Good morning,
Well, here I am, vacation averted, and not just because the media set the lowest possible bar for Elon Musk and Twitter to clear over the weekend (continue to exist as a going concern, as opposed to something more complicated like, well, making money). That, I am sure, is a story that is not going away anytime soon.
There is, though, one executive who is going away: Bob Chapek, the now former CEO of Disney who is not only the successor to Bob Iger, but also his predecessor. Bob is dead, long live Bob!
On to the update:
Bob Iger Is Back
From the Wall Street Journal:
Walt Disney Co.’s board of directors on Sunday night replaced Chief Executive Bob Chapek with Robert Iger, the company’s former chairman and CEO who left the company at the end of last year, according to a company announcement. “The board has concluded that as Disney embarks on an increasingly complex period of industry transformation, Bob Iger is uniquely situated to lead the company through this pivotal period,” said Susan Arnold, chairman of Disney’s board, in a statement. “We thank Bob Chapek for his service to Disney over his long career, including navigating the company through the unprecedented challenges of the pandemic,” she added.
The surprise change comes at a tumultuous time for Disney. This month, the company reported weaker-than-expected fourth quarter financial results, killing the momentum built up over a strong year that saw record revenue and profits in multiple divisions, especially the one that includes theme parks. Disney’s theme park business has recovered strongly since the coronavirus pandemic shut down its venues across the world, but the division continues to subsidize widening losses in the streaming video business.
Mr. Chapek has said repeatedly that he expects the streaming business to be profitable by September 2024. In the most recent quarter, though, it lost $1.47 billion, more than twice the year-earlier loss. The company also cautioned that its profitability target would only be met if there wasn’t a significant economic downturn, the first time it has added such a caveat. Disney shares fell 13% the day after the earnings report and are down more than 41% so far this year.
Negotiations between Mr. Iger and the board to return as CEO were initiated only in recent days, according to a person familiar with the talks. Mr. Iger has said publicly on at least two occasions over the last year that he isn’t interested in returning to Disney. In recent months, he has focused on investing in and advising startups, particularly in the technology industry. Adding to the surprise, Mr. Chapek, who has served as CEO since February 2020, over the summer saw his contract renewed through the end of 2024. At the time, Ms. Arnold, the board chair, said that while the company was “dealt a tough hand by the pandemic,” Mr. Chapek “not only weathered the storm but emerged in a position of strength.”
This news was perhaps the ultimate example of something that is completely shocking and yet not at all surprising. Iger had, reportedly, not exactly been quiet about expressing his overall displeasure in Chapek’s leadership, and the company’s disastrous earnings earlier this month — particularly the massive streaming loss and shocking forecast on media networks declines — provided an opening for a change.
There is a lot about those earnings and Disney’s overall trajectory that is, in fact, Iger’s fault, which I will get to in a moment; what was worrisome about the last couple of weeks, though, was an overall failure in the blocking and tackling entailed in being a CEO:
- First, investors were completely blindsided by Disney’s results; Chapek deserves blame for not setting expectations properly. This is particularly damning in terms of the streaming loss, which was blamed in part on content release schedules being thrown off by COVID, leading to a glut in content last quarter. That, though, raises questions as to why investors weren’t warned, why the releases weren’t managed better, and oh yeah, how much is Disney going to have to spend going forward.
- Second, Disney announced a cost review, and likely layoffs, a couple of days after earnings. This seems like a panicked reaction to a plunging stock price: if it were a considered decision, why not announce during earnings? Or, better yet, actually have a layoff plan in place and execute on it, instead of announcing a review and putting employees on pins and needles for however long it takes to accomplish it?
- Third, Chapek is presiding over big increases in price for not just Disney+, but also Disney’s theme parks, both of which are probably necessary and certainly make business sense, but also further the sense that Disney is losing touch with the average consumer.
This last point, though, gets at why this isn’t all Chapek’s fault.
Chapek’s Tactics, Iger’s Strategy
Iger’s final move as CEO was the acquisition of 21st Century Fox and the launch of Disney+. These were, naturally, seen as two pillars of the same strategic shift to streaming, at least by me and, clearly, Chapek. Chapek said at the WSJ Tech Live conference late last month:
This is a critical mass business. Streaming is a critical mass business. Scale is really really important in order to be able to thrive.
Makes sense! A streaming service not only needs to acquire customers, it also needs to prevent churn, which means producing a wide array of content that appeals to the entire household.
Disney, of course, has larger ambitions than just creating a streaming service: as I wrote back in 2017, streaming was particularly compelling for Disney because it had the opportunity to not just make money from streaming subscriptions, but also by being able to better understand and target individual customers. Chapek agreed; from the same interview:
It’s about customizing and personalizing our products and experiences to cater to what individuals want as opposed to looking at them en masse and trying to program that way. We have the unique ability to do that…because people have such a deep-founded relationship with Disney.
To be clear, this customization isn’t in addition to streaming: it is part and parcel of the streaming strategy and why Disney pursued it. To that end, it made perfect sense to reorganize Disney so that distribution decisions were centralized, ensuring that old fiefdoms didn’t get in the way of making hard choices to favor the long-term vision. Back to the same interview:
We had five operating units in the company, and I distilled it down into two: the physical world of our parks and cruises and things like that, and then the the digital media world that we operate in, and that’s a direct reflection of a couple of things, but maybe most fundamentally, it’s a reflection that if you’re a fan of Disney, you don’t really care about our organizational structure, and the less siloes that we have, the less times that we have to worry about going cross-transom in order to make something happen.
A big part of how this pays off — and this goes back to Walt Disney’s famous map — is through the theme parks; Chapek’s strategy reflected that too, including the aforementioned pricing changes. Same interview:
We want to guarantee a great guest experience no matter when people come. If they come the second Tuesday in September, we want them to have a great guest experience. Maybe that wouldn’t be so hard in the past, but if they come the day after Thanksgiving, we also want to guarantee that they’re going to have a great experience — the people who actually come into the park on that day, we want them to have a great experience — so matter what day you come, you are guaranteed to get that magical experience that creates magical memories that last a lifetime.
In a world where we don’t control demand, you’re left with one of two situations: you either let way too many people into the park, where they don’t have a great experience, or, you manage it by just turning people away at the gate. Now imagine if you’re a family from Seattle and you come to Disney Land, you come for a two-or-three day stay, you come at 10:00 in the morning, and you’re turned away because we won’t let too many people in the park. So what we developed during the COVID shutdown is a reservation system so we can plan like every other business out there, like an airline that has a fixed capacity — like an airline, hotel, cruise industry — we developed a reservation system so people would know ahead of time whether they were going to get in or not. And then we practiced yield management, which again, every other company in the world can do, so that we have pricing be a reflection of how many people we can actually let in and still guarantee that great experience.
So for some of our fans that’s heresy, but I think it’s not only good business practice in terms of maximizing shareholder value, but more importantly it protects the guest experience so that when you get into the park you can have confidence it’s not going to be over-crowded.
The last part of that answer is a call-back to something Chapek said near the beginning of the interview:
People love Disney. They don’t even look at it as a company…They look at it as something that is part of their lives, part of their identity, and that’s great. We need to embrace that. But it also puts extra pressure on us because they don’t think of us as a company and when we do things that normal companies might do, sometimes it creates a friction because all of a sudden they are like, “Why are you doing that”, but of course we have shareholders who have different expectations, so one of the pleasures of my job is trying to balance all of those different constituencies especially with a brand like Disney.
This, in the end, is probably why Chapek is gone: I actually think his strategy was quite appropriate for the streaming future Iger pioneered. The decisions around content, organization, pricing, yield management, etc. are all the decisions that needed to be made for a world with Disney+ at the center and the theme parks as an essential part of capturing the value generated; the problem, though, is that customers increasingly hated those decisions, and worse, the financial results were starting to suggest the trade-off wasn’t worth it.
What’s not clear, though, is what Iger will do differently.
Tactics, Strategy, or Environment
First, all of the decisions that Chapek was making that Iger hated were, in my estimation, downstream of the strategy Iger himself laid down for the company. That means that to the extent Chapek’s big changes were wrong, so was Iger’s strategy.
The reorganization that Iger allegedly hated from the get-go is a great example: if content owners own their own profit-and-losses, then streaming is going to get short shrift for two reasons. First, you’re building the business, so losses will be large; second, the supposed goal of the streaming service isn’t just to make money in its own right, but to benefit Disney as a whole, via things like customization and personalization and yes, yield management. That means it makes total sense to shift from a divisional profit-and-loss approach to more of a functional one, with ultimate responsibility at the top of the company.
It’s the same thing with the theme parks: if they are a payoff of not just investments in rides but investments in Disney+, then Chapek was absolutely right to both maximize the customer experience and also to wring every last cent out of them he could. Isn’t that what the billions of investment in Disney+ are allegedly for?
To put all of this a different way, if Iger is coming back because he disagrees with Chapek’s tactics, well, that strikes me as a bad idea: Chapek played the hand that was dealt him by Bob Iger. On the other hand, perhaps Iger has come to realize that the all-in bet on Disney+ was itself the problem: in other words, he is coming back not to fix Chapek’s mess, but to fix his own.
This, though, isn’t great news either: the entire reason why Iger went all-in on streaming is because the cable bundle, Disney’s real money-maker for most of Iger’s tenure, was starting to falter; that faltering is coming perilously close to being a full-blown engine failure. That means simply going back to the old strategy isn’t an option either.
Indeed, this is why I worry that this CEO change may be bearish for Disney’s long-term outlook. I’m reminded of a Warren Buffett quote about newspapers I have mentioned before; from Berkshire Hathaway’s 1991 letter to shareholders:
An economic franchise arises from a product or service that: (1) is needed or desired; (2) is thought by its customers to have no close substitute and; (3) is not subject to price regulation. The existence of all three conditions will be demonstrated by a company’s ability to regularly price its product or service aggressively and thereby to earn high rates of return on capital. Moreover, franchises can tolerate mis-management. Inept managers may diminish a franchise’s profitability, but they cannot inflict mortal damage.
In contrast, “a business” earns exceptional profits only if it is the low-cost operator or if supply of its product or service is tight. Tightness in supply usually does not last long. With superior management, a company may maintain its status as a low-cost operator for a much longer time, but even then unceasingly faces the possibility of competitive attack. And a business, unlike a franchise, can be killed by poor management.
Until recently, media properties possessed the three characteristics of a franchise and consequently could both price aggressively and be managed loosely. Now, however, consumers looking for information and entertainment (their primary interest being the latter) enjoy greatly broadened choices as to where to find them. Unfortunately, demand can’t expand in response to this new supply: 500 million American eyeballs and a 24-hour day are all that’s available. The result is that competition has intensified, markets have fragmented, and the media industry has lost some — though far from all — of its franchise strength.
This strikes me as being very relevant to Disney. A big reason why Disney could be something more than a normal company — the sort of business that made mass market hits and kept its parks relatively cheap and accessible — is because it was riding on top of the cable bundle franchise. As that franchise diminishes, though, Disney has to increasingly operate like a business, and that means making unpopular decisions like “yield management”, or moving imagineers to get tax breaks, or breaking down internal fiefdoms.
In short, Iger may have disliked Chapek’s business moves, but I suspect he will find that while his first tenure was about shepherding a franchise, with all of the latitude that entails, his second tenure will be more about managing a business, and making some difficult tactical decisions that he had the good fortune to avoid his first time around. To put it another way, the worst news for Disney would be if its imminent struggles are not due to Chapek’s tactics or Iger’s strategy but rather a secular change in the market that no CEO could ultimately outrun; that, I would add, sounds like a miserable reason to leave retirement.
To that end, the more optimistic take as to why Iger would change his mind is that he still believes the strategy can work, but precisely because the tactics necessary are very difficult, Disney simply couldn’t afford the more basic CEO errors I opened with, and that both investors and customers needed someone they trusted to support Disney through this transition. If that ends up being the case, well, that’s a pretty good reason to come back: it wouldn’t simply be that Disney needed Iger, but that Iger’s own strategic legacy needed Iger’s touch with tactics.
Time will tell (Disney does understand a good cliffhanger).
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