On Monday I wrote an essay arguing that the Disney “magic” returning CEO Robert Iger reportedly thinks that now-fired CEO Bob Chapek neglected – and which he sees himself as bringing back – may not be the “magic” audiences have been trained to pay for in the age of TikTok and YouTube. Today, I had planned on looking at Disney through the lens of each of PARQOR’s four key trends in media for Q4 2022, and then making recommendations as to what Iger and his management team may need to do to create shareholder value.
Those plans changed yesterday evening after Disney released its 10-K for FY 2022, which included this paragraph in its Management’s Discussion and Analysis:
As contemplated by the leadership change announcement, we anticipate that within the coming months Mr. Iger will initiate organizational and operating changes within the Company to address the Board’s goals. While the plans are in early stages, changes in our structure and operations, including within DMED (and including possibly our distribution approach and the businesses/distribution platforms selected for the initial distribution of content), can be expected. The restructuring and change in business strategy, once determined, could result in impairment charges.
“While the plans are in early stages” is notable phrasing in light of former CEO Bob Chapek’s “Disney Prime” vision: exclusive deals for Disney+ subscribers for Disney merchandise, theme parks and cruises. Disney+ would become more than just an app — Chapek envisioned it as an “experiential lifestyle platform” for over 150MM Disney streaming subscribers and hundreds of millions more Parks visitors. As I have written previously, the objective was to change the value proposition of Disney+ from streaming content, alone, to “a deeper direct-to-consumer relationship that can be nurtured in ways both obvious (such as sales of consumer products) and less obvious (such as gaming).”
Key Takeaway
Returning CEO Bob Iger and Disney's board may be right in rejecting Bob Chapek’s vision of "Disney Prime" vision, but it's not yet clear what Disney's alternative paths are for creating both consumer and shareholder value at scale.
Total words: 2,100
Total time reading: 9 minutes
This vision offered a utilitarian answer for “magic” — use Disney+ for marginal economic benefits elsewhere in the Disney ecosystem. As un-magical as that may read, it reads much closer to Amazon’s and Apple’s bundles of services, and YouTube’s and TikTok’s multipronged business relationships between their millions of creators and billions of viewers, than Disney+ as it is, today.
The Wall Street Journal has reported that Iger hated this vision for Disney and told more than one confidant that Chapek was “killing the soul of the company.” Iger thought Chapek’s pursuit of data-driven models neglected the “creativity” of Disney.
But, given that Iger-led Disney evolved into "a conglomerate built via M&A and consisting of a non-related collection of great assets" (more on this below), this critique of “killing the soul” reads funny. Because distribution models are rapidly declining and streaming has not proven to be replacement for them, either financially (as AMC Networks announced yesterday) or as a use case.
So this passage from 10-K raises an important question: how do the Board and Iger plan on delivering both user and shareholder value?
The Problem with Disney Prime
So far, we have no evidence of how Disney’s Board of Directors regarded the Disney Prime strategy (though the Financial Times reported that board Chairwoman Susan Arnold backed Chapek until other C-suite executives mutinied). Back in September, I asked this question about the strategy: “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?”
The question was based on a conversation with reader Andy Weissman — who is a Managing Partner of Union Square Ventures — about whether all that data Disney is gathering will mean anything without a TikTok-type personalization algorithm. Because, an algorithm provides “some way, app, apps, network of digital services, to touch a user and give them value every day or multiple times a day”.
Weissman was skeptical about Disney Prime: In his framing, Disney's pursuit of a personalized, algorithmic experience for consumers faced the challenge of what it means to delight a Disney consumer in ways that aren’t obviously delightful. Amazon and TikTok have reframed the competitive dynamics of that challenge with their own algorithms. And therefore, Chapek’s “Disney Prime” bet would likely not solve the challenge of what it means to delight a customer, both in video and beyond video.
But, Chapek, Disney management, and Disney's board believed they could evolve from a conglomerate built via M&A that also is a non-related collection of great assets and become an integrated ecosystem of delight à la Amazon or Apple (“maybe FB/Meta”, Weissman wrote me).
Like Weissman, Iger has been skeptical of the wisdom of this pivot.
Two Problems revealed by “Disney Prime”
Even if I believe Disney Prime was directionally right, I shared some of this skepticism. I argued in September that the Disney Prime initiative revealed two challenges for Disney:
The Disney Board — “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”; and
Disney’s technology — The “true challenge” for Chapek’s plan was whether all that data Disney is gathering across theme parks and streaming will have any value without a TikTok-type personalization algorithm.
1. The Disney Board
If Disney must evolve and transform in the streaming era — and I think directionally Chapek was right in identifying the need to evolve Disney+’s competitive value proposition beyond streaming — this may not be the Board to oversee the evolution and transformation.
This has been the argument of Third Point Capital’s Dan Loeb, who has been reported to be “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.” Loeb has already added one board member (former Viacom, Facebook and Instacart executive Carolyn Everson) while still pushing for another. Notably, Nelson Peltz’s activist investor fund bought $800MM in Disney stock after its Q4 earnings and is likely to grow. One of its objectives is also to seek a seat on the board.
Iger’s shocking return hasn’t changed this problem of a lack of relevant experience, and therefore it probably has not changed Loeb’s concerns, either. In some ways it makes the optics for the current board worse: over the past three years it has presided over a failed succession strategy and a streaming strategy now losing $1.5B in a quarter. Also, there are legitimate questions about how the Board decided upon Iger’s return and the firing of Chapek: Excluding Everson and two members appointed at the time of Chapek’s accession (former Cisco and Google executive Amy Chang and Chief Executive Officer of lululemon athletica Calvin McDonald), eight out of the 11 independent board members came during Iger’s tenure.
The question under Iger will be whether changes in the board are an outcome he is willing to pursue. I think Loeb looks prescient in having raised concerns about the board, and especially if one agrees with the premise that Chapek was more directionally right about Disney+’s need to evolve beyond Iger’s original vision.
But it’s not yet clear how Loeb regards Iger’s return (he hasn't tweeted anything). Also, it’s not yet clear what Peltz and Trian want or why they are taking a larger stake in Disney. But their questions and challenges to the Board’s governance and direction of Disney are supported by objective evidence.
2. Disney's Technology
The second challenge reflects something I argued before Thanksgiving: the streaming model has “evolved so rapidly and so significantly away from [Iger’s] original vision of global, inelastic demand for a low-priced subscription-only offering.” But for users, Disney+ remains the same app as it was at launch, with tweaks to the back-end in Europe (Star) and Canada.
I argued this past Monday that Iger's vision for Disney+ was “always more conservative”:
a low cost, streaming-only service without a personalization algorithm (which Iger pushed back on in 2019 with the rationale ‘I think if people are clicking on Mickey Mouse, they mostly want Mickey Mouse). But now Disney+ growth has plateaued, it has lost $1.5B in its last quarter, and according to Nielsen, YouTube now has 4.25x the TV usage to Disney+ in the U.S. on TVs.
I later added:
And given his past track record with direct-to-consumer initiatives that reflect the new “magic” like gaming — which failed operationally to adapt to the video game model — and YouTube channel Multichannel network Maker Studios — which failed in large part because Disney “wasn’t as keen on making the type of investment required to do original content at scale” — Iger may suffer from a confirmation bias of not appreciating media business models driven by data.
Iger's track record generally failed to deliver experiences that deliver delight in the more technologically advanced ways that Disney's digital competition has. And, in the attention economy, Disney+ must compete with a long list of streaming apps, social media apps (TikTok in particular) and games (e.g., Fortnite and now Warner Bros. Discovery’s “Multiversus”).
We haven’t heard much from Iger yet — he didn’t discuss it at the Town Hall on Monday, only mentioning that he hasn’t visited Theme Parks since he left Disney — so we don’t know where he stands on Disney+ failing to evolve or creating user delight going forward. We have one signal that he’s willing to double down on his Disney+ vision: Disney announced via a footnote in its 10-K last night that it has purchased the remaining 15% stake in BAMTech for $900MM. It’s not clear what advantage Disney has in owning 100% of a technological back-end against which it has accomplished little competitive innovation over the past three years.
That isn’t to say that Disney’s streaming technology doesn’t work — it obviously does for over 150MM subscribers worldwide. But audience behaviors are changing in the "attention economy", and so Netflix has moved on to gaming and YouTube and TikTok are engaging audiences with more bells and whistles (Super Chat, Stickers, Tips for creators) than the passive, lean-back viewing experience of Disney+, Hulu and ESPN+.
And, if past is precedent — Iger has proven to be the proverbial leopard who doesn’t change his spots — Disney is not going to seek to solve this problem anytime soon under Iger or this board.
Does a conglomerate have a “soul”?
As I concluded in “Can Disney TikTok-ify or Amazon Prime-ify Itself?”, “Disney Prime” wasn’t the end-all, be-all solution for Disney’s post-Iger future: “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 be pursuing them if they had better and savvier board oversight.”
But what are the paths toward providing the best creation of value for shareholders? Andy Weissman proposed five:
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”
Chapek, Disney management and Disney's board believed they could evolve from path #4 to path #1. Iger hates path #1, and seems to believe path #4 is best because it has creativity as its “soul”.
But, those great assets worked best when plugged into TV and theatrical distribution channels, and into which the “soul” of creativity plugged. To Iger’s credit, he has understood that video distribution would evolve towards the Internet since he held the video iPod for the first time (as he described in his book ‘The Ride of a Lifetime”). But with those channels declining in both usage and revenues, it’s less clear what the purpose of a conglomerate with a non-related collection of great assets should be.
Notably, the majority of scenarios in Weissman’s don’t involve content distribution, alone: rather, most rely on the “magic” of business models driven by data. It’s also notable how the majority of scenarios require ecosystems built around the consumer (which in turn requires consumer data). This was the architecture of Chapek’s objective, and now both Disney’s board and its new CEO seem to be rejecting that architecture as a premise for building user and shareholder value.
This brings us back to the Disney Board’s description of its plans as in the “early stages”: If they are rejecting Chapek’s "Disney Prime" architecture of scaling Disney around the consumer’s needs across mediums, then according to Weissman's list, Disney’s only remaining paths to creating shareholder value are either more niche or focused on a particular medium.
Neither is a path to scale, nor to "some way, app, apps, network of digital services, to touch a user and give them value every day or multiple times a day". Even if shareholders — activist and others — want to hear more about profitability from Disney, they are not going to want to hear this.