Good morning,
I hope that you all had a pleasant Thanksgiving break, whether in the U.S. or not.
On to the update:
Disney Expectations
From CNBC last Monday:
Bob Iger, less than 24 hours after returning to the helm of Disney, told employees Monday that the company would be undergoing a restructuring in coming weeks. One of the first steps, Iger announced, would be the departure of Kareem Daniel, the company’s head of media and entertainment, and right hand to now-departed CEO Bob Chapek.
From Iger’s memo, via that article:
Over the coming weeks, we will begin implementing organizational and operating changes within the company. It is my intention to restructure things in a way that honors and respects creativity as the heart and soul of who we are. As you know, this is a time of enormous change and challenges in our industry, and our work will also focus on creating a more efficient and cost-effective structure.
I’ve asked Dana Walden, Alan Bergman, Jimmy Pitaro, and Christine McCarthy to work together on the design of a new structure that puts more decision-making back in the hands of our creative teams and rationalizes costs, and this will necessitate a reorganization of Disney Media & Entertainment Distribution. As a result, Kareem Daniel will be leaving the company, and I hope you will all join me in thanking him for his many years of service to Disney.
Our goal is to have the new structure in place in the coming months. Without question, elements of DMED will remain, but I fundamentally believe that storytelling is what fuels this company, and it belongs at the center of how we organize our businesses.
I’m happy with the Update I put out last Monday, particularly given the logistics involved, but based on some tweets I saw I think a couple of points of clarification are in order.
First, while Chapek may have been following Iger’s strategy, and while that strategy may have been wrong, it was in Chapek’s power to change the strategy! It will be interesting to see if Iger does just that (i.e. double down on Disney IP for Disney+ and abandon more general purpose exclusive streaming, i.e. admit that the 21st Century Fox acquisition was a mistake).
Second, one of the things that bothered me about that Chapek interview at the WSJ Tech Live conference that I quoted last week was how he kept returning to how Disney had to give users what they wanted. That is all well and good in many aspects of business, but it’s not always the right strategy when it comes to being a differentiated content maker. Giving users what they want is the provenance of TikTok, Reels, and YouTube, deciphering preference signals from billions of users in order to choose the best content from hundreds of billions of hours of user-generated content acquired for free. Disney’s most essential strategic advantage lies in its ability to create new content that users could never create on their own, but want all the same, and that takes vision.
Third, it’s notable that Iger took the opportunity of firing Daniel — which by all accounts was a popular move — to not just put “more decision-making back in the hands of [Disney’s] creative teams” but also to “rationalize[] costs”. In other words, Iger will do the layoffs that Chapek was belatedly forced to admit were necessary, but gets to do them with the patina of a fresh start and the liberation of creativity. Not too bad!
More broadly, a way to summarize my criticism of Chapek in that Update was that he failed in managing expectations. First the expectations of Hollywood talent, then the expectations of both Disney employees and customers, and the final straw was the expectation of investors. That is, more than anything, the job of the CEO, and that alone was reason enough for him to lose his job.
Twitter Expectations
This expectations point was front-and-center with Twitter 10 days ago: on Friday, November 18, after Elon Musk required employees to affirm their desire to remain at Twitter — with many declining — Twitter users worked themselves into an absolute frenzy about the idea that Twitter was going to go away that very evening. I won’t belabor the point — if you were online that Friday, you saw the hysteria — but what was fascinating to me was how this seemed to flip a lot of the Twitter narrative on its head.
From my perspective, I had two main concerns: first, that Twitter is going to lose revenue because of its dependence on brand advertisers who have brand safety concerns, and two, that Twitter is subject to regulatory action both in the U.S. and the E.U. Those concerns remain! What I was not concerned about, however, was that Twitter would, in the space of a few hours, simply cease to operate: if Twitter’s employees were not up to the task of keeping the service up there would be slow degradation, not fail whales in a matter of hours.
Twitter, of course, has not gone down (although there do at times seem to be oddities consistent with some sort of degradation, but it’s hard to know to what extent this is a sort of psychosomatic suspicion of bugs that have always existed), and Musk is bragging about record users and engagement. That, though, doesn’t solve the issues I have raised around monetization and regulators; the advantage for Musk, though, is that those are no longer the expectations: simply staying online is now seen as a Musk victory.
This isn’t the first time we have seen similar dynamics, of course: there is sometimes a tendency to imagine the worst possible outcome and to proceed as if it is an inevitability, and then, when that outcome does not come to pass, more moderate concerns are discredited in the wash. Like, for example, a potential degradation in service, or, as I have been writing about, concerns about monetization and regulatory action. Those are still real concerns — and to be fair, I suppose Twitter could forget to renew a security certificate or something — but it seems to me that the hysteria of last Friday has, counter-intuitively, increased the chances that Musk succeeds because it already seems like he has.
What I have not seen much discussion about is the positive impact on Twitter’s financials of all of Twitter’s layoffs and resignations. According to Platformer Twitter had 2,700 full time employees as of last Monday; that’s down from 7,500 at the end of last year (there were also a reported 4,000 contractors let go). Let’s assume, for the sake of argument, that 20% of Twitter’s Cost of Revenue, and 80% of Research & Development, Sales & Marketing, and General & Administrative were salaries:
| 2021 (in thousands) | Total Costs | $ Salary | Salary Costs |
|---|---|---|---|
| Cost of Revenue | $1,797,510 | 20% | $359,502 |
| R&D, S&M, G&A | $3,007,010 | 80% | $2,405,608 |
| Total | $2,765,110 | ||
| Employees | 7,500 | Average | $368,680 |
| Post-Layoffs | 2,700 | Total | $995,440 |
Again, these are very rough estimates, but I think it is reasonable to assume that Twitter’s employee costs have been cut significantly, leaving its total annual costs at around $3.0 billion (excluding last year’s lawsuit settlement); add on the company’s reported $1 billion in interest payments and the company needs to come up with $4.0 billion a year in revenue. 2021 revenue, meanwhile, was $5.1 billion, and remember, Twitter had around $6 billion in cash pre-buyout. In other words, while I suspect Twitter’s ad revenue has been impacted, it will take a pretty large impact to drive the company bankrupt.
Silicon Valley Expectations
The reason this expectations game matters is that the ramifications could be far larger than Twitter, a relatively minor company in the Silicon Valley ecosystem. For the record, I remain skeptical that Musk will ever achieve a positive return on his purchase, but again, the media has set the bar to simply continuing to exist! That seems more likely than not.
That, then, will raise questions for every tech company about their costs: if Twitter can cut their workforce by two thirds (or even more, if you include contractors), then investors will start raising a lot of questions about how many employees other tech companies have, even after the current wave of layoffs. Indeed, you could see PE firms looking to acquire companies, confident they can slash costs to pay off the debt necessary.
There are a few factors that would push against this: network effects are, if anything, underrated, and Twitter has some of the best network effects in the world (an argument, perhaps, that Meta continues to be underrated). Easy money is also not so easy anymore, making big debt raises difficult (banks are not, I assume, very happy about having financed Musk’s Twitter purchase). And, of course, there is the fact that Twitter has to actually make money at some point.
Still, Musk’s actions, to the extent they are perceived as successful, could fundamentally change expectations about tech company cost structures. At a minimum it seems likely that management will be much more empowered than they have been over the past few years, when a negative story in The Verge about unhappy employees could lead to executive responses within the hour. To put it another way, for the last five years or so employees have ruled the roost in Silicon Valley; if Twitter clears the very low bar set for it by the media — don’t go down and don’t go bankrupt — that may change in a significant way the dynamics not just at Twitter but across Silicon Valley broadly.
This Update will be available as a podcast later today. To receive it in your podcast player, visit Stratechery.
The Stratechery Update is intended for a single recipient, but occasional forwarding is totally fine! If you would like to order multiple subscriptions for your team with a group discount (minimum 5), please contact me directly.
Thanks for being a subscriber, and have a great day!