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Walt Disney (NYSE: DIS) is an icon in the media world, with a powerful portfolio of media properties. And yet the stock is trading down around 60% from its 2021 peak. What’s going on? The answer is that new business opportunities aren’t doing well enough to offset declines in the company’s older businesses. It’s a big problem.

There’s value in Disney’s brands

Characters like Mickey Mouse, Captain America, and Luke Skywalker are recognized around the world. For a certain type of consumer, they might even evoke a little more emotional excitement than you might expect for what are basically just fictional beings. But that’s the power of the media properties Disney owns, and those three names are just a tiny fraction of the company’s collection.

Image source: Getty Images.

Over the long term, the company’s media properties will likely retain a massive amount of value and see strong demand among consumers for the content the company has created and continues to create with them. That’s the good news, and it’s one of the core reasons why an investor would want to step in to buy Disney despite a massive share price decline. However, there’s more to the media giant than just these intellectual assets.

For example, the company operates some of the largest and most successful amusement parks in the world. It operates a cruise line as well. The company’s iconic media properties are used to get consumers into those parks and onto those ships. In addition, the company distributes its own productions through multiple television networks it operates and direct to consumers via streaming services it owns. There are troubling trends in these two businesses.

Going up slower than it’s coming down

Streaming, or “direct to consumer” as Disney calls it, is a relatively new business. The company has spent heavily to build this business line up after industry leaders like Netflix and Amazon started to draw consumers away from more traditional forms of entertainment distribution, like television and cable. There has been something of an arms race, as new content was used to get consumers to subscribe to streaming services amid an increasing number of options.

Disney and its collection of iconic media properties did fairly well competing with the early movers. However, the cost of creating content has been a huge headwind. For example, Disney lost around $500 million in the fiscal third quarter of 2023 in its direct-to-consumer business. Content creation costs were a big part of that. To be fair, that’s an over 50% improvement versus the same quarter of 2022. So the company is slowly moving toward profitability.

The problem is that streaming platforms are pulling revenue away from the more traditional ways consumers consume media, specifically cable and broadcast television. The company’s linear networks, which is where TV and cable live, posted operating income of roughly $1.9 billion in the third quarter. While that’s a big number, it was down 23% year over year. So this business is in a steep descent.

Since the shift on the consumer side is from cable/television to streaming, Disney’s new business obviously isn’t profitable enough to offset the declines in its old business. And, even if the company is able to get the direct-to-consumer business into the black, it will only offset a small portion of the hit from the faltering linear networks division, which is a much larger profit source.

So things are bad now, but better still won’t necessarily be a good outcome for Disney. And there’s no easy solution because what’s really taking place is a massive change in consumer habits.

Disney has no choice

The unfortunate fact is that, at this point, Disney has to go down the path it is going down if it wants to remain relevant. That’s bad news for the company and shareholders. Yes, Disney’s media assets remain highly attractive, but it is still struggling to adapt to the rapid shifts taking place in consumer behavior.

There are no easy answers. And that’s one of the most important stories that investors need to be paying attention to as they examine Disney’s financial results.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends, Netflix, and Walt Disney. The Motley Fool has a disclosure policy.

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