Last week The Wall Street Journal reported that Disney is exploring a membership program that could offer discounts or special perks to encourage customers to spend more on its streaming services, theme parks, resorts and merchandise. The objective of the program is something akin to Amazon Prime and seeks to better link Disney products and services, something I’ve been describing in recent mailings as “Customer Data Platform (CDP) business logic”.
A CDP is software that combines data from multiple tools to create a single centralized customer database containing data on all touch points and interactions with a product or service.
So: Disney, the acme of the PARQOR Hypothesis-ideal media company, is centralizing its various databases of its extraordinary first-party data on its consumers across multiple retail touchpoints. As I have noted before, CEO Bob Chapek has been a DTC executive in his career at Disney Parks, so there is both an understanding of DTC at the senior-most levels of Disney and business initiatives seeking to unlock value through consumer data (including bundle deals with National Geographic, which I wrote about in April).
The right company with the right strategy in 2022, and the right management team with the right experience in place, what could go wrong?
Activist investor Dan Loeb of Third Point Capital seems to believe plenty can go wrong.
As the Wall Street Journal reported last week, he “is concerned that Disney directors don’t have enough experience in digital advertising, the monetization of consumer data and other areas that could help Disney boost profits as the company becomes more technology-focused.”
I argued before that his recent critiques in a recent letter to Disney's board are wrong. But on the point of this ambitious objective, he may be right. Why does a conglomerate built via M&A and a non-related collection of great assets believe it can transform itself into an Amazon Prime-like, personalized ecosystem from scratch and compete with the likes of YouTube and TikTok?
Not the metaverse, but a CDP
The “Disney Prime” objective in The Wall Street Journal reads quite ambitious in concept and execution. A more limited version of it last year was outlined by Chapek to the JP Morgan Global Technology, Media and Communications Conference: “we've got [a] tremendous amount of information on our consumers from our parks business and what would happen if we married that and actually mine that data to help people subscribe to Disney+ knowing what we know.”
As I wrote last August (Note: on the Substack archive), investing in and leveraging a CDP to manage and build out customer relationships across platforms is not the same strategic or operational objective as building out a “metaverse”. And as I wrote last month, the advantage of a CDP is both the ingestion and also the application of first-party data, or the data owned by a publisher or vendor with the consumer's permission to use.
Meaning, data is ingested to tell the CDP owner important details about its customers, and the data is then applied throughout the ecosystem to deliver services and goods to the customers. It also may be used to improve how the broader consumer ecosystem runs.
A key challenge is the “vast majority of marketers are unhappy" with their CDPs, as a recent Digiday article reported. Ronan Shields wrote, “Only 10% of marketers to have bought into the first-generation of customer data platforms believe their purchases are fit for purpose with even less (1%) certain such technology will stand up to the requirements of tomorrow.”
So all available evidence suggests that Disney is succeeding where the majority of other businesses pursuing CDPs are failing - its entire Parks business has been running on Disney’s proprietary customer database, as has its streaming business. It is also successfully selling advertisers on its proprietary first-party data: Its upfronts for the 2022-2023 season sold a record $9B in commitments, with 40% committed to Hulu, ESPN+ and Disney+.
The Wall Street Journal quoted a statement from Kristina Schake, senior executive vice president and chief communications officer at Disney: “Technology is giving us new ways to customize and personalize the consumer experience so that we are delivering entertainment, experiences and products that are most relevant to each of our guests. A membership program is just one of the exciting ideas that is being explored.”
To put it in simpler terms, if Disney's CDP has centralized all data on all Disney customers, then the proposed, personalized membership program would be a layer on top of that CDP.
Disney’s Tricky, Weird Attempts at Personalization
But algorithmic personalization has been a tricky project at Disney, to date.
Personalization has been increasingly part of the Disney Parks experience for consumers since the MagicBand was introduced in 2013, and MagicMobile Pass was introduced for smartphones in 2021. These enable visitors not to have to carry paper tickets or FastPasses, avoid worrying about keeping track of a room key, skip having cash and credit cards at the ready and more (The Points Guy has a good overview).
A MagicBand+ was released in July, unlocking the ability to play interactive games in all four Disney World theme parks. It also enables other interactions during experiences like Disney World’s nighttime shows. With these bands and the MobilePass, Disney keeps track of which rides visitors go on, what they buy and where they buy them.
In streaming, personalization is built into Hulu, which arguably has the second-best algorithm in paid streaming behind Netflix, but ranks lower in the standings when compared more broadly to YouTube, TikTok, Snap, and Instagram.
But, algorithmic personalization is purposefully not something built into the DNA of Disney+. In October 2019, it was reported that then-CEO Robert Iger pushed back on a recommendation engine in Disney+:
Mr. Iger said he is piloting the service himself. He spent two hours on Tuesday exploring the app and offering notes to engineers. His feedback: make the product rely less on algorithms to predict what consumers want….
“I think if people are clicking on Mickey Mouse, they mostly want Mickey Mouse,” he said.
Both Disney+ and ESPN+ both have more personalization than they did at launch, but nothing anywhere near the sophistication of Hulu’s customized interface.
These points reveal a weird observation: Disney management seems to believe it can build a highly personalized experience across streaming, consumer products, games and Parks but without a compelling personalized experience in any of its proprietary streaming apps except for Hulu. In this light, even Chapek’s original goal of connecting Parks data to streaming data may be a compelling exercise with the data, but there is little evidence that Disney management can build a compelling personalized experience for the consumer. [1]
What is Disney aiming to build, exactly?
This observation leads to four logical questions:
What is Disney aiming to build, exactly?
How are they going to build it?
Who is going to build it?
Why are they going to build it?
There are two answers to the first question. First, there is the vision that Chapek laid out to investors on the Q3 2022 earnings call:
As you know, Disney+ is still a young business and we are learning more every day about the service's ability to attract new fans to our powerhouse franchises. For example, in addition to driving engagement among tens of millions of existing Marvel fans, we have seen each new Disney+ original Marvel series attract incremental viewership and new subscribers that hadn't previously engaged with Marvel content on the service, thanks to the episodic format that enables us to explore new characters and genres. The value of expanding the fan base is tremendous, and this new audience can then experience Marvel across our other offerings from consumer products to games to theme parks.
Second, putting the two-and-two together of the “Disney Prime” concept and Chapek’s quote, Disney seems to believe it can build an Amazon-like personalization algorithm across streaming, consumer products, games and theme parks. That’s a very different objective than a "metaverse" - whatever that means - for which Disney promoted Mike White to lead on top of his existing duties leading consumer experiences and platforms in the Disney Media & Entertainment Distribution (DMED) division (where he oversees the technology strategy, engineering and product teams charged developing digital experiences across Disney’s brands).
But building an algorithm from the ground up and on top of an existing CDP is a different beast altogether: Both Netflix and Amazon have been building out their algorithms and customer databases since the late 1990s. YouTube’s algorithm is almost 20 years old, and Hulu’s algorithm is 15 years old this year. The oldest data Disney seems to have is its MagicBand data dating back to 2013, and Chapek's quotes to investors suggest it only began to correlate its data within a single CDP in 2021.
If the past is precedent, building a personalized algorithm is not a plug-and-play execution. TikTok seems to be the exception - it launched in 2016 - and its product DNA (and software code) includes the Chinese government’s model of disregarding consumer privacy.
What does Disney’s algorithm *need* to do?
The true challenge for Disney is whether all that data they are gathering will mean nothing without a TikTok-type personalization algorithm (something that Meta CEO Mark Zuckerberg has realized about Instagram and FB).
I had a good exchange on this topic with reader Andy Weissman, who is a Managing Partner of Union Square Ventures. He suggested that an algorithm means “some way, app, apps, network of digital services, to touch a user and give them value every day or multiple times a day”.
In his framing, Disney's pursuit of a personalized, algorithmic experience for consumers faces the challenge of what it means to delight a Disney consumer in ways that aren’t obviously delightful. For instance, Amazon offers Prime Video, but it also has turned the delivery of something banal and every day like paper towels into something that is delightful for consumers: with the click of a “Buy now” button or a subscription, they can receive paper towels at favorable prices and a variety of quantities the same day (via Amazon Fresh) or within 24 hours (via Amazon Prime). And "delightful" can be different for each of its 300MM active customer accounts.
Andy pointed out that the only medium by which Disney touches a user and give them value every day or multiple times a day is via video: Disney theme parks visits cost thousands of dollars, consumer products are a rare buy, and games are a more frequent touchpoint that Disney has licensed out to third-parties.
If the video is the only medium where it touches consumers, then Disney is competing with the likes of TikTok, YouTube, Snap, and Instagram and Spotify, each and all of which deliver value every day or multiple times a day with algorithmic, personalized recommendations. Netflix falls both within and outside of this group with both algorithmic, personalized recommendations of video and its games offerings.
More broadly, there may be no worse time for Disney to try to build an algorithmically driven business, as Meta is quickly learning from its competition with TikTok:
Meta realizes that to really compete with TikTok, it has to replicate the magical experience of TikTok’s main “For You” page. The News Feed, which dropped the “News” from its name earlier this year, pioneered a social feed that learns from explicit cues you give it, such as friending someone or following a page. TikTok went a step further by guessing what you like based on your passive viewing habits, injecting a never-ending fire hose of short videos into peoples’ screens. By removing the need to follow accounts before you see interesting videos, TikTok also leveled the playing field for creators, giving them a way to go viral overnight without a large following.
Meaning, TikTok has upended long-held assumptions of what users want from personalized feeds, and succeeds by giving users value every day or multiple times a day with a “firehose” of creator-generated videos. Disney is betting on the gravitational pull of its brand and IP to bring Disney fans deeper into the ecosystem to create more personalized touchpoints with them, and at a fraction of TikTok's scale. Moreover, it is betting on an algorithm at a time when TikTok is upending the existing logic of algorithmic personalization.
So, that bet does not seem to solve for how both Amazon and TikTok have reframed the challenge of what it means to delight a customer in ways both in video and beyond video.
Dan Loeb & shareholder value
This brings us back to Dan Loeb’s concern that “Disney directors don’t have enough experience in digital advertising, the monetization of consumer data and other areas that could help Disney boost profits as the company becomes more technology-focused.” The Wall Street Journal reported:
“Disney’s board makeup is now thinner on directors leading consumer-facing brands in tech and media. Instead, the board is stocked with executives with backgrounds at manufacturers such as Procter & Gamble, General Motors Co. and Coca-Cola Co., consumer-apparel brands such as Nike Inc. and Lululemon Athletica Inc. and healthcare and biotech companies.”
In short, there may be no one on the Disney board who understands and can offer oversight for building an algorithm-driven, consumer-facing business model that can deliver more consumer touchpoints daily, both within and beyond video. That is indeed a problem.
There is also a challenge presented by the Visionary vs. Fiduciary Executive framework: who within Disney will own the vision for a “Disney Prime”-type model? And are they incentivized to execute it?
Former CEO Bob Iger wrote in his autobiography “The Ride of A Lifetime” that, after buying BAMTech to become Disney’s streaming back-end, he set about building an entirely new incentive structure for executives to reward them for helping Disney pivot towards streaming. The incentive structure he imagined involved him deciding how much stock each executive would be rewarded, and based the award not on revenue but on how well the executives were able to work together.
Chapek will inevitably need to figure out similar new incentive structures, too. But it’s still not clear who owns the vision: the likely candidate, metaverse strategy leader Mike White, is reported to be involved as one of the leaders in “a cross-company effort”.
So Chapek seems to be the visionary, but does the board understand Chapek's vision? And can it help to guide Disney management toward outcomes that deliver both user and shareholder value?
Loeb's point is all available evidence suggests that they do not.
What delivers the best creation of value?
Tomorrow is Disney+ Day and it is already announcing a wave of perks for Disney+ subscribers, including a buy two, get two free offer on Disney Cruises, and perks for its D23 fan convention. But even these perks don’t offer value to Disney+ subscribers every day or multiple times a day.
Andy Weissman posed the question of which model delivers the best creation of value “for users mainly but also shareholders as that flows from users in my book”:
An integrated ecosystem of delight à la Amazon or Apple (“maybe FB/Meta”);
A service you check 20 times a day, every day, for delight (e.g., YouTube, TikTok, Spotify);
A branded content service that serves primarily in one medium;
A conglomerate built via M&A and is a non-related collection of great assets; or,
A niche media community that offers e-commerce, experiences, and more so that “people can now almost always find something they love”
He and I have yet to get close to an answer. It would appear that Chapek, Disney management, and Disney's board believe they can evolve from #4 to #1.
But what if they simply cannot figure out what it means to delight a Disney customer with personalized services in ways that aren’t obviously delightful? What if they don't have the internal know-how to build an Amazon Prime-like product fast enough or, more importantly, in a way that delights Disney consumers.
These questions point to Dan Loeb’s ultimate concern: there may be better paths for Disney management to create shareholder value than by pursuing this consumer-facing personalization and membership strategy, and they might pursuing them if they had better and savvier board oversight.
Footnotes
[1] There is an interesting debate to be had about whether personalization is necessary: Disney+ has grown 75% in the domestic U.S. since its launch in 2019. But, its growth is flat and at 44.5MM subscribers in the U.S. and Canada, it is at 61% of Netflix’s market penetration. Meanwhile, Hulu’s continued growth (+2% last quarter, +7% year-over-year) is evidence of how personalization is marginally valuable in an increasingly competitive streaming marketplace.