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This has been quite the 72-hour news cycle for Disney. On Tuesday it announced a joint venture with Warner Bros. Discovery and Fox Inc. for a streaming platform that bundles their sports broadcast channels. Then, yesterday a quarterly earnings call with a “kitchen sink” of announcements that included a $1.5 billion investment in Epic Games and Taylor Swift’s movie “The Eras Tour” coming exclusively to Disney+ (with four extra song performances, no less).
The strategy seemed to be throwing everything possible at preventing Nelson Peltz from winning a seat or two on the Disney board. The call played out like Oprah Winfrey’s famous “You get a car! You get a car! You get a car!” moment but tailored to wary Disney shareholders.
Wall Street responded positively, with the stock price up over 10% since yesterday. Peltz’s firm Trian Fund Management responded with a statement quoting Yankees legend and famous wordsmith Yogi Berra: “It’s deja vu all over again” and added “We saw this movie last year, and we didn’t like the ending.” (NOTE: I used Yogi Berra quotes last March in my Medium Shift column “Disney’s Hulu Deal Ain’t Over Till It’s Over”). Meaning, Iger made promises to shareholders last November in his surprise return. After an initial bump, the stock price dropped below $80.
The question is, with all this newfound enthusiasm from shareholders, why be skeptical about Disney’s future? There are two answers based on recent essays from The Medium:
Streaming models should be market-making, first, and content distribution models, second; and.
Disney continues to rely upon third parties to own the customer relationships in its direct-to-consumer businesses.
Key Takeaway
To save itself from Nelson Peltz and other activists, Disney appears to have overcomplicated the foundation of its pivot to a direct-to-consumer future. In trying to pivot to a DTC business that should owns its customers, Disney seems to risk losing valuable customers and ceding its relationships with next generations to third parties.
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Streaming models should be market-making, first
There is a simple question to apply to Disney’s swath of announcements: Is Disney connecting supply and demand to its content as Netflix does with personalization algorithms? Or as it does to theme parks and cruises in its Experiences business?
Or, is it still relying on third parties like cable and theatrical distributors to make the market for them?
Its joint venture with Fox and Warner Bros. Discovery offers an ambiguous answer. All three parties share the role of market-maker. The venture seems to combine all parties’ assets into one platform and then release that app into the wild, assuming that demand will naturally find the new supply. But, the audiences they seek are disaggregated across multiple platforms.
This planned sports bundle is a different value proposition that is more analogous to Amazon Prime Video’s non-exclusive NFL Thursday Night Football (TNF) broadcasts before 2022—which it shared with NBCUniversal—or Paramount Plus and Peacock’s non-exclusive broadcasts of NFL games. The idea seems to be to capture “cord-nevers” with traditional TV broadcasts also distributed over the internet.
But, both Amazon and Peacock’s successes in streaming sports in 2023 and 2024 have come from two advantages: exclusivity of the broadcasts and market-making. Amazon reaches 165 million Prime members in the U.S. across its website, apps and Fire TV devices. It can make a market for NFL viewership itself. This was the second season where all TNF broadcasts were exclusive to Amazon. According to Nielsen National TV Ratings (panel only), TNF on Prime Video averaged 11.86 million viewers per game during the 2023 season, marking an increase of +24% over the previous season (vs. 9.58 million). Also, for the first time, all 15 of TNF on Prime’s games won the night among total viewers against competing programming on broadcast and cable.
This was the first season where Peacock exclusively distributed an NFL game. Comcast has positioned itself as a “market-maker” for Peacock in the U.S. across 67 million households, offering Peacock’s Premium ad-supported tier for free to Xfinity subscribers. Its NFL Wild Card game between the Miami Dolphins and Kansas City Chiefs averaged 23 million total viewers across its linear and streaming platforms, and Nielsen reported the game reached 27.6 million viewers overall. NBCU also shared that the game drove “the Internet to its largest U.S. usage ever on a single day and the largest Internet event ever, consuming 30 percent of Internet traffic during the game.”
The difference in those models is marginal cost. Disney's joint venture will have to spend to identify and market to 60 to 70 million “cord-nevers” and cord-cutters in the U.S. Whereas, Comcast accesses many “cord-nevers” via its Xfinity broadband platform. Amazon likely has most—if not all of them—within its ecosystem already. Their marginal costs for marketing are effectively $0. For Disney’s joint venture with Fox and Warner Bros. Discovery to succeed—much less “ESPN as a stand-alone streaming option with innovative digital features” in 2025—it will need to rely on the market-making abilities of third-party platforms in the U.S.
Third Parties Owning Disney’s Customer Relationships
The reliance on third parties to make a market for its businesses also was evident in its acquisition of a small equity stake ($1.5 billion) in Epic Games. The partnership will launch a “new persistent universe” offering “a multitude of opportunities for consumers to play, watch, shop and engage with content, characters and stories from Disney, Pixar, Marvel, Star Wars, Avatar and more.”
The important caveat is that—despite the equity stake—Disney is licensing its IP to Epic Games. This is similar to Disney’s licensing deal with Electronic Arts (EA) and its $1.5 billion partnership with Penn Entertainment for the ESPNBet app. In all three deals, third parties own the customer relationship in their direct-to-consumer businesses instead of Disney. Therefore, Disney does not appear to be getting any smarter about its DTC consumers, and therefore not any closer to building a DTC ecosystem. That contrasts with competition like Amazon, Apple, Netflix, and even the much smaller The New York Times (10.4 million subscribers) and Crunchyroll (13 million paying subscribers). All have succeeded with the assumption that a successful DTC ecosystem requires complete ownership of the customer relationship.
If it seems like a missed opportunity, Iger himself inadvertently confirmed it as indeed in the long run on the earnings call:
“...when I saw Gen Z and Gen Alpha and even millennials and I saw the amount of time they were spending in terms of their total media screen time on video games, it was stunning to me, equal to what they spend on TV and movies. And the conclusion I reached was we have to be there, and we have to be there as soon as we possibly can in a very compelling way.”
The phrasing here is key: Disney does not need to own the customer relationships with “Gen Z and Gen Alpha and even millennials”. Rather, Disney simply needs to be present “in a very compelling way” where these customers are. Disney is handing that relationship off to a partner with extraordinary scale: Fortnite, alone, is estimated to have over 500 million players. Epic Games will be Disney’s market maker in games at a time when Disney most needs to have cost-effective marketing.
Perhaps that $1.5 billion effectively will be marketing spend for Disney content on Fortnite, but Epic Games will still own the customer relationship. Even if millions of Fortnite players embrace and engage with Disney’s brand within a new immersive universe, Disney will need to spend to market to those millions of consumers outside of Fortnite. Assuming Disney achieves the scale it hopes it will with Epic, that will be expensive.
Notably, Disney does not break out marketing costs but does include them in selling, general, administrative and other costs. Those totaled $15.3 billion in 2023, down 6% year-over-year “primarily due to lower marketing costs at Entertainment Direct-to-Consumer.” Its joint venture and its partnership with Epic suggest those cost-savings will be momentary.
Connecting the Dots (?)
In simple terms, the dots of Disney’s DTC proposed vision do not connect because they ultimately do not own the consumer outside of the Disney Experiences ecosystem. It owns the consumer in its DTC streaming business, but its new sports bundle means it will share that relationship with third parties. The bundle also will undermine its relationship with 4.6 million subscribers to its own virtual cable distributor Hulu Live. Analyst Michael Nathanson asked about this disconnect on yesterday’s earnings call: “how does [Hulu Live] fit into what you just announced with direct over-the-top ESPN and then sports bundle?."
Iger’s response to Nathanson is objectively confusing (read the transcript). To distill what I think what he meant:
Hulu Live “reflects the bigger, fatter bundle of television channels” that “happens to be integrated or attached to Hulu if you subscribe to it”
The bundle “competes with Hulu Live directly, but it doesn't compete with Hulu” because the new sports service can be bought as an add-on to Hulu.
That new sports offering will be “very, very compelling in terms of reducing churn for Hulu and increasing engagement.”
Hulu + Live TV is “certainly a nice, important feature” of Disney/s Hulu business, but “the critical part of that business is Hulu itself."
The obvious problem is that last December, Disney paid Comcast $8 billion in cash to own both Hulu and Hulu Live. The sports bundle JV will become more costly if it also undermines the relationships with 4.6 millions subscribers to Hulu Live that Disney just acquired. Those customers deliver $93.61 in monthly average revenue per user. In trying to pivot to a DTC business that should owns its customers, Disney seems to risk losing valuable customers and ceding its relationships with next generations to third parties.
“Crawl, Walk, Run”
The frequent refrain of “crawl, walk, run” by Netflix Co-CEO Greg Peters came to mind while listening to Disney’s earnings call. He has frequently used the saying to describe its efforts in video games and advertising. CFO Spencer Neumann described it in its Q1 2023 earnings call last year as “being very thoughtful and methodical on how we're building the business and, with that also, how it impacts our overall financials, our revenue and our incremental profit contribution.”
Disney’s “kitchen sink” earnings call played out as the opposite of that thoughtful and methodical approach. There is a good reason for this: Iger and Disney’s board of directors are fending off activist campaigns by Nelson Peltz’s Trian Partners and others. Iger needs to win over Wall Street by boosting the stock price and executing his vision for the best interests of the future of Disney. He seems to have accomplished that, for now, in ways that will be studied by future generations in business schools.
But, this strategy also raises the question of whether Disney’s business is now positioned to evolve, much less succeed. Disney has struggled with building and evolving, losing $4 billion in streaming in 2023 and another $200 million in Q1 2024.
Both Disney management and shareholders now must manage and invest in something more labyrinthine and highly reliant on third parties than an optimally built direct-to-consumer business should. To save itself from Nelson Peltz and others, Disney appears to have overcomplicated the foundation of its pivot to a direct-to-consumer future.