The Magical Math Behind Disney’s Content Purge

Disney is the most magical place on earth — and that may extend to the company’s accounting. As the company cuts its streaming libraries to save on residual payments to actors and writers, they could reap big tax benefits by presenting an unrealistic picture of how much their deleted content was previously worth. Reporter Julia Rock digs into Disney’s accounting magic and its impact on your favorite shows.

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As Hollywood actors and writers strike together for the first time since 1960 over pay, working conditions, and job security, Disney has purged dozens of original TV shows and movies from its streaming platforms, in a move that hurts workers and gives subscribers fewer options to watch.

Disney claims it needs to destroy the content to cut costs on platforms that aren’t making money, but experts say the company is overstating the value of its content — which could ultimately help the company pocket a higher tax break.

In May, Disney told regulators that it will incur $1.5 billion in losses as part of its content purge. Disney’s chief financial officer Christine McCarthy told investors Disney was making “excellent progress on our cost-cutting initiatives,” on its May earnings call, including “removing certain content from our streaming platforms.”

But that $1.5 billion number is raising eyebrows among industry experts, who question how Disney can simultaneously declare that it is purging content because it wasn’t worth the cost, while also asserting the move will lead to a staggering $1.5 billion in losses. There is an obvious upshot to this approach: The bigger hit that Disney claims, the larger the potential tax writeoff for the company.

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“In the context of Disney streaming, where revenue is driven by subscriber numbers and churn rates, it pushes the limits of credibility that any of the shows removed could have had this big an impact,” said Aswath Damodaran, a professor of finance at New York University’s Stern School of Business. “I don’t think it makes any sense for any company to take content off a streaming platform if it creates $1.5 billion in value. Because, as a business, why would you do that?”

Disney’s streaming platforms, Disney+ and Hulu, are not the only platforms that have been purging content from their libraries. Last year, Warner Bros and HBO Max undertook the first massive purge in the industry following the merger between the two companies, removing dozens of titles — reportedly to save on residuals and other costs. This spring, Paramount + also removed original content from their platform.

Beyond the tax writeoffs, removing content that isn’t helping platforms retain or bring in new subscribers is a way to cut spending on residual payments to writers and actors as well as avoid paying licensing costs. It adds insult to injury for striking workers, who warn that a few consolidated streaming platforms have slashed worker pay, worsened working conditions, and made employment more erratic, and who see further cuts to their already meager streaming residuals when shows are purged.

Disney’s moves come as CEO Bob Iger, who has made $499 million over the past five years, has promised major cost-cutting efforts at the company — including 7,000 layoffs — and called the actors and writers’ fair pay demands “not realistic.”

But experts say the IRS should not let Disney take a tax writeoff for the latest content purge.

“If you take a show off because people are not watching it, you can’t in good conscience turn around and claim a billion dollars, or even $100 million, because you’re taking it off because people are not watching it,” said Damodaran.

Disney did not respond to requests for comment.

A Confounding $1.5 Billion Calculation

It is objectively difficult to say how much one particular show or movie on Disney+ or Hulu is worth, since Disney measures the performance of those platforms in terms of overall subscriber growth and churn — which is one reason why experts are skeptical about the math behind Disney’s content purge.

In late May, Disney told regulators and investors in a public filing that it would be taking down “certain produced content from its [direct-to-consumer] services. As a result, the company will record a $1.5 billion impairment charge.” Disney warned that “additional produced content will be removed” and could create an additional $400 million impairment charge.

Crater, a well-reviewed, touching movie about kids on a lunar mining colony, was one of the “additional produced content” casualties that was removed from Disney+ in July. Disney spent $53 million producing the film, and it was available for streaming for just seven weeks.

In simple terms, when Disney produces a movie like Crater, the company has created an asset that will have value over the course of what accountants call its useful life. For tax purposes, Disney is required to spread the cost of the asset over the course of its useful life through what is known as “amortization.”

But when Disney declares that the asset has become worthless more quickly than expected — and contributes to its worthlessness by making it unavailable to stream — the company must report what is known as an “impairment charge” to reflect the writeoff in the asset value.

Outside observers say that the numbers don’t add up behind Disney’s decision to take down the shows and claim a $1.5 billion impairment charge. That’s because Disney is claiming two contradictory things: Both that the assets were least producing so little value that it’s cheaper to destroy them than to keep them, and that the assets were worth $1.5 billion.

There’s an additional reason the number is confounding: The 2017 tax bill contained a huge corporate giveaway known as “bonus depreciation,” which temporarily allowed companies to expense the costs of assets up front, rather than requiring them to amortize the costs over time.

That provision has allowed just 25 major companies to save $67 billion on their taxes since 2017, according to a recent report by the Institute for Taxation and Economic Policy. One of those companies, Disney, has saved billions of dollars on tax breaks from bonus depreciation.

“I cannot figure out how they can possibly get to $1.5 billion, because they should have almost no unamortized costs,” under the 2017 tax bill, said David Offenberg, a professor of entertainment industry finance at Loyola Marymount University. The exception is that foreign-made shows and movies were not eligible for the tax break.

Offenberg said it’s possible that Disney is including in that $1.5 billion number “movies that they released in 2023, that have not worked out the way they thought they would, without acknowledging that they’re taking a huge writedown on all of these misses.” One such movie is Elemental, which cost more than $200 million to make and flopped at the box office.

Entering The Memory Hole

However Disney arrived at the amount, the company will be able to claim a tax writeoff and the IRS isn’t likely to ask questions. While the $1.5 billion shows up as an earning hit, the company stands to benefit for tax purposes because it lowers Disney’s taxable income.

“I don’t even know what they are writing off,” said Damodaran, noting that movies and TV shows don’t appear on Disney’s balance sheet — which instead measures revenue in terms of subscriber growth and churn.

“So if I were the IRS,” he said, “I wouldn’t allow them to take a single cent of the $1.5 billion.”

The IRS does not have a good record of corporate tax enforcement after years of budget cuts — although it saw a funding boost for enforcement in the Democrats’ Inflation Reduction Act last summer. Over the past four decades, as corporate profits have steadily increased, corporate tax payments have remained about the same, according to a recent report from the nonpartisan Congressional Budget Office (CBO). Between 2010 and 2018, audit rates for corporations with assets of more than $20 billion dollars fell from nearly 100 percent to about 50 percent, according to the CBO.

Over the past five years, Disney has paid a single-digit corporate income tax rate, despite making nearly $40 billion in profits over that same period.

“The way that shows are amortized is really up to the producer,” said Offenberg. “They have to make good-faith estimates of how much they think the show is going to earn over its lifetime, and the IRS cannot possibly get involved in determining the earnings of a specific show over its lifetime. That’s way beyond the scope of their capabilities, they have to rely on companies to do their best to report these numbers.”

Where actors and screenwriters see the product of years of hard work and their sources of income, platforms see costs to be cut and potential tax breaks.

The new fantasy adventure TV series Willow, starring Warwick Davis, was one of Disney’s most-watched and beloved new shows this year. “This show is fun,” wrote Alex Cranz for The Verge.

But in May, just six months after it was released, Disney+ abruptly removed Willow from its offerings, and now the show can’t be accessed anywhere.

“They gave us six months. Not even. This business has become absolutely cruel,” tweeted John Bickerstaff, a writer on Willow, following Disney’s announcement.

When Willow was removed from the library, residual payments to the show’s writers and actors ceased. And now, the show can’t be accessed anywhere — by its creators and by audiences.

The Hollywood Reporter has termed this moment streaming’s “memory-hole era.” Disney and other streamers are committed to cutting costs, finding tax breaks, and returning money to shareholders — not ensuring creators’ work remains available to the public in perpetuity.