Since Bob Iger’s second term as Disney chief executive started in November, some of America’s most prominent media executives have offered him advice on how to turn the world’s largest entertainment group round.
One topic has dominated the conversations: what to do with Hulu, the popular but complicated streaming service in which Disney owns a majority stake.
The executives have counselled selling the platform, according to people familiar with the conversations, with some also suggesting Iger spin off ESPN, a profitable but declining piece of the Disney kingdom.
Rumours surrounding the streaming service and the sports network, assets potentially worth $40bn, get to the heart of a larger question: as Hollywood enters a more mature phase of the streaming era, what kind of company should Disney be?
Iger — who stepped down as chief executive in 2020 weeks before the coronavirus pandemic struck the US — has returned to a bleaker era in Hollywood. Rising interest rates have had a sobering effect on the streaming boom. Ambitious investment has been tempered by a renewed focus on profitability and cost control.
Now speculation is rife about whether Iger, who defined modern Disney through dealmaking, will seek another big transaction to cement his legacy. Selling off Hulu, ESPN or both would slim Disney down, placing a sharper focus on its family-friendly superbrands such as Marvel and Star Wars.
Rich Greenfield, partner at research group LightShed, said the signs pointed to “a retrenching of Disney back to its roots” and that “it feels like something is about to happen”.
Hulu’s ownership structure has set a timer on the decision. Disney owns two-thirds of the business with rival Comcast holding the remainder, and the companies in 2019 agreed that either side could force a transaction starting in January of 2024. Comcast can “put” the stake to Disney, or Disney can “call” the stake from Comcast.
With that date only 10 months away, Iger told investors on Thursday he was “studying” Hulu “very, very carefully”.
“The environment is very, very tricky right now. And before we make any big decisions about our level of investment, our commitment to that business, we want to understand where it could go,” Iger said at a conference.
Bob Chapek — who succeeded Iger in 2020 but was ousted in November — tried to aggressively expand Disney Plus, aiming to hit a target of 260mn subscribers by 2024, almost 100mn more than today.
Iger has shifted away from that strategy, instead speaking of the need for more focus. “Because the streaming platforms require so much volume, one has to question whether that’s the right direction to go, or can you be more curated,” he said last week.
With the “easy money” era over, big media companies face a painful dilemma: how to navigate the collapse of once-lucrative cable television businesses while waiting for their streaming units to become profitable.
“Iger is stuck,” said the chief executive of one large entertainment rival, noting Disney’s $48bn in debt. “[Hulu]is a great service but it’s domestic only and the US is a very crowded market.”
Disney’s main traditional TV asset is ESPN, which continues to generate annual revenue of more than $10bn. But subscribers are shrinking as people cancel their cable TV packages.
ESPN’s cable subscribers have dwindled from 98mn in 2013 to less than 74mn last year, according to estimates from S&P Global Market Intelligence. The ESPN Plus streaming service, which launched alongside Disney Plus in 2019, has reached 25mn subscribers but they pay a fraction of what ESPN earns from cable TV subscribers.
Towards the end of 2021, Disney executives met Michael Rubin, chair of sports company Fanatics, to discuss options for ESPN, including a potential investment or sale, according to three people familiar with the matter. While the talks did not advance beyond the meeting, they speak to the uncertainty surrounding the sports network’s future.
While Iger has announced he is open to different scenarios regarding Hulu, he has been less vague about ESPN, which he views as a “differentiated” asset.
“It is going through some obviously challenging times,” Iger said last month, pointing to the decline of traditional TV. “We just have to figure out how to monetise it in a disrupting world . . . we’re not engaged in any conversations right now or considering a spin-off of ESPN.”
Chapek, too, had been leaning towards holding on to ESPN, according to a person close to him. “But ESPN is a declining asset, and Disney has a tough balance sheet. Can you invest in [ESPN], and can you also buy the third of Hulu you don’t have?” the person questioned. “Can you do all these things? At a time when the market is saying: ‘Hey, I don’t want you losing money’?”
Hulu was created in 2007 as a joint venture among media companies who wanted to combat online piracy with a legitimate digital home for their programming.
Home to critically acclaimed shows such as The Handmaid’s Tale, The Bear and Only Murders In The Building, it has 48mn subscribers — roughly equal to HBO but behind Netflix, which has 74mn in the US and Canada.
Despite this success, Hulu has been handicapped throughout its history by its complex ownership structure and the reluctance of old media companies to disrupt their traditional TV units — highlighting the messy nature of Hollywood’s transition to streaming.
More than a decade ago Jason Kilar, Hulu’s then chief executive, tried to expand the service globally but met resistance among its old media owners. As Netflix has raced into countries around the world, signing up hundreds of millions of people, Hulu remains restricted to the US.
Towards the end of 2019, executives at Hulu pitched for a $6bn investment to launch the service globally. Iger was initially receptive, saying he would present the idea at Disney’s January 2020 board meeting, according to people familiar with the matter. But he changed his mind, concluding such a move was premature, the people said, and a month later he announced he was stepping down.
One former senior Disney executive said that when the pandemic struck, pummelling Disney’s theme park and cinema businesses, any lingering notion of a big Hulu international expansion died. “Without expanding globally, it’s not worth it,” said the executive. “So just get rid of it now.”
In the US, Hulu continues to operate as a separate service to Disney and is the home to edgier programming, such as R-rated films. Outside the US, Disney has created a general entertainment service via its Star brand.
Iger told CNBC last month that “everything is on the table” regarding Hulu’s future, noting that he was “concerned” about “undifferentiated” content.
His comments did not go down well internally at Hulu, according to employees. “It was an affront,” one executive said. “The takeaway was: He’s selling it.”
A former Hulu employee said that Hulu got “absorbed inside the Disney blunt-force object”, with many of its original staff leaving after Disney took over. “It’s hard to fathom that you don’t need a profitable 50mn subscription service in today’s world,” the person said.
Until recently, the assumption across Hollywood and Wall Street was that Disney would buy out Comcast’s Hulu stake next year. But recent comments made by the companies suggest it could be the other way round.
Comcast chief executive Brian Roberts said in September he would be interested in buying all of Hulu, calling it a “phenomenal business”.
“If it was for sale, Comcast would be interested — and I think others would also want to get into that opportunity,” Roberts said.
Comcast has its own streaming service, Peacock, which has about 20mn paying subscribers. Buying Hulu could catapult Comcast from a bit part to a leader in the streaming wars.
But it would come at a heavy cost, as the two sides had previously agreed a guaranteed minimum valuation for Hulu of $27.5bn, making for a big cheque for either company to write in today’s environment.
“We have to get much more judicious in terms of not just how much we’re spending, but what we’re spending it on,” Iger said last week. “It’s just a tricky period of time.”
