Disney CFO Takes High Road in ‘Mulan’ Film Credits Controversy

In the highly partisan political landscape, a growing controversy has emerged regarding locations and local authorities in China where some of Disney’s live-action Mulan was filmed.

With the $200 million budget movie set to open in Chinese theaters, in addition to the current Premier Access on Disney+ in the U.S. and other territories, human-rights activists have raised questions about Disney’s cooperation with local authorities in China’s Xinjiang region, where allegations of abuse and re-education internments against ethnic Muslim Uighur minorities originate.

In response, there have been growing calls on social media to boycott Mulan over the issues.

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Mulan is a patriot but she shouldn’t be placed in Xinjiang because patriotism has been forbidden in Xinjiang,” Abduweli Ayup, a Norway-based Uyghur activist, wrote in a post. “In China, patriotism is loving the Chinese Communist Party.”

Sen. Josh Hawley (R-MO) weighed in on the matter, accusing Disney of “whitewashing genocide” by allegedly cooperating with Chinese police working at the camps.

“Your decision to put profit over principle, to not just ignore the CCP’s genocide and other atrocities, but to aid and abet them, is an affront to American values,” Hawley wrote in Sept. 9 letter to Disney.

Liu Yifei, the lead actress in Mulan, added fuel to the controversy when she tweeted support for police crackdowns on pro-democracy protesters in Hong Kong.

Speaking Sept. 10 on the Bank of America Securities Virtual Media, Communications & Entertainment Conference, Disney CFO Christine McCarthy said she had no interest in discussing international politics. Instead, the executive reiterated that production on Mulan involved numerous international locations — most notably in New Zealand.

“The real facts of Mulan [are] that it was primarily shot in — almost the entirety in New Zealand. And in an effort to accurately depict some of the unique landscape and geography of the country of China for this historical period piece drama, we filmed scenery in 20 different locations in China,” McCarthy said.

The CFO said it is standard procedure that when filming in China or any foreign country, that permits must be obtained. And in China, that permission comes from the central government in Beijing. McCarthy added that it is also common practice in Hollywood to acknowledge the appropriate agencies, authorities and governments in a movie’s credits.

For Mulan, Disney reportedly thanks eight government entities in Xinjiang, including security in the city of Turpan, where the government allegedly operates the camps. Disney also credits the publicity department of CPC Xinjiang Uighur Autonomy Region Committee, an agency that reportedly produces state propaganda.

McCarthy said it is common practice in movies to also acknowledge  national and local governments, which for Mulan included both China as well as New Zealand.

“I would just leave it at that,” she said. “But that’s generated a lot of issues for us.”

Disney CFO on ‘Mulan’ Bypassing Theaters: ‘Would a Family Go? Probably Not’

Calling the unprecedented decision to launch $200 million live-action movie Mulan direct-to-consumer via premium video-on-demand “not an easy decision,” Disney CFO Christine McCarthy told a virtual Wall Street event that a lot of factors played into the release strategy.

Speaking Sept. 9 online at the Citi 2020 Global Technology Conference, McCarthy said the decision to release Mulan as a $29.99 “Premier Access” title to Disney+ subscribers on Sept. 4 revolved around the fact that just 68% of theaters were re-opened for business, and internal data suggested consumers were hesitant to return to the cineplex during the coronavirus pandemic.

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“We know what the statistics are on consumer behavior when people are asked, ‘Would you go to a theater?'” McCarthy said. “It’s gone up a bit in the last month, but a lot of that has to do with what demographic you’re in.”

McCarthy said the pandemic has taught management to “take the opportunity that this crisis is presenting,” and re-evaluate how the business units operate. For example, when internal data showed that just 40% of typical moviegoers would frequent screens at the moment, with older consumers less likely to return and younger audiences, whom McCarthy characterized as more likely doing non-approved activities such as social gatherings and partying, more likely to return to the theater — the move toward PVOD became more clear.

“Would a family with young kids go [to the theater]? Probably not,” McCarthy said.

The executive said Disney would release Mulan on Disney+ (without Premier Access) in select markets will soon have access to the SVOD platform. McCarthy said financial results for the film would be disclosed on the next fiscal call in November, adding the film’s  exclusivity on Disney+ contributed to increased subscriber growth, which pleased senior management.

“But that wasn’t the driving force [for PVOD],” McCarthy said.

She said theme parks, movie and TV production return to normalcy remains on a slow path — with much dependent on the rate of COVID-19 infections and development of a vaccine.

“These are unprecedented times. We’ll have to ebb and flow as the rate of infection hopefully will stay low, but if it creeps back up, we may have to adjust accordingly,” McCarthy said.

Bob Iger: Hulu Taking Backseat to Disney+ Global Launch

Disney is moving ahead with plans to launch the Disney+ streaming service in Europe and India (co-branded with Disney-owned Hotstar) next month. Hulu will have to wait its turn. That’s the portfolio of riches CEO Bob Iger has to deal with.

Despite Hulu having more than 30 million subscribers and being a household name in the United States, Disney is putting marketing muscle behind Disney+ with hopes of generating upwards of 90 million subscribers by 2024. The SVOD service ended Feb.3 with 28.6 million subs.

London-based Goldmedia contends up to 7.6 million consumers in the U.K. have indicated a desire to use Disney+ when it launches there on March 24th.

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“We are working up a plan to take Hulu internationally. We actually have a lot of specifics around it. But we’ve decided that the priority needs to be Disney+,” Iger said on the company’s Feb. 4 fiscal call.

Indeed, following the Disney+ launch in India on March 29, the service will expand globally, including Latin America, through 2021.

“We feel that we need to concentrate on those launches, in the marketing and the creation of product for those and then come in with Hulu right after or soon after that,” Iger said.

With rival Netflix’s first-mover status touting 167 million global subscribers worldwide, Disney is spending lavishly to bridge the SVOD divide.

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CFO Christine McCarthy said the company’s Direct-to-Consumer & International segment (which includes Disney+, Hulu and home entertainment) is expected to generate about $900 million in operating losses for the current second quarter (ending March 31).

“We expect the continued investment in our DTC services, specifically Disney+, and the consolidation of Hulu to drive an adverse impact on the year-over-year change in operating income of our DTC businesses of approximately $520 million,” McCarthy said.

Regardless, the change in focus contributed to Hulu CEO Randy Freer’s previously-announced departure as Disney revamps the service’s management.

 

Disney’s 20th Century Fox Film Purchase Continues to Underwhelm Financially

Less than six months into Disney’s protracted $71.3 billion acquisition of 20th Century Fox Film and related assets, including Fox’s Hulu stake, the mega transaction continues to underwhelm on the bottom line.

Fox Studios generated a $120 million loss for Disney in the most recent fiscal quarter — driven by box office disappointments Ad Astra, Dark Phoenix and The Art of Racing in the Rain, according to CFO Christine McCarthy.

“The loss from the Fox Studio business was $100 million higher than the loss we estimate the business generated on Q4 last year,” McCarthy said on the Nov. 7 fiscal call.

The CFO attributed consolidation of Hulu’s operating losses (about $1.5 billion for fiscal year) and inter-segment eliminations that resulted in an adverse impact to segment operating income of about $170 million.

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“We estimate the acquisition of [20th Century Fox] and the impact of taking full operational control of Hulu had a total dilutive impact on our Q4 [earnings per share] before purchase accounting of $0.47 per share,” McCarthy said.

Indeed, Fox generated about $260 million in combined ticket sales from six movies halfway through 2019, which was $100 million less than just the opening weekend of Disney/Marvel’s Avengers: Endgame.

Dark Phoenix had the lowest box office of any “X-Men” franchise movie, which resulted in Disney taking an impairment charge on the film.

The results continue what CEO Bob Iger lamented in the previous quarter about Fox’s performance being “well below where it had been, and well below where we hoped it would be when we made the acquisition.”

And the outlook isn’t getting better anytime soon.

McCarthy expects an operating loss in the current first quarter (ending Dec. 31) of about $60 million at the Fox studio, compared with about $30 million operating income in the previous-year period.

“We estimate the acquisition of Fox and the impact of taking full operational control of Hulu will have a dilutive impact on our Q1 earnings per share before purchase accounting of about $0.30 per share,” she said.

McCarthy remains hopeful the Fox acquisition will be accretive to EPS before purchase accounting for fiscal 2021.

 

Disney Brass Surprised at Fox Studio Underperformance

Back when Rupert Murdoch weighed in on 21st Century Fox fiscal calls, the senior media mogul was quick to praise the success of movies such as Avatar and Planet of the Apes. He was also quick to dismiss box office misses as part of a studio’s rollercoaster existence.

The fickle nature of theatrical releases in an age of over-the-top video, ultimately, is one of the reasons Murdoch put Fox Studio up for sale along with other media assets.

Disney’s $71.3 billion acquisition of 20th Century Fox Film Corp. was in part for the studio’s catalog, majority ownership of Hulu and future box office releases.

Apparently, Disney CEO Bob Iger and CFO Christine McCarthy weren’t prepared for a fiscal downturn at Fox Studio so soon after completion of the acquisition earlier this year.

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On the Aug. 6 fiscal call McCarthy disclosed that Fox posted a third-quarter (ended June 29) operating loss of $170 million — the opposite of a projected $180 million operating profit.

“One of the biggest issues we faced in the quarter was the performance of the Fox film business,” Iger said. “It was well below what it had been and well below what we thought it would be when we did the acquisition.”

Disney was quick to lay the blame on Dark Phoenix, whose reported $200 million production budget dwarfed its $65.8 million domestic box office. The film did generate more than $252 million internationally.

“I know what happens when a company gets bought,” Iger said, “Typically, operations and decision making comes to a halt. We avoided that when we acquired Pixar and Lucasfilm, but this was a very different position for Fox.”

Indeed, Disney announced the Fox deal in 2018, but the transaction wasn’t finalized until this March. While Fox will likely bounce back theatrically (Iger has high hopes for Ford vs. Ferrari), in the meantime, Disney’s theatrical prowess shows no sign of slowing.

With Marvel, Pixar and Lucasfilm content overperforming, Disney has generated a record $8 billion at the box office thus far in 2019.

Streaming Red: Disney’s OTT Venture Down a Fiscal Black Hole

NEWS ANALYSIS — Disney bought Marvel Studios in 2009 for $4 billion. It bought Lucasfilm (“Star Wars”) for another $4 billion three years later.

The acquisitions helped Disney reign supreme at the box office in 2018, 2017 and 2016, according to data from BoxOfficeMojo. And it has a commanding lead in 2019 thanks to Avengers: Endgame.

At the same time, the Mickey Mouse company is set to lose more than $2 billion on streaming investments — “Disney Streaming Services” (formerly BAMTech), Vice Media, ESPN+ and Hulu — before it even launches its much-ballyhooed new $6.99 monthly SVOD service Disney+ in November.

Earlier this year, Disney CFO Christine McCarthy said ESPN+ is projected to lose $650 million annually through 2020. The company just wrote-off more than $300 million on its minority stake in Vice Media.

And the much-hyped Disney+ SVOD platform is not projected to become profitable until 2024 — three years after CEO Bob Iger plans to retire.

“Streaming requires a strong stomach for losses, especially as you are playing catch-up,” Rich Greenfield, analyst at BTIG Research, told CNBC earlier this year.

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Down the OTT Rabbit Hole

As Disney saw Netflix growing exponentially worldwide — much of it based on streaming movies and TV series based on Marvel intellectual property, it switched its business focus from SVOD enabler to over-the-top provider.

Indeed, Iger says OTT video is the company’s No. 1 focus in 2019, regardless of the financial hits to the bottom line.

Hulu, which Disney majority owns along with Comcast, lost $580 million in 2018, while BAMTech, the backend tech firm acquired from Major League Baseball Advanced Media in 2017, spearheaded another $470 million operating loss for the company’s new direct-to-consumer and international operating unit (which also includes home entertainment).

And the fiscal hits continue.

DTC & International lost $393 million in the most-recent fiscal quarter (ended March 31), up from $188 million loss in the previous-year period. Through the first half of the fiscal year, DTC has lost $529 million, twice as much was lost in 2018.

“We expect our direct-to-consumer businesses to have an adverse impact on the year-over-year change in segment operating income,” McCarthy said in an understatement on the May 8 fiscal call.

Disney, of course, can arguably absorb the losses. It generated a $12.5 billion profit on almost $60 billion in revenue in 2018. That was before closing the 21st Century Fox transaction, which could help Disney reach $100 billion in revenue.

At the same time, the Fox acquisition upped Disney’s long-term debt from $18 billion to about $52 billion. Disney is also expecting about $2 billion of cost synergies absorbing 20th Century Fox Film Corp. and related businesses.

Thus far, Wall Street appears supportive, contending the Disney brand has the best chance of narrowing the SVOD divide with Netflix.

“I think Wall Street is at least accepting of the fact that we’re doing this, that it’s the most important thing we’re doing,” Iger told Barron’s in January. “And while I won’t say they’re cheering us on, they’re definitely giving us the room to prove that we can do it.”

Disney Forgoing $150 Million in License Revenue Withholding ‘Captain Marvel’ From Output Deals for Pending SVOD Service

The Walt Disney Co. offered some insight on the financial impact its pending Disney+ SVOD service will have on existing distribution models.

Speaking on the Feb. 5 fiscal call, CFO Christine McCarthy said the company would forgo about $150 million in third-party license revenue in fiscal 2019 for the Q4 launch of the subscription streaming video service.

McCarthy added that the pending theatrical release Captain Marvel, with Brie Larson starring as Disney/Marvel’s first female superhero solo lead, would be excluded from traditional output deals in favor of Disney+.

“So that’s where you can see the forgone licensing revenue begin,” she said.

Disney plans to showcase the Disney+ service on its annual investor day on April 11.

“We’ll also take that opportunity to provide detailed insight into our overall DTC business,” said CEO Bob Iger.

Separately, Iger said he expects to expand Hulu into foreign markets once acquisition of select 21stCentury Fox assets (including Fox’s 30% stake in Hulu) is completed.

“We’ll own 60% when the [Fox] deal closes, and we’ll be prepared to talk more, perhaps, about Hulu’s strategy at that point,” he said.

“Having already designed much of the integration process, we are prepared to start effectively combining our businesses as soon as we obtain regulatory approval from the last few remaining markets,” added Iger. “We look forward to working with the tremendous teams at 21st Century Fox to create the world’s premier global entertainment company.”

 

Iger: Disney Has Smoother Path Than Comcast Closing Fox Acquisition

NEWS ANALYSIS — When it comes to mega corporate mergers, regulatory muster is just as important as money.

Speaking (along with CFO Christine McCarthy) June 20 on the analysts call to discuss Disney’s enhanced $71.3 billion offer for 20th Century Fox Film, CEO Bob Iger said he believes his company has more insight with federal regulators than rival Comcast, which has a competing $61 billion offer on the table for Fox and British satellite TV operator Sky Plc., among other assets.

“We have a much better opportunity in terms of approval and the timing of that approval than Comcast does in this case,” said Iger. “We are confident that we have a clear and timely path to approval.”

Iger cites the six months already invested by Disney with Fox involving the media company’s initial $52 billion bid for the Rupert Murdoch-owned media giant. He also downplayed Comcast’s concerns that control of entertainment content was at the heart of government’s failed antitrust lawsuit in the recently completed AT&T/Time Warner deal.

“It’s simply an apples to oranges comparison to what the Justice Department was considering when considering the AT&T acquisition of Time Warner,” Iger said. “We have a much greater appreciation for the potential that these assets represent to us, to our strategy today and to the strategy we intend to deploy long-term. We’ve been extremely impressed with the talent we’ve been engaging with at Fox.”

Iger said internal management changes (upping Kevin Mayer and Bob Chapek’s duties) at Disney were done in part to absorb Fox and Sky — the latter Europe’s largest satellite operator with more than 10 million subscribers — while greenlighting over-the-top video initiatives.

“Direct-to-consumer distribution has become an even more compelling proposition in the six months since we announced the [initial Fox] deal,” Iger said. “Clearly the consumer is voting, loudly, that these new platforms are very compelling from a consumer experience and consumer value perspective.”

CFO McCarthy projects $2 billion in cost synergies (i.e. job cuts) and lower debt with the transactions by 2021.

“We’re very comfortable with this level of [debt-to-earnings] leverage,” said McCarthy. “We’ve always said we would be willing to deploy our balance sheet to advance our strategic objectives.”