in 2020 and an additional $3.7 billion in 2021. The analyst says that the quarter reported on May 8 will be the "last clean read for a while" because it included only 11 days' worth of Fox results.

More bullish, though, is Macquarie analyst Tim Nollen, who May 9 reiterated his "outperform" rating on Disney shares: "Near-term earnings figures are less important as long as they hold to expectations, and investors can look ahead to the big picture."

Disney's healthiest segment, based on its 15 percent growth in operating income in the most recent quarter as the other primary segments got worse, was Parks, Experiences and Products, though, there, too, Disney will spend an estimated $24 billion on upgrades the next five years: Says Juenger, "Parks beat, Media Networks missed. Given our views on cannibalization risk and foregone licensing, we wouldn't be surprised if that becomes a common thread."

This story first appeared in the May 13 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.