Good morning,
Last Thursday’s episode of Sharp Tech covered Microsoft’s victory over the FTC in federal court; that victory (which denied the FTC’s request for a permanent injunction) was upheld by the 9th Circuit Court of Appeals over the weekend. Sony responded by signing a 10-year agreement to keep Call of Duty on Playstation. The only remaining obstacle is the U.K.; Bloomberg is reporting that Activision will decline to terminate the deal for now (it can do so today) as Microsoft seeks final approval over the coming weeks.
On to the Update:
Bob Iger on CNBC
From CNBC:
Disney CEO Bob Iger opened the door to selling the company’s linear TV assets as the business struggles during the media industry’s transition to streaming and digital offerings. Iger appeared Thursday on CNBC, the morning after the company announced it would extend his contract by two years through 2026. He returned to the helm of the company in November after Disney’s board ousted Bob Chapek with a two-year contract through 2024 and plans to find a next successor.
“After coming back, I realized the company is facing a lot of challenges, some of them self-inflicted,” Iger told David Faber at Allen & Co.’s annual conference in Sun Valley, Idaho, noting he’s accomplished a lot of work in seven months but there’s more to be done. At the top of the list is assessing the traditional TV business, Iger said. Disney owns a portfolio of TV networks, from broadcast station ABC to cable TV channels like ESPN. Disney is going to be “expansive” in its thinking about the traditional TV business, leaving the door open to a possible sale of the networks. “They may not be core to Disney,” Iger said, adding the creativity that has come from those networks has been key for Disney…
Cable TV channel ESPN is in a different bucket, however. On that front, Iger said Disney is open to finding a strategic partner, which could take the form of a joint venture or offloading an ownership stake. Iger said when he had left the company he had predicted the future of traditional TV and had been “very pessimistic,” and has found since his return that he was right in his thinking, adding it’s worse than he expected.
I thought this 40 minute interview with David Faber was fascinating, and I want to address the linear network and ESPN portions in a moment. One thing that was refreshing was Iger’s honesty, and not just in terms of his evaluation of Disney’s TV business: he also acknowledged a decline in quality in Disney’s animation, the fact that producing TV shows for Disney+ hurt the quality of Marvel and Star Wars movies, and even questioned the ways in which Disney has conducted its fight with Florida even as he defended the company’s right to free speech.
What was missing, though, and is worth re-emphasizing, is not just that Disney’s problems are in part of its own making, but that the person most responsible is Iger himself. I made this case back in November when Iger came back, noting that while Bob Chapek’s tactics were poor — this was another point that Iger was honest about — the strategy he was executing was Iger’s. The biggest issue was the acquisition of 21st Century Fox, which saddled Disney with not just debt but also a collection of studios and cable channels that were in secular decline, and an obligation to double down on Hulu.
That Iger’s strategy might be wrong, though, wasn’t even the worst case scenario; I wrote in the conclusion of that Update:
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.
In short, it very well might be the case that neither strategy nor tactics matter; Disney is simply on the wrong side of a disruptive change in entertainment. That, though, brings me back to the honesty bit: poor expectations management was the very first criticism I levied on Chapek in terms of tactics, and the fact that Iger is correcting not just that but also Chapek’s lack of flexibility means that we have a test case on whether or not a great CEO can overcome something as disruptive as the destruction of the TV business (even if said CEO helped hurry that destruction along).
The End of Linear TV
Here is what Iger had to say about the company’s linear TV networks:
Transformative work is dealing with businesses that are no-growth businesses and what to do about them, particularly the linear business, which we are expansive in our thinking about, and we are going to look expansively about opportunities there, because clearly that’s a business that is going to continue to struggle.
Let’s stop there for a second, and let me ask you about it. We’re talking about ABC the network, the stations, and the cable networks as well: FX, NatGeo…is it possible you would look to sell them?
We’re going to be expansive, and you can interpret what that word means. We’re just getting at that work, but we have to be open-minded and objective about the future of those businesses.
Meaning that they’re not core to Disney?
They may not be core to Disney, yeah. There’s clearly creativity and content they create that is core to Disney, but the distribution model, the business model that forms the underpinning of that business and that has delivered great profits over the years is definitely broken, and we have to call it like it is, and that’s part of the transformative work that we’re doing.
We’ve been having this conversation for a very long time now in terms of the erosion of the linear business, and now it’s kind of closer to obsolescence?
As I said, when I came back, one of the things I discovered was that the disruptive forces that have been preying on that business for a while are greater than I thought. It’s eye-opening. There’s a reality to it that we have to come to grips with and we have to come to grips with that now.
Iger’s response to Faber’s next follow-up question is that he would leave it to others to speculate as to what Disney might do, so I will accept that invitation — not that it needs much imagination. It seems very clear that Disney will soon sell off all of its non-ESPN networks, and it may not be particularly bothered about the price it can get. Yes, networks can still make some amount of cash from sheer inertia — in this case cable affiliate fees from people unaware they can cord-cut is analogous to print advertising for newspapers delivered to people too old to use the Internet, which suggests that private equity may, as was the case in newspapers, be the buyer — but from Iger’s perspective there is no more value to Disney in owning the means of distributing general entertainment via the bundle.
It’s worth remembering what that value once was: Disney’s status as a fully-integrated entertainment and sports giant meant they benefited more than anyone else from the cable bundle. ESPN was the most essential cable channel, and bundling it with Disney’s general entertainment channels gave pricing power to the latter. Those channels benefited ESPN too, though, by giving Disney’s bundle pricing power that was broader than just sports fans, which both gave it leverage with distributors and kept leagues at bay in terms of extracting their share of ESPN’s fees.
The mad dash to streaming, though, decimated the value of those channels directly, and by extension destroyed the value of the integration Disney had built: the more that bundle subscribers became sports subscribers, the less Disney could leverage ESPN to drive up the value of its other channels, and the greedier sports leagues could become in extracting the full value of their rights. That move to devalue linear general entertainment channels is probably one Iger wishes he could undo, but it is also one that can’t be undone: consumers who aren’t sports fans aren’t signing back up for cable and enduring commercials just to get access to a TV show.
To that end this is a move that makes sense — and it also raises big questions about what is next for ESPN.
ESPN and Strategic Partnerships (and Apple?)
ESPN is what came next in the interview:
Let’s talk about sports first, which is ESPN. If you look at today’s media landscape, sports stands very tall in terms of its ability to convene millions and millions of people all at once — it’s almost a guarantee that that occurs. It’s an advertiser’s dream, there’s a great demographic there, it lends itself to technology in many ways, both in terms of coverage, distribution, and consumption, and our position in that business is very unique. We have a great brand, we’ve had a great business, and we want to stay in that business. That said, we’re going to be open-minded there too, not necessarily about spinning ESPN off but looking strategic partners that can either help us with distribution or content, but we want to stay in the sports business.
What would a strategic partner look like with either distribution or content for ESPN?
I’m not going to get too detailed about it but we’re bullish about sports in general as a media property. There is an inevitability, by the way, you raised it, to taking ESPN direct to consumer. We haven’t said when but we do know it will happen.
Is it sooner than you thought even seven months ago?
No, I think I’m much more certain about when but not prepared to say when that is, I won’t say whether it’s soon or not, but I’m enthusiastic about it.
Why are you enthusiastic about it?
Because I think sports stands tall in a sea of tremendous choice and it is in many respects an advertiser’s dream, and a consumer’s dream, meaning it’s a very attractive medium. We have a unique position in it and we feel we should stay in it…
You’re spending a lot of money to do that. To keep the NFL, to keep the NBA, you’re essentially renting the content that keeps this thing alive. Is that the best use for your capital?
I know a lot has been said about renting versus owning, and if you can rent it and continue to be profitable from renting it, which we have been, and we believe we will continue to be, then there’s real value in staying in it. We have great relationships with Major League Baseball and the National Hockey League and various college conferences and of course the NFL and the NBA, and it’s not just about the live sports coverage of those leagues and those teams, it’s also about all of the shoulder programming that throws off on ESPN, and what you can do with it in a streaming world.
As a direct to consumer proposition I talked about it being technology friendly in a way, there’s so much more that can be done with it in terms of the way it’s distributed, the way it’s consumed. It’s interesting just thinking about the Apple announcement a few weeks ago and what the possibilities that device lends itself to in terms of sports. So I think it’s a business that we want to stay in.
What would be the advantages of having a strategic partner?
Well it could be a variety of things.
Could it be a joint venture? Could it be someone taking an ownership stake?
Possibly. Everything is on the table.
Why would you do that? You already have a 20% owner in Hearst.
If they come to the table with value, whether it’s content value, whether it’s distribution value, whether it’s capital, whether it just helps de-risk a business to some extent — that wouldn’t be the primary driver — but if they come to the table with value that enable ESPN to make a transition to a direct-to-consumer offering than we’re going to be very open-minded about that.
I think it is news that Disney is committed to keeping ESPN, because it wasn’t a sure thing: ESPN’s biggest contribution to Disney’s business — beyond all of the cash, of course — was the aforementioned bundle within the bundle; if that bundle is largely disintegrated and may soon be sold off, then why hold onto ESPN instead of selling it off and paying down debt?
One reason was articulated by Iger twice: advertising. Disney, like all streamers, has very high hopes for building a big advertising business on streaming (Iger noted that 40% of new Disney+ subscribers opt for the advertising-supported plan, and that 40% of Disney’s upfront sales were for streaming). ESPN provides the best possible anchor for a broad-based advertising business.
Another possible reason is that Disney may very well want to recreate the bundle. The company already announced that Hulu will be incorporated into Disney+ to create a single-app experience, and MoffettNathanson had a report last week detailing how Disney’s current bundle (Disney+, Hulu, and ESPN+) has the lowest churn in the streaming industry (far better than any of Disney’s services on a standalone basis).
Might Disney ultimately offer all of its streaming content only as a single service? Yes, the price would be very high, but the combination of Disney content, Hulu general entertainment, and ESPN would mean there is content for everyone the whole year, mitigating the churn issues that have afflicted Disney+ in particular, what with its sporadic content schedule (which is going to be further reduced to cut costs and increase focus in Marvel and Lucasfilm on movies). My assumption has long been that sports will be permanently severed from general entertainment, but if there is any company that could force them back together it is Disney.
Then there is that bit about a strategic partnership, which to my mind means three candidates: Apple, Amazon, or Google. While a bundle helps address churn, partnering with one of those three tech companies helps address customer acquisition. Specifically, those are the three companies that actually own the devices people consume content on, which means they own payments, which is the biggest obstacle to ESPN’s mooted idea of being a sports aggregator.
Then again, Iger mentioned content as well — might ESPN actually partner with one of the sports leagues directly? If so the obvious candidate is the NBA, which is negotiating its next rights deal with ESPN right now, and which is facing its own challenges with the cable bundle, specifically the decimation of RSNs.
What does seem notable was Iger’s call out of Apple’s headset; I can attest that the sports experience on the Vision Pro is extraordinary, and remember that Iger appeared on stage at the event to say that Disney would be working with Apple to bring content to the device; here is the sports portion of the video he played at WWDC:
I have to say, one almost gets the impression that the Apple Vision sports-watching experience might have single-handedly convinced Iger to keep ESPN! What does seem likely is that Apple is probably Iger’s preferred partner, and there certainly is upside for Apple — probably more upside than any other tech company — primarily because of the Vision Pro. The single most important factor in the Vision Pro’s success will likely be how quickly entertainment is built for it, and as Cook noted while introducing Iger, “The Walt Disney Company is the world’s leader in entertainment.”
Of course Apple is the preeminent example of the miracles a returning CEO can work; it would be fascinating if a partnership with Steve Jobs’ creation and redemption helped burnish the myth of Iger.
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