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Monday, October 26, 2020

Why Disney is furloughing workers and the other media giants aren’t

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On Monday, Disney began furloughing workers, temporarily stopping pay to as many as 100,000 workers, according to an estimate by the Financial Times. (Disney won’t comment on the number of furloughs).

Over the last few weeks Disney has laid out its plans to impose unpaid leave, first for some non-union employees, then in a subsequent deal with 43,000 union workers. The media giant will pay 100% of health insurance costs for workers currently covered for up to 12 months. While the majority of those furloughs are at the theme parks, they also extend to all of Disney’s other divisions, including the movie studio and TV division. Disney’s also asked its senior executives to accept a pay cut, with no set end.

Disney’s extensive furloughs stand in sharp contrast to the other two media giants – Comcast, which owns NBCUniversal, and AT&T, which owns WarnerMedia – which haven’t yet announced any furloughs or layoffs.

These are the three largest media conglomerates, in a category above all the others: Disney’s market cap is $185 billion, Comcast’s is $169 billion, and AT&T’s is $222 billion. They do face some similar challenges: all three have movie studios that are suffering from the closure of theaters and all are seeing their ad revenue plummet as live sports has been halted. And all three are working to get ahead of the cord-cutting trend and have new services designed to own that direct-to-consumer relationship.

But the finances of these companies are incredibly different. Parks and Resorts is Disney’s largest division, responsible for 35% of its revenue in 2019. That division includes not only theme parks and resorts, but also a cruise line. In contrast, Comcast derived only 5.4% of its revenue from parks such as Universal Studios, and AT&T doesn’t own any parks.

That reliance on gathering large groups of people in public lies at the heart of Disney’s challenges right now.

On Monday, both UBS an Credit Suisse downgraded Disney to neutral, largely on concern about the parks.

UBS analyst John Hodulik lowered his price target on the stock, pointing to the parks division as the largest source of earnings revision. Hodulik says they’re estimating that the parks re-opening on January 1 is the base case, with profitability likely impaired until a vaccine.

“We believe Parks’ profitability will be impaired for a longer period of time given the lingering effects of the outbreak …. the economic recession plus the need for social distancing, new health precautions, the lack of travel and crowd aversion are likely to make this business less profitable until there is a widely available vaccine,” Hodulik wrote.

 Credit Suisse’s Douglas Mitchelson is more optimistic about park openings, projecting that they’ll start opening this summer, with Shanghai Disneyland likely first.

But Mitchelson projects a three-year recovery path for the parks, and in the second half of the year he sees parks at 30% of peak revenue, down from a prior forecast of 60% of that division’s peak.

“It is obviously highly challenging to forecast timing of COVID-19 solutions, consumer behavior during and post-crisis, the depth/duration of the recession and the resulting slope of a recovery (theme parks and cruise ships in particular).”

At the same time, Comcast and AT&T have the advantage of their mobile and broadband divisions, which have become more essential in this volatile time when people are stuck at home. Last year 18% of Comcast’s revenue was from its high speed Internet and wireless divisions, and those two divisions comprised 44% of AT&T’s revenue. And that doesn’t include either Comcast or AT&T’s business services divisions.

Then there’s Disney’s movie studio, which dominated with 38% of market share (including properties from its Fox acquisition) last year. Disney was lauded for its consistent success with event movies which drew crowds to theaters. That ability to consistently produce the kind of big-budget films that merited a huge theatrical release – in greater numbers than any of its rivals — was a unique advantage before Covid-19.

Now, while Universal and other studios have taken films direct-to-consumer with video on demand releases, Disney has decided to delay most of its films until theaters re-open, starting with Mulan, which is scheduled for release in July. But there are questions hanging over all the studios about how eager moviegoers will be to return to theaters, and since Disney had the most success in that now shuttered arena, it also has the most at risk.

On the plus side for Disney, its streaming service, Disney+, was the first to launch from these three media giants, and numbers have been far better than expected. Disney reported 50 million subscribers on April 10th, putting it on track to reach the bottom end of its 60 million to 90 million subscriber goal 4 years earlier than forecast.

In contrast, AT&T and Comcast aren’t able to fully take advantage of demand for streaming content: HBO Max is launching in May and Comcast’s Peacock is rolling out nationwide in July.

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