Disney Hit With Investor Suit Over Alleged “Cost-Shifting Scheme” In Streaming Division

Disney’s lofty subscriber growth and profitability targets for its streaming service have drawn a lawsuit from investors who claim that the entertainment giant misled them about the extent of its losses.

A suit filed on May 12 in California federal court accuses Disney of engaging in a fraudulent scheme designed to hide Disney+ costs and make forecasts that it would be profitable by 2024 believable. It takes aim at ousted CEO Bob Chapek’s alleged “cost-shifting scheme” to first air certain shows meant to be Disney+ originals on legacy TV networks to conceal the platform “suffering decelerating subscriber growth, losses, and cost overruns,” the suit says.

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The suit details Disney’s pivot to prioritizing streaming amid the pandemic. While most of the company’s businesses suffered as its theme parks, resorts and cruise lines were shuttered and movie theaters were forced to close, subscriptions to Disney+ rapidly took off. Against this backdrop, Chapek decided to “go all in” on the platform, announcing a major reorganization of the company’s media and entertainment operations. Under the new reorg, distribution and commercialization activities were centralized into the Disney Media and Entertainment Distribution (DMED) arm, which essentially became responsible for the monetization of all content globally. Investors say that the 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 Chapek lieutenant Kareem Daniel, who alongside his mentor, “exerted near complete control over the company’s strategic decisions around content,” according to the complaint.

From December 2020 to November 2022, Chapek and Daniel repeatedly misled investors about the success of Disney+ by concealing the true costs of the platform and the difficulty of maintaining robust subscriber growth in addition to claiming that it was on track to achieve profitability with 230 to 260 million paid global subscribers by the end of 2024, the suit claims. This includes an allegedly fraudulent plan to debut certain shows that were supposed to be Disney+ originals, including The Mysterious Benedict Society and Doogie Kameāloha, M.D., on its TV networks, like the Disney channel.

“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,” reads the complaint.

The suit says the plan was a “motivating factor” behind the reorganization, which was announced a month before The Mysterious Benedict Society went into production. It also takes issues with statements from Chapek in December 2020 that touted gains. “Disney+ has exceeded our wildest expectations with 86.8 million subscribers as of December 2,” he said. “This success has bolstered our confidence in our continued acceleration towards a DTC-first business model.”

Chapek additionally discussed how the company’s new distribution and commercialization team empowers creative teams to “make the high-quality branded entertainment they believe will resonate with audiences.” The slides that accompanied the presentation reiterated the company’s estimate Disney+ would be profitable by the end of 2024. These new forecast represented an “astounding three-fold increase from prior estimates without any degradation in expected profitability for the segment,” according to the complaint.

After acknowledging that subscriber growth had slowed in 2021, Disney in November 2022 reported that it missed analyst estimates by wide margins on revenue, sales and earnings. The company’s direct to consumer arm, which includes Disney+, ESPN+, Hulu and Hotstar, reported an operating loss of $1.47 billion — up from a $630 million loss in the same quarter the year prior. Disney’s stock plummeted by more than 13 percent.

After Bob Iger returned to lead the company two weeks later, he made clear that an important component of restoring Disney’s success would be to return power back to creative executives, including distribution decisions. The suit points to the statement as evidence that Chapek’s comments on his reorganization were meant to mislead investors. It also argues that Disney’s fiscal second quarter earnings last week, which showed that Disney+ lost subscribers for the second quarter in a row, is further proof “confirming that the 2024 Disney+ targets had never been achievable.”

Chapek, Daniel and CFO Christine McCarthy were named in the complaint.

“We are aware of the complaint and intend to defend vigorously against it in court,” said Disney in a statement.

May 16, 9:34 a.m. This story has been updated with Disney’s statement to The Hollywood Reporter.

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