Was Disney right to pay $71 billion for Fox’s entertainment empire? The sprawling properties it brought in-house helped fuel Disney+ and have given returning CEO Bob Iger a much-needed box office hit with “Avatar: The Way of Water” as he settles back into his old chair.
But investors are scrutinizing spending much more closely than they used to. Disney still carries a hefty debt load from the Fox deal and Iger’s rebound tenure has a time limit as he searches once again for a successor.
As adult-skewing movies struggle in theaters and Wall Street changes the rules in the streaming war, Disney’s purchase of Fox’s studio properties may prove to be Iger’s biggest blunder, dealing lasting damage to the company’s reputation among shareholders for media-merger magic. The idea that Disney could take any given property, get audiences to associate it with its megabrand and make it an even bigger cross-platform commercial success was part of how it sold Wall Street on the notion of total entertainment dominance.
Now with a weaker stock currency, heavier debt load and skeptical investors, Iger has the harder challenge of squeezing performance out of an existing portfolio. He may not be able to buy his way out of this one.
Playing defense, not offense
It’s worth remembering that Fox put itself up for sale back in late 2017, with the deal ultimately closing in 2019. Had Disney passed, runner-up Comcast — whose Peacock streamer is now projecting a $3 billion loss in 2023 — would own 100% of Hulu instead. Universal and Peacock, which just passed 20 million paid subscribers, would benefit from Fox’s IP riches.
Disney “got a part of Hulu and a huge footprint in India thanks to the Star television empire,” said Sean Nyberg, an attorney who runs the “Disney Beat” podcast and owns shares of the company. “They also now own FX and National Geographic channel, which are major successes in a dying marketplace.”
Conventional wisdom holds that even if Fox didn’t quite pan out as an endless fountain of streaming franchises and theatrical blockbusters, at least Disney kept the goodies away from rivals.
Josh Spiegel, the author of “Pixar and the Infinite Past: Nostalgia and Pixar Animation,” disagreed: “Overpaying for Fox to keep it out of the hands of a competitor only made sense when Disney was at the peak of its pop culture domination.”
A deal whose benefits dissipated
The plan, as insiders tell it, was for the Fox studios to give Disney an edge in adult-skewing blockbusters like “Planet of the Apes” and Disney-compatible fare for kids like the “Ice Age” series that could strengthen its hand in streaming.
Things didn’t go as planned. Even before the pandemic, in a trend visible when deal talk began, general moviegoers were shifting from theatrical viewing to streaming, particularly with adult-audience, non-event films. That hurt Fox films like “The Hate U Give,” “Bad Time at the El Royale,” “Stuber” and even not-so-must-see franchise flicks like “Dark Phoenix” and “Terminator: Dark Fate.”
By 2018, 26% of the domestic box office was made up of the six biggest grossers. In 2019, the first year Disney owned Fox, Walt Disney’s total theatrical output was around $12.6 billion. Just $1.6 billion came from Fox and Searchlight under Disney.
Seemingly valuable, kid-friendly Fox IP translated into streaming films like “The Ice Age Adventures of Buck Wild,” “Home Sweet Home Alone” and “Night at the Museum: Kahmunrah Rises Again” that, as one leading streaming viewership expert confirmed, few Disney+ subscribers watched.
At first, Wall Street cheered Disney+’s subscriber growth. Then it changed its mind about the streaming war, prioritizing profitability.
Disney bought Fox and then mostly proceeded to bury it
Disney’s stewardship of the Fox assets is a key question. With $45 billion in debt as of September, the productivity of its IP portfolio is critical. Yet the company seemed more interested in shutting down former Fox studios than nurturing them.
Fox 2000 was shuttered in mid-2019 and after the poor theatrical performance of “Spies in Disguise” in late 2019, Blue Sky followed in 2021. Fears that Disney would buy Fox and strip it for parts — or Hulu streaming fodder — proved partially founded.
“This was unlike Disney buying Marvel to make Marvel movies or buying Lucasfilm to make ‘Star Wars’ films,” said Spiegel. “Disney bought a ginormous entertainment studio — removing a competitor from the board — to acquire specific IPs [like ‘The Simpsons’ and ‘Avatar’] only to discard the rest.”
“Planet of the Apes,” “Avatar” and the Marvel brands like “Fantastic Four” and “Deadpool” remain among 20th Century’s few theatrically viable brands. Yes, “Avatar: The Way of Water” has passed $2.1 billion worldwide, and the Human Torch and Wolverine bring added value to the MCU. However, even with “The Simpsons” being the most popular show on Disney+ and Ryan Reynolds’ original, high concept “Free Guy” grossing a miraculous $331 million in the summer of 2021, that’s only so much value for $71 billion. (Or $57 billion: Disney argued in a presentation to investors recently that the sale of a stake in Sky for $15 billion in 2018 and around $2 billion in synergy transactions reduced the deal’s real cost.)
“It’s like spending $25,000 on a hybrid or electric car,” noted a rival studio executive, “to save $3,000 a year on gas. The world may be a radically different place by the time you would have broken even and begun coming out ahead.”
Pop culture dominance, but at what price?
BoxOffice.com analyst Shawn Robbins argued that it’s still too soon to pass judgment on the purchase. “Films like Tom Hanks’ ‘A Man Called Otto’ show that even adults want feel-good or escapism films,” he noted, also highlighting Fox’s “The Greatest Showman,” which grossed $430 million in 2017 pre-Disney.
That’s not even factoring in potential revenue opportunities from T-shirts featuring Mickey Mouse palling around with Kiri Sully, Deadpool heckling guests at Disney World or Kylo Ren teaming with Dr. Doom to host a trivia night on a Disney cruise ship.
Iger’s always seemed to have good timing. Coming back as CEO weeks before “Avatar 2” clobbered the box office is just the latest example. But he doesn’t have much time, with the board and investors eager for him to name a successor.
In his first tour as CEO, Iger made his name through big buys: Pixar, Marvel, Lucasfilm. Disney would take IP like the MCU, the “Star Wars” movies or the live-action remakes of Katzenberg-era Disney toons like “The Lion King” and “Aladdin,” which were triumphs from another company or a prior regime, and supercharge it with the modern Disney marketing playbook.
The weakness of Fox franchises under Disney seems to undercut that narrative. Iger could blame the last guy — Bob Chapek, whom he abruptly replaced in December — except that Chapek was his handpicked successor.
Can Disney win the battle without losing the war?
Disney is poised to report quarterly earnings next week, and even though Iger had little to do with those numbers, how he presents them to Wall Street could prove critical. Iger and the board are contending with a challenge from activist investor Nelson Peltz, whose Trian Industries owns a stake worth $900 million in the company. A Disney spokesperson declined a request for comment Monday.
Peltz’s pursuit of a board seat is a long shot, and Disney has dismissed his lack of media experience, saying he brought no ideas for a turnaround when he met with the board on Jan. 10. Unlike Michael Eisner, who was ousted in 2005 by a shareholder revolt that included Roy Disney, Iger isn’t facing off against an executive with his name on the building. And even if Peltz managed to get a seat in the boardroom, he would just have one vote.
Still, Iger needs Wall Street on his side. The stock has rallied since he returned and is up 21% since the beginning of the year, but it’s still down 32% from its year-ago high. Shares are about where they were when the Fox deal closed nearly four years ago. In a response to Peltz, Disney pointed out that under Iger, it returned considerable capital to shareholders, but the company has not issued a dividend since suspending the payouts under the strain of the pandemic in 2020.
Disney “needs a knockout with a sharper defense,” said Nyberg. “That we’re discussing Iger’s legacy and the Fox purchase is a sign that Disney is not yet winning.”
