The House of the Bloody Mouse

Media is one of the worst businesses known to man. Creative success is inherently hit-based, so you spend years investing time and money without knowing if a movie, book, or videogame will justify that investment. Even when you have a hit, monetization is dependent on making marketing that grabs fickle consumer attention. Margins are low and products are rarely repeatable. You usually have to come up with something totally new every time or do some sort of sequel.

Perhaps worst of all, your employees are really, really good at complaining. When you do something wrong, you don’t just get a snarky email, you get an employee deploying the most poignant prose you’ve ever seen to tell you, in detail, that you are a moron. Journalists feast on the succulent drama oozing of employee malcontent, publishing exposes that are both truthful and kind of mean. It’s a mess. Shoot, when I first became a writer at Every, in the second post I wrote I published screenshots of my contract and discussed “Whether I Was Getting Ripped Off” by working here. I’m part of the reason that running a newsletter empire is exhausting! And even if you keep your employees happy, your fans will certainly have something to say.

This combination of high drama and low margin means a special skill set is required of a media company executive. They must simultaneously be great at keeping the creative types happy and also practice ruthless financial discipline.

Bob Chapek, the recently ousted CEO of Disney, was bad at both of these skills simultaneously.

On the fiscal discipline side, the Disney+ service lost $1.47B last quarter, double the losses of a year ago. Despite guests spending 6% more per capita at the parks in comparison to 2019, the theme park division reported far lower profits than expected. While Disney+ has crushed all expectations of growth, with 164M subscribers and a total of 235M subscribers if you include ESPN+ and Hulu—more than Netflix—the losses are painful. Disney+ was supposed to be the replacement for cable bundle profits, and the opposite has occurred.

On the human management side, Chapek made multiple smaller flubs, such as the bungling of the “Don’t Say Gay” bill in Florida, where he managed to offend both conservatives and liberals by waffling. However, the biggest change was the implementation of the equivalent of the Central Planning Division of Soviet Russia inside of Disney's media empire. The unit’s job was to decide which content went to cable, theaters, or streaming. This same team also had major say over the creative team’s budgets. (Unsurprisingly, this was an unpopular strategy, and Iger fired the executive in charge of it as his first big move). The final nail in the coffin was the Disney CFO going to the board and expressing a lack of confidence in Chapek.

With that, the board brought back the Sultan of Acquisitions, the former CEO Bob Iger, for another go at the top role. Iger was the architect of Disney’s purchase of Marvel, Pixar, Lucasfilm, and, right before he left, 21st Century Fox, the latter for $71B. His signature move was to acquire new intellectual property, empower these new assets with Disney distribution muscle and marketing budget, and generate additional revenue by selling park tickets and merchandise. This worked! And worked well! The Marvel, Pixar, and Star Wars acquisitions will likely go down as three of the greatest in media history.

However, this model was reliant on the higher 30-40% margin that they could eke out of the cable bundle. Does it work when you swap out cable with streaming bundles? Iger will now be faced with a challenge he hasn’t yet encountered—when to unbundle components of the business.

The atomic activity of a media company requires two separate components. As I’ve argued previously, whenever a new technology enables a fresh media paradigm, companies initially compete on distribution. But over time competition shifts to the competition to the quality of creative content.

We are now at the point in the cycle where streaming companies no longer win by answering tech questions—they do it by answering media questions. The ability to stream that content onto any device won’t determine the victor in the streaming wars; the correct mix of content, pricing, and bundling will. This cycle of distribution to content competition isn’t something unique to the television. When the rights to novel radio technology were being negotiated between Britain and America in 1919, all of the questions were around technology: who owned the rights to the crucial Alexanderson alternator (the key piece of technology for this era of media) was the focus of furious negotiations. When the dust settled, a new corporation called the Radio Corporation of America (RCA) was formed to manufacture radio technology. As an afterthought, they also built out a subsidiary, the National Broadcast Company (NBC), as the first nationwide radio network. Over time, RCA would be diminished as technology would shift, but NBC’s profits would rise and fall depending on which technology or media paradigm was dominant. This same NBC would be the progenitor of the ABC networks that Disney owns today.

This cycle matters because every time the technology changes, so does the business model. The content companies that are able to shift their monetization strategies accordingly are the ones who survive the transition.

Disney is in the weird spot of being halfway through this cycle. Between Iger’s extraordinary intellectual property acquisition, coupled with a legacy business starting in 1923, the company owns a ton of assets. This graphic from 2019—here’s a high-res version—outlines the enormous scale of the current organization.

We are in the age of content wins for streaming. While there is a chance that virtual reality, AI, or short-form video changes the paradigm and business model yet again, the question of what you play on your TV is no longer one of technology. Disney’s issue is that they are doing everything all at once. They have ABC and ESPN on the cable side, Hulu and Disney+ on the direct-to-consumer offering, and a bunch of other offerings.

As a media CEO, there are essentially two ways to improve the outcomes of your organization. You either make each incremental dollar you spend on content have higher-quality output, or you’re able to eke out higher returns on each dollar through better monetization strategies.

Iger will fix the creative issues that Chapek created. He’s a pro who is trusted by Hollywood and is very good at creator management. He’ll be able to get creative teams more performative and succeed at the first outcome.

The second category is far less clear. Some of Chapek’s most unpopular moves—raising the price of Disney+ and increasing the price of a Disney park visit—aren’t his fault. They are a necessity of the decline of cable. That isn’t going away no matter who the CEO is. Iger is left with a number of tough choices.

To bundle or not to bundle, that is the question

Former Netscape CEO Jim Barksdale famously said, “The only way to make money is bundling and unbundling.” This quote is typically cited in the context of product offerings, but I wonder if it can be applied to corporations, too. Disney has so much corporate sprawl that I can’t help but think that a more focused organization would be more effective. It may be time to unbundle Disney.

Chapek’s Soviet Russia central planning division was poorly executed—but it was also necessary. A creative team is always going to choose a theatrical release versus Disney+. If Iger only empowers the creative teams without some sort of streaming forcing function, Disney+ will wither and die—reverting them to where they were in 2016 with cable profits shrinking and no way out.

Unbundling Disney would require Iger to eat a huge amount of humble pie; many of the things he would be selling are the things that he originally bought. Iger could unwind the Fox transaction, perhaps selling it to its other suitor, Comcast. ABC and ESPN could be spun off towards other cable providers. There are also a variety of other hodgepodge assets like Hotstar in India that would have interested bidders. 

Yes, the resulting company would be smaller, and now is a tough time to sell with interest rates as high as they currently are. However, the thing Disney needs isn’t size—it's good old-fashioned Disney magic. By building a smaller, more focused streaming service for families and fans, they’ll be able to produce similar excellence again. Shedding the content bloat and debt, they’ll be able to get Disney+ profitable. Once the service is cash flow-positive, they can then upsell Disney+ fans with capabilities none of the other streamers can match—the best theme parks and merchandise in the world.