Disney’s Multibillion-Dollar Streaming Decisions May Be Unearthed In Court Battle Against Investors

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Investors have taken legal action against Disney, alleging that they were deceived about the actual financial losses incurred by the company during the tenure of former CEO Bob Chapek, due to overly optimistic projections regarding subscriber growth and profitability.

On Wednesday, U.S. District Judge Consuelo Marshall refused Disney’s request to dismiss a lawsuit, suggesting that some former executives, who are accused of concocting a scheme to give the impression that Disney’s streaming service could match Netflix’s scale, potentially engaged in misleading behavior.

The accusation suggested that CEO Bob Chapek was attempting to disguise Disney+ costs and make predictions of profitability by 2024 more credible, by restructuring the executive leadership team and broadcasting certain shows initially intended for streaming as TV network content. This strategy was allegedly used to mask losses during a period of decreasing subscriber growth.

In 2023, a lawsuit was filed, outlining Disney’s shift towards focusing on streaming services during the pandemic. As their theme parks, resorts, and cruise lines were closed, and movie theaters faced forced shutdowns, subscriptions to Disney+ saw a significant increase. With Chapek, who became CEO just before COVID-19 affected the company’s primary businesses, deciding to fully commit to the streaming platform, he increased the subscription target from initial expectations of 57.5 million to an ambitious goal of 230 million by 2024, as stated in the complaint. (By December 2024, Disney+ had approximately 124.6 million core subscribers.)

As a devoted fan, I can’t help but share my excitement over the recent court ruling in favor of investors who accused Chapek and other executives of strategizing to boost short-term subscriber growth while concealing escalating costs. The judgment specifically referenced the restructuring of Disney’s media and entertainment divisions, an alleged move by Chapek and his deputy Kareem Daniel to seize creative control over all content. This reorganization appears to have centralized distribution and commercialization activities under the Disney Media and Entertainment Distribution (DMED) division, which now seems to be responsible for the global monetization of all content.

In simpler terms, Chapek communicated to investors that reorganizing Disney would enable them to make more effective distribution choices for their content based on consumer preference, as well as maximize profits from original productions. The court determined that this restructuring could potentially increase Disney+ subscribers by taking control of TV show and movie distribution away from studio executives and focusing more on streaming. For instance, instead of releasing Pixar films like “Soul”, “Turning Red”, and “Luca” in theaters, they would be sent directly to Disney+. The lawsuit also questioned other decisions such as reducing the theatrical release period to 45 days from the usual 90 days and skipping the profitable premium home entertainment phase.

It’s likely that a key point in the accusations is that Disney spent approximately tens of billions of dollars on creating fresh content for Disney+ to entice more subscribers. With the new management structure in place, Chapek aimed to “overstock the so-called digital shelves with as much content as feasible,” according to the lawsuit.

As a former gamer at Disney’s streaming division, I can confirm the claims made in this case. During my tenure from 2019 to 2021, I felt an overwhelming pressure to meet unattainable goals, much like trying to beat the highest level in a game without sufficient resources or power-ups. The boss, Chapek, was always pushing us to generate as much content as possible, believing that the one who has the most levels completed (content) would win the game. Another colleague of mine, responsible for planning Disney+’s global strategy, shared that everyone’s focus was solely on achieving growth from a subscription standpoint, making it feel like we were all competing to achieve the highest scores in our personal gaming worlds.

In 2021, under Chapek and Daniel, Disney’s content expenditure soared to an impressive $33 billion, with over $16 billion allocated specifically for Disney+ content. Contrastingly, Netflix, boasting a subscriber base double the size of Disney+ during that time, invested $17 billion in content.

In the year 2022, Disney’s streaming service suffered a quarterly operating loss worth $1.47 billion. This led to the dismissal of CEO Chapek only five months after his contract was renewed. Following Bob Iger’s reinstatement as CEO in November 2022, he abandoned the projected subscriber numbers and reduced the annual content budget by billions, also removing more than 50 Disney+ series and movies that had previously been promised to investors. This decision resulted in substantial financial losses.

Disney asserts that it clearly communicated the potential risks associated with its business model, which primarily revolved around its streaming platform, to investors. Upon Michael Eisner’s return, it adjusted its approach accordingly.

In addition to the main point under dispute, Disney’s strategy of offering steep discounts on subscriptions through a series of promotions is a key factor. For instance, they teamed up with Verizon to offer a year of free Disney+ with specific mobile plans. This promotion led to a significant surge in subscriptions, with as much as 20% of new subscribers being from this deal within the first two months. However, this came at a price: the revenue per subscriber plummeted significantly. The impact on Disney’s business has been long-term, as Verizon received a portion of the payments for billing Disney+ subscribers directly onto their wireless bills.

Between 2020 and 2023, Disney increased promotional efforts as a way to compensate for the challenging targets set for subscriber growth, testified one of the witnesses in the case. This individual also shed light on how Disney recorded subscribers, stating that anyone who received a subscription via Disney’s collaboration with Verizon was categorized as a “paying subscriber.” Another witness confirmed this information, clarifying that all those granted access to Disney+ through promotional offers fell under this classification.

During a March 2021 earnings meeting, Chapek emphasized to investors that the company is cautious when choosing partnerships and has certain rules regarding the proportion of its audience it wants to acquire from external sources, in order to maximize benefits from such alliances. Later in 2023, Iger admitted that perhaps there had been some overzealousness in their efforts to attract subscribers, suggesting they may have been too aggressive in their promotional strategies.

In refusing to drop the lawsuit, the court also pointed out that Disney’s reorganization enabled Chapek and Daniel to manipulate costs related to content and marketing for Disney+ by temporarily airing certain content initially meant for the streaming platform on cable TV networks first. This allegedly resulted in a reduction of streaming costs reported to investors during quarterly earnings calls, as these shows were later made available on Disney’s streaming service. For instance, “The Mysterious Benedict Society” and “Doogie Kameāloha, M.D.” were initially broadcast on cable TV networks before being streamed on the platform.

Investors alleged that the cost shifting violated Disney’s internal accounting policies.

The court permitted the continuation of accusations that Chapek, Daniel, McCarthy, and Iger may have engaged in illegal insider trading.

The class action being proposed aims to speak for those who purchased Disney shares between December 2020 and May 2023. During this span, Disney’s share price fell approximately 55% from a peak of around $203 down to roughly $92. However, as of February 19th, the stock is trading at 111.35.

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2025-02-20 03:55