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Disney Is a Fascinating Case Study for the Coronavirus’s Economic Effects

It might be a while. Photo: Paul Hennessy/SOPA Images/Shutterstock

The Walt Disney Company had a rough winter quarter because of the coronavirus. The company believes COVID-19-related disruptions cost it $1.4 billion in operating income in the quarter. Disney eked out a profit — it made $460 million in the quarter, which sounds like a lot, but it’s down drastically from the same quarter a year earlier — and that’s despite the fact that most of the quarter was normal, even strong, in most of its businesses. The company’s China theme parks closed in January, but its U.S. and European parks, as well as its cruise ships, didn’t start shutting down until mid-March. The company nonetheless lost $1 billion in operating income from its parks, products, and experiences segment due to that shutdown for only part of the quarter. Film releases also stopped in March, and coronavirus-related business disruptions started taking a toll on ad revenue at its television businesses — including ESPN — late in the quarter as companies like restaurants and automakers cut advertising spending and live sports ceased.

Many of these effects are likely to persist through the entire spring quarter, producing revenue losses of similar intensity to what Disney saw in March but spread over an entire financial reporting period. That loss of revenues at parks and movie theaters will be partly offset by strong subscription sales for the Disney+ streaming service and by cost-cutting measures, most notably the furlough of about 100,000 employees who were still being paid in March even as the parks were closed. Furloughed Disney employees continue to receive their health-care benefits, with the company paying the usual employee share of health insurance premiums, the company noted on its earnings call this Tuesday, but the reduction in wage and salary expenses will cut the company’s losses. Nonetheless, Disney may well lose money this spring.

Disney chairman Bob Iger, who recently stepped down as CEO but retains a highly active management role in the company, says he has an optimistic outlook nonetheless.

“What we create has never been more necessary or more important than right now,” he said at the start of the company’s earnings call. “In fact, it’s quite possible that what we create is appreciated now more than ever because people find comfort and inspiration in our messages of hope and optimism. This is the same reason we believe people will resume familiar activities once this crisis ends. They missed doing the things they enjoy, things that make them feel happy and connected with family and friends.”

Because Disney is in so many businesses — theme parks, hotels and resorts, cruises, movies, television, streaming, retail — it will provide a nice case study of whether the coronavirus “changes everything” in the long run. My suspicion is that Iger is broadly correct: People miss the things they are doing and are hungry to get back to them, when it is safe to do so. I do not believe this crisis will cause a permanent reduction in leisure stays at hotels in resorts, or visits to theme parks, because I believe we will find ways to do those things as safely in the future as we have in the past.

I even believe that cruises will eventually be back much like they were before. Most of the obituaries for the cruise industry you see being written online are by people who wouldn’t be caught dead on a cruise ship anyway, but people who like cruises really like them and they kept returning even after all the norovirus and “poop cruise” stories we all saw in the news well before the coronavirus outbreak hit. Disney CFO Christine McCarthy noted on the earnings call that Disney Cruise Line is “one of our highest-rated businesses in terms of guest satisfaction, and it also has a very high intent to repeat the experience.” (See also the Businessweek cover story about all the regrettable decisions Carnival Corporation made as the coronavirus crisis intensified, which often resulted in customers stranded in miserable ship-based quarantines and which ends with the observation that “almost all the passengers interviewed for this story say they’d cruise with the company again.”) Disney is especially well positioned: Cruises are a small fraction of its overall business, so the company can wait out a lengthy stoppage and slow ramp-up of the industry that might well bankrupt its competitors. And Disney already had a significant brand equity advantage that allowed it to price much higher than its peers prior to the crisis — as Cruise Critic notes, a three-day Disney cruise can cost as much as a comparable seven-day Royal Caribbean cruise.

But I do expect to see two kinds of big changes from the coronavirus that will have material, ongoing consequences for firms like Disney. One involves the acceleration of shifts that were already underway. For instance, the move away from theatrically released films was in progress and will likely proceed faster than it otherwise would have. And Disney is fortunate that its hotel-and-resort business is so heavily weighted toward leisure, but a permanent corporate shift away from in-person conferences toward virtual ones could impair the company’s sideline as a convention destination. The other big concern is that the upheavals caused by the crisis could persist for quite a long period. Disney can brush off a slow return to cruising, but a slow ramp-up in its much larger theme park business could have a very serious negative impact on shareholders even if the parks are totally back to normal by, say, 2023. We will start to see how the very beginning of that restart looks when Shanghai Disneyland reopens on May 11, with a capacity limit of around 30 percent of normal levels and a requirement for customers and staff to wear masks.

The plus side for Disney is that the company is positioning itself relatively well to be on the upsides of any persistent coronavirus-related shifts as well as the downsides. The company has extensive interests in in-home entertainment that stand to grow if the movie theater business permanently shrinks. Disney+ has shattered expectations for subscriber growth — the company had forecast at least 60 million subscribers by 2024 and is likely to hit that target within the next few months — and the company’s long-standing broadcast and cable assets also provide avenues to monetize assets that might have otherwise gone to theaters. That doesn’t mean everything will come out in the wash. There is a reason Disney stock is down 30 percent this year. But the company is positioning itself to adapt.

Disney Is a Case Study for Coronavirus’s Economic Effects