Disney Sued Over Company’s Streaming Initiatives, Spiraling Costs

An investor group has filed a class action lawsuit against the Walt Disney Co. alleging previous CEO Bob Chapek, his former “right-hand man” Kareem Daniel, chairman of the erstwhile Disney Media and Entertainment Distribution segment, and current CFO Christine McCarthy misled investors about the true financial costs of the media giant’s growing direct-to-consumer business segment, which includes Disney+, Hulu and ESPN+.

Former CEO Bob Chapek

The suit, filed May 12 in U.S. District Court in Los Angeles, contends that despite senior management’s claim the DTC business segment would be profitable by 2024, from 2020 to 2022 Chapek and the other defendants attempted to hide the mushrooming costs of the company’s singular focus on streaming by distributing original Disney+ content such as “The Mysterious Benedict Society” and “Doogie Kameāloha, M.D.” series across legacy distribution channels, including the Disney Channel, among other “cost-shifting scheme” initiatives.

“By doing so, a significant portion of the marketing and production costs of the shows were shifted away from Disney+ and on to the legacy platform,” read the complaint.

CFO Christine McCarthy

While distributing content costs across multiple distribution channels is not a new financial accounting trick or unique to Disney, Chapek and his team had few options other than streaming after the pandemic shuttered the company’s legacy theme parks, cruise ships, retail outlets and content production literally overnight.

In fact, the suit acknowledges that despite former CEO Bob Iger and McCarthy setting an initial target of 60 million to 90 million subscribers by the end of fiscal 2024, after Chapek became CEO following the departure of Iger in early 2020, the service experienced higher growth than originally anticipated, gaining more than 50 million subscribers in its first five months, and nearly 74 million subs in its first year (by November 2020).

Kareem Daniel

In fact, the success of Disney+ became virtually the only bright spot in an otherwise bleak start to Chapek’s tenure as CEO.

“We believe that we’ve got the opportunity to build upon the success of Disney+, which by almost any measure has been far and above anybody’s expectations, and really use this to catalyze our growth and increase shareholder wealth,” Chapek said on a fiscal call. 

The suit alleges, however, that the business 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-content-focused executives and centralized it in a new reporting group led by Daniel, who reported directly to Chapek.  

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Then in November 2022, the DTC business segment reported an operating loss of almost $1.5 billion compared to an operating loss of $630 million in the previous-year period. Wall Street reacted with shock, sending Disney shares down, and angering investors. Chapek was fired a month later, replaced by the returning Iger, who then parted ways with Daniel. CFO McCarthy remains in her position.

Disney+ has now lost subscribers for two consecutive financial quarters, which in part triggered the lawsuit that claims the 2024 Disney+ positive fiscal targets “had never been achievable.”

Disney, in response, said it is aware of the complaint and intends “to defend vigorously against it in court.”

Hey, Everyone! Stop Dumping on Bob Chapek!

Would everybody please stop dumping on Bob Chapek?

Ever since the surprise Sunday night announcement that Disney’s board, in a knee-jerk reaction to a bad quarter, had sacked Chapek from the CEO spot he had held since February 2020, the return of former CEO Bob Iger to his old job has been heralded as something akin to the Second Coming.

Chapek immediately disappeared from the Disney corporate website; in his place was a heavily photo-shopped mug shot of Iger atop a laudatory bio that praised the returning CEO for his “strategic vision” and track record of “building on Disney’s rich history of unforgettable storytelling.”

Analysts and journalists cheered Iger’s return to the executive suite, while The Wall Street Journal noted that even Disney fans “flocked to social media to celebrate the news.”

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Chapek, meanwhile, was bludgeoned for alleged missteps such as getting into a spat with Scarlett Johansson over Black Widow, which she said underperformed in theaters because of its simultaneous release on Disney+; not cracking down hard enough on a controversial Florida law that bans classroom discussion on sexual orientation or gender identity; and a corporate restructuring that saw business executives, not creatives, placed in charge of distribution strategy.

Chapek’s reign, Business Insider opined, “was marked by a series of controversies and questionable moves that raised eyebrows at best and ignited condemnation at worst.”

Other publications tossed similar brickbats at the ousted executive, with the consensus being that from the very beginning, he was the wrong person for the job.

But let’s ask this — Who would have been the right person for the job? Show of hands? Anyone?

That’s what I thought. Chapek assumed the CEO position — at Iger’s behest, by the way — with years of experience in all facets of Disney’s business holdings, and I daresay he wasn’t just the right person at the time, he was the only person who could keep Disney afloat as it faced a series of unprecedented challenges — challenges Iger saw coming, such as the global COVID-19 pandemic, as well as challenges of Iger’s own making, such as the pricey 20th Century Fox purchase and Disney+ launch.

Iger shrewdly doffed his CEO cap three weeks before the World Health Organization declared a global COVID-19 pandemic, which shuttered virtually all of Disney’s businesses. The film business was shut down because theaters were closed. Theme parks were shuttered. Cruise ships, which had become human petri dishes, suspended operations. Resort hotels were empty, and Disney’s vaunted ESPN stopped showing live sports because, well, there were no live sports.

On top of that, the 20th Century Fox acquisition left Disney saddled with debt, while the streaming strategy Iger had concocted was half-baked, with virtually no fresh content and too much dependence on India’s Hotstar.

In short, Iger left Chapek with a shitstorm, and then proceeded to snipe at his successor, from the sidelines, every chance he got.

Now that the worst of the storm is over — thanks to Chapek — and Disney is in recovery mode, Iger decided the time was right for his triumphant return.

But while it is true that Disney’s stock price is at its lowest since the start of the pandemic, let’s not forget that on Chapek’s watch the stock by March 2021 had hit a new record of close to $200 a share, at a time when the theatrical business was still not running on all cylinders.

Furthermore, Disney is far from the only big company that has seen its stock price crater. Netflix stock as of this week was trading in the $285 range, from a high of $690 in October 2021. Meta (formerly Facebook) is at $111, down from $378 in September 2021. Even Amazon is at $93, half of what it was trading for a year ago at this time.

Let’s give Bob Chapek some credit: For successfully leading the company out of the pandemic and building its streaming business into a global powerhouse with 164 million subscribers, up 39% from the prior year, according to the latest stats.

Good luck, Mr. Iger. I believe you’re going to find Bob Chapek is a hard act to follow.

Bob Iger Is Back as Disney CEO, But His Return Is Hardly Heroic

The sudden and unexpected exit of Bob Chapek as CEO of Disney and return of the media giant’s velvety former chief executive Bob Iger underscores the stark reality that good deeds and intentions in corporate Hollywood are often in the eye of the beholder.

It wasn’t too long ago (Feb. 25, 2020) that Iger quietly announced he would be stepping down as CEO after 15 years, replaced by Chapek, the former home entertainment executive who transitioned from championing Blu-ray Disc to heading the consumer products and parks and amusement business units.

Bob Chapek

Iger at the time appeared in no hurry to retire completely, having already written his memoir and ditching any U.S. presidential aspirations. He twice extended his employment contract with the Disney board (the latest until Dec. 31, 2021) despite originally planning to retire in 2017.

But his shift from hands-on CEO to passive “executive chairman” came at a most opportune time — for him. Iger had the instinctive smarts to recognize that a growing global pandemic tsunami was about to hit not just the United States but also the entire world, shuttering much of what was near and dear to Disney: theatrical movies (Disney dominated the global box office in 2019 with $11 billion in ticket sales), cruise ships, resorts and amusement parks.

All four of those businesses essentially shuttered overnight in March 2020 — leaving Chapek with a pile of long-and-short-term catastrophic situations. Indeed, Shanghai Disneyland, Disney’s sixth global amusement park and China’s first foreign invested ($5.5 billion under Iger’s reign) theme park, remains closed due to COVID concerns.

Iger stepping back into the spotlight to “save the day” and largely avoiding the last two-year shit storm should hardly be observed as heroic.

To be sure, Chapek made a few self-forced errors. First came a public feud with Scarlett Johansson after the actress filed a lawsuit accusing Disney reneging on a contractual agreement when it released Black Widow on Disney+ concurrent with the theatrical release. The two parties settled out of court.

Then, Chapek appeared to sit on the political fence too long in response to Florida Gov. Ron DeSantis’ controversial “Don’t Say Gay” legislation aimed at preventing the topic from being discussed in public elementary schools. Iger condemned the bill from the get-go.

On the flipside, Iger spearheaded the $71 billion acquisition of 21st Century Fox, inheriting a studio with significant debt ($13 billion) and few box-office prospects. The long-delayed signature sequel, Avatar: The Way of Water, is finally hitting the big screen next month. And the end result of the pricey purchase is the obliteration of a vaunted, highly respected movie studio with a rich Hollywood legacy.

“A lot of Disney’s current problems were started by Iger, driving heavy into streaming to play catch-up to Netflix (after licensing first-run movies to the service for years). Plus, he did nothing but undercut Chapek at every turn, instead of supporting the person he supposedly hand-picked to succeed him,” said a source familiar with the studio.

Disney’s singular direct-to-consumer streaming focus is shared throughout the media landscape. The $1.5 billion in segment operating losses through Oct. 1 may have caught Wall Street off guard and occurred on Chapek’s watch. But they originated under Iger.

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The increase in operating loss was due to a higher loss at Disney+ and a decrease in results at Hulu, partially offset by improved results at ESPN+. The Fox acquisition helped jumpstart the global Disney+ subscriber count thanks to India’s obsession for the sport of cricket (Disney+ Hotstar owned the streaming rights the Indian Premier League cricket), but it also left Disney 33% short of owning Hulu outright.

Now, Iger faces a Jan. 1, 2024, date to exercise a $27.5 billion option to buy the remaining stake from NBCUniversal. The latter’s corporate parent, Comcast, thinks that stake is now worth a lot more. CEO Brian Roberts is also interested in acquiring Hulu outright.

Chapek Out as Disney CEO as Bob Iger Steps Back In

In a stunning twist, Bob Chapek is out as CEO of The Walt Disney Co. and Robert Iger, the man he replaced nearly three years ago, is back in.

Chapek, who ran home entertainment at Disney during the heyday of DVD and later became a vocal champion of Blu-ray Disc, was appointed CEO in February 2020, on the eve of the COVID-19 pandemic, and steered the company through uncertain times. Disney+ was just three months old when Chapek became CEO, and he shifted the company’s resources toward making it a success. 

Just this past June, Chapek was given a three-year contract extension, with board chair Susan Arnold saying in a press release, “The board is committed to keeping Disney on the successful path it is on today, and Bob’s leadership is key to achieving that goal. Bob is the right leader at the right time for The Walt Disney Co., and the board has full confidence in him and his leadership team.”

Returning CEO Bob Iger

But now, according to an evening announcement Sunday, Nov. 20, “Iger is returning to lead Disney as chief executive officer, effective immediately. Mr. Iger, who spent more than four decades at the company, including 15 years as its CEO, has agreed to serve as Disney’s CEO for two years, with a mandate from the board to set the strategic direction for renewed growth and to work closely with the board in developing a successor to lead the company at the completion of his term.”

Chapek, according to the board announcement, “has stepped down from his position.”

In a Nov. 20 statement, Arnold said, “We thank Bob Chapek for his service to Disney over his long career, including navigating the company through the unprecedented challenges of the pandemic.”

Chapek’s exit comes as the company’s stock is trading at around $91 a share, the lowest it’s been since the global pandemic declaration in mid-March 2020. Earlier in November, Chapek announced a hiring and travel freeze in an effort to contain costs, which soared this past quarter due to streaming expenses.  

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And yet Disney+, The Walt Disney Co.’s flagship streaming service, finished the quarter ended Oct. 1 with more than 164 million global subscribers — an impressive 39% gain from the same quarter a year ago.

The 62-year-old Chapek, born in Chicago but raised in Indiana, joined Disney in 1993 as marketing chief for the company’s home entertainment division, then known as Buena Vista Home Entertainment. In 2006 he was promoted to president of the division, just as Blu-ray Disc was being launched, and he aggressively promoted the new format through innovative bonus features and extravagant promotions that included a mall tour engineered by then-publicity head Eric Maehara.

In 2009, Chapek was promoted again, to head of distribution for Walt Disney Studios. He was named head of consumer products in 2011 and spearheaded the integration of “Star Wars” merchandise into Disney’s licensing program after the studio acquired Lucasfilm.

In February 2015, Chapek was appointed  chairman of Walt Disney Parks and Resorts. Over the next five years, he oversaw the completion of Shanghai Disneyland, Pandora — The World of Avatar at Disney’s Animal Kingdom, and the Star Wars: Galaxy’s Edge lands at Disneyland and Walt Disney World.

He was upped to CEO three weeks before the World Health Organization declared a global COVID pandemic on March 11, 2020. Iger, who had been CEO since 2005, remained at Disney as executive chairman until the end of his contract on Dec. 31, 2021. He is 71.

Disney+ Ups Q4 Subs 39% to 164 Million, Streaming Biz Loss Skyrockets $800 Million to $1.5 Billion

The Walt Disney Co. Nov. 8 announced that its flagship streaming service ended the fourth quarter (ended Oct. 1) with more than 164 million global subscribers. That was up 39% from 118.1 million subs during the previous-year period.

The platform, which is launching an ad-supported subscription option on Dec. 8, again saw India’s Disney + Hotstar account for the majority of the platform’s subs at 61.3 million — up 42% from 43.3 million a year ago.

North American subscribers increased 20% to 46.4 million from 38.8 million. International subs (excluding India) increased 57% to 56.5 million from 36 million.

Separately, ESPN+ saw its sub base increase 42% to 24.3 million from 17.1 million.

Hulu ended the fiscal year with 42.8 million, up 9% from 39.7 million. Hulu + Live TV ended the period with 4.4 million subs, up 10% from 4 million. Total Hulu subscriber count increased 8% to 47.2 million from 43.8 million.

Overall, the direct-to-consumer segment saw revenue increase 8% to $4.9 billion and operating loss increased $800 million to $1.5 billion. The increase in operating loss was due to a higher loss at Disney+ and a decrease in results at Hulu, partially offset by improved results at ESPN+.

In a statement, CEO Bob Chapek remained cautiously optimistic about the media giant’s digital strategy going forward.

“Our fourth quarter saw strong subscription growth with the addition of 14.6 million total subscriptions, including 12.1 million Disney+ subscribers,” Chapek said. “We expect our DTC operating losses to narrow going forward and that Disney+ will still achieve profitability in fiscal 2024, assuming we do not see a meaningful shift in the economic climate.”

CEO Bob Chapek Looking to Accelerate Disney+/Hulu Merger

Subscription streaming VOD pioneer Hulu remains a co-owned platform between Disney and Comcast, with Disney having 67% ownership and operating control following its $71 billion acquisition of 21st Century Fox in 2019. Comcast’s NBCUniversal owns the remaining 33% stake in Hulu.

The companies have an agreement in place whereby Comcast has the option to sell its 33% stake in Hulu to Disney in 2024 at a price no less than $27.5 billion. Disney would like to expedite that transaction in an effort to meld Hulu within the Disney+ ecosystem, according to CEO Bob Chapek.

Disney CEO Bob Chapek

Speaking Sept. 14 at the Goldman Sachs + Technology confab in San Francisco, Chapek said that when the opportunity comes in 2024 to acquire NBCUniversal’s Hulu stake, there will also be an opening to combine the streaming platforms.

Hulu ended the most-recent fiscal period with 42.2 million subscribers, while Disney+ ended the period with 152.1 million.

Specifically, Chapek contends that without full ownership of Hulu, combining the platform with Disney+ is not an option.

“We would love to get to the endpoint earlier, but that obviously takes some level of propensity on [Comcast] to have reasonable [fiscal acquisition] terms to get there,” he said. “And if we can get there, I would be more than happy to try and facilitate [a Disney+/Hulu combination].”

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The executive said the company is getting hands-on experience combining diverse content within the Disney+ brand as evidenced by the melding of the Indian-based Hotstar streaming platform with Disney+, as well offering general entertainment in Europe through the Star platform.

“We’re going to have a lot of experience integrating Disney general entertainment into a Disney+ integrated hard bundle,” Chapek said, adding that the combination would revolve around giving consumers more content choices on the Disney+ platform.

The CEO contends the biggest content growth areas for Disney+ revolve around general entertainment, not just family-based fare.

“It’s only natural if you have some young kids and its 8 o’clock at night and you’ve just watched Dumbo, chances are you are not going to want to watch Pinocchio right after that,” Chapek said, adding that content options for older viewers across the Disney spectrum are fragmented and need to be consolidated.

“I’m amazed every day on this job how elastic the Disney brand is, and that we have had no blowback whatsoever in terms of including that general entertainment content on a Disney-branded streaming proposition,” he said.

Based on the success of the Hulu ad-supported subscription streaming tier, Chapek has high confidence Disney can replicate the revenue growth when it launches an ad-supported Disney+ subscription tier on Dec. 8.

“We expect that our ad-driven business will be margin neutral at worst to the full-priced, non-ad version,” he said. “I think this just puts wind in our sails in terms of being able to achieve that. So, we are very optimistic.”

When asked about the pending 38% price hike for the non-ad Disney+ tier and the fact that the ad-supported option will be priced at the current $7.99 Disney+ rate without ads, Chapek contends that when the platform launched in 2019, it was significantly undervalued.

“I think everyone in the room would acknowledge that the launch of Disney+ at that introductory [$4.99] price was pretty absurd,” he said, adding those ongoing investments in Disney+ from both a technology aspect as well content, support price hikes.

“I think we have a lot of room on the price value range, and we believe our churn implications of taking up the price even in the big chunks that we’re doing, is going to be negligible,” he said. “Again, I think it is what the market will bear, which is a direct reflection of price value. And I think we’re way underpriced relative to the value we provide to consumers.”

Disney+ Tops 152.1 Million Q3 Subs; Ad-Supported Tier Launching Dec. 8 Along With Platform Price Hikes

The Walt Disney Co. on Aug. 10 announced that its branded Disney+ subscription streaming service completed the studio’s third third quarter (ended July 2) with 152.1 million subscribers worldwide. That represents a 31% increase from 116 million subs at the end of the previous-year period. The platform added 14.4 million subs since the end of Q2 on April 2.

Disney’s pending ad-supported Disney+ subscription offering is set to launch on Dec. 8, priced at $7.99 per month. The ad-free subscription tier is increasing to $10.99 monthly, up $3. Hulu will also see a price hike to $7.99 from $6.99, with the ad-free option rising to $14.99 from the current $12.99.

Again, much of the platform’s foreign subscriber growth originated in India through Disney’s Hotstar streaming platform. The platform helped Disney add 13.5 million subs to 58.4 million from 44.9 million last year.

Disney+ added 6.6 million North American subs to end the period with 44.5 million from 37.9 million at the end of Q3 2021. International sub growth, excluding India, grew 48% to 49.2 million from 33.2 million last year.

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International subscribers now account for 107.6 million, or almost 71% of the Disney+ subscriber base.

When combined with 22.8 million ESPN+ subs (up 53% year-over-year), plus Hulu’s 42.2 million (up 8%) and four million Hulu with Live TV subs (up 8%), Disney ended Q3 with 221 million total streaming subscribers.

Disney expects to generate 135 million to 165 million core Disney+ subs by end of fiscal-year 2024, with non-Hotstar subscribers accounting for 60% to 70% of the projected 230 million to 260 million overall subscribers. Disney is now upping its guidance for Disney+ Hotstar subs to 80 million by the end of fiscal year 2024.

Meanwhile, as Disney ups its direct-to-consumer streaming footprint, so too do the segment’s expenses. The DTC segment ended the quarter with more than $1.1 billion in operating losses on revenue of $5 billion. That compared with an operating loss of $293 million on revenue of $4.2 billion in the previous-year period as the platform ramps up content spending and worldwide distribution.

Disney expects the unit’s operating loss to peak in the current fiscal quarter before transitioning toward operating income over the next two years.

“We continue to transform entertainment as we near our second century, with compelling new storytelling across our many platforms and unique immersive physical experiences that exceed guest expectations, all of which are reflected in our strong operating results this quarter,” CEO Bob Chapek said in a statement.

Disney Extends CEO Bob Chapek’s Contract Three Years, Includes $20 Million Annual Bonus Incentive

In a major show of confidence, The Walt Disney Company’s board of directors June 28 extended CEO Bob Chapek’s term of employment agreement for three years, beginning from July 1.

The employment agreement will be amended to provide that Chapek will be granted a long-term incentive award having a target value of not less than $20 million annually. The proportion of his long-term incentive award comprised of performance-based restricted stock units will be increased to 60%.

Disney said the largely stock-based bonus incentives do not guarantee Chapek any minimum amount of compensation. The actual amounts payable to the former home entertainment executive in respect of such opportunities will be determined based on the extent to which any performance conditions and/or service conditions applicable to such awards are satisfied and on the value of the Disney’s stock.

Indeed, Chapek may receive compensation in respect of any such award that is greater or less than the stated target value, depending on whether, and to what extent, the applicable performance and other conditions are satisfied, and on the value of the media giant’s stock.

The new employment contract does not alter Chapek’s existing employment agreement, including his $2.5 million base salary.

Since being named CEO in February 2020, Chapek has weathered a pandemic, political issues in Florida, mixed up the theatrical window and help broaden the reach of the Disney+ subscription streaming service globally, among other accomplishments.

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Disney Board Backs Bob Chapek Following Executive Ouster

Disney’s board of directors issued a formal vote of confidence for CEO Bob Chapek after the former home entertainment executive abruptly fired Peter Rice, the media giant’s TV boss. Rice, who came to Disney in the $71.3 billion Fox acquisition, was reportedly seen as a possible successor to Chapek, whose contract comes up next February.

In a statement, Disney board chairwoman Susan Arnold said the strength of The Walt Disney Company’s businesses coming out of the pandemic remain a testament to Chapek’s leadership and vision for the company’s future.

“In this important time of business growth and transformation, we are committed to keeping Disney on the successful path it is on today, and Bob and his leadership team have the support and confidence of the board,” Arnold wrote.

The vote of confidence comes as Disney’s stock remains at a two-year low, and Chapek deals with the fallout of his controversial handling of Florida’s Parental Rights in Education legislation. Florida lawmakers have passed legislation that would strip Disney of its 55-year-old self-governing status in the state next year.

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Disney: Ad-Supported Disney+ Could Mirror Hulu Pricing

Disney’s pending launch of a cheaper, ad-supported option for Disney+ has no price point or launch date. But that didn’t stop Wall Street analysts from calling out Disney senior management for further details on the subscriber option SVOD rival Netflix is looking to emulate in the fourth quarter.

Speaking on the May 11 fiscal call, CFO Christine McCarthy and CEO Bob Chapek both reiterated that an ad-supported Disney+ option is coveted by marketers as well as a way to attract incremental subscribers.

Christine McCarthy

“We will continue to evaluate what makes sense for the service in terms of pricing,” McCarthy said. “And I will say that you can look to our experience with Hulu and [its] ad-supported tier. We believe that this will contribute to ARPU. And we look at it as certainly something additive that will work towards achieving our long-term profitability goals.”

Hulu charges $6.99 monthly for access with advertising, and $12.99 monthly for ad-free access. Disney+ currently costs $7.99 monthly, but Chapek hinted a price hike was in play in part to pay for upwards $32 billion in multiplatform content production across Disney properties.

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“As we increase our content investment, we believe that that’s going to give us the ability to adjust our price,” Chapek said. “We are bullish about our future content going forward, not only in terms of quality but also in terms of quantity. And that’s really what’s driving our bullishness, for what we might see as the pricing power that we would have going forward.”

The executive said the company remained in “good shape” in terms of being able to meet an internal deadline for rollout of the Disney+ ad tier.

“That’s largely because we’re already doing it,” Chapek said. “The combination of our ESPN+ streaming tech stack, and our experience in Hulu and the software, we think that our current advertising capabilities really substantially prepare us to already bring this tier into operations.”

He said Disney doesn’t need to acquire additional assets or develop anything new internally since it acquired IT backend engine BAMTech in 2017.

“We’ve been looking forward to the [Disney+ ad-tier option] for a while,” Chapek said. “So, this is something that’s well-greased, if you will. And our teams are hard at work at making that become a reality.”