Author’s Note #1: There were a couple of copy errors in Thursday’s mailing. Those have been fixed.
Author’s Note #2: I was interviewed for this good, in-depth piece on the future of Pluto TV written by The Wrap’s Lucas Manfredi.
Yesterday The New York Times released a long-form piece from James Stewart and Brooks Barnes about how Disney CEO Bob Iger “undermined and outmaneuvered Bob Chapek”, and then returned to power. The beats of the story were familiar as reporters like CNBC’s Alex Sherman had previously covered much of the same territory last Fall. The difference now seems to be that more people are willing to go on the record anonymously and offer more juicy details.
The NYT article painted a picture of misaligned incentives between the Board, Disney management and Iger to execute a successful CEO succession. It reminded me of an essay I wrote last summer—“It's Complicated”—which argued media ecosystems have become too complex for management teams and boards to navigate disruption.
In particular, it reminded me of a passage I quoted from Iger’s book “The Ride Of A Lifetime”. Iger described challenging Disney’s Board of Directors to change managerial incentives for the pivot to Disney+, Managers needed to be incentivized to focus on the “new thing” instead of the businesses at which they had been successful, to date. They also needed incentives to suffer through “the purposeful erosion and disruption of their businesses”.
Iger framed this challenge using Clayton Christensen’s innovator’s dilemma. Disney was an incumbent that needed to “spend capital to generate long-term growth or adapt to change”:
“It’s your choice," I said. "Do you want to fall prey to the innovator's dilemma or do you want to fight it?”
I argued that six years later, it is “harder to believe that the interests of managers across the divisions of Disney’s ecosystem were successfully re-aligned.” Now, analysts and reporters befuddled by Disney's bet on Venu Sports, their standoff with DirecTV and a streaming strategy that is driving higher churn, it is worth asking:
Was Iger—and every other media CEO and their advisors—too focused on Clayton Christensen and not enough on Marshall McLuhan?
Key Takeaway
The lurking danger in the Venu Sports lawsuit and the DirecTV negotiations is that existing management teams at Disney, Fox and Warner Bros. Discovery believe building "walled gardens" is more valuable than decentralizing their business models.
Total words: 1,400
Total time reading: 5 minutes
McLuhan & “Portfolio Reconstruction”
In last Thursday’s essay, I introduced this concept of “portfolio reconstruction”: If management cannot optimize shareholder value across unrelated assets, then they should either discard those assets or find managers who do understand how to connect them in ways that audiences want.
Baked into this point is McLuhan’s famous adage “the medium is the message”: The linear model justified Disney’s aggregated portfolio of unrelated cable channels because televisions aggregated audiences at scale, aka ”scarcity”. Bundles of unrelated cable channels were the best business model because they created the most negotiating leverage.
Now that the invisible "groundrules [sic], pervasive structures and overall patterns" of digital media enable new forms of storytelling in streaming and gaming, the content matters more than those channels or channel brands. The technological environment of the linear distribution business model— light signals sent via miles and miles and miles of fiber optic cable to a finite number of homes and businesses (over 100 million homes in the early 2010s and now 76 million— is losing to the business of distributing interactive content to billions of devices (mostly smartphones) over the internet.
That is less a story about streaming being the future of media—which Iger convinced the Disney board of back in 2019—and a more technological story about the types of media that the invisible "groundrules [sic], pervasive structures and overall patterns" of the internet will make possible for consumers.
The point of “portfolio reconstruction” is not only that the corporate structure of cable bundles no longer matters. It is that the entire corporate entity needs to be rethought. In relying on Christensen's logic of incumbents vs. disruption, Iger and the Disney board did not go far enough.
Venu Sports, DirecTV
This precedent makes Disney’s bet on the “wrong” product Venu and its ongoing dispute with DirecTV particularly fascinating.
First, Fubo TV’s successful lawsuit exposed how Venu was a step for Disney towards “portfolio reconstruction”. The decision revealed that in Spring 2023, Disney approached Fox about potentially licensing its Fox content for its ESPN Flagship (the ESPN-only streaming service expected to launch in 2025). Fox proposed the joint venture, instead.
The implication is that Disney saw the future of “portfolio reconstruction” in internet distribution—Fox Sports content could live independently of the Fox Sports cable channel on ESPN DTC—but Fox did not.
Second, Disney and DirecTV are currently in a standoff over a new distribution deal. Disney is seeking an increase in fees to carry some of its more popular channels. DirecTV desires to have more flexibility in how it sells those channels to its customers. DirecTV seems to be pushing for a narrower version of “portfolio reconstruction”—it seeks to break up and repackage Disney’s bundle of unrelated assets without Disney.
In both instances, everyone is seeking some version of the outcome of portfolio reconstruction, but no one seems to want that actual outcome yet. As DirecTV’s Chief Content Officer Rob Thun wrote in a blog post: Cable programmers have been “eroding the price-value proposition for pay TV customers by shifting the best programming to direct to consumer services while raising programming fees on pay TV.”
The Return of The Doom Loop of The Mogul
“Portfolio reconstruction” effectively has two definitions in the marketplace. The more conservative definition comes from distributors like DirecTV seeking skinnier bundles. However, that approach makes the bundling of unrelated assets an unnecessary business strategy and therefore the media conglomerate an unnecessary entity.
The more aggressive definition comes from the streaming strategies that fund expensive original content for exclusive distribution on platforms like Disney+. But, Anand Shah—the COO of EffinFunny, a production company who explained “portfolio reconstruction” to me last week—suggested that from the perspective of a free marketplace, this definition is not aggressive enough.
A key problem with the “walled gardens” of streaming services is that they use linear channels as building blocks. In doing so, they kill the marketplace for content, or what I called “The Doom Loop of The Mogul” last summer:
Legacy media management is unable to deliver shareholder value in streaming within the constraints of their strategic, financial and/or management structures; and
Therefore they engage in self-dealing to keep costs low, and
Therefore writing and acting talent protest with strikes, and with less content produced for their streaming services…
Legacy media management is unable to deliver shareholder value in streaming within the constraints of their strategic, financial and/or management structures… [repeat cycle]
Shah was focused on the dynamic in step #3. At the time, the Hollywood strikes were ongoing. But, now that they are over and content production is on the upswing, the problem is increasingly less about the supply of content. Instead, Shah argued that the same self-dealing I describe in step 2 of “The Doom Loop of The Mogul” reflected more that “there is no real marketplace in Hollywood right now”.
Back to McLuhan
A marketplace needs lots of buyers and sellers and Shah believes Hollywood doesn’t have “enough of those things happening” because studios are selling to themselves. Whereas on YouTube, there is a huge marketplace for creators and that marketplace has driven its success: It is increasingly dominating consumer streaming time on U.S. televisions at 10.% in July 2024 according to Nielsen’s The Gauge.
YouTube's marketplace is more McLuhan than Christensen: It has leveraged the invisible "groundrules [sic], pervasive structures and overall patterns" of the internet to build a marketplace where creators have a more interactive relationship with their consumers. The implication is that Hollywood also needs a marketplace that is more McLuhan than Christensen. "Walled gardens" DTC offerings are the "wrong products", especially those that re-bundle cable channels.
In a YouTube-like new marketplace, there is still demand for content but there is no demand for cable channels. Former WarnerMedia CEO Jason Kilar argued for one version of a solution with a "digital everything product". "Portfolio reconstruction" is the extreme of a solution, where legacy media companies decentralize and become arms dealers to this product.
The lurking danger in the Venu Sports model and the DirecTV negotiations is that existing management teams at Disney, Fox and Warner Bros. Discovery believe building "walled gardens" is more valuable than decentralizing their business models. This appears to be an existential mistake, even if they believe streaming is an existential disruptive threat to incumbents (and their jobs).