«The Strategy Club» - The New Disney
Previous twelve months were action-packed for the «Magic Kingdom» of Disney - launching Disney+, wrapping up Star Wars Skywalker Saga, finalizing 21st Century Fox acquisition, changing the CEO, bearing the COVID-19 impact, and much more... Expectedly or unexpectedly, all these might have been the pieces of a big puzzle shaping the new Disney strategy. The company has finished the dramatic franchise expansion and it looks like it's now a time for it to become operationally leaner, execution focused and digitally driven. In this article, I am zooming in the latest events to see how they all tie in together to shape the new Disney.
CEO Transition
The first notable change has been the significant shift in the company leadership. On the 25th of February 2020, Disney abruptly announced that Bob Iger will be stepping from the role of the CEO after 15 years of successful company growth. The transition was long in the making and was delayed four times since 2014. Last December, he announced to the board that he would be retiring in 2021. It looked like a grand finale after the series of strategic acquisitions of companies like Pixar and Marvel, growing revenues and record-breaking box office sales for new pictures.
The new CEO, Disney veteran, Bob Chapek was chosen to continue on executing on Disney vision, with Bob Iger stepping into managing the creative aspects of the company. Some news outlets, like The Verge, drew parallels to Steve Jobs to Tim Cook leadership transition at Apple. While Steve was focused on creating the pipeline of new standalone products, some argued that Tim has been focusing more on perfecting the current lineup and creating more accessories that complement the core iPhone experience.
With Disney, it was Bob Iger, who was aggressively expanding the universe of the Intellectual Property available under Disney brand - think about combining beloved Pixar, Star Wars, and Marvel characters, all under one roof. Now, as the mergers are stable, it is a high time to perfect and capitalize on them. According to the same The Verge article, this is exactly what Chapek has been doing for years - helping Iger to implement, operationalize, and perfect the set vision.
Even more, the current setup of responsibilities between Chapek and Iger is very interesting on its own. Out of various possible roles, Iger will be focusing on creative aspects, i.e. doubling down on visionary activities. Chapek in the meantime will be taking over all operational aspects. However, as Iger is expected to retire in 2021, such might be the signs of a company shifting more focus on perfecting operations and execution in the mid-term.
COVID-19 and Financials
COVID-19 is putting the magic of Disneyland at risk
The second structural shift came unexpectedly with COVID-19 - shuffling some of the former plans, and reinforcing and accelerating other. For such a diversified entertainment giant, the unfolding pandemic adversely affected almost all business segments. In a small detour, to give a broader overview, this section examines the challenges and shifts each Disney segment experienced.
Parks, Experiences, and Products line was undoubtedly hit most - WSJ reports Q3 2019 operating income of $1.72 billion turned into a $1.96 loss in Q3 2020. Once the king, the segment fell from 37% of overall business revenue to a mere 7% last quarter. With parks closed, cruises stopped and social distancing here to stay, it is unclear when the line would regain its revenue, profits, and dominance. It will all depend on the ability of Disney to innovate on keeping the intimate in-person interaction magic of the parks in the presence of social distancing. While re-opened Shanghai Disneyland is working at a third of capacity, with masks, checks and distancing, the first tickets were sold out in minutes bringing a ray of optimism for the segment.
Studio Entertainment is the segment producing video content for further distribution. With movie theaters closed, the revenue for Q3 2020 shrank by 54% compared to last year's performance. The studio was hit with a double-edged sword - finished movies can't be released, while the in-progress ones can't get finalized. It is even more important for the programming schedule of Marvel movies, where motion pictures must be released in sequence, clogging and rescheduling the whole pipeline.
Media Networks, which cover the live TV channels and networks, like Disney Television Animation, ABC, ESPN, received only a slight financial dent of -2% YoY in Q3 revenue. Shifted production costs for the coming months, combined with retained cable subscription and ad revenue streams helped achieving +48% YoY in operating income, offsetting Parks losses. However, the question remains whether the revenue streams would remain stable in the coming months. Without live sports, financially lucrative channels like ESPN will become less attractive to customers. In fact, as WSJ reported, March-April prime-time viewerships were down 54% compared to last year according to Nielsen. Disney was innovating with programming, releasing Michael Jordan «The Last Dance» documentary and locking in exclusive ads, while the overall industry was slowing down.
Direct-to-Consumer was the only segment showing the bright light. Disney+ saw a noteworthy growth to 60 million paid subscribers in 9 months after launch. Executives are calling this segment, particularly with streaming services, the future of Disney. To strengthen the portfolio, it will launch a Hulu-like separate streaming service under the «Star» brand outside the US, expanding the offering beyond the Disney family of movies.
Check out my previous The Strategy Club article «The Reset» that explores broader implications of the current pandemic on the business landscape.
In my opinion, COVID-19 can shake up the currently neat 4-segment structure and make Direct-to-Consumer the front-and-center hub for other initiatives. For one, depending on the consumer preference towards movie-going in the post-pandemic world, Studio Entertainment may need to rely stronger on the direct streaming movie distribution. For another, with pandemic somewhat accelerating the «cut-the-cord» move and people shifting from cable packages towards a combination of streaming services, it might be a time for sunsetting some old live TV initiatives and ad businesses. Two two recent pieces of news are the examples of such changes coming slowly to life.
«Mulan» Surprise
Mulan is coming to Disney+ on September 4 (Source and copyright by Disney)
Recent Mulan news has just highlighted the importance of the Studio and Direct-to-Consumers connection. After several release delays, Disney unexpectedly announced that it will release Mulan digitally using Disney+ for an extra $30 purchase fee. It will launch in September and will be accompanied by the theatrical release in the markets where cinemas reopened. The company highlighted that this should be a once-off practice for such big-name movies, but still, the markets took the news very positively. Mulan was planned to be one of the blockbuster remakes, which had a $200 million investment.
I personally think that this is a great experiment and it might be adopted as a viable business model in the future. It is an opportunity for Disney to test the new Direct-to-Consumer channel, gauge demand, and perfect the playbook for potential future experiments. Disney already has 60 million paying customers and it will be interesting to see the portion of those willing to pay extra for the fresh movie. $30 price might be a good bargain for family households with children, compared to the price for multiple tickets, cinema snacks, fuel, and parking. With the Disney+ exclusive release and the omission of Apple iTunes and Amazon distribution channels, the company is also making a stronger case for new subscribers to try the service out.
Such setup is cutting a portion of costs on middle-men and aggressive marketing. It should take less than 8% of the current Disney+ subscriber base to break-even the movie costs. With $200 million production investment and virtually no cost associated with traditional blockbuster Disney marketing, 5 million households would be enough to cover such investment. Cutting on middle-men - cinemas (and online distributors) - which could take up to 50% of the sale price would bring this number even lower. The coming months will tell whether the consumers were convinced with the new distribution channel, as well as enjoy the movie content itself.
Leaner Company
However, the changes don't stop on the movie distributions, the company is becoming leaner and focuses on cutting costs. Last week, Bob Chapek announced more transformations to the company. It will be shutting down more than 20 Disney TV channels, stopping «Frozen» musical, and closing English-language schools, according to Bloomberg. The Disney TV programming will be pushed from cable TV offerings, such as Virgin Media and Sky, to Disney+ to further boost digital strategy. On top of this, the aforementioned NYT article reports that Bob Iger is envisioning Disney with few employees and less office space in the post-COVID world.
The New Disney
All these are shaping the new Disney.
The Disney that takes the digital-first direct-to-consumer approach across both studio and television efforts
The Disney that performs leaner operations
The Disney that focuses on building deeper experience from the current universe of franchises instead of further expanding horizontally
It will be interesting to see how the interconnections between various business units within Disney change, what actions Disney will take to make Direct-to-Consumer profitable, and how Parks and Resorts rebound.
Some sources for further thoughts: The Verge, WSJ, Bloomberg