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Last Tuesday, The Walt Disney Company rejected the nominations for its board of directors by Nelson Peltz's Trian Fund Management, L.P. and its affiliates. The company issued a statement “Mr. Peltz again offered no strategic insights or proposed courses of action to address his concerns, and instead responded that he was not there to put forth a plan, he was only there to get a Board seat.” On Thursday, Trian founder Nelson Peltz updated Trian’s “Restore The Magic at The Walt Disney Company” website with new data supporting its argument that Disney’s board “is too closely connected to a long-tenured CEO and too disconnected from shareholders’ interests”.
The critiques of both parties are right. Longtime readers of The Medium are familiar with my long-running questions about Disney’s shift to retail under Iger’s leadership. My first essay of 2023—“When The C-Suite Are Not Digital Natives”—asked whether Iger is the right leader to navigate paradigm shifts towards consumer-first, retail-first models given his struggles with gaming, creator economy and now streaming business models.
I also have argued that former CEO Bob Chapek was more strategically right with his “Disney Prime” initiative than Iger or Peltz. It would have established Disney+ membership as a single point of access into Disney’s ecosystem. It also would have boosted average revenue per user (ARPU) beyond streaming, alone. But, the sales pitch was too complicated for Disney’s board, Disney’s management and Wall Street. None seemed to understand what that meant in practice, or to care enough to stick around.
Notably, Peltz is making a simpler pitch: There is no need to get into the weeds of how Disney reorients towards consumer-first, retail-first distribution models. Instead, cut costs, deliver a growth story in streaming and shareholders will invest accordingly. That makes Peltz "right", too.
So, to date, Iger is "right" about Peltz, Peltz is "right" about Iger and the Disney board, Chapek was right to be skeptical about streaming, and shareholders who currently choose to invest elsewhere are right to avoid the mess. But, ultimately, someone has to promise and execute a growth story for shareholders, and that does not seem to be the priority of Disney management.
Key Takeaway
Both Iger’s and Peltz’s stories are the dominant narratives for Disney—and despite the existence of a simpler and arguably better past narrative from Chapek—is that they are the only stories investors may understand. That does not make them the best paths for growth for Disney.
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The Art of Storytelling
From the investor’s perspective, Peltz and Iger have two competing stories. It is effectively a confidence game: Iger promises strategy, new board members and a path to streaming profitability. Peltz questions the entire gambit and also promises a path to streaming profitability.
All these promises about streaming profitability seem misguided. That may be because I have longer argued Chapek’s “Disney Prime” initiative was an implicitly skeptical perspective on consumer demand for the streaming business model. But, I also have been paying close attention to Nielsen’s weekly Top 10s for Disney+ and Hulu, which reflect a “power law”: a handful of titles are watched for more than 100 million minutes, and the rest have lower consumption. Whereas, all ten of Netflix’s titles for the same week (ending November 19, 2023) had over 250 million minutes of viewing. The demand for Disney content exists but it is niche relative to Netflix.
There is less transparency into how consumers engage with Disney+ and Star internationally. All we know is that Disney+ is growing overseas (up 9.4% year-over-year to 112.6 million subscribers), in part because it continues to expand to more territories and in part to other trends (like new movie and show releases). We also know that it lost $2.5 billion in its fiscal year 2023 from streaming alone, and has made making streaming profitable a strategic priority for Q4 of fiscal 2024 (by this October).
Through the lens of Chapek’s skepticism, the cliffhanger in both Iger’s and Peltz’s stories to investors is whether streaming alone has a path to profitability. Iger believes the answer lies in the execution of a strategy, and Peltz’s story lies in the financials of that strategy and the people to properly execute it.
Which “Great Man”?
Two weeks ago I argued in “Disney's Cash Needs Rule Everything Around Hulu's Future”:
The fragmentation of a technology platform within a media conglomerate like Disney—which has a market capitalization of $167 billion—is a challenge of execution across fiefdoms. It is the difference between the theory of a great operational culture—whose focus on the subscription model Netflix Executive Chairman and Co-founder Reed Hastings wrote about in “No Rules Rules” —and a culture driven by the great man theory—which CEO Robert Iger wrote in “The Ride Of A Lifetime” was why Disney succeeded under him despite its multiple and varied business line items and cultures (e.g., Parks as a retail model versus its linear business as a wholesale model).
I was referring to Disney’s decision to fragment Hulu into both an app and content on Disney+. It is “hard to imagine Hulu thriving after the giant cash hit Disney will take to buy out Comcast's share of the platform.”
Both Iger and Peltz are angling to be the “great man” who saves Disney. But, The problem with all the criticism of Chapek—some unfair, some deserved as CNBC’s Alex Sherman reported—is that its focus on the man misses that his vision for Disney’s business model was simple, too. Chapek was promising investors that Disney+ would become more than just an app — it would be an “experiential lifestyle platform” for over 150MM Disney streaming subscribers and hundreds of millions more Parks visitors. One credit card on file for a Disney+ account could be monetized within the Disney “flywheel” in multiple ways. Chapek's vision was surgically oriented to rethinking Disney's value proposition with consumers into an entirely retail-first, consumer-first business model.
What this criticism gets right—and what both Peltz and Iger understand—is that Chapek’s story was too complicated for both investors and Disney management. As I wrote in “The ARPU of Storytelling”:
But, from the perspective of a single subscription fee, all the upside of this story can get lost easily. In the case of ticket sales to Disney theme parks exclusive to Disney+ subscribers, what is the ARPU? Is it significant enough to matter? How is that different from the ARPU of Disney+ subscribers who purchase merchandise?
Look Beyond The "Great Men"
There are no easy answers to these questions. The easiest solution when dealing with both investors and management display growing skittishness about the future of Disney is not to tell them Chapek's story. And that is effectively what played out for Chapek last November when he was fired by the board.
This dynamic mirrors something Holman W. Jenkins, Jr. wrote in The Wall Street Journal back in January 2022 about AT&T’s decision to spin out WarnerMedia:
“it’s hard also to escape a suspicion that AT&T management recognized that new investors would want new managers for new opportunities, not a bunch of telecom veterans. In short, AT&T is proceeding with its chaotic unmerger so AT&T can go back to being a company that the market will let AT&T’s current leaders keep running.”
Applying that logic to Disney, the market seems to be telling Disney that growth investors will not invest until they see new managers offering new growth opportunities. If we believe Jenkins, Chapek arguably was that manager and outlined that new opportunity. He was ultimately undermined from within by a board and management who prefer to keep running the business and who the market will allow them to do so. Their priorities trump the need for growth and evolution.
Iger's return has unintentionally affirmed and therefore cemented that mentality within Disney. Peltz’s strategy will not change those dynamics, either, even if his pitch is easier to understand. Disney cannot and will not bring back Chapek, who is too unlike Iger he to be impatiently waiting on the sidelines. But, as Jenkins also argued, "fifty years of Nobel Prize-winning financial economics" suggests that the right strategy will attract growth investors. Chapek's vision was much closer to that story than either Iger's or Peltz's stories currently are.