The first question Bob Iger must answer as Disney CEO

Bob Iger has several questions to answer as he steps in, once again, as Disney's (DIS) CEO.

The first and most important? Streaming profitability.

"Streaming losses is the absolute number one issue on hand," Geetha Ranganathan, senior media analyst at Bloomberg Intelligence, told Yahoo Finance Live.

"Investors no longer have patience," Ranganathan added. "We've seen the streaming business at Disney already lose about $8 billion. They're expected to lose another $3 billion in fiscal 2023, so obviously Bob Iger really has to go back and articulate a much better strategy."

On Monday, Iger gave investors a taste of what seems to be the first step of that strategy — firing Kareem Daniel and restructuring Disney's Media and Entertainment Distribution (DMED) division. DMED was one of former CEO Bob Chapek's first big swings as chief executive, but the reorganization was categorized as a controversial move that upset longtime veterans and reportedly "confused" workers.

"Over the coming weeks, we will begin implementing organizational and operating changes within the company," Iger wrote in an internal memo obtained by Yahoo Finance and sent to employees on Monday afternoon.

Iger added: "As you know, this is a time of enormous change and challenges in our industry, and our work will also focus on creating a more efficient and cost-effective structure... Our goal is to have the new structure in place in the coming months. Without question, elements of DMED will remain, but I fundamentally believe that storytelling is what fuels this company, and it belongs at the center of how we organize our businesses."

In its most recent fiscal year, losses for Disney's direct-to-consumer unit, which includes Disney+, Hulu, and ESPN+, totaled $4 billion for the year.

The streaming division lost a combined $1.5 billion in the company's latest quarter, missing expectations and sending shares down more than 10% following the results. Shortly after these results, Disney established "a cost structure taskforce" to help the streaming division reach its profitability targets.

In an internal memo obtained by Yahoo Finance earlier this month, Disney warned hiring freezes and layoffs were all likely consequences as it worked to rein in spending.

Management said it expects streaming losses to shrink by about $200 million in the first fiscal quarter of 2023 before profitability in fiscal 2024. The company will roll out its $7.99 ad-supported tier in December, one month after the much-anticipated debut of Netflix's ad option.

Future of ESPN, Hulu hangs in the balance

Two Disney properties Iger will likely have to make decisions on as he charts a path to streaming profits are Hulu and ESPN.

Disney owns two-thirds of Hulu with Comcast's NBCUniversal (CMCSA) controlling the rest. Under the terms of the agreement, Comcast could require Disney to buy out its stake in Hulu as early as 2024.

At the time of the arrangement, Iger maintained the purchase would allow Disney the opportunity to offer an alternative, more mature viewing experience to consumers, in addition to providing more flexibility with bundling.

Flash forward to today and streaming economics are vastly different.

Lightshed Partners’ Richard Greenfield, who perviously argued that waiting until 2024 for Disney to end the Hulu partnership with Comcast "feels suboptimal," wrote in an updated blog post this week there is a lack of clarity surrounding Hulu's true monetary value: "Hulu’s actual worth is unclear if Disney wants to keep the Hulu original programming created by Disney for Disney+."

"Essentially Iger has to decide on a streaming strategy," Greenfield wrote. "Does Disney want to run multiple streaming services as they do now, focus all their energy on a vertically-integrated and more narrow Disney+ strategy or do they envision a world with just one 'everything' Disney service (combining Disney+, Hulu and ESPN+)?"

In addition to Hulu, media analysts have long questioned the murky future of ESPN and whether or not Disney should consider spinning off the popular sports network — a suggestion previously made by Third Point's Dan Loeb. Loeb argued ESPN would have greater flexibility to pursue business initiatives, such as sports betting, if it were not part of Disney.

"We're very much against spinning off ESPN... that's the dumbest thing ever," Jason Bazinet, managing director at Citi, told Yahoo Finance Live on Monday.

Bazinet went on to explain ESPN has the potential to be a much bigger global business, especially if Disney chooses to leverage the internet for distribution. He also noted the network generates the bulk of Disney's cash flow, which will ultimately fund its pivot to direct-to-consumer and help offset accelerating streaming losses.

"What Disney is embarking upon with a direct-to-consumer business is very much like a cable company or a telecom company," Bazinet said, stressing that DTC bridges the gap between the consumer and sports rights. "They should not spin it off."

In its most recent fiscal year, Disney's operating income for its Linear Networks segment — which includes ESPN — totaled $8.52 billion.

Alexandra is a Senior Entertainment and Media Reporter at Yahoo Finance. Follow her on Twitter @alliecanal8193 and email her at alexandra.canal@yahoofinance.com

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