The Walt Disney Company and its former chief executive are facing a lawsuit brought by a major shareholder that accuses the company of misleading investors about the health of its direct-to-consumer streaming products for at least two years.
The lawsuit, filed in the federal Central District of California last Friday, accuses former CEO Robert Chapek and two other executives of making false or misleading statements about Disney Plus that suggested the streaming service was growing its customer base when it was actually doing the opposite.
The lawsuit also alleges Chapek and the other two executives “made platform distribution decisions based not on consumer preference, consumer behavior, or the desire to maximize the size of the audience for the content as represented, but based on the desire to hide the full costs of building Disney Plus’ content library.”
The lead plaintiffs in the case, a labor union pension fund, say Disney was not on track to reach certain global subscriber and profitability targets by a 2024 deadline, despite affirmations by company executives. The pension fund said it realized this to be true when the company reported a $1.47 billion operating loss during a quarterly earnings report filed with the U.S. Securities and Exchange Commission last November. The financial disclosure resulted in the immediate decline of Disney’s stock price, and the pension fund lost money.
The lawsuit is seeking class-action status on behalf of all investors who purchased common Disney stock between December 10, 2020 and November 8 of last year. A Disney spokesperson said the company is “aware of the complaint” and intends to “defend vigorously against it in court.”
The lawsuit comes amid shifting priorities at Disney, whose board removed Chapek last November and re-appointed former CEO Bob Iger to the role. Since then, Iger has enacted an aggressive cost-cutting strategy that he hopes will get the company’s streaming products back on the path to profitability.
That cost-cutting strategy has led to thousands of pink slips being issued at Disney and its subsidiary businesses, including ABC television and ESPN. Disney has also pulled back on marketing, raised the prices of its streaming services and trimmed its output of TV shows and movies, all in an effort to cut costs.
Some of those measures have started to work: According to the company’s latest quarterly earnings report, Disney lost around 1 percent of its Disney Plus and saw virtually no growth at its general entertainment streamer Hulu during the first three months of the year. Despite this, the company’s streaming revenue grew to $5.514 billion, a 12 percent increase compared to last year. Its overall revenue was logged at $21.85 billion for the quarter, about in line with estimates from Wall Street analysts.