Many months ago, I declared that if Disney couldn’t get Walt Disney World up and running by the end of the summer (mid September), bankruptcy would be a real threat to the company. Now in early autumn, Disney has managed to get its crown jewel going, but the rest of the company is in shambles. Moving towards 2021, Bob Chapek has major hurdles to keep the company intact in its current form.
Consider for a moment that Disney has approximately $41,310,000,000 in net debt at the moment. That’s debt that needs to be paid, much of it coming from the purchase of Fox. Some of that debt has been accrued over the past year to keep the company rolling during a time when revenue has been severely down. And while many predicted the last earnings call would be the start of Disney in deep trouble, they were one report early. The truth is this November will be when the vultures start circling.
Now, I’m not saying that Disney is done for. I’m saying that Disney has steep challenges forthcoming. Let’s take the situation in California as an example. In that quagmire, Disney has played along with the most liberal state in the nation, doing their bidding, firing part time cast members at the most opportune times for the California governor’s ambitions, planning another termination cycle exactly when that will be best again, and keeping Walt Disney World in Florida at very low crowd numbers just to get the California parks open sooner. But even at massive cost, Disney lost the synchronous messaging and behind-the-scenes congruity with the California government… to the point that Disney is now in open conflict with the state. That’s unheard of.
Right now, most pundits predict that President Donald J. Trump will lose the upcoming election. But what if the president doesn’t lose? If President Trump wins, it’s very likely that relations with China will continue to be strained. Even if President Trump loses, it’s not guaranteed that China will come around to behaving the way the United States government would prefer. Disney has repeatedly been put in awkward positions due to their relations with the Chinese Communist Party, to the point of employees in China having communist emblems on their desks within Disney management. Should a China-America Cold War move forward, Disney may have to consider divesting themselves of their Chinese investments, even to the point of finding a third party manager for the Shanghai and Hong Kong resorts. Regardless, Disney’s friendship with a concentration camp communist party is beginning to really damage their optics (as if just knowing it’s an awful idea isn’t enough).
In the short term, that might bring in some cash to help with their cash flow problem. The company has just announced they’ll be releasing another major theatrical film on streaming services exclusively. The Mulan streaming service release did not go well whatsoever, despite what some might say, and having to do this once more is a real sign of desperation. Luckily, a Pixar Film on Christmas Day might just bring in some much-needed revenues. If it underperforms, it’s a really bad canary in the coal mine.
As of right now, Disney has two major sources of revenue: Walt Disney World and Disney+. Due to the need to survive, Disney World’s gates are being opened wide. Playtime is over when it comes to WDW. They’ve gotta make money. They’ve gotta start getting fireworks back, parades back, and more. They know that and it’s almost certainly going to happen either later this year or early next. Disney+ on the other hand, is slowing in its content release schedule due to the pandemic. In order to reverse course on that problem, serious conversations are occurring about suspending annual dividend payments to invest them completely in Disney+ to open the programming generation once more.
So what of Disney’s film division? Crickets. And more troubling, the pause for the MCU is causing Disney to lose its business model on its serial programming of MCU movies. Lucasfilm is in such chaos that they can’t even figure out what they’re going do, little alone bring it to fruition. Pixar and Disney Animation are still humming, but they have been slowed a bit by being in California and having moved most operations to remote activity. Merchandise is down because new entertainment is down to drive it. And the move to get Disney completely out of the video game industry a few years ago… well, that was a nightmare-level decision in hindsight.
So here’s the deal: Disney is looking at a Q3 2020 to Q3 2021 decrease of about 20 billion dollars. This is frankly unsustainable. Disney desperately needs California to help them get out of this situation. Disney needs to decouple from China while they can by using third parties to facilitate their China operations without the risk of losing real assets due to geopolitics. The loss of 60% of NBA viewership from last year to now is a harbinger to Disney that they need to stay the hell away from hyper social cause messaging – whatever your position is, it’s a financial killer at a time when Disney can’t afford it.
If Disney can’t get their act together and make some kind of deal with California, then we won’t just be looking at divesting from real assets in China. Instead, it’s going to be Apple, Microsoft, or some other major company with a huge war chest coming in to buy Disney without the parks involved. Either that or Disney will be groveling for some Trump / Biden dollars to bail them out. The time for games is over; Disney has major hurdles to overcome quickly.