When Bob Iger returns to Disney for a second stint as CEO in late 2022, the company will be in trouble: It had just reported poor financial results, was trying to recover from an unpopular business strategy and was reeling from the bad press of former CEO Bob Chapek.
Just a year later, Mr. Iger has begun turning Disney around, delivering a strong earnings report in February, announcing partnerships with Epic Games and Taylor Swift and touting a sports-streaming platform. “We're entering a new era,” Mr. Iger gushed to investors on the company's February earnings call, referring to news that Swift's “Eras Tour” movie would be released exclusively on Disney+. That sent the company's shares soaring higher, and investors rejected a public challenge to its control by activist investor Nelson Peltz.
But investor jubilation was short-lived. Iger still faces big problems, including a declining TV business, slumping box office numbers and the need to name a successor. Perhaps most worrying, Disney is losing its monopoly on kids.
Once the gateway to all things Disney, Disney Channel was a top 10 network in 2014 with an average of nearly 2 million daily primetime viewers, but by 2023 it had fallen to 80th place with just 132,000. Nielsen estimates that kids now watch TV through streaming, accounting for two-thirds of TV viewing time among kids ages 2-11. YouTube is king there. Kids are increasingly preferring to binge watch hours of free short videos over full-length TV shows and movies. In April, Nielsen estimated that kids ages 2-11 watched three times as much YouTube as Disney+ content. Meanwhile, Disney said that in 2022, more than 60% of Disney+ subscribers were adults without children at home.
“YouTube is the platform of choice for kids,” says Alexia Raven, a former vice president of research at Warner Bros. Discovery who co-founded the consulting firm Mavericks Insights & Strategy and has studied kids' viewing behavior. “YouTube meets kids where they are and fulfills their passions in subtle ways. YouTube has truly changed the entertainment landscape.”
Media companies are increasingly incorporating YouTube into their distribution strategies by releasing shorts and trailers there, but it's not an ideal setup: The companies don't control the distribution or revenue of their content, and it's unclear whether YouTube will serve as a gateway to their properties in the same way that the Disney Channel did for Disney. Kids who watch Disney clips on YouTube may not need Disney+.
Meanwhile, movie theaters are struggling. The company has had a string of box office failures and has focused on creating content exclusively for its streaming service. But in its quest for streaming dominance, Disney appears to be losing a lot of ground with kids.
In some ways, Disney faces the same challenges as other established media and entertainment companies like Comcast and Paramount. For years, conventional wisdom has been that it needs to get bigger to compete with tech giants like Google and Netflix. But streaming, advertising and box office revenues haven't panned out as expected. For Disney, this is an existential issue. If kids who grow up on Disney content don't keep coming back, the downstream impacts on other parts of Disney's business, like theme parks and merchandise, will be severe. If Disney can't recapture the hearts of Gen Alpha, it risks losing the next generation of fans to other brands.
Over the course of a century, Disney has transformed a quaint cartoon about a mouse into a vast $185 billion empire, and the company has become synonymous with wholesome entertainment for millions of children around the world.
Not anymore. The most popular kids' show of the past two years was Moonbug Entertainment's “Cocomelon,” which streams on Netflix. Acquired in 2021 by two former Disney executives, Moonbug has quickly caught up with giants like Disney, Paramount, and Comcast, ranking fifth in kids' entertainment on YouTube in 2023, according to social video analytics company Tubular. Shows featuring child actors have become popular on YouTube, with channels like “Kids Diana Show” (123 million subscribers) and “Ryan's World” (37 million) each garnering the attention of millions of kids.
“Kids are growing up watching themselves on these platforms, seeing kids like them creating content,” said Liz Huzarik, former vp of research at WarnerMedia and now managing partner at Mavericks.
It's a trend that parents like Nick McKnight, a streaming media executive in Dallas, knows firsthand, as he once tried to get his 2- and 4-year-old daughters to watch his favorite Disney movies from childhood rather than watch YouTube's hit “The Kids Diana Show.” “I tried really hard because they love 'The Lion King' and 'Aladdin,' but they would just say, 'I want to watch something on YouTube,'” he said.
The move to YouTube threatens Disney's foundational gateway into the wider world. The Disney Channel, which launched in 1983, was once a marketing juggernaut for all things Disney, introducing kids to stars like Justin Timberlake and Zendaya and hit TV movies like “High School Musical.” But it has become a victim of cable's decline.
Disney seems to be losing a lot of support among kids in its quest to dominate streaming.
Disney is certainly trying to figure out where kids are. It launched a series of shorts on YouTube to promote “Disney Junior Ariel.” And earlier this year, it launched a series of shorts on YouTube called “Winnie the Pooh” to gauge interest in a longer version. In Disney's largest gaming investment ever, Iger bought a stake in Epic Games for $1.5 billion, putting Disney characters in mega-popular games like “Fortnite,” where kids and young people are increasingly spending their time and money. The hope is that these efforts will encourage kids to seek out more content on Disney's own platforms. But while Disney is now the top media company on YouTube, getting popularity on other companies' platforms isn't really the answer to the problem. (Disney declined to comment publicly on the matter.)
Kids are known for watching the same things over and over again, making them especially valuable to media companies, as they play a key role in keeping families subscribed to streaming services. But developing new series that stick around to realize that lifetime value can take a long time. Another problem is that the number of kids in the U.S. is falling rapidly, and media companies are increasingly giving up. As Netflix's growth slowed in 2022, it and other streamers pulled kids' programming, promising investors they'd make streaming profitable.
In some ways, Disney is following suit, expanding from kids to sports, news and general entertainment, and plans to buy the remaining third of Hulu it doesn't already own in 2023. It's also investing more in the growing “adult Disney” market, which accounts for about half of Disney theme park attendance, a number that has been gradually increasing over time, people familiar with the matter said.
But diversification has not come without challenges. Like its other traditional TV businesses, Disney's TV business is in decline. The company's profitable Experiences division, which covers theme parks, resorts and related merchandise, has grown in importance over time, and according to Bernstein, will account for 70% of the company's operating profit in 2023, up from less than 25% a decade ago. But those numbers can be misleading. Over the past decade, the division has become increasingly reliant on growing spending per guest rather than growing attendance, Bernstein noted. While attendance at parks and resorts has remained roughly flat, spending per guest has increased 7%, leading Wall Street to question how much growth is left for the parks.
In theory, targeting adult audiences that advertisers can target more freely than kids could help Disney turn a profit in its streaming business, but it would also put the company up against bigger competitors like Netflix and Warner Bros. Discovery's Max. Those platforms have a head start because they're not considered “just for kids” like Disney is. Iger himself acknowledged that general entertainment content tends to be less differentiated than Disney's franchises.
To ensure its future, Disney needs to replenish its pipeline of younger fans. Unfortunately, there's no easy solution. When Iger became CEO of the company in 2005, he made a string of big acquisitions, buying Pixar, Marvel and Lucasfilm in quick succession. But today, there's no equally big company it can buy to bolster its kid appeal. Disney already distributes the global children's phenomenon Bluey, but it doesn't own the merchandising or theme park rights to the film.
But it's too early to give up on Disney.
The company has weathered many challenges over the decades, from the Great Depression to expensive flops like “The Black Thermos” and “Mommy from Mars,” to criticism over its portrayal of minorities and a surreal public debate with Florida Governor Ron DeSantis over what critics called the “Don't Say Gay” law.
Kids' preference for short videos on YouTube over full-length episodes and movies seems to be a problem Disney can't solve.
The only hope is the strength of Disney's franchises. According to Nielsen, Disney owns six of the top 10 streaming movies for 2023, including 2019's hugely popular “Moana,” “Encanto” (2021) and “Elemental” (2023). Disney is also still dazzling fans with its “Star Wars” and Marvel spinoffs such as “Andor” and “Ahsoka,” which are dominating Disney+. After a string of box office failures, Iger has made no secret of his plans to get back on track, starting with reducing the number of films and focusing on sequels rather than originals. In June, Pixar's “Inside Out 2” became the highest-grossing movie of the year just a week and a half after its release. Other highly anticipated movies this year are sequels and spinoffs such as “Moana” and “Deadpool & Wolverine.” Disney is also shifting resources away from digital series and toward more potentially blockbuster theatrical releases, as evidenced by recent cuts at Pixar that targeted its streaming-focused team.
But Disney's reliance on franchises comes with risks: The stumbling of its Marvel releases last year cast a pall over the company and put Iger at risk of losing control of the company. In the future, Disney will need fresh storylines to regain its edge.
Whether all this helps Disney stay ahead of changing consumer behavior is an open question: Kids' preference for short videos on YouTube over longer episodes or movies is a problem Disney can't solve.
To prepare for a family trip to Disneyland, Dallas media executive McKnight sat his kids down and showed them a video about the famous theme park. And on what platform did they watch it? YouTube, of course.
Lucia Moses I'm a senior correspondent for Business Insider.
