Disney surprised the media industry on February 25 when it announced that longtime CEO Bob Iger had replaced himself with executive Bob Chapek. The abruptness of the news and the choice of successor, combined with the company's explanation that it was a long-planned transition, didn't seem to add up.
It now makes more sense. It appears evident in hindsight that Iger saw the dire financial impact of the coronavirus sooner than other American chief executives and took decisive action. The most important task of Disney's CEO for the next two years will be rescuing Disney, not growing it. Iger made a point to end his 15-year reign on a high note. Chapek was put in charge as the Magic Kingdom's wartime leader.
Disney's stock multiplied from $30-40 per share during 2011 to $148 this past December, capped with a phenomenal launch of its Disney+ subscription video streaming service. Then from January 2 to February 25, as the virus impacted China and Disney shut down its Shanghai and Hong Kong theme parks, the stock slid from $148 to $128. Between February 25, the day of Iger's announcement, and this morning, the stock dropped a further 29% to $92. That's a 38% plummet in the company's valuation in 10 weeks.
As head of the company's Parks, Experiences, & Products division, Chapek represents the old-school businesses of Disney. These business lines sustained healthy growth through last year, but Iger had spent the last couple of years emphasizing that Disney's future sits with its subscription video streaming services (Disney+, Hulu, ESPN+, Hotstar) overseen by Kevin Mayer, who previously spearheaded the company's incredibly successful M&A strategy (including acquisitions of Pixar, Marvel and Lucasfilm).
With Disney managing the impact of the crisis on its parks in China beginning in January, Iger likely foresaw the global spread of coronavirus and the economic damage sooner than most other American chief executives. Disney will be hit hard.
While it is a powerhouse in the media industry, roughly 34% of Disney's revenue (and 28% of its operating income) comes from its parks, cruises and resorts. The cruises and parks could be shuttered for months, and health-weary consumers dealing with an economic downturn will be slow to return to them or to the company's hotels.
With cinemas closed or sparsely filled, potentially even into the summer months (peak season for cinemas), the global box office will be much smaller this year. That means a substantial revenue decrease for Disney's Studio Entertainment division (16% of revenue and 19% of operating income), which accounts for one-third, or $11 billion, of the entire box office market.
The largest division of Disney by revenue (41%) and operating income (42%) is its TV networks. While hundreds of millions of people staying home will increase viewership in the short term — notwithstanding ESPN, given major sports leagues paused or canceled their seasons — TV advertising revenue shrinks during market downturns as brands reduce their marketing budgets.
After launching in November, the Disney+ streaming service hit 28 million subscribers in January. People staying home with their families during the coronavirus crisis should be a boost to its subscriptions, particularly with children home from school, but the venture isn't close to profitability (2024 has been its goal for that).
Disney+ is a long-term investment that's currently draining cash from a company where cash is about to get much tighter. Disney's streaming division had losses of $740 million and $693 million during the last two quarters and estimated its investment in original content for Disney+ would run $1-2 billion annually. That ongoing investment could be undermined by reduced profits from its other divisions.
The fundamentals of Disney as a business have been strong, but it is in a rough position as a global health crisis and an almost certain global recession take the wind out of its sails. This starts a new era for the company's leadership, and it made sense for Iger, who planned to step down in 2021 anyway, to end his tenure on a high note in February — capped with the book tour for his memoir and release of his MasterClass course — while putting the man who oversees the most threatened part of the company in charge of leading the response.
Streaming services remain the heart of Disney's long-term future, so it remains critical they continue to thrive under highly capable leadership while the CEO focuses on rescuing the established businesses that provide the company's income in the present. Mayer may well have his chance at the CEO role when the rest of the company stabilizes again in the future, but Chapek made the most sense as the commander holding Disney together in this crisis.