Disney’s lofty subscriber growth and profitability targets for its streaming service have led to a lawsuit from investors who claim the entertainment giant misled them about the size of its losses.
A lawsuit filed May 12 in California federal court accuses Disney of participating in a fraudulent scheme designed to hide the cost of Disney+ and make predictions that it would be profitable by 2024. It targets ousted CEO Bob Chapek’s alleged “cost-shifting plan” to air certain shows intended as Disney+ originals for the first time on legacy TV networks in order to hide the platform “suffering from declining subscriber growth”. , losses and cost overruns,” the lawsuit says.
The suit details Disney’s pivot in prioritizing streaming during the pandemic. While most of the company’s businesses suffered from the closure of theme parks, resorts and cruise lines and enforced movie theater closures, Disney+ subscriptions quickly took off. Against this backdrop, Chapek decided to “go all in” on the platform, announcing a major reorganization of the company’s media and entertainment operations. Under the new reorganization, distribution and commercialization activities were centralized into the Disney Media and Entertainment Distribution (DMED) arm, which became essentially responsible for monetizing all content worldwide. Investors say the reorganization marked a “dramatic departure from Disney’s historic reporting structure and was hugely controversial within the company because it took power away from creative, content-oriented executives and centralized them into a new reporting group,” led by Chapek Lieutenant Kareem Daniel, who exercised “almost complete control over the company’s content strategic decisions” alongside his mentor, according to the suit.
From December 2020 to November 2022, Chapek and Daniel repeatedly misled investors about Disney+’s success by hiding the true cost of the platform and the difficulty of sustaining robust subscriber growth, in addition to claiming that it would on track to become profitable with 230 to 260 million paid global subscribers by the end of 2024, the lawsuit alleges. This includes an allegedly fraudulent scheme to debut certain shows that would be Disney+ originals, including The mysterious Benedictus society And Doogie Kamealoha, MD, on its TV networks, such as the Disney channel.
“As a result, a significant portion of the shows’ marketing and production costs were shifted from Disney+ to the legacy platform,” the complaint reads.
The suit says the plan was a “motivating factor” behind the reorganization, which was announced a month earlier The mysterious Benedictus society went into production. There are also issues with statements made by Chapek in December 2020 that praised profits. “Disney+ exceeded our wildest expectations with 86.8 million subscribers as of December 2,” he said. “This success has strengthened our confidence in our continued acceleration toward a DTC-first business model.”
Chapek also discussed how the company’s new distribution and commercialization team enables creative teams to “create the high-quality, branded entertainment they believe will resonate with audiences.” The slides that accompanied the presentation reiterated the company’s estimate that Disney+ would be profitable by the end of 2024. This new forecast represented an “amazing three-fold increase over previous estimates without any deterioration in expected profitability for the segment,” the complaint said.
After acknowledging that subscriber growth had slowed in 2021, Disney reported in November 2022 that it missed analysts’ estimates of revenue, sales and profit by wide margins. The company’s direct-to-consumer division, which includes Disney+, ESPN+, Hulu and Hotstar, reported an operating loss of $1.47 billion, compared to a loss of $630 million in the year-ago quarter. Disney’s stock plummeted more than 13 percent.
After Bob Iger returned to run the company two weeks later, he made it clear that a key part of restoring Disney’s success would be to return power to creative executives, including distribution decisions. The lawsuit refers to the statement as evidence that Chapek’s comments about his reorganization were intended to mislead investors. It also states that last week’s second-quarter earnings from Disney, which showed Disney+ losing subscribers for the second quarter in a row, are further evidence “confirming that Disney+’s 2024 goals were never achievable.”
Chapek and Daniel were named in the indictment. Disney did not immediately respond to a request for comment.