Disney, Plus

Summary Notes


In season five, episode seven of the podcast "Acquired," hosts Ben Gilbert and David Rosenthal explore Disney's strategic pivot under CEO Bob Iger's leadership. They discuss Disney's historical content and distribution model, the innovator's dilemma, and the company's ambitious launch of Disney+, a direct-to-consumer streaming service. The episode delves into Disney's acquisitions, including Pixar, Marvel, Lucasfilm, and 21st Century Fox, which collectively bolster the company's IP and distribution capabilities. The hosts also touch on Disney's technological advancements through its acquisition of Bamtech, positioning the company to compete against digital disruptors like Netflix. The conversation highlights Disney's transformation from a traditional media powerhouse to a modern entertainment titan, emphasizing Iger's vision of quality branded content, embracing technology, and global expansion.

Summary Notes

Disney's Investor Relations and Clarity

  • Disney's investor relations materials are approachable and clear.
  • Ben Gilbert finds the transition from analyzing tech companies to Disney refreshing.
  • Disney's straightforward communication is contrasted with the often complex information from fast-growing tech companies.

"Disney makes it very approachable, but I've just read all their ir stuff, and it's not hard. It's really cogent. I mean, it's quite refreshing."

The quote indicates that Disney's investor relations information is well-organized and easy to understand, making it a pleasant experience for analysts.

Introduction to Acquired Podcast Season 5, Episode 7

  • Hosts introduce themselves and their professional backgrounds.
  • Ben Gilbert is a co-founder of Pioneer Square Labs.
  • David Rosenthal is a general partner at Wave Capital.

"Welcome to season five, episode seven of acquired, the podcast about great technology companies and the stories behind them. I'm Ben Gilbert, and I'm the co founder of Pioneer Square Labs, a startup studio and early stage venture fund in Seattle."

Ben Gilbert introduces the podcast episode and his professional role, setting the stage for the discussion.

Disney's Strategic Evolution

  • Disney, under CEO Bob Iger, is attempting to combine content and distribution.
  • Past failures in media industry mergers are acknowledged (AOL Time Warner, Comcast NBC Universal, AT&T Time Warner).
  • Disney's challenge is to compete with digital disruptors like Netflix.
  • Disney aims to transform its business to directly distribute its content to consumers.
  • The move involves risking current revenue streams for a long-term direct connection with fans.

"Bob Iger, the CEO of Disney, is trying to achieve the pipe dream of what has failed so many times before in the media industry, combining content and distribution under one roof."

The quote summarizes Disney's strategic goal under Bob Iger to integrate content creation with distribution, a challenging endeavor in the media industry.

The Mandalorian and Disney+

  • "The Mandalorian" series on Disney+ is discussed.
  • Ben Gilbert expresses his approval of Jon Favreau's stewardship of the series.
  • David Rosenthal has begun watching the series and also enjoys it.
  • The series is considered part of the research for the podcast episode.

"I'm a huge fan. I think Jon Favreau is so far proving to be an amazing steward of that."

Ben Gilbert compliments Jon Favreau's work on "The Mandalorian," highlighting the series' success and its relevance to Disney's strategic content offerings.

Pilot as a Sponsor

  • Pilot is a company that provides accounting, tax, and bookkeeping services for startups and growth companies.
  • Pilot is endorsed as a valuable resource for companies to outsource non-core activities like accounting.
  • The hosts discuss Pilot's growth and the value it provides to its clients.

"Pilot is the one team for all of your company's accounting, tax and bookkeeping needs and in fact now is the largest startup focused accounting firm in the US."

The quote describes the services offered by Pilot and its position as a leading accounting firm for startups, emphasizing the benefit of outsourcing accounting tasks.

Disney's Acquisition History

  • Disney's acquisition history set the stage for Disney+ launch.
  • Key acquisitions include Capital Cities/ABC/ESPN, Pixar, Marvel, Lucasfilm, Hulu stake, Bamtech, and 21st Century Fox.
  • Disney's strategic planning and M&A team are noted for their success in setting up deals with options to acquire over time.
  • Bob Iger's leadership and vision are acknowledged as driving forces behind these acquisitions.

"We've covered most of these on their own episodes on acquired, which we will link to in the show notes. But just as a quick recap, first, Disney acquired Capital Cities, which included ABC and ESPN, most importantly in 1995 for $19 billion."

David Rosenthal provides a summary of Disney's significant acquisitions that have contributed to the company's growth and the eventual launch of Disney+.

Bob Iger's Career and Vision

  • Bob Iger's career at ABC/Disney spans 45 years.
  • Iger started at the bottom and worked his way up to CEO.
  • Iger's work ethic and enthusiasm are highlighted as keys to his success.
  • The book "The Ride of a Lifetime" by Bob Iger is recommended for its insights into his career and vision.

"So this is a man, Bob Iger, who has worked for every year of his life except one. His very first year out of college, he was a weatherman in Ithaca, New York, for a local tv station."

Ben Gilbert outlines Bob Iger's long tenure at Disney and his initial job as a weatherman, setting the stage for a discussion of his rise to CEO.

Michael Eisner's Tenure and Disney's Revival

  • Michael Eisner became CEO of Disney in 1984 and led a turnaround.
  • Eisner and Frank Wells revitalized Disney's animation studio and embraced home video distribution.
  • Jeffrey Katzenberg's leadership in animation produced hits like "The Little Mermaid" and "The Lion King."
  • The acquisition of Capital Cities/ABC/ESPN was a landmark deal for Disney under Eisner.

"Michael Eisner, who we're going to talk a lot about, the CEO of Disney, then CEO of Disney, gets together with Tom Murphy and Warren Buffett and they cook up a plan for Disney to acquire capital cities and ABC and ESPN."

David Rosenthal introduces Michael Eisner's role in Disney's acquisition of Capital Cities/ABC/ESPN, emphasizing the strategic importance of the deal for Disney's growth.

Michael Eisner's Leadership and Operational Style

  • Michael Eisner recognized and harnessed talent for Disney's success.
  • He hired Michael Ovitz in hopes of reviving Disney's spirit but it failed.
  • Ovitz's departure left Disney in disarray and Eisner's reputation tarnished.

"Eisner's gift was he recognized that talent out there, and he recognized it in Katzenberg, and it led to this great, great flourishing within the company." This quote highlights Eisner's ability to identify and utilize talent, which contributed to Disney's flourishing under his early leadership.

Disney's International Expansion and Operational Changes

  • Eisner assigned Bob to run international operations, which were initially not a major focus for Disney.
  • Bob's experience with international operations, including the initial failure and subsequent success of Euro Disney, was valuable.
  • Disney's approach to international markets had to be adjusted, like offering wine at Euro Disney.

"Disney was not huge internationally at this time." This quote indicates that Disney's international presence was limited during the period in question, setting the stage for future expansion efforts.

Disney's State and Strategy Post-Ovitz

  • Eisner returned to solo management, consolidating authority after Ovitz's departure.
  • Disney's reputation suffered, becoming a laughingstock in the business world.
  • Bob's assignment to run international was a prescient decision, leading to future projects like Shanghai Disney.

"Heisner goes back after this. He's wounded in more ways than one, and he goes back to running the company solo and consolidating all authority and responsibility with himself." This quote describes Eisner's consolidation of power following Ovitz's exit and the challenges Disney faced.

Bob Iger's Rise to COO and CEO

  • Bob Iger was running international and ABC, showing competence.
  • In January 2000, Iger was promoted to COO as Eisner faced pressure from the board, especially regarding succession planning.
  • Iger's promotion to COO came during a time when Disney's core, animation, was struggling.

"So finally, in January of 2000, Eisner does promote Bob to COO. He kind of has to at this point in time." This quote explains how external pressures and Iger's performance led to his promotion within Disney.

Disney's Flywheel and Financials

  • The Disney Flywheel illustrates how film IP powers parks, merchandise, and media networks.
  • Despite lower studio entertainment revenue, parks and experiences generate significant income.
  • Disney's flywheel concept shows the interconnectedness of Disney's various business segments.

"So studio Entertainment did about $11 billion in revenue. But parks experiences, products, licensing, that sort of thing, did over 26 billion." This quote breaks down Disney's revenue streams, highlighting the importance of parks and experiences in their financial success.

Disney's Animation Struggles and Pixar's Success

  • Disney animation was in decline with a series of unsuccessful movies.
  • Pixar, as an independent company, had a successful collaboration with Disney.
  • Pixar's success with films like Toy Story contrasted sharply with Disney's failures.

"Here's a sampling of Disney animation movies that come out during this time. You ready for this, Ben? Yeah. I'm glad you're sitting down. Tarzan, Dinosaur, Atlantis, Treasure Planet." This quote exemplifies the lackluster performance of Disney's animation studio during this period, setting the stage for major strategic changes.

The Fallout with Pixar and Technology Stagnation

  • A public clash between Eisner and Steve Jobs led to Pixar's intention to end their partnership with Disney.
  • Jobs criticized Disney's mismanagement, highlighting the contrast between Pixar's technological innovation and Disney's stagnation.
  • Pixar's departure signaled the need for a change in Disney's approach to content creation and technology.

"Eisner and Steve Jobs get into a very public clash and the deal goes sour." This quote captures the tension between Disney and Pixar, which was a pivotal moment leading to strategic reevaluations.

Roy Disney's Save Disney Campaign and Comcast's Takeover Attempt

  • Roy Disney and Stanley Gold launched a campaign to oust Eisner following Pixar's fallout.
  • Comcast attempted a hostile takeover of Disney, seeing it as vulnerable, but Disney's stock price increase made the bid unfeasible.
  • The Save Disney campaign resulted in a significant no-confidence vote against Eisner, leading to his eventual departure.

"Roy Disney, who is the nephew of Walt and the sort of steward of the Disney family's involvement on the board and with the company, and longtime Disney family lawyer Stanley Gold, who's also on the board, they resign from the board and they launch the Save Disney campaign." This quote explains the internal strife and efforts to change Disney's leadership, which were a prelude to Eisner's exit.

Bob Iger's Vision and Plan for Disney's Future

  • Bob Iger proposed a plan to transform Disney focused on high-quality branded content, investing in technology, and global growth.
  • Iger's plan included embracing technology for content distribution, anticipating the rise of digital media consumption.
  • The vision aimed to revitalize Disney's relevance and innovation, leading to initiatives like Disney Plus.

"We needed to devote most of our time and capital to the creation of high-quality branded content." This quote from Bob Iger outlines the strategic focus on quality and branding as key to Disney's future success.

Disney's Acquisition of Pixar

  • Disney acquired Pixar for $7.4 billion, a significant price that raised questions about financial sense.
  • The acquisition brought technology and creative leadership to Disney, revitalizing the company.
  • Pixar's unique value included a full studio with films in pre-production and a team capable of consistent content creation.

"They've reached a deal for Disney to acquire Pixar for $7.4 billion, which was a huge price at the time."

This quote highlights the scale of the acquisition and the initial uncertainty regarding the deal's financial rationale.

Pixar's Impact on Disney Animation

  • Pixar's acquisition was pivotal for Disney Animation's revival.
  • Lasseter and Catmull's leadership was crucial for Disney's success.
  • The deal's worth is debated, hinging on the success of Disney Animation post-acquisition.

"To the extent you believe that Frozen would not have happened without revitalizing Disney animation... then, yes, it's worth it."

The quote suggests that the success of movies like "Frozen" justifies the Pixar acquisition, as it wouldn't have been possible without the rejuvenation that followed.

Pixar's Pre-Production Roadmap

  • Pixar had a five-year roadmap of films in development, adding value to the acquisition.
  • This foresight and planning differentiated Pixar from other companies like Lucasfilm.

"The thing that made it really unique was it came with this full studio that number one had films already in pre-production."

The quote emphasizes the strategic advantage Disney gained through Pixar's well-prepared pipeline of upcoming films.

Disney's Negotiation with George Lucas

  • Disney had to differentiate the value of Pixar from Lucasfilm during negotiations.
  • Pixar's current development and technology were highlighted as unique assets compared to Lucasfilm's past successes.

"You made these great movies a long time ago that have a really enduring universe... But there's not any of the infrastructure or any of the current development that, or the technology."

This quote explains the distinction made to George Lucas about why his deal would differ from Pixar's, focusing on the lack of current infrastructure and development.

Pros and Cons of the Pixar Deal

  • The Pixar deal presented existential risks and benefits for both Disney and Pixar.
  • Disney gained creative talent and IP, while Pixar secured distribution and marketing support.
  • The deal promised a larger creative canvas for Pixar's team.

"Bob says, you guys are going to get a much larger canvas to paint on."

The quote captures the essence of the opportunity presented to Pixar's leaders, offering them a broader scope for their creative endeavors.

Disney's Acquisition Strategy

  • Disney's acquisition strategy was influenced by Bob Iger's background and vision.
  • The company shifted from a 'not invented here' syndrome to embracing external IP and franchises.
  • This strategy led to a series of high-value acquisitions, including Marvel and Lucasfilm.

"You look at sort of where Bob Iger comes from... you can kind of see why he had the conviction that, hey, this could work."

The quote reflects on Bob Iger's ability to envision the potential in acquiring external IPs, diverging from Disney's traditional approach.

Disney's Content and Technology Acquisitions

  • Disney's acquisitions were based on the belief that combined assets could be more valuable.
  • The company invested heavily in content and technology, with significant purchases like Marvel, Lucasfilm, and Bamtech.

"They go out, they pay 7.4 billion for Pixar, and then in 2009, 4 billion for Marvel."

This quote summarizes Disney's bold investment strategy, highlighting the substantial amounts paid to acquire key content and technology assets.

Disney's Response to Cord-Cutting

  • Disney recognized the existential risk of cord-cutting to its business model.
  • The company realigned its strategy, focusing on technology acquisitions to support direct-to-consumer distribution.

"They realize we've spent the last several years fixing the content side of the house... We now need to massively accelerate part two."

The quote indicates Disney's strategic pivot to address the challenges posed by the changing media landscape and consumer behavior.

Disney's Reorganization and Future Vision

  • Disney restructured the company to separate content creation from technology and distribution.
  • The reorganization aimed to adapt to modern media dynamics, reminiscent of traditional newspaper structures.

"What does a modern media company look like... He talks about how he's whiteboarding out sort of this organizational structure."

This quote describes the process of reimagining Disney's structure to align with contemporary industry standards and practices.

Launch and Early Success of Disney Plus

  • Disney Plus was launched with aggressive pricing and a strong content lineup.
  • The service achieved 10 million subscribers within the first 48 hours, indicating a promising start.

"They get 10 million subscribers in the first week... A very auspicious beginning that it is off to."

The quote captures the initial success of Disney Plus, suggesting a strong market reception for the streaming service.

Challenges and Opportunities for ESPN Plus

  • ESPN Plus faced challenges in attracting subscribers due to limited content offerings.
  • The service's future potential is tied to the declining reliance on traditional cable affiliate fees.

"This ESPN plus thing is not yet going well. They only have 2 million subscribers."

This quote highlights the struggles of ESPN Plus in gaining traction compared to the rapid success of Disney Plus.

Bull and Bear Narratives

  • Bull narrative depicts a triumphant scenario despite previous failures in combining content and distribution.
  • The potential for Disney to successfully integrate content and distribution is contrasted with past failures such as AOL Time Warner.
  • Disney's acquisition of Bamtech is seen as a strategic move for pure distribution technology, avoiding cultural clashes and conflicts of interest.
  • The bull case is reinforced by Disney's exclusive content on Disney Plus and the prospect of re-bundling to offer a comprehensive subscription service at a competitive price.
  • Disney's global market access is highlighted as a key advantage in the bull narrative.
  • The Disney flywheel effect is discussed, emphasizing the importance of direct customer relationships and leveraging data analytics.

"I think Disney actually has the chance to do this right. They aren't buying some other distribution company. I mean, they did buy Bamtech, but they bought that for exactly the right reason. They do nothing more than pure distribution."

This quote illustrates the strategic rationale behind Disney's acquisition of Bamtech, emphasizing the focus on distribution technology rather than content, which is seen as a move that could avoid the pitfalls of previous mergers in the industry.

"The only shows that are on Disney plus are Disney. I think this time really may be different. So that's my bullcase."

Here, the speaker expresses optimism about Disney's strategy of exclusive content on its streaming platform, Disney Plus, suggesting that this approach may lead to successful integration of content and distribution, unlike past attempts by other companies.

"Now with direct, they're in every country in the world. They're in India, they're in China."

The global reach of Disney's direct-to-consumer services is highlighted as a significant advantage, expanding the company's addressable market and potential revenue.

"It's really about the direct relationship and turning Disney's hundreds of millions of sort of loosely connected, I'll call them fans, into real and actual customers with an actual defined digital relationship."

This quote emphasizes the strategic value of establishing direct relationships with consumers through digital platforms, which allows Disney to convert fans into paying customers with measurable interactions.

Bear Case for Disney's Strategy

  • Disney's direct-to-consumer and international segment reported significant losses, raising concerns about the profitability of the streaming services.
  • Analysts predict continued losses for Disney's streaming services until a projected turnaround in 2024.
  • The sustainability of Disney's streaming services is questioned in light of the need for continuous content to retain subscribers.
  • Doubts are raised about the effectiveness of promotional strategies like free trials in achieving long-term subscriber growth.
  • The bear case also considers the potential for Disney to underestimate the volume of new content required to satisfy subscribers.

"Well, this quarter, the direct to consumer plus international segment that is under two years old lost $740,000,000."

This quote presents a financial concern, indicating that Disney's direct-to-consumer segment is currently unprofitable, which is a key point in the bear case against the company's streaming strategy.

"There's an analyst at Moffatt Nathanson that expects the three streaming services to lose a combined 11 billion over the next four years and finally turn it to profit in 2024."

An analyst's prediction of continued financial losses for Disney's streaming services over the next few years contributes to the bearish outlook on the company's direct-to-consumer strategy.

"One reason to doubt it too, is I think Disney may be underestimating just how much content people need to stay satiated and new content."

The speaker expresses skepticism about Disney's ability to provide enough new content to keep subscribers engaged, which is a central concern in the bear narrative.

Disney's Potential to Rebundle and Own Content

  • Disney's rebundling strategy is likened to owning all content across distribution channels, potentially replacing traditional cable subscriptions.
  • The discussion includes the possibility of Disney offering a subscription service that encompasses all Disney, Fox, ESPN, and Hulu content at a competitive price point.
  • The concept of Disney owning both content production and distribution margins is presented as a "mega bullcase."

"That Disney may be able to rebundle and actually own all the content. That is, the mega, mega bullcase is like, imagine if you're comcast, but you actually own all the content that's flowing across all the channels as well."

The speaker outlines an ambitious scenario where Disney not only rebundles content but also owns all of it, eliminating costs associated with content acquisition and increasing profit margins.

The Importance of Direct Customer Relationships

  • Disney's streaming strategy is seen as a way to transform loosely connected fans into actual customers with defined digital relationships.
  • The potential for Disney to leverage customer data and direct communication is discussed as a key advantage.
  • The integration of streaming services with other Disney experiences, such as theme parks, is highlighted as a means to enhance customer engagement and loyalty.

"It's really about the direct relationship and turning Disney's hundreds of millions of sort of loosely connected, I'll call them fans, into real and actual customers with an actual defined digital relationship."

This quote reiterates the strategic importance of converting fans into customers with direct digital relationships, which allows for more targeted communication and enhanced customer loyalty.

The Role of ESPN and Sports Content

  • ESPN is identified as a unique asset for Disney, offering content that is not available on platforms like Netflix or YouTube.
  • The exclusive nature of sports content and the rights to show sports events are discussed as a competitive advantage for Disney in retaining subscribers.

"That is the biggest chip that Disney has, that nobody else has out there, which is ESPN and sports."

The speaker points out ESPN's unique position in the market as a provider of sports content, which is a differentiator for Disney in the streaming landscape.

Disney's Strategic Decisions and Leadership

  • The transition from protection mode to empowering creatives at Disney is discussed as a significant shift in strategy.
  • The dismantling of the strategic planning group under former CEO Michael Eisner and the empowerment of creatives under CEO Bob Iger is highlighted.
  • The leadership style of Bob Iger, characterized by low ego and respect for all employees, is praised as inspiring.

"No, we actually need to empower the creatives to do what they do."

This quote reflects a change in Disney's approach, moving away from a protective stance to one that encourages innovation and creativity among its employees.

Disney's Content Integration with Marvel Movies

  • The integration of Disney Plus content with upcoming Marvel movies is mentioned as a strategy to encourage subscriptions.
  • The idea that viewers may need a Disney Plus subscription to fully understand future Marvel movies is presented as a compelling reason for fans to subscribe.

"If you want to understand everything in future Marvel movies, you'll probably need a Disney plus subscription because events from the new shows will factor into forthcoming films such as Doctor Strange in the Multiverse of Madness."

The speaker explains how Disney plans to intertwine the narratives of its streaming shows with its theatrical releases, creating an incentive for Marvel fans to subscribe to Disney Plus.

The Era of Scale and Consolidation

  • The discussion explores the importance of scale in the current media landscape, with Disney's acquisition of Fox as a case study.
  • The necessity for a large content library to compete with services like Netflix is debated.
  • Rupert Murdoch's comment about Disney's scale advantage is cited as a reason for Fox's sale to Disney.

"So why do you think that's so important right now?"

This quote prompts a discussion on the critical role of scale in the success of media companies, especially in the context of streaming services and content production.

Innovate or Die Philosophy

  • The importance of innovation in the media industry is underscored, with Disney's strategic moves seen as courageous and necessary for future success.
  • The willingness to take risks and disrupt existing business models is highlighted as a key theme in Disney's approach.

"It takes, like, courage back to what was the Apple? What was the Phil Schiller Courage. Courage about the headphone jack."

The speaker draws a parallel between Disney's strategic risks and Apple's past decisions, emphasizing the importance of bold moves to drive innovation and stay competitive.

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