Can Disney rediscover the magic?

There are no sure things in Hollywood. But if there were a secret formula for making blockbusters, it would look a lot like what Marvel Studios has done over the past 15 years.

Since the release of Iron Man in 2008, Marvel has generated $30bn at the box office, with three of its Avengers movies ranking in the list of top 10 highest-grossing films worldwide. 

Many thought Disney chief executive Bob Iger overpaid for Marvel when he bought the studio for $4bn in 2009, but that smug sentiment among his Hollywood rivals soon turned to envy. 

After an epic hot streak, however, there has been growing concern inside the company that the Marvel hit machine is running out of steam. Its latest film seems to have confirmed those fears. A $200mn sequel to the successful Captain Marvel released in 2019, The Marvels had the worst opening weekend ever for the Disney-owned studio, taking in $46mn.

Perhaps worse for Disney, the problem is not confined to Marvel. Pixar and Lucasfilm — two other Iger acquisitions that gave Disney the most coveted collection of intellectual property in the industry — also seem to have hit a wall. In 2019, Disney studios produced seven films that made $1bn or more but since then there has only been one: last year’s Avatar sequel. 

“Disney needs to start making hits again,” says Michael Nathanson, a media analyst at research firm MoffettNathanson. “They need to address the content pipeline, which has really suffered over the past few years.”

The problems at Marvel mirror a new sense of vulnerability for both Disney, whose success in Hollywood had seemed unstoppable, and Iger himself, who returned to the company a year ago after his handpicked successor Bob Chapek was dismissed after less than three years.

His dramatic comeback was cheered by staff and Hollywood at large. But he has found himself navigating the company in a far less forgiving environment than the one he left in 2020.

The era of low interest rates that made billions in streaming losses seem palatable is over, leaving traditional media groups to cope with high debt loads and intense competition for fickle streaming customers. The traditional TV business is in decline.

He acknowledges that Disney’s studios have hit a rough patch and is taking a hands-on approach to improving the quality of its movies. Iger has scaled back the number of films being made and is engaging in “candid” discussions with studio chiefs when films like The Marvels miss the mark.

“With creativity, it’s not sometimes as precise as you want it to be — it’s not science or math,” he tells the Financial Times. “There’s risk in everything we do. But I think it’s important when you do something that doesn’t work to understand why.”

His first year back in the job has also been marked by a series of crises — from the lengthy Hollywood strikes to a bitter legal clash with Florida’s governor — along with the ongoing financial aftershocks of the streaming revolution and pressure from hard-nosed activist investor Nelson Peltz.

Iger was jeered by actors and writers picketing outside Disney’s Burbank headquarters after he said their demands weren’t “realistic” — a blow for a CEO who considers himself talent-friendly.

The road back starts with restoring Disney’s creative spark — Iger’s top priority on a lengthy to-do list as he seeks to transform the company he ran for 15 years. 

Any pay-off from these changes will take time, given the long gestation period for feature films. But getting it right is crucial: hit films feed through to the rest of Disney’s business, from theme park and leisure attractions to merchandise such as lunch boxes, toys and apparel. 

Reinvigorating Disney’s legendary studios will be a challenge, but it is just one of the crucial tasks the chief executive faces over the remainder of his tenure, which is due to end in 2026. 

Iger says his first year back was mostly “spent on fixing”, but he is now looking for ways to get Disney’s businesses growing again.

A big part of that depends on whether he can finally turn streaming — including Disney+, Hulu and the ESPN sports network — into something profitable.

He thinks Disney can. “We feel really good about the potential of this business,” he said earlier this month.

Balance of quality and quantity

Analysts and Disney executives say the problems at Marvel, Pixar and Lucasfilm can be traced back to the heady period following the launch of the Disney+ streaming service in 2019.

Disney wanted to catch up to Netflix, and to do that it promised new original series at a low subscription price. The company’s number of subscribers soared — as did its content budget, which reached $30bn in 2022. 

All the Disney studios — but especially Marvel and Lucasfilm — were charged with developing binge-able new series in addition to their regular roster of feature films. The result was hit programmes including The Mandalorian from Lucasfilm, and Wandavision and Loki from Marvel. But it stretched the studios’ creative teams to the limit. 

“It was just, ‘go get as many subscribers as you can,’” says a Disney veteran. “And in doing so the studios were asked to make a lot of content.”

The glut of Star Wars spin-offs and Marvel superhero shows on Disney+ over the past 18 months has led to diminishing viewing figures and often lacklustre critical responses.

For Iger, the February release of Marvel’s Ant-Man and the Wasp: Quantumania seemed to embody a number of problems with the studios. It was the third Ant Man movie, and its reception from critics and Marvel fans alike was unenthusiastic. 

“Sequels typically worked well for us,” Iger noted at a conference shortly after the film was released, before questioning whether that was still the case. “Do you need a third and a fourth?” he asked.

The overall lesson, Iger has said, is that “quantity can be the enemy of quality”. But that may be changing. Disney recently revised its release schedule, which includes only one Marvel film in 2024 — the third instalment of the Deadpool series starring Ryan Reynolds — while a new Captain America movie has been shifted to 2025. Part of the shake-up has to do with the Hollywood strikes, which paused production for five months, but the company is also being more selective about what it greenlights and when movies should be released. 

“Their content output is key,” says one institutional investor. “They got the balance wrong between the quality and the quantity.” 

Iger is also asking the studios to do more with less. The company’s overall cash content budget for next year will fall by $2bn, bringing it to $25bn. He has overseen a major restructuring of the entertainment group to unwind a structure designed by former chief executive Chapek, which left studio chiefs out of the loop on distribution and other decisions. Now creative executives have more control. The chief executive says he already detects a change of atmosphere. “I think there’s a lightness in the step at Disney these days that is palpable when you walk on the lot.”

What is not changing, however, is the management of the studios. 

Kevin Feige, the architect of Marvel’s cinematic universe strategy, remains in place, alongside Pixar’s Pete Docter, Lucasfilm’s Kathleen Kennedy and Jennifer Lee, chief creative officer of Walt Disney Animation Studios.

Some investors say they would have expected changes at the studios given their recent performance. But inside Disney, supporters point out that this is the same team that produced the record results in 2019.

In a call with investors this month, Iger praised the “talented team at the studios” and their new focus on quality, while assuring them he was aware that “our performance from a quality perspective wasn’t really up to the standards that we set for ourselves.”

A broken television model

While Iger tries to revive Disney’s creative engines, he is also navigating the collapse of television businesses that for decades reliably delivered mountains of cash. Profits at Disney’s TV networks business unit fell by $1bn in the fiscal year 2023 as more customers moved to streaming services. 

Iger, known for his bold acquisitions, has taken the unusual step of publicly floating ideas of selling off some of Disney’s TV assets. He says he wants to find a partner to join Disney in the ESPN sports TV business and has discussed the possibility of selling the ABC television network.

Early this year he even questioned the need to keep the Hulu streaming service — though he has since determined that it belongs inside Disney. The company is also engaged in active talks about partnerships for its Star India business, but so far no deals have been sealed.  

Iger sounded the alarm about the collapse of the TV business in July at the annual gathering of media titans in Sun Valley. Linear television channels “may not be core to Disney”, Iger told CNBC, speaking from the ski resort town. “The business model . . . that has delivered great profits over the years, is definitely broken.”

It was a full circle moment for both Disney and Iger. His predecessor, Michael Eisner, had run into billionaire Warren Buffett at the Sun Valley summit in 1995, where the two men initiated talks for Disney to merge with ABC. That $19bn deal flung Disney headfirst into the television business, and brought the former weatherman Iger into the Mickey Mouse empire. 

Disney’s main traditional television asset, ESPN, was a crown jewel through the 2000s as it rode the wider boom in cable TV, providing the cash that helped finance Iger’s ambitious acquisitions of Pixar, Marvel and Lucasfilm.

ESPN still delivered $2.7bn in profits from $17bn in revenue last year, according to recent filings. But it is viewed by analysts as a melting iceberg, as millions of Americans cancel their cable TV packages every year. In its heyday ESPN beamed into the homes of more than 100mn households in the US, but this number has dwindled to less than 80mn. 

ESPN is a “company fighting to stay in its place”, Bank of America analyst Jessica Reif Ehrlich wrote this month. This is why Iger is seeking a “strategic partner” to acquire a stake in ESPN, although Ehrlich believes “the benefit to prospective buyers appears nebulous”.

Some envision a scenario where a tech company — say Apple or Amazon — would partner with ESPN as they seek to make sports content a bigger part of their own streaming offerings. The benefits for Disney would include help in paying for ever-increasing sports rights. The company has also reportedly held discussions with sports leagues about partnerships.

Iger said this summer that the goal was to find a partner to help with “distribution, technology, marketing, and content opportunities where we retain control of ESPN”.  

At the same time, he is weighing when to finally take ESPN “over the top” — meaning placing more content available to its pay TV customer on its streaming service. When that happens, it would be a signal that streaming’s victory over traditional TV was finally complete.

Pressure to perform

The man many consider to be the King of Hollywood has sometimes seemed daunted by the array of problems in his in-tray since his return.

Almost immediately, Iger found himself in a proxy battle with the activist investor Nelson Peltz, who sought a seat on the Disney board, cost reductions and attacked the company’s “balance sheet from hell”. Iger responded with swingeing cuts aimed at saving $5.5bn — which ultimately cost 7,000 jobs — and announced plans to restore a dividend by the end of this year. Peltz backed off, but he grew concerned as Disney shares declined as much as 30 per cent this year.

Now the start of Iger’s second year back from retirement is looking a lot like his first: with yet another challenge from Peltz.

Peltz’s Trian Partners is expected to put forth a slate of at least two candidates for the Disney board early next month. Last week, another activist firm, ValueAct, confirmed that it had taken a large stake in Disney and has engaged in talks with management.

The prospect of an expensive proxy fight is not what Iger wants as he attempts to shift his focus from restructuring and cuts to “building our businesses again”.

Iger has committed to spending $60bn over the next decade to expand Disney’s theme parks, which have mounted a robust recovery since the pandemic. He is standing by his pledge that the Disney’s streaming businesses will be profitable by late 2024 after more than $11bn in total losses since its 2019 launch. The market is responding well; shares are up 13 per cent over the past month.

Nevertheless, like last time, Peltz is expected to hammer away at Disney’s board, which he has accused of being too cosy with Iger. During his first stint running the company, Iger was granted contract extensions in 2013, 2014 and twice in 2017; a board with a different make-up extended his contract this year until December 2026.

Investors say Iger needs to get his succession right given Chipek’s ill-fated tenure. “Iger’s biggest weakness is succession planning for sure,” says an institutional investor.

They say the earlier extensions may have cost Disney good potential CEO candidates, including Tom Staggs and Kevin Mayer, who left the company when it became clear they wouldn’t get the top job. Now the two men are running their own company, Candle Media, and acting as advisers to Iger.

“Disney has been a controversial company in the governance area for a long time,” says Charles Elson, a corporate governance expert at the University of Delaware. “A lot of people can run that company. He’s not the only person on Earth who can do it. A healthy board should go find someone else.” 

But Iger says the board is actively working on finding his successor, adding that he is already doing many of the things Peltz would want to see.

“We have a very solid succession process in place. We have reduced costs, we’re getting streaming on the path to profitability,” he says. “I’m not concerned. I refuse to get distracted and not get the job done.”