.jpg)
The Wall Street Journal reported Tuesday that part of Disney’s (DIS) 7,000 job cuts include 50 employees from its much-hyped metaverse-driven next-generation storytelling unit. According to the report, that’s virtually the entire metaverse operation.
Former CEO Bob Chapek promoted the unit as the “next great storytelling frontier.” Current CEO Bob Iger feels differently. While it’s never good to see job losses of any kind, the decision was easy.
Disney has much bigger issues to solve if its share price is to recover territory lost during Chapek’s tenure. In March 2021, DIS traded at or near $200. Today, it’s worth less than half that amount.
Disney’s most significant need is simultaneously reviving the creative culture at the company while doing so with an appropriate cost structure. Unfortunately, the metaverse operation was but one example of how bloated the company has gotten.
Axing the metaverse business was a no-brainer. Here’s why.
The Metaverse Wouldn’t Be a Profit Center for Years
One could argue that a company full of creative types should be given leeway to develop future products and services, such as the metaverse, in the same way, Alphabet’s (GOOGL) got its Other Bets unit, which makes expensive investments in the development of future technology. Waymo comes to mind, the company’s self-driving unit.
However, even Google, which generates $60 billion in annual free cash flow, has limits. In November, TCI Fund Management called on the company to reduce its headcount like Nelson Peltz did with Disney.
In TCI’s letter to Alphabet CEO Sundar Pichai, TCI Managing Director Chris Hohn said,
“Over the last five years, Other Bets has generated only $3 billion of cumulative revenue, but incurred a massive $20 billion of cumulative operating losses. Alphabet’s investments in Other Bets have been unsuccessful. Alphabet should reduce annual operating losses in Other Bets (which we expect to amount to $6 billion this year) by at least 50%,” Hohn stated in his Nov. 15 letter.
While it’s hard to imagine Disney’s operating losses from its metaverse project being anywhere close to what Google spends, Bob Iger could see the writing on the wall. It will take years to generate significant revenue from the metaverse, let alone operating profits.
When the time comes and Disney’s in a better financial position, both on the top and bottom line, there’s no reason it can’t go out and acquire a metaverse-related business to reignite its metaverse storytelling unit. That time isn’t now.
The company has to make its video streaming business profitable before going down the metaverse rabbit hole. Nelson Peltz would approve of its dismantling.
Three Rounds of Job Cuts
Disney is cutting 7,000 workers from its payroll in three waves: some today, more in April, and the final cuts in late spring. The cuts are part of the company’s move to save companywide $5.5 billion in annual costs.
Iger has simplified its business into three segments: Disney Entertainment (streaming and media), ESPN (TV network and streaming service), and Parks, Experiences and Products (resorts, cruise line, theme parks, and products).
Approximately $3.0 billion of the cuts will come from content-related efforts, while the remaining $2.5 billion will be non-content-related. Translation: It will invest less in new streaming content for Disney+ while trimming the headcount across all three divisions.
I can’t say for sure, but I guess the 50 jobs from the metaverse unit would be part of the cuts from Disney Entertainment. In addition, several executives involved in its production operations have been laid off in the first round of its cuts, according to Deadline.
The company’s TV operations are expected to be a big casualty of the cuts. Less likely to be hit are front-line, guest-facing resort operations. You can’t run a theme park without human staff.
But, of course, until all the layoffs have happened and been reported on, this is all mere speculation.
Is ESPN for Sale?
Interestingly, ESPN -- both its network and streaming service -- has been established as a separate operating unit. Before the change, it was part of the Disney Media and Entertainment Distribution segment; the other being Disney Parks, Experiences and Products.
Under the new plan, Iger’s created a third unit with ESPN and shortened the content business’s name by three words to Disney Entertainment.
There has been plenty of speculation about whether Iger would sell or spin off ESPN. However, in its Q1 2023 conference call, the CEO said the company wasn’t contemplating a spinoff.
“ESPN is a differentiator for this company, is the best sports brand and television, is one of the best sports brand in sports. It continues to create real value for us,” Iger stated.
“It is going through some obviously challenging times because of what’s happened in linear programming. But the brand of ESPN is very healthy, and the programming of ESPN is very healthy.”
He believes that the company can successfully transition ESPN from linear TV to streaming, but it won’t do so until it is sure business profitability won’t be adversely affected.
In the meantime, investors should have an easier time valuing the entire company, with ESPN hived off into its own unit. Of course, that cuts both ways. When business is good, ESPN will add value to the share price. When it doesn’t, that will be a headwind for its stock.
Ultimately, it makes sense to simplify the business reporting along these lines.
The Bottom Line on Job Cuts
The 7,000 job cuts represent about 3.2% of its 220,000 global headcount. The 50 or so let go from the metaverse project is less than 1% of the 7,000 job losses. In the big picture, it’s a tiny cut, but given how much it would have to spend on an uncertain outcome, the move makes a ton of sense.
Disney is far better off taking what it would have to spend over the next 3-5 years on the metaverse and investing it in customer-centric parts of its business. This includes providing better benefits for its front-line park employees.
If you’re a Disney shareholder, this small cut makes excellent sense.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
