Disney's and Comcast's Recent Moves Are Insufficient and Inefficient Against Disruption
Disney announced a path to increased profitability last week: Together, Disney+ and Hulu would earn about $1 billion in fiscal 2025 and achieve a 10% profit margin in 2026.
Comcast announced on Tuesday that its proposed spin-out will indeed happen. It will separate off entertainment and news channels including MSNBC, CNBC, USA, Oxygen, E!, Syfy and Golf Channel—all of which generated $7 billion in revenue in 2023—into a separate public company.
Last week I argued both solutions reflected media conglomerates pursuing either consolidation (Disney) or contraction (Comcast).
They seem inefficient and insufficient as Meta, Netflix, YouTube and generative artificial intelligence (AI) companies gun for the inefficiencies in their conglomerate business models.
Key Takeaway
Neither Disney nor Comcast seems willing to pursue efficiency more aggressively. In doing so, they do not seem to be focused on the emerging disruptive forces in the marketplace.
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Disney
Disney finally has a story of fiscal efficiency in streaming. Two years ago it reported $4 billion in annual losses. In its fiscal Q4 2024, its direct-to-consumer businesses generated $253 million in operating income and $143 million for the year. It projects for 2025 that the division will reach $1 billion in operating income in its fiscal 2025 and a 10% operating margin in 2026.
Disney has accomplished that outcome with a mix of both layoffs and cost-cutting. It reduced its content budget from $27 billion in FY 2023 to $25 billion in FY 2024, and by another 4% in FY 2025.
Its recent Disney+ series “Agatha All Along” had a reported budget of around $40 million. Previous series like Loki (2021) and Moon Knight (2022) had budgets of $23 million and $24 million per episode, respectively.
However, there is also the sense that there is clever accounting that the Disney conglomerates can only pull off. After carving out a new Sports division for its ESPN properties—including streaming service ESPN+—in Q1 2024, it reported its first profit in streaming in Q3 2024. Its Entertainment streaming businesses lost $19 million but ESPN+ earned $66 million.
In Q4, it reported that its Entertainment streaming businesses had generated $253 million in profit—14x more than the previous quarter—while its ESPN+ had only grown by 3%.
A conversation I had with a streaming executive on Tuesday noted that Disney management could still cut costs further and become more operationally and technologically efficient if it simplified its business to a single streaming platform. However, the problem is that Hulu and BAMTech remain two separate platforms, and—as The Information reported in 2019—the “longstanding tensions” that both engineering teams brought with them into their merger remain unresolved.
That is related to another conglomerate-specific problem: Disney and Comcast are locked in a dispute as to whether Disney owes Comcast more than $8.6 billion in exchange for the remaining 33% ownership of Hulu. The deal was one element of Disney’s acquisition of Fox’s entertainment assets in 2019.
A final third-party appraisal of Hulu’s valuation was expected but not delivered in its annual report. That should not prevent further financial, operational and technological efficiencies because Hulu’s equity fair value is being assessed as of September 30, 2023. This obstacle is a symptom of Disney’s struggles to find these efficiencies easily as a large, $206 billion conglomerate that prefers its bet on consolidation over contraction.
Comcast
Comcast’s spin-out offers a mixed bag on efficiency. Cord-cutting accelerated in Q3 2024 to 9.3% among the top six U.S. operators—a loss of 1.3 million households—who publicly report their customer metrics. Virtual MVPD YouTube TV is now projected to be the largest Pay-TV distributor in 2026, and it currently reaches 8 million households, nearly 60% of total households for Comcast’s video business.
The spin-out has an accompanying reorganization:
Chief Content Officer Donna Langley will become chairman of NBCUniversal Entertainment and Studios, gaining streamlined authority to greenlight productions and more financial visibility and control over content spending.
Matt Strauss, a Comcast veteran who heads the direct-to-consumer business, will be named chairman of NBCUniversal Media Group, with control over areas such as sports, ad sales and distribution.
With this move, the organization becomes both more and less efficient. It is more efficient because Comcast may better focus on and allocate resources to its growth businesses, and particularly Peacock. It is less efficient because Comcast’s media business has less scale at a time when advertisers are shifting their digital spend to platforms with more scale (Amazon Prime Video, Netflix, YouTube).
Wall Street has reacted to this news with mixed reactions. There is a relief that the cable businesses no longer will be a weight on Comcast’s stock price. There is also the belief that the spin-out could get larger as “a potential partner and acquirer of other complementary media businesses.” But, the upside to both moves is not yet obvious or unlikely to ever manifest.
In terms of consolidation and contraction, the spin-out delivers both outcomes. The contraction of Comcast opens the door to consolidation opportunities for the cable networks in its spin-out. Those opportunities were less likely with the cable networks in-house. The contraction leaves Comcast increasingly relying on nearly $50B in revenues and 40% Adjusted EBITDA margins from its video and broadband businesses.
Efficiency
Both outcomes share the optics of efficiency but not the substance. Meanwhile, technology companies and new technologies like generative AI are redefining efficiency for them.
Netflix just redefined sports distribution with last week’s Paul vs. Tyson fight. Now, the NFL—a partner to NBC Sports and ESPN—is excited that “Netflix can bring you a gigantic audience to a major sporting event’, according to Netflix chief content officer Bela Bajaria. Global scale in content distribution is now possible and millions will tune in despite technical glitches
I also argued in “Media Conglomerates' Tough Choices With Meta's Generative AI” that Comcast and Disney increasingly need new sources of cash flow as cable network revenues decline. I asked at the end, “If small businesses can afford to re-imagine the value of old [intellectual property] better than a studio can, why not let them—and Meta—deliver and participate in the upside?”
Another way to frame this given the headlines above is to ask whether Disney and Comcast are too conservative given the speed of technological change. They should be pivoting faster towards a licensing model.
Unfortunately, the answer is a hypothetical. Yes, a licensing business with recurring revenues can be profitable—Warner Music generated 27% profit margins on $1.2 billion in revenue for its Music Publishing business in its fiscal 2024—and therefore precedent for licensing models from Comcast and Disney. However, licensing TV series and movies is far more complicated given the long list of creative and productive talent involved.
The takeaway is that in this marketplace, efficiency as an outcome will always be insufficient. Meta, Netflix and generative AI are redefining "efficiency" for these conglomerates faster than they can redefine it for themselves.
Two questions linger in both Disney's and Comcast's success stories:
Can they solve for the new standards of technological efficiency being dictated by their competition?
If they cannot, what circumstances will force their hand?
Neither company seems willing to pursue efficiency more aggressively. In doing so, they remain vulnerable to the emerging disruptive forces targeting those same inefficiencies.
Author's Note On "Conglomerate"
It is worth reconsidering the term “conglomerate”.
I first used the term two years ago in "Can Disney TikTok-ify or Amazon Prime-ify Itself?" In 2023 I used it in 19 essays, and this year I have used it in 41 essays. I now plan to cut that usage back substantially.
The rationale for using the term has been simple: "Conglomerate" is a single word that summarizes a complex, centralized and evolvingcorporate decision-making structure across a diverse collection of assets. It also succinctly sums up a long, complex and ongoing history of mergers and acquisitions and corporate restructurings.
However, the term is a mouthful of clunky consonants. The “ng” and “om” require a more nasal pronunciation. Unsurprisingly, there are few, if any, heated debates about the "conglomerate model" in mainstream media or social media.
Nor is the conglomerate the end-all-be-all target of disruption for the next generation of media entrepreneurs. For example, in the connected TV space—where Amazon, YouTube and Netflix now compete for linear upfront dollars—the market focuses on capturing advertising spend traditionally allocated to inventory of cable and broadcast TV channels. None of those companies are also gunning for Comcast’s or Disney’s theme parks businesses.
For this reason, "efficiency" may be the better term and concept going forward. Conglomerates capture and exploit efficiency in all its various forms, specifically financial, operational, technological and legal. Disruptive market forces always gun for inefficiencies within conglomerates but not to topple the conglomerates themselves.
Going forward, I will be reorienting my arguments and analyses around efficiency because—even if the business rationale for the media conglomerate is disappearing with cord-cutting—there are more market inefficiencies created by conglomerates than there are actual media conglomerates. Those inefficiencies are where the market excitement lies.