Disney is giving us a reality check this week. Last week’s earnings announcements among the tech giants were exuberant. Each made robust gains in sales, prompting a bewildered Paul Krugman to conclude in the New York Times that “the stock market is not the economy.” The share price of big tech could go up, despite the shrinking economy and skyrocketing unemployment.
That’s not the same on Main Street. The Walt Disney Co. reported on Wednesday night that profits dove more than 90% in the second quarter. And its share price declined more than 30% so far this year, for a company, until now, has been held as the best example of a traditional organization transforming into a digital winner.
Compared to Netflix, which employs fewer than 5,000 people, Disney has almost 200,000 employees. It poured a $1 billion investment into MagicBands, whose 1,000-engineer team developed a tech-studded wristband featuring a long-range radio that can transmit more than 40 feet in every direction. It’s essentially contact tracing for theme park visitors. Wherever they go, Disney’s restaurants, shuttles, and hotels can have personnel responsible for their pre-orders, made ready just steps before they actually arrive.
That magical experience was then extended to Shanghai when Disney opened its $5 billion Chinese theme park in 2016. Next, it weaned itself off of Netflix, halting the distribution of its content through the streaming behemoth in 2017 by launching Disney+ as its own direct-to-consumer service. All of these have been part of their relentless pursuit of great content as were their acquisitions of Marvel and Pixar a decade ago. That’s how Disney achieved almost exactly $70 billion in total revenue in 2019 between its media and studio on the one hand and its parks and experiences on the other.
And yet, in its precarious transition to all things digital, Disney’s theme parks, musicals, cruise lines, and retail stores have all been hit hard by an unthinkable external shock. Without a “v-shaped” recovery, Disney’s drop in earnings won’t recover anytime soon. The experience of Hong Kong illustrates just how fanciful any “v-shaped” thinking really is: The city is currently reporting mere single-digit increases of new coronavirus cases each day, yet the Hong Kong Disneyland remains closed indefinitely. The same is happening with the Disney Shanghai Resort. When will Florida and California report single-digit increases? And so the fate of its musicals, cruise lines, and theme parks seems tied to the eventual arrival of a universal vaccination successfully administered to a large portion of the population. Keeping that in mind, we are bracing for a silent summer.
Unlike Netflix, which has acquired the largest movie library on Earth, the nascent Disney+ needs new content beyond its existing back catalog. Netflix is the ultimate matchmaker between films and film viewers, while Disney is under constant pressure to produce new hits. This hitmaker logic works well when every Disney business is set to capitalize on spillover from the box office. But when all non-film businesses are on pause, the cost of producing a new title while limiting its distribution to only online streaming cannot pass even the most lenient of financial considerations. The more movies Disney makes, the more money it will lose, no matter how popular each new title is. The flywheel of the magic kingdom has gone into reverse.
The inconvenient truth here is that there won’t be any quick fix. Disney is raising $6 billion in debt to preserve its cash reserve. In the medium term, it will most likely look to China to accelerate e-commerce in the midst of social distancing. Chinese consumers in particular have demonstrated a voracious appetite for live-streamed events, where online influencers curate their products in real time while interacting with new buyers for hours. Traditional brands have been turning their sales representatives into online influencers, multiplying sales volume despite the closure of their physical stores. Or partnering with unusual partners, such as the movie studio Huanxi Media did with their tie up with Bytedance, is another way into the social commerce world. Borrowing lessons from other places can buy Disney time to ride out the pandemic.
Like all businesses that emerge stronger than before, after the first round of cost containment, Disney will need to pick a few areas to experiment, giving employees high degrees of autonomy. Online influencers can’t have corporate public relations to vet what they say every hour. So long as business managers are staying within their own reduced budget, they should be tasked with increasing revenues wherever possible by repurposing existing assets.
What Disney will do is hardly an exception. Most S&P 500 companies resemble Disney more closely than big tech. When people can’t congregate, there can be no sports events, no concerts, no fashion shows, no trade shows, no business conventions. The entire “experiential economy” sector is all but impossible. Disney is a taste of what is yet to come on Main Street.
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