Disney’s massive subscriber and profitability growth targets for its streaming service have sparked a lawsuit from investors who claim the entertainment giant misled them about the size of its losses.
A lawsuit filed May 12 in a California federal court accuses Disney of engaging in a fraudulent scheme designed to hide Disney+ costs and project predictions that it will be profitable by 2024. The lawsuit says the order takes aim at ousted CEO Bob Chapek’s alleged “cost-shifting scheme” to stream Certain shows are supposed to be Disney+ originals on older TV networks to hide the platform “suffering from slowing subscriber growth, losses, and cost overruns”.
The lawsuit details Disney’s pivot to prioritizing streaming amid the pandemic. While most of the company’s business suffered because theme parks, resorts, and cruise lines closed and movie theaters were forced to close, subscriptions to Disney+ 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 marketing activities were concentrated in the arm of Disney Media and Entertainment Distribution (DMED), which became primarily responsible for the monetization of all content globally. Investors say the reorganization represented “a dramatic departure from Disney’s historical reporting structure and was hugely controversial within the company because it took power away from creative-focused executives and centralized it in a new reporting group” led by Chapek Lieutenant Karim Daniel, who along with His mentor, “exercised near total control over the company’s strategic content decisions,” according to the complaint.
From December 2020 to November 2022, Chapek and Daniel repeatedly misled investors about the success of Disney+ by hiding the platform’s true costs and difficulty in maintaining strong subscriber growth as well as claiming it was on track to achieve profitability from 230 to 260 million paying subscribers globally by the end of the year. 2024, the suit alleges. This includes an alleged fraudulent plan to air some shows that were supposed to be Disney+ originals, incl Benedictine Mysterious Society And Doji Kamaloha, MD, on its television networks, such as the Disney Channel.
“By doing so, a significant portion of the shows’ marketing and production costs were shifted away from Disney+ to the legacy platform,” the complaint says.
The lawsuit says the plan was a “catalyst” behind the reorganization, which was announced a month earlier Benedictine Mysterious Society put into production. It also deals with issues with Chapek’s December 2020 remarks touting the gains. “Disney+ has surpassed our wildest expectations with 86.8 million subscribers as of December 2,” he said. “This success has reinforced our confidence in our continued acceleration towards the first DTC business model.”
Chapek additionally discussed how the company’s new distribution and marketing team is enabling creative teams to “make high-quality entertainment that they think will resonate with audiences.” The slides accompanying the presentation reiterated the company’s estimate that Disney+ will be profitable by the end of 2024. According to the complaint, this new forecast represented “a staggering three-fold increase over previous estimates without any deterioration in the segment’s projected profitability.”
After acknowledging that subscriber growth had slowed in 2021, Disney reported in November 2022 that it missed analyst estimates by significant margins on revenue, sales and profits. The company’s direct-to-consumer arm, which includes Disney+, ESPN+, Hulu and Hotstar, reported an operating loss of $1.47 billion — up from $630 million in the same quarter a year earlier. Disney shares fell more than 13 percent.
After Bob Iger returned to lead the company two weeks later, he made it clear that an important component of restoring Disney’s success would be to return power to creative executives, including distribution decisions. The lawsuit points to the statement as evidence that Chapek’s comments on his reorganization were intended to mislead investors. It also argues that Disney’s fiscal Q2 earnings from last week, which showed Disney+ lost subscribers for the second straight quarter, is further evidence that “confirms that the Disney+ goals for 2024 were never achievable.”
Chapek and Daniel are named in the complaint. Disney did not immediately respond to a request for comment.
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