A federal judge has moved forward with a lawsuit against Disney. Investors claim they were misled about the company’s losses during the era of former CEO Bob Chapek.
U.S. District Judge Consuelo Marshall ruled that Disney’s attempt to dismiss the case was denied. She noted that past executives might have engaged in deceptive practices, trying to convince investors that Disney+ could meet Netflix’s subscriber numbers.
The lawsuit alleges that Chapek worked to hide the costs of Disney+, making it seem like the streaming service would be profitable by 2024. This involved reorganizing the company and airing shows meant for streaming on traditional networks to mask losses as subscriber growth slowed.
Disney’s shift towards streaming took off during the pandemic. With parks and theaters closed, subscriptions to Disney+ skyrocketed. Chapek, who became CEO just before COVID-19 hit, aimed for lofty goals—quadrupling subscriber targets to reach 230 million by 2024. However, as of December 2024, the service had only 124.6 million core subscribers.
The court supported investors’ claims that Chapek and other executives manipulated figures to achieve short-term growth while hiding significant costs. They pointed out how Chapek centralized content control in a new division called Disney Media and Entertainment Distribution (DMED), responsible for monetizing all content globally.
Chapek claimed this restructuring would help Disney better distribute content based on consumer preferences. However, the lawsuit argued that it aimed to boost subscriber numbers by limiting studio executives’ control over their shows and pushing exclusive content onto Disney+. This strategy included releasing major Pixar films directly to Disney+ rather than theaters.
The court noted that the company spent billions on new Disney+ content to attract more subscribers. Witnesses, including former executives, stated they felt constant pressure to meet “unreasonable” targets, with a focus solely on subscriber growth. In 2021 alone, Disney’s content spending reached $33 billion, with over $16 billion dedicated to Disney+.
In 2022, Disney’s streaming division reported a massive operating loss of $1.47 billion. Chapek was ousted just months after his contract was extended. When Bob Iger returned as CEO, he quickly withdrew the ambitious subscriber goals and cut content spending, leading to significant impairments.
Disney has argued that it warned investors about the risks of its streaming strategy, stating that it changed direction after Iger’s return.
The case also questions Disney’s promotional strategies. For instance, the company offered discounted subscriptions in partnership with Verizon, driving short-term growth but reducing revenue per subscriber. Witnesses in the case suggest this promotion led to how subscriber numbers were counted, with those using promotional access counted as “paid subscribers.”
Chapek previously assured investors that Disney was selective with partnerships to maintain quality. However, Iger later acknowledged that in the rush to gain subscribers, the company may have been overly aggressive with promotions.
The court allowed the lawsuit to proceed, highlighting how the DMED reorganization might have allowed executives to shift costs between divisions to present a more favorable financial picture. This included temporarily airing content on cable TV before releasing it on the streaming platform, making Disney+ costs appear lower.
Investors also claimed that these cost shifts violated Disney’s own accounting rules. There are further claims related to insider trading against Chapek and others, which will also advance in court.
The proposed class action represents investors who bought Disney stock between December 2020 and May 2023, a timeframe when the company’s stock price plummeted by about 55%. It fell from a high of $203 to around $92. As of February 19, the stock is trading at 111.35.
Source link
Disney
