Third Point/Disney: Loeb needs to have more faith in the Magic Kingdom

Investors are a demanding lot. Take Third Point. Nearly two years ago the hedge fund run by billionaire Dan Loeb urged Walt Disney to axe its dividend and spend more aggressively on streaming service content. The House of Mouse did just that. The investments appear to have paid off. Disney Plus added 14.4mn subscribers in the most recent quarter, blowing past estimates and pulling ahead of Netflix in total subscribers.

Now Third Point is back. After exiting its position in the company earlier this year it has taken a fresh $1bn stake. With it comes a new list of requests. These include cost-cutting, spinning off ESPN, a board shake-up and taking full control of the streaming service Hulu.

The proposed changes push Disney to reverse its direction but they are in tune with the zeitgeist. After reporting outsize gains in the Covid-19 pandemic, the streaming sector has slowed. That has contributed to Disney’s shares falling more than a fifth this year. They are down 37 per cent from their March 2021 peak.

Expensive streaming content may add subscribers but it is taking a long time to translate into profits. Still, Third Point’s recommendations may not be the best way to improve Disney’s performance.

ESPN, for example, is a cash-generating machine. Consumer willingness to pay to watch live sporting events means Disney’s cable TV business remains profitable despite cord-cutting. The linear networks unit boasts a 30 per cent margin and pulled in $8.4bn in operating profit last year. Bundling sports offerings into its streaming services has helped drive growth at Disney Plus. Spinning out ESPN may reduce Disney’s $46bn debt pile. But it will also strip the company of a crucial source of content and subsidies for its transition from cable TV to streaming.

Cost-cutting can also backfire if it ends up diminishing the quality of Disney’s theme park experience or TV and film content.

Plans to raise prices on streaming services and introduce an ad-supported tier are more sensible, albeit slower ways to reach the goal of achieving profitability at Disney Plus.