Disney’s Streaming Transformation
By Mike Kuczkowski
In the summer of 2015, Disney Chairman and CEO Bob Iger wanted to be candid with the investment community about an issue that had been haunting the company for a while.
ESPN was a very big and very profitable part of Disney’s $52 billion business, which at that point included Pixar, Marvel Entertainment and Lucasfilm. But things were changing. The rise of high-speed internet connections had led young people, in particular, to drop their cable packages for cheaper, “skinny” internet packages that gave them access to free or low-cost streaming services like YouTube or Netflix.
It was unclear how big a threat “cord cutting” really posed to the business. In 2008, fewer than a million people in the United States relied exclusively on the Internet for television. Yet, the number of cord cutters continued to grow. At the same time, subscriptions to what the industry called “multichannel video programming distributors (MVPD)” (read, cable and satellite companies) also grew through 2012. In 2014, the research firm SNL Kagan reported that the number of MVPD subscribers, or “subs”, had fallen by 250,000 in 2013. Not a huge number, compared with the many millions of households who were subscribing to cable and satellite plans. At the time, there were many questions. Were the losses due to market saturation, regional or seasonal trends or was it cord cutting? Was a whole generation of viewers really going to ditch broadcast-quality programming and live sports events to watch YouTube videos? Views were very mixed.
Still, the implications were profound. If subs were really declining, companies like ESPN needed to find another way to reach viewers. And that was complicated. There were the technology requirements, which were daunting. There were the rights deals with broadcast networks and MVPDs, who didn’t want Disney going straight to consumers since that was a relationship they held. And there were the rights deals with the sports leagues, like the NFL and NBA, whose games were the centerpiece of ESPN’s programming and whose deals did not allow ESPN to deliver their product directly to consumers.
Still, on August 4, 2015, on a quarterly earnings call, Iger decided it was time to open up about the issue. “Before Tom takes you through the highlights of our businesses, I’d like to address an issue that has been receiving a fair amount of interest and attention these days and that’s the rapidly changing media landscape especially as it relates to ESPN,” he said, according to a transcript of that earnings call.
“We are realists about the business and about the impact technology has had on how product is distributed, marketed and consumed. We are also quite mindful of potential trends among younger audiences, in particular many of whom consume television in very different ways than the generations before them. Economics have also played a part in change and both cost and value are under a consumer microscope. All of this has and will continue to put pressure on the multichannel ecosystem, which has seen a decline in overall households as well as growth in so-called skinny or cable light packages.”
“ESPN’s experienced some modest sub losses although those have been less than reported by one of the prominent research firms.” He proceeded to make the case that ESPN remained in a dominant position and was well-poised for success, based on existing rights deals and its value to advertisers. “All of this adds up to a very strong hand and gives us enormous confidence in ESPN’s future, no matter how technology disrupts the media business.”
Wall Street’s reaction to the phrase “some modest sub losses” was swift and pronounced. Disney’s stock dropped 15% and it sparked what The Wall Street Journal called a “media meltdown.” Viacom plunged 14%, 21st Century Fox fell 7%. “Media stocks are getting slaughtered,” one analyst told the Journal. “It’s been the long-running fear that we would eventually see cord cutting. Everyone thought it would be a slow-moving train wreck, but Disney’s comment woke people up.”
In an interview with podcast host Bill Simmons in February 2020, Iger recounted the incident. “That was a real wake-up call,” he told Simmons, referring to the response of the stock market. “I wanted to be candid. It was premeditated. It wasn’t something that I accidentally declared. But anyway, in doing so the reaction was pretty harsh and the wake-up call was, ‘Okay. It’s time for us to change, time for us to move.’”
A strategic inflection point
Iger didn’t use the term, but Disney’s experience with cord cutting was a textbook case of a strategic inflection point. In 1996, in his best-selling book “Only the Paranoid Survive,” Intel CEO Andrew Grove described a strategic inflection point as a “time in the life of a business when its fundamentals are about to change.” As the third employee of Intel, starting in 1968 Grove had a front row seat to the disruption of the computer industry.
When he started in computing, the industry was vertically integrated. Companies like IBM manufactured and sold the entire stack of computing technology, from chips to computers to operating systems and software. If you bought an IBM computer, you had the advantage that the whole system was designed to work together. But also, if you bought an IBM computer, you were trapped with the system you purchased, because there was no way to replace one part with another part as things changed.
Technology, specifically the microchip, upended this paradigm. The ability to put what was once many chips onto a single, smaller chip reduced costs significantly. A $20,000 mainframe now could be produced for $2,000 in parts. Companies began specializing in chips and computers, but also in operating systems and software. The vertically integrated industry yielded to a horizontal one, in which various players competed in each category for market share.
In “Paranoid”, Grove said this shift, which is relatively easy to see in hindsight, was incredibly difficult to perceive in the moment. “Even in retrospect, I can’t put my finger on exactly where the inflection point took place in the computer industry,” he wrote. “Was it in the early eighties, when PC’s started to emerge? Was it in the second half of the decade, when networks based on PC technology started to grow in number? It’s hard to say.”
In the 25 years since Grove’s autobiography, we’ve seen strategic inflection points disrupt many industries. Wal-Mart disrupted retail; Amazon disrupted logistics and delivery; Apple disrupted mobile computing; Facebook disrupted publishing and advertising; Uber disrupted transportation; Airbnb disrupted travel & hospitality; and the Internet disrupted everything, including the MVPD business.
This disruption means businesses are constantly facing pressure to evolve, and not all of them survive. In 1964, the average tenure of a firm on the S&P 500 was 33 years, according to research firm Innosight. In 2016, it was 24 years. By 2027, Innosight forecasts it will be 12 years. Long-term trends around technology, scientific discovery, empowered consumers, global trade and income inequality have had a dizzying and disruptive effect on business and society.
In her 2019 book “Seeing Around Corners,” Columbia Business School professor Rita McGrath defines an inflection point as “a change in the business environment that dramatically shifts some elements of your activities, throwing certain taken-for-granted assumptions into question.” Like, say, cord cutting for a broadcasting business. If spotted early enough, McGrath says, “Changes in the environment in or around organizations can create new, entrepreneurial opportunities.”
Entrepreneurial opportunity is what Iger was pursuing when he spoke candidly about sub losses. It’s worth noting that inaction would have been a far easier choice. When Iger’s comments threw media industry stocks into turmoil, the business he was seeking to disrupt was doing just fine. Even today, ESPN delivers billions of dollars to Disney in profits, mostly through MVPD relationships.
The catalyst was Iger’s view of the landscape and his sense that they needed to do something different. In his February interview with Simmons, Iger said “(T)he alternative, which is a pivot in the direction of what they call direct-to-consumer, ‘over-the-top” (OTT) services, was not as obvious. Meaning, it was sitting out there to do, but the financial implications or ramifications of doing that were challenging. Meaning, it’s not like you can flip a switch and go from being paid a significant amount of money — billions of dollars in cable and subscriber fees — and immediately earn that in direct to consumer subscription fees. It just didn’t exist.”
An acquisition and a plan
What did exist was a story that had crystallized in Iger’s mind about what was happening in the environment. One that Iger had pieced together for himself and gotten comfortable with based on his view of the landscape. Timing was critical. He had to act neither too soon – and risk undermining the profitable ESPN business that had delivered significant profits for Disney since 1995 – nor too late — and see technology companies like Google, Apple, Facebook or Amazon buy live streaming sports rights and muscle ESPN out of that space.
In Iger’s memoir “Ride of a Lifetime,” he describes his next step after the August 2015 earnings call as focusing “even more on the dramatic changes we were experiencing in our media businesses and the profound disruption we were feeling.” He and his executive team concluded it was time to find their own technology platform to deliver content directly to consumers.
They estimated it would take five years to build such a platform for themselves, so they looked for an acquisition. After evaluating Snapchat, Spotify and Twitter, Disney took a 33% stake in a technology company called BAMTech in August 2016. BAMTech had started out as Major League Baseball Advanced Media, the IT department of MLB, and had developed the ability to stream live video quickly and at scale, and also work around existing rights deals that required “blackouts,” meaning that a subscriber couldn’t watch a baseball game on a streaming device if it was being broadcast in that market at the same time. It had a strong network infrastructure to support the bandwidth requirements of streaming at scale. It might be the technology Disney needed.
But Disney didn’t just rush into the breach. Ten months later, in July 2017, Disney held its annual board retreat at Walt Disney World in Orlando. On the agenda was the company’s five-year strategic plan. Iger had his executive team focus on disruption. Each of Disney’s business leaders made presentations about the disruption they were seeing in their businesses and the potential impact those disruptions could have on their long-term success. As the board heard presentation after presentation about the threats Disney’s business faced, their sense of urgency was heightened. Knowing that he didn’t want to frame a problem without providing a solution Iger and his team pitched the board on buying a controlling stake in BAMTech and using it to launch direct-to-consumer streaming services for ESPN and Disney. As Iger told Simmons, “The board’s reaction to that in the context of this changed strategy was, ‘Speed is of the essence. Get it done.’ They were great. The board was great about it.”
The board approved a $1.58 billion deal to increase Disney’s stake in BAMTech to 75%, a controlling interest. A month later, Iger announced the acquisition along with plans to launch ESPN+ in 2018 and Disney+ in 2019. “This time, our stock soared,” wrote Iger in his memoir. In fact, that’s not accurate. Disney’s stock fell 4% after that call and didn’t recover to its early August levels until December. But the story sounds better if Wall Street immediately embraced this new vision for the future.
Still, Iger’s account aligns with McGrath’s scholarship on inflection points. She says the signs of an inflection point typically emerge slowly – then quickly. To spot them, leaders need to work at “seeing” inflection points coming. They need to establish horizontal flows of information, so leaders can learn and respond quickly to changes in the environment. She describes a process of “discovery-driven planning” in which planning aims to generate multiple hypotheses about the implications of a change in the environment, and dismiss many of those hypotheses quickly as a way of honing in on the changes that will be lasting. All of these are apparent, or suggested, in the approach Iger describes. Whether it was evaluating multiple potential technology acquisitions, encouraging his team to deeply explore the disruptions in their businesses, or presenting an agenda rooted in that work’s findings to the board, there was a great deal of exploration happening before Disney’s strategic pivot.
A whiteboard and a reorganization
In fact, the picture of what this all looked like did not come together until January 2018. Following a Christmas holiday, Iger tried to get his brain around how to manage the assets that Disney had acquired in the past several years.
He had his assistant roll a whiteboard into a conference room. Iger listed all of Disney’s assets. (He joked during one forum that he had to consult Wikipedia to find out everything the company owned.) On the left side, he listed out the creative businesses. Movies, television and sports. This included Disney, Pixar, Marvel, Lucas, Fox, ABC, FX, National Geographic and ESPN. These businesses were the creative centerpieces of the company, the creators. Yet, as much as these businesses were focused on touching and inspiring consumers, they did not have direct relationships with them.
In the middle, he listed out the group of “physical entertainment and goods” that includes Disney’s stores, resorts, cruises and merchandise. These groups dealt with consumers and consumer experiences all the time. They didn’t need a new connection there.
On the right side of the whiteboard, he wrote out their platform technologies that would connect the company’s content to consumers. Things like data management, user experience, customer acquisition and retention, distribution and sales.
This construction had been inspired, in part, by some additional research he had done and some external engagement with other businesses. “In fact, I met with people at Google,” he told Simmons. “And I said, tell me how YouTube is structured. Interestingly enough, one of the people from YouTube said, well there’s a product group and there’s a content group. I said well, what’s the difference between product and content? Content was the videos that are uploaded and product was really platform. Oh, that’s very interesting. That’s how you organize it? And I looked at a few other companies too, Netflix and a few others, just to get some sense.”
When he finished his whiteboard work, Iger showed it to his executive team. He joked with Simmons, “I thought it was so brilliant, umm, (chuckle), I then had to immediately say, come see this. And I brought my CFO in and our general counsel and our head of HR and everyone came in and I said, aren’t I great?” To be clear, he strikes a self-deprecating as he talks about his brilliance.
But in fact, this was an important exercise. And in his memoir he writes that he felt energized looking at it. He said to himself: “There it is. That’s what a modern media company should look like.” In addition, the picture allowed him to overlay talent in key roles, since as he noted, an org chart is only as good as the people you have running things. A year later, the white board was still outside his office, an artifact to his story of the reorganized Disney empire.
Disney’s stock did rise as a result of Iger’s strategic pivot, but it took some time. They successfully launched ESPN+ in April 2018. In April 2019, Disney announced that it would price its Disney+ streaming service at $6.99 per month. Its stock got a bump. In November, it announced that it had acquired 10 million new subscribers to the Disney+ service on the day it launched. The stock went up further, rising 34% in 2019 overall. On February 4, 2020, in the company’s Q1 2020 earnings call, Iger said “The launch of Disney+ has been enormously successful, exceeding even our greatest expectations.” The library was strong, he noted. The user experience, from a technology perspective, was elegant. The price point was winning. At the end of 2019, the company had 33.1 million subscribers for Disney+ and ESPN+, up from 1.4 million ESPN+ subscribers the prior year.
His interview with Simmons took place the day after the earnings call. In hindsight, he was glad he had gone public with his concerns about sub losses in August 2015. If he had not, he said, “on yesterday’s earnings, I would have been talking about more ESPN erosion and I wouldn’t have been talking about Disney+ growing subs or ESPN+ growing subs. Which dominated the call. Interest in these new businesses that we’ve launched is, these days anyway, far greater than anything else that we’re doing.”
The long-term success of these efforts remains to be seen, but the five-year journey of navigating the inflection point of sub losses and cord cutting has without question transformed the company and positioned it to compete with both traditional media companies and technology companies in a battle for consumers’ time and attention.
Principles for Navigating Inflection Points
The narrative Iger has laid out in various forums has all the hallmarks of navigating an inflection point. In reviewing the literature (Grove, McGrath and others), charting Disney’s narrative and applying our own experiences, we’ve identified six critical steps for navigating inflection points that are at play in Disney’s story:
- Be curious: It’s clear that cord cutting was a threat to ESPN and ABC, but there are probably dozens of threats that Disney faces on any given day. As Iger notes, there were lots of reasons to ignore it – and as the analyst quoted in the Wall Street Journal says, there was a broad sense in the marketplace that while cord cutting was an issue, it would be a “slow-moving train wreck.” Ultimately, Iger and his team saw the potential disruption from this trend as a particularly significant and complex one. You can see how he describes it in his interview with Simmons – there are the implications of the loss of subscribers to the MVPD business, but also the rights deals with those businesses and the leagues. He describes these as “encumbrances” because they stood in the way of quickly pivoting to a streaming strategy. All of that complexity required a commitment to deeply understanding the issues and developing novel solutions to address them.
- Establish a vision: As he writes in his memoir, he and his executive team decided at some point in the last five years that they didn’t want to rely solely on cable and satellite distributors to connect their creative assets with consumers. That was the key. Technology, and all the functions required to support that technology, was the missing piece. This positive sense, rooted in possibility, is a response to the threats that were forming against the business. Amid disruption, they planned to create something new.
- Develop a narrative, and keep evolving it: The story Iger told to Wall Street in August 2015 about sub losses was the catalyst for the investment in BAMTech a year later, which led to a deeper analysis of the disruption of the media business by his executive team, which led to the decision to take a controlling interest in BAMTech and then announce their own streaming services. If he had known the company would launch Disney+ or ESPN+ in August 2015, you know he would have announced that. But each step led to another step, likely with a clearer sense of the picture and more data about how each step would actually work over the long term.
- Align the team: There was clearly a lot of work done as an executive team to understand the disruption that was happening, challenge their assumptions about the business, and get the Disney board to agree with the path Iger saw moving forward. So much of Iger’s memoir is driven by relationships. He recounts multiple moments in which a multi-billion-dollar acquisition – be it Pixar, Lucasfilm or Fox – is ultimately about trust with a founder or fellow CEO. But when it comes to the strategic pivot to deal with the disruption in the media environment, he is careful to note that the team was integral to the effort. (Certainly, many team members are also involved in major acquisitions, but Iger’s point about the personal relationships at the core of these deals is impossible to miss.)
- Get real: The acquisitions he made in BAMTech were small steps forward toward the execution of a bold strategy. ($1 billion small steps forward, but the investment is relatively small compared to the company’s nearly $70 billion in annual revenue in 2019.) He put each piece in place and let stakeholders get comfortable with what he was doing. Then he got bolder and brought stakeholders along with him, clarifying the picture of how Disney intended to execute its strategic pivot.
- Keep learning: And clearly, they were learning along the way. The ESPN+ launch was modest as compared to the Disney+ launch. But it gave them a sense of what was required to succeed. The fact that Bob Iger was visiting YouTube to understand how Google managed that business shows that his curiosity remained active throughout this process. As he drew out the “modern media company” in his white board, you can sense he is applying new insights on how to organize a great consumer experience to people in a digital world. His lighthearted sense of pride expressed in his whiteboard reorganization of the Disney assets belies real pride in cracking the challenge of how to run such a unique, massive and complex business.