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Disney revenue dropped more than $8 billion last quarter as pandemic took its toll

Aug 05. 2020
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By Steven Zeitchik
The Washington Post

For months it's been clear that Disney, the country's most prominent entertainment company, was facing a financial disaster unlike any in its history.

On Tuesday, it became evident just how deep the carnage has gone.

The company revealed that as a result of the coronavirus pandemic it took in just $11.8 billion in revenue and $1 billion in operating income in the three-month period that ended in June, the height of lockdowns in the country. The numbers are a significant drop from the same period a year ago, when it generated $20.25 billion in revenue and $4 billion in operating income, among the worst slides of the modern era.

The earnings report for the fiscal third-quarter gave numeric form to what had been the sense of many in the entertainment and financial communities: Disney, once the high-flying giant of Hollywood, has been brought low by the virus, its creations often unable to be produced or consumed.

To try to get some of that revenue back, the company said it would finally release "Mulan," the action-adventure reboot that has been delayed several times since its March opening.

But the company said it would employ a patchwork approach to do so. The live-action film will be made available on Disney Plus in the U.S. beginning Sept. 4 - at a cost of $29.99. The same pattern will follow in Canada, Australia and some of Western Europe. Customers will be given indefinite access to the film in exchange for the fee, but only as long as they subscribe to Disney Plus.

In countries where Disney Plus is not offered or theaters are widely open, meanwhile, the movie will go to theaters. This will almost certainly include China, where the film is expected to generate a large percentage of its box office.

In moving the film to a digital platform in the U.S., Disney is acknowledging that covid-19 surges make unlikely the quick resumption of normal business - a belief embraced by other studios, which have either substantially postponed their movies to 2021 or pursued a more circumscribed American release plan.

The "Mulan" announcement also finally resolves what had been one of the great ambiguities of corona-era Hollywood.

Where many movies - including those from Disney - had either been postponed to the end of 2020 or moved quickly to digital, "Mulan" had remained in a kind of purgatory, postponed several times as the studio sought to bring it to theaters around the world. With the move, Disney has decided on a solution, if a hybrid one. It will bring out the film in theaters in some countries but not others, and it is taking it to a subscription streaming platform but still charging a supersized theater price.

Disney's $11.78 billion in revenue in the quarter was lower than the $12.37 billion many analysts expected, though earnings-per-share of 8 cents was above the 64-cent loss many forecast.

The company saw major revenue drops in several business units compared to 2019.

Theme parks saw a plummet from $6.58 billion to $983 million, a plunge of 85 percent. No American or European park was open in the quarter, while parks in Shanghai and Hong Kong reopened only midway during the period.

Equally concerning for Disney have been the few rays of theme-park light since the quarter ended. The company reopened Disney World in Florida last month to begin rebuilding its revenue pipeline. But chief financial officer Christine McCarthy acknowledged the move has not panned out as hoped.

"The upside we're seeing is less than we originally expected given the surge of covid-19 in Florida," she told analysts.

Disney chief executive Bob Chapek said that the park has experienced a "higher-than-expected level of cancellations" as people decide not to travel to Orlando because of the virus.

The company's studio unit, which did not release any major new movies to theaters, saw revenue drop from $3.8 billion during the quarter last year to $1.74 billion this year, a slide of 55 percent.

Its TV unit, however, was able to hold the line, as revenue stayed mostly flat at $6.6 billion compared to $6.7 billion last year, with many advertisers already paid up through the quarter. Harsher effects could be felt in the months ahead with the lack of new shows and a slowdown in the ad-sales market.

One of the rare bright spots in the quarter was Disney Plus, the streaming service the company launched in November. Disney executives said on a conference call it now has 60.5 million subscribers worldwide after moving a number of previously theatrical movies to the service, most notably "Hamilton" on July 4 weekend. The service is growing faster than many analysts expected, reaching 54.5 million in May and adding six million subscribers since.

The direct-to-consumer division, of which Plus is a part, saw revenue tick up slightly, by 2 percent, from $3.88 billion in the same quarter in 2019 to $3.97 billion in 2020.

Still, with investment costs high, the company does not expect profitability from Disney Plus for several more years, and the direct-to-consumer division saw a loss of $706 million in the quarter, 26 percent more than last year.

"Mulan" is one way that challenge might be remedied: a product financed by another division that could bring revenue to the start-up service.

Disney executives acknowledged how uncommon the tack was but called it a necessary exception at this moment.

The pandemic has "forced us to consider different approaches and look for new opportunities," Chapek said in an analyst call.

The move, though, is unusual even in the streaming world, which has typically offered an all-you-can-eat plan to subscribers in which all new content is available under the monthly fee. According to the "Mulan" plan, however, a customer must subscribe to the service just for the right to pay for the movie.

By placing the movie exclusively on the service instead of making it available through cable or satellite providers, the company is gambling that the benefit of the new Disney Plus subscribers it attracts will outweigh the lost revenue from people who are not subscribers.

It also is making a financial calculation: by putting the movie exclusively on its own platform, Disney is avoiding handing over as much as 20 percent of sales revenue to cable operators, as studios typically do with distributors.

Later in the call, Chapek seemed poised to rule out the possibility this could be a trial balloon but then stopped short of that position.

"We're looking at Mulan as a one-off as opposed to trying to say there's some new business-windowing model," he said. But then he added, "That said, we find it very interesting to take a new offering to consumers at a $29.99 price point and learn from it."

The company's stock price has not dropped during the pandemic, as bargain-hunters and long-term investors have sent the price up more than 20 percent since lockdowns began in mid-March. On Tuesday, investors, apparently reacting to the digital "Mulan" announcement, sent the share price up 4 percent in after-hours trading.

Both Chapek and executive chairman Bob Iger face significant headwinds in the months ahead. Any hope of a Disney comeback in the last six months of 2020 will turn on several factors related to the pandemic: Whether sports, particularly the NBA and Major League Baseball, can continue uninterrupted and bring much-needed revenue to ESPN; whether prime-time shows can begin shooting to ensure a reasonable start to the broadcast-network fall season; and whether enough theaters can reopen in the U.S. and around the world to begin collecting box office revenue.

While Mulan will not be in U.S. theaters, Disney has high hopes for November, when it has Pixar's "Soul" and Marvel's "Black Widow" scheduled to open.

Disneyland will also need to reopen if the company wishes to restore its theme parks to its past glory; the park remains closed under California orders. The parks are key to Disney's financial fortunes: with $6.76 billion in operating income last fiscal year, the division was the most profitable of any unit besides television.

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