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The poker “tell” that arguably revealed Trian Advisors’ Nelson Peltz was likely to lose his bid for two seats on Disney’s board was when he complained to The Financial Times in an interview:
“Why do I have to have a Marvel that’s all women? Not that I have anything against women, but why do I have to do that? Why can’t I have Marvels that are both? Why do I need an all-Black cast?”
It was a narrower version of his sales pitch to investors at the shareholder meeting: “All we want is for Disney to get back to making great content.” The argument is that neither “the Marvels” nor “Black Panther: Wakanda Forever” had delivered mass appeal.
“The Marvels” left its theatrical window with the lowest gross in the Marvel Cinematic Universe's history ($206 million worldwide) and only lasted in Nielsen’s Top 10 movies list for two weeks (02/05/24 to 02/18/24). But, “Black Panther: Wakanda Forever” *did* have mass appeal: It grossed $859 million at the box office worldwide—the 8th highest for 2022—and the 8th most-streamed movie in the U.S. for 2023. So, it is an apples-to-oranges comparison because, even though its global box office gross was 63% of the first "Black Panther”, Disney+ did not exist then as an alternative viewing platform. As Disney learned the hard way during the pandemic with Pixar titles, consumers now anticipate the release of theatrical titles on Disney+ and are willing to wait.
But, Disney CEO Robert Iger betrayed his own poker “tell” at yesterday’s shareholder meeting: “With Disney+, Hulu, and ESPN+ and with their combined power I think Disney has a real chance to become the ultimate streaming destination for consumers.” The pitch conveniently left out that all ESPN streaming in February 2024 was effectively zero (0.09.%) and that growth for Disney+ has flattened both domestically and internationally. It also does not imply a business case for why Hulu is worth $27.5 billion (or more) to Disney shareholders.
Still, 69% of Disney voting investors gave Iger a decisive win over Peltz in this gerontocratic showdown. Now, the stock is down over 3% despite the victory and not soaring towards prices that reflect the growth Iger is promising. Why?
Key Takeaway
The takeaway from the past six months may be that Peltz's campaign solved little. Those on Wall Street and in the industry who understand the complex future of media distribution and mass appeal simply may be staying away from Disney because they know the company may not survive it as is.
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Succession
It looks like all investors were unhappy with the succession process and want a solution. Iger told CNBC this morning that the board is proceeding with “urgency” in trying to identify the next chief executive and the process “was decisive in terms of how shareholders voted.”
Peltz failed to prove that he understood mass appeal in the age of streaming or unsentimental Generation Z and Alpha consumers. But, Iger acknowledged Peltz's campaign opened the door to “increased engagement with shareholders” and a feedback loop between investors and the board about multiple failed succession processes. The question, now, is who should inherit Iger’s gerontocratic strategy.
Recent news stories have suggested ESPN Chairman Jimmy Pitaro or Dana Walden, co-chair of Disney Entertainment. Disney Experiences Chairman Josh D’Amaro and Alan Bergman, who is Entertainment co-chair with Walden, are also candidates but have yet to get the treatment of a profile. All are in their 50s and therefore Generation X and digital natives.
But, as I noted in “Media Executives Covet Games, but Are Ill-Suited to Run Them”, none are gamers. So, all would start with a fundamental disconnect with crucial audience segments for growth and video games as “Hollywood’s New Source of Fresh Characters and Worlds”, as The Wall Street Journal recently reported.
Required Skills: Theoretical Physics?
In last month’s “A Theoretical Physicist Walks Into A Media Company…”, I laid out the criteria of what a predictable digital business model looks like given that digital media business models have "more and newer scientific factors that need to be understood by management teams.”
Disney is a complex web of businesses that relies primarily on its Sports and Experiences divisions for operating income. In 2023, $2.47 billion in operating income from Sports seemed to subsidize $2.45 billion in operating losses from its Direct-to-Consumer division, leaving the $8.95 billion in operating expenses subsidizing the rest of the business. Iger is targeting “double-digit profit margins” in the direct-to-consumer segment, but with stagnant growth that only may be accomplished through cost-cutting and price increases.
As I highlighted in “Investors & The Unsentimental Media Consumer”, Deloitte’s 18th annual Digital Media Trends Report for 2024 showed consumers expressing a growing resistance to price hikes. The objective of “double-digit profit margins” effectively forces Disney to cut off its nose to spite its face. Iger’s presumptive heir will both need to solve for a stagnant streaming business and for consumers who do not care for the streaming service enough, and they will need to do so while preserving the margins of its Experiences business and protecting the declining revenues of its profitable Sports segment (ESPN).
The Science of Succession
Last month I offered three guidelines for navigating this challenge to a successful outcome:
Are “great software people” in charge?
Is the management team of an incumbent up to the task of adapting?
Can the company survive a failed pivot with the existing customer base and existing brand?
On top of this, I added in “A Theoretical Physicist Walks Into A Media Company…” the five cornerstones of a media business in 2024 and beyond should be:
Finance
Game theory (or, the study of mathematical models of strategic interactions with rational consumers)
Programming (or, designing and implementing algorithms and step-by-step specifications of procedures by writing code in one or more programming languages); and,
Distributed systems (or, a collection of computer programs that utilize computational resources across multiple, separate computation nodes to achieve a common, shared goal)
Creative
Disney’s Experiences business model—which is a highly sophisticated consumer-first, retail-first model—seems to hit most of these checkmarks. Disney’s Genie and Genie+ services at Walt Disney World are all about game theory, offering visitors a personalized itinerary based on their top interests.
But, for whatever reasons, Iger and his team have not introduced a similar level of sophistication to its Direct-to-Consumer business. This has happened despite investing nearly $40 billion into Hulu, a platform that offers a personalization experience competitive with Netflix. It is a disconnect that, as I argued last February, has “overcomplicated” Disney’s Direct-to-Consumer future.
The X-Factor: Creative
The likes of George Lucas and Roy O. Disney’s grandchildren supported Iger in the board contest with a message that framed the shareholder vote as defending creativity from Wall Street. Lucas wrote in his letter of support, “Creating magic is not for amateurs”. Disney’s grandchildren wrote that activist investors’ “‘‘I alone can fix it’ mentality makes clear that they are not interested in preserving the Disney magic, but stripping it to the bone to make a quick profit for themselves.”
There is a sentimentality for Disney as a creative engine, both from the imagination of Walt Disney and later through the imaginations of Pixar, Star Wars and Marvel. Ironically, this nostalgia mirrors the arguments for mass appeal that Peltz was making, above.
The reality after Netflix’s first “What We Watched” report is that streaming audiences have a lower bar for creativity and imagination. But, in this era of online gaming platforms like Epic’s Fortnite and Roblox, audiences beyond streaming have a higher bar for creativity and imagination. Consumer intent has fragmented beyond the traditional formats of video and news articles, and “mass appeal” is no longer the outcome of plug-and-play distribution via movie theaters and then television.
Today, those channels are far more complex than Iger, Lucas and Disney’s grandchildren suggested. As Marshall McLuhan argued in “The medium is the message”, the technological architecture of the internet is “active processes which are invisible” and therefore necessary to be understood for a creative business to survive. Creative media needs to map to those. Under Iger, Disney has repeatedly struggled to do so in large part because management has failed to adapt to them.
Arguably Iger's biggest success in digital media—launching with Apple's iTunes store for the video pod in 2005—was simply plugging content into another distribution channel.
Does Wall Street Understand?
Disney’s stock price is up 50% from last October and over 30% year-to-date. As a Disney investor explained to me, the Disney stock at the price of $80 implied there was zero future value in the streaming business earning $20 billion per year. Now, the price of $119 suggests Wall Street believes there is some value.
The looming question is whether Wall Street understands that Iger’s successor will need to redefine the “mass appeal” of creativity with more arcane concepts like game theory, programming and distributed systems. Wall Street's enthusiasm for the immediate succession process suggests that they know there is a disconnect between creativity and distribution. But, it is unclear whether the Disney board understand this disconnect, too.
Because, if not, this activist campaign will have solved very little in the long run. The most important signal for Disney's future may have been that it was Nelson Peltz and not a technologically savvier activist investor who led the charge. Those on Wall Street and in the industry who understand the complex future of media distribution and mass appeal simply may be staying away from Disney because they know the company may not survive it as is.
If the future leader must understand everything that I laid out above, it may be three to five years before we see the type of growth Iger envisioned in the streaming era.
Will anyone, including Disney's board and employees, have the patience for that? Will any successor to Iger want to inherit a corporate culture that was so resistant to change that it forced (or "forced") Iger out of retirement to replace Bob Chapek?
To paraphrase the famous song from "Snow White" goes, some day a prince or princess is inevitably come to succeed Iger. But, there is a greater likelihood of a nihilistic, "Après moi, le deluge"-type outcome—the famous saying of French king Louis XV before the French Revolution ended his reign—than the outcome of "happily ever after" for Disney.