Disney just fought off a shareholder revolt - but the clock's still ticking

This episode delves into Disney's recent challenges with a shareholder revolt and its strategic moves in the streaming market, highlighting the ongoing shifts in the entertainment industry due to changes in content consumption.

1. Disney is at a pivotal point, having to shift from traditional media to a focus on streaming, despite not yet making a profit in this area.
2. The company's historical reliance on revenue from cable is waning, necessitating a successful transition to digital platforms.
3. Disney's creative output has faced criticism, suggesting a need for rejuvenation to keep up with competitors.
4. The episode highlighted the importance of adapting business models in response to technological changes affecting consumer behavior.
5. Discussions about Disney's future leadership and strategic direction underscore the ongoing challenges of navigating a transforming industry.

1. Introduction

Host Neil Patel sets the stage by introducing Disney's recent challenges and its impact on the wider entertainment industry. Neil I. Patel: "Disney is obviously a giant in the world of entertainment... But streaming has upended both the cable bundle and the traditional movie business."

2. The Shareholder Revolt

Details Disney's encounter with activist investor Nelson Peltz and the implications of this revolt for corporate governance and strategic direction. Julia Alexander: "That company just came through a massive shareholder battle with Nelson Peltz... But a phrase you keep using about Disney, even in their triumph, is that there is a hum of anxiety throughout the company."

3. Streaming Strategy

Explores Disney's strategic bets on streaming and the challenges of creating profitable digital media services. Julia Alexander: "Disney needs to figure out streaming because it has spent more than $11 billion on Disney+ so far without making a profit."

4. Content and Creative Direction

Examines criticisms of Disney's current content strategy and the need for innovative, engaging media to attract and retain audiences. Julia Alexander: "It needs to fix what many critics consider to be a serious creative rut in its movies and TV shows."

5. Looking Forward

Discusses potential future strategies for Disney, including leadership changes and further integration of streaming services. Julia Alexander: "Disney's biggest advantage is that maybe sitting alongside Nike and Apple, it is one of the most world-renowned brands."

1. Diversify Content Offerings: Companies should diversify their content to meet varied consumer interests and adapt to changing media consumption habits.
2. Leverage Brand Strength: Utilize strong brand heritage to maintain customer loyalty during transitions and changes in business strategy.
3. Invest in Technology: Embrace technological advancements to enhance content delivery and customer experience.
4. Monitor Consumer Trends: Continuously analyze consumer behavior to anticipate market shifts and adapt strategies accordingly.
5. Strengthen Leadership: Ensure strong, forward-thinking leadership to navigate through periods of significant change.

Today, we're talking about Disney, the massive activist investor revolt it just fought off, and what happens next in the world of streaming. Because what happens to Disney really tells us a lot about what's happening in the entire world of entertainment. Earlier this month, Disney survived an attempted board takeover from businessman Nelson Peltz. While investors ultimately sided with Disney and CEO Bob Iger, the boardroom showdown made something very clear: Disney needs to figure out streaming and get its creative direction back on track.

To help me figure all this out, I brought on my friend Julia Alexander, who is VP of Strategy at Parrot Analytics, a Puck News contributor, and most importantly, a former Verge reporter. She's a leading expert on all things Disney, and I always learn something important about the state of the entertainment business when I talk to her.

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Julia Alexander, Neil I. Patel

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Disney

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Julia Alexander

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Speaker A

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Speaker B

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Speaker C

Hello and welcome to Decoder. I'm Neil I. Patel, editor in chief of the Verge, and Decoder is my show about big ideas and other problems. Today we're talking about Disney, the massive activist investor revolt it just fought off and what happens next in the world of streaming, because what happens to Disney really tells us a lot about what's happening in the entire world of entertainment, and this is a crucial moment for the company and the industry as a whole. Disney is obviously a giant in the world of entertainment.

There's Mickey Mouse and the theme parks, of course, but there's also Marvel, Star Wars, Pixar, ABC and a whole lot more. Disney funded all that growth with huge fees it was collecting from cable companies that needed to distribute Disney owned channels like ESPN and ABC, and it cemented its dominance with an incredible run of blockbuster movies, particularly from Marvel. But streaming has upended both the cable bundle and the traditional movie business, and the end of the ride appears to be clearly in sight. So Disney's made a huge bet on Disney to take on Netflix, and it's now rolling Hulu and ESPN into that product in an effort to recreate some of the old cable magic. But the pressure isn't going away.

Earlier this month, Disney survived an attempted board takeover from an activist investor named Nelson Peltz, his second attempt in two years. Peltz was upset with Disney's approach to Disney, and he thought CEO Bob Iger could be doing a lot of things differently. And while investors ultimately sided with Disney and Iger, the boardroom showdown made something very clear. Disney needs to figure out streaming because it has spent more than $11 billion on Disney so far without making a profit. And at the same time, it needs to fix what many critics consider to be a serious creative rut in its movies and tv shows.

To help me figure all this out, I brought on my friend Julia Alexander, who is VP of strategy at Parrot Analytics, a puck news contributor and most importantly, a former Verge reporter. She's a leading expert on all things Disney, and I always learned something important about the state of the entertainment business when I hang out with her. And there's a lot going on in the Disney story. It's about distribution. It's about old Hollywood versus new.

It's about how our individual habits have been dramatically changed by technology in a way that some of the most powerful companies in the world are struggling to predict. What's going on at Disney really tells us so many stories about why the media business is the way it is, what the Internet did to it, and why it's all now changing once again. All right, Disney in the state of entertainment. Here we go.

Julia Alexander, welcome to Decoder. Thank you for having me again. I'm excited to talk to you because it feels like there are a tiny number of people in the world who understand what is happening inside Disney, and very few of them actually work at Disney. You've got a view on Disney. You have paid a lot of attention to Disney for a long time.

That company just came through a massive shareholder battle with Nelson Peltz, who's an activist investor. They won. They seem triumphant. But a phrase you keep using about Disney, even in their triumph, is that there is a hum of anxiety throughout the company. What is the hum of anxiety at Disney?

Speaker D

If you look at Disney's finances, you can kind of see that hum of anxiety come to fruition. Even two years ago, first quarter fiscal year 2022, media networks and linear networks, which is typical cable and linear broadcast system, made up like 35% of their overall revenue. Right? And that is continues to drop every single quarter since then. And if you look at streaming, although their revenue has increased, they're still not a profitable business by any stretch of the imagination.

And so the Nelson Pelts fight really comes in at this moment of continuous hum of anxiety in the company, which is the Runway that we're on that we need to take off in order to kind of be this legacy media company of tomorrow. A phrase that I like to use to describe Disney, is quickly coming to an end, and there's no sign that Disney is really going to replace the lost revenue from the linear division. There are signs that Disney is very successful and that it will continue to be successful and will continue to grow. But is that enough to offset what is happening on the decline in the cable business, which is the greatest invention in capitalism history? At least there's no signs right now that say yes.

What happens with Disney, this very strong media brand company, if it can't figure out its streaming business before its linear business actually falls off a cliff? Do me a favor for the decoder audience. You said the cable bundle is the greatest invention in the history of capitalism. I feel like a lot of decoder listeners have never had cable. Explain what the cable bundle is very quickly and why you think it's the greatest invention in the history of capitalism.

There's different forms of linear channels within a television ecosystem that we used to think of it. So you had your broadcast networks, which are still very strong. So you have ABC, CB's, NBC. Those still bring in large audiences. Then you had basic cables.

These were other channels that sat within this one unified ecosystem. So think of it kind of like the App Store of television, right? Like what it kind of used to be. Instead of apps, you had channels. The basic networks, like AMC, basic cable networks, you paid a little bit extra for access to them.

And then the roster of channels that you had access to grew from channel one to channel like 60. And then there were all these cable channels. So ESPN, HBO, Showtime, these are all premium cable channels, and you could add those onto your package, but they all sat within this ecosystem. So be, just because you added HBO does not mean you got rid of ABC. And so the more that these cable channels came together and these, these companies grew, the more they started selling their high interest cable channels, ESPN within packages.

So if I'm Disney, I want you charter or you comcast to carry ESPN. ESPN. And you want to carry ESPN. So in order to get ESPN, you're going to also have to buy the Disney Channel and ESPN two, ESPN Three, ESPN Four. And the more that this happened, the more affiliate revenue is coming into the companies and the more advertising revenue you could sell.

So even if your channel was not getting as much viewership as ESPN, which was certainly the case for many networks, your network was still profiting off being within this ecosystem that ESPN was part of that has gone away in the direct to consumer era. So you've laid out how the cable bundle worked and why it was so hugely profitable for companies like Disney. But we are not seeing the same story play out for Disney. Let's just go through it. Disney launches in 2019, and it grows really fast to almost 100 million subscribers in its first year.

Speaker C

The following year, Bob Iger, who had been CEO for more than 15 years and oversaw the acquisition of Lucasfilm and Marvel, steps down, and he hands the reins to Bob Chapek, the head of parks and resorts. Two bobs, then COVID happens in 2020, and streaming services all explode with growth. But it turns out not everyone was going to stay inside forever. That growth was not sustainable, and it cost these companies a lot. Disney has spent more than $11 billion in Disney plus, hasn't turned a profit yet.

This is the other side of the story, right, is that just as cable starts unbundling and people start replacing it with streaming, the economics of the streaming services start to fall apart. And it doesn't feel like any of these companies were prepared for that. The ironic part of this part of Disney's history, which was a small chapter, but a very important chapter. Bob Chapek is the CEO at this point. He's the former head of parks, right?

Speaker D

Comes in and he's the CEO. He's tasked with kind of carrying through Bob Iger and Kevin Mayer, who was the former head of DTC, Ir streaming at Disney, who then became CEO of TikTok for a very short period of time. For two minutes? For two minutes. So Bob Chapek comes in.

One of the things that they do in part because of the pandemic, but then they carried it through to 2021 and early 2021, if I remember correctly, was they said, we're just going to take movies and send them to streaming. We're going to build up Disney by bringing it to the streaming audience, and then we're going to go directly from theaters to Disney. A quick explainer on how movie studios typically make money. They go to theaters where they earn anywhere between 60% to 70% of the revenue from the film. The rest of it goes to the exhibitors like AMC, Regal, Alamo, whatever it is.

Then what happens is what many people listening to this podcast will remember. It would go to Blu ray, it would go to DVD. Then you would remember that it would go to HBO, right? So there is pressure to perform at theaters, but if you didn't perform in theaters, you were also getting secure money coming in from HBO. So by the time the film actually made its way back to being fully owned by Disney.

It had made a ton of money on the backend that they didn't even have to worry about because they had all these deals in place. We totally eliminated that. The industry just got rid of it and they said we're going to go directly from theaters to our owned and operated platforms. So we're basically paying ourselves, we, Disney are paying you, the Walt Disney studio, to bring this film over here specifically. Not only does that cut down your audience in terms of who's getting access to the film and where you can really build that franchise, but it cuts out a ton of the profit that you're making off that film.

Speaker C

So linear tv is declining because the cable bundle is going away. And you've just described why the economics of streaming are so much worse than the theater model. When Disney would sell a movie to the theater, to licensing, it would sell DVD's. I really want to stress this. Companies like Disney were making huge amounts of money with incredible margins before streaming took over.

And now those revenue streams are drying up fast. And that's a really big deal. I think many people have pointed out the increased revenue from ESPN in particular is what allowed Disney to buy Marvel, to buy a Lucasfilm that's going away. And the thing that's supposed to replace it is a similarly expensive bundle in Disney. So you buy Disney, you get Hulu, you get ESPN.

Plus maybe over time, Disney loads more and more things into that. Is Disney ever meant to get as expensive as an old school cable subscription with all of the content in it? I think that's the million dollar question. And underlining that question is something that is very prevalent in today's direct to consumer streaming market. That was not a concern almost at all within pay tv.

Speaker D

And that's churn, right? So that's cancellation. We've made it very cheap to get a lot of television, a lot of movies at once. Think about when Netflix launched and it was like $10, right? And so it hasn't actually increased that price, their prices that much, even on their premium tier.

But when you were within pay tv for people who are listening, who likely to neil eyes point, did not have pay tv, if you want to cancel, you would be on the phone with comcast for 4 hours, and by the end of it, you ended up buying more. Like you didn't get rid of it somehow you got more out of them and so you never canceled. So that service, you were able to have sustainable revenue that was increasing. And as your total addressable market as your audience grew, you were able to sell advertising at a higher rate. Within direct consumer, you have to price low in order for mass adoption to happen, right?

People are going to come in, especially when there's free offerings. Look at how much attention YouTube commands as a free offering, right within Gen Z, Gen Alpha and millennials. Look at new services like Tubi. These are free, ad supported television services, typically called fast platforms. Those are free, and they have a lot of old television, old films, but they generate larger shares of attention from audiences every single month.

So in order to be a premium subscription service, that is, that is charging a fee, you have to start low and then build up high, but you can only build highs. Anybody who's built a subscription business knows if your churn rate is extremely low. So really hard. If you're spending marketing money to effectively reacquire the same customers, you're losing, but having to prove the value of your product again and again. If you look at Disney, the goal is always to make the largest revenue you can off each customer.

Typically that comes from advertisement, which is why we're seeing that huge push and that comes from higher prices. But you can only increase those prices if that churn rate's low. That's why you're seeing the Disney Hulu integration really rolling out. You're seeing that internationally with the Star integration. If that gets churn rate low, then what that tells you is that value perception of the product is high, and so they can increase their prices and say, we might lose some customers, but it's okay.

But price increases again, as anyone who runs a subscription business knows, you have to handle them carefully. You typically do it when you've got an onslaught of really strong programming coming in. And I think Disney is sitting at a point where the programming isn't as strong as they'd like it to be. On Disney, the churn's a little bit higher than they like it to be. Is it get to a point where it's a 15 $2030 product, I'm sure they might want it to eventually potential potentially one day, but they're simply not there yet.

Speaker C

So this strikes, I think, at the heart of the issue. Disney used to make a chunk of guaranteed money from every cable subscriber in America. I feel compelled to point out that people did not love their cable companies. In fact, they hated, like, openly hated them. I also feel compelled to disclose that Comcast is an investor in Vox Media or parent company.

They don't like me. And I made a Netflix show called the Future of I also hosted the mister robot aftershow for USA. Great disclosures, all very relevant to this conversation. People didn't like their cable companies, but they were getting a lot of value. There was not a lot of choice.

You couldn't really quit them easily. Fine, Disney makes a bunch of money that way. The idea now is all of that revenue has to come back from Disney as the cable bundle goes away. Or is there somewhere else that Disney is going to make up the lost revenue from? There are few pathways Disney specifically has in front of it.

Speaker D

So Disney's biggest advantage is that maybe sitting alongside Nike and Apple, it is one of the most world renowned brands, right? So Disney has that in a way that Netflix doesn't. Disney, to me, equals love. Netflix equals convenience. And so you open Netflix because it's got most of what you want.

This now includes licensed programming like suits. We all saw everybody in America got suits fever last summer. That happened on Netflix because of the size of that platform. Disney can do Star wars, it can do marvel, it can do Pixar, and that is its advantage. Those are very expensive and something to understand about Disney that gets lost in the conversation.

Disney has always been a supplier. Disney supplied to theaters, Disney supplied to cable operators. So they were not the actual distributor. They did not have the operational spend of a direct to consumer platform, which they now have. And so their spending has increased on the same type of product, but they haven't brought down their spending on the content side.

They're slowly starting to do that now. So what Disney likely has to do is twofold. One, determine how to better license its catalog to other players so that way it can continue building sustainable revenue until it's streaming division, which will include ESPN in 2025 as they launch their OTT service for that product that will be integrated into Disney and Hulu, part of it is figuring out, okay, so we have all this programming we don't really need. People aren't necessarily watching it and we can license it out. This is a double edged sword, right?

If you just license all your programming to Netflix and that programming finds a new audience on Netflix, you've just trained your audience to spend time on Netflix. And so they're not necessarily going to come back to you at this frequency that you need them to come back to you at. Instead, they, they grow a part of a churn and return audience, right? They cancel. They come back when they need to and then they go back to Netflix.

But the other key component that Disney has the advantage of is that as we are inundated in this era of abundance, finding scarcity is so much harder to do. And scarcity takes the form going forward, in my opinion, in physical events. So you can see this with Taylor Swift tickets, you can see this with Barbenheimer, which was Barbie and Oppenheimer at the movie theaters. And you can see this at Disney Parks. We think of it in the media as a boring story because it's just so conventionally safe.

But if we look at that company or that segment of the company, I think it did eight or 9 billion in revenue in the last quarter, and it did like 3.5 billion in operating income. To put that into perspective, that is more an operating income alone than I think linear television, which was one of its largest sectors, did in revenue. So it's a huge difference for Disney and streaming. Again, strong revenue coming in about 5.2 billion, but still at a loss in terms of operating income. At the time that we're recording this, if you're Disney, you're thinking about, what are we going to do?

You lean into your two biggest strengths. One is being able to create event style content, go back to theaters, you use your ABC network to have your new mandalorian show and bring it to Disney. You really lean into that event and bring Hulu in to be this churn catcher. Two, you sell the content to other players that is not necessarily performing on your platform, so why hoard it? And three, you do what they are doing, which is invest $60 billion over the next ten years in parks and say, we want eventually to get people over here because we can monetize somebody much higher rate than we are necessarily going to do.

On a pure entertainment side, easier said than done. Parks are expensive. There are not that many around the world, but that is where you can see Disney really leaning into and saying, how do we get that love back within this community and really monetize it and its parks? I just went to Disney World last year and I was ruthlessly monetized, so I can see the strategy working. Like every minute of my visit, I felt monetized.

Speaker C

I felt the monetization running through me. We need to take a quick break. When we come back, Julie and I get into what went wrong with Disney's content strategy over the past few years.

Speaker F

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Speaker G

What'S up guys? I'm Evan Turner, co host of the .4 podcast alongside Andre Uadala. We got a special series out now all about our favorite NBA cities, the greatest places to travel, the evolving cultures and cuisines, and some of our most memorable experiences while we are on the road during our many years in the NBA, we talk about Miami, Chicago, New York, and many more. Tune in to courts and culture the point forward travel guide, sponsored by Hennessey. You can find it on point forward feed on YouTube or wherever you get your podcast.

Speaker D

Sometimes things in the world of technology. Are complicated and need careful explaining. Sometimes they just need a little hard truth. I don't think anyone is going to. Buy a banana with crypto at any.

Speaker C

Point in the foreseeable future. I'm Lizzie O'Leary, the host of Slate's what next? TBD, your clear eyed guide to technology. Power, and the future. Friday and Sunday, wherever you get your podcasts.

Speaker E

We're back with paired analytics vp of strategy Julia Alexander to talk about Disney and how it started to go sideways. Here's a little context about Disney around this time. Julia just told us about the combination of three big trends, the decline of linear tv in the cable bundle, the big changes streaming had caused to traditional distribution, and then the pandemic powered illusion that the streaming audience would keep growing forever and magically turn into profits. All of that is really what's putting pressure on Disney. Julia also mentioned Bob Chapek, who took over as CEO for Bob Iger in 2021.

If you're just catching up on the Disney saga, Julia and I have talked about the two bobs quite a lot on this podcast over the years. We'll link to some of those conversations in the show notes. The short version is that Bob Iger appointed Bob Chapek as his successor and then ended up firing him and coming back to run the company in relatively short order. It was a mess, but none of it changed those three essential pressures on the business. So we're just going to spend some time here on concrete examples of what Disney got wrong in those first couple years of Disney.

Because, as you'll hear Julia explain, Disney was operating off some very skewed data because it launched Disney right as the pandemic set in. Its expectations were out of sync with reality. And you can see that as it experiments with what it thinks audiences want out of Disney and what's really keeping them subscribed.

Speaker D

You have to remember, and it's something that we don't talk enough about as analysts, but it's so important. These companies have not had a solid data set for customer activity until very recently. Most of these streaming services launched in November of 2019. So, like a few months before the pandemic. And the pandemic had a massive pull forward.

Anyone who was going to get a streaming service in the United States got it between 2020 and 2021, when the rest of these kind of services launched, like Peacock and Max. So Disney had a moment of saying, we need to increase adoption. Wall street is rewarding scale, that all they want is scale. So if we have a new Star wars and Marvel show every two months, every three months, very HBO style, then every three months, we're going to see a huge increase in subscribers. That was not what happened.

They were seeing big increases in subscribers because they were launching in new countries. And so you launch, and now there's more opportunity to build subscribers. The other thing is that the Marvel and Star wars fans were coming in from the get go. They were there. They were not leaving.

So you didn't have to work as hard at that expense to keep that audience. So they're thinking, okay, our data set shows that these shows are performing well on the platform, which they would do because your platform is built up of families and then Marvel and Star wars fans, and your subscriber activity is increasing because you're launching globally, but you're not necessarily attracting a new audience. There was a very specific moment on Disney that I think was a great lesson that had a bunch of wrong takeaways, and it was in July 2020, and they brought Hamilton to Disney. And that movie did bonkers for Disney, not only in terms of engagement as in viewership, but in terms of the amount of subscribers that brought into the platform and the type of subscribers. They were non Disney fans who came in for Hamilton, and everyone pointed to it and said, it's a really big moment.

If we bring movies to Disney, it will increase the amount of people who are going to come to Disney. That's fantastic. What we didn't look at was, again, that term, churn, right after they left. I think we look at third party data from a firm called Antenna. I think it was like 70% of people who came in for Hamilton Churn, like, canceled.

They got out of there. Compared to the benchmark was maybe 30%. For those who came in who were not part of the Hamilton crowd, who were just average Disney fans. The reason why Disney kind of moved a bunch of things over was one. The pandemic meant that there weren't a lot of opportunities to go to theaters, and they used it as a new platform.

They used it to increase adoption, which I would not blame them for. I think that's smart. They were thinking about, how do we get to mass adoption? And remember Nilaya? This was the period where Wall street was valuing and rewarding growth over anything else.

It was grow, grow, grow, grow. It wasn't until the end of the chapek era that Wall street came in and said, oh, are we making money here? And if we're not making money, what are we doing? And all of a sudden, they had to totally change course on their strategy. You've described a lot of tensions here.

Speaker F

Right? We've got to move all the revenue from our decaying cable bundle to parks and Disney. That's a really hard problem. We have to go back to windowing. There needs to actually be other places to sell things to.

Speaker C

So if you were windowing to pay cable and the cable industry is dying, maybe your number of distributors is going down. You don't want to window to other streaming services because they're in direct competition with you. These are all very hard problems. I described the victory over Nelson Peltz as a triumph. They beat the activist shareholder who was a pain in Disney's side.

But that victory didn't actually solve the problems. He's just the symbol of the problems, waving a flag and saying, look at all these problems. Bob Iger isn't the person to fix it, and the plan is bad. Defeating him isn't the solution to the problems. Right.

It's just saying, the shareholders believe in me, Bob Iger, to fix it. I don't know that Disney's actually fixed it. Is that the hum of anxiety? That's absolutely the hum of anxiety. And what's really funny, if you have an hour to kill and want to read through some PowerPoints, you can go read Nelson Peltz and Tryon's deck about what their issue is with Disney.

Speaker D

There's like 160 slides, and then you can read Disney's deck, which is like 70 slides, as kind of a response. The funny thing about this whole situation is that Nelson keeps going. The streaming strategy is not working. We have to make changes. Disney has said the same thing.

Disney's like, the things you're recommending, we are also aware of, and we're working on those already. Disney's problem is not the Disney problem. It is the underlying problem facing legacy media company. So that includes NBCUniversal. Thank you, Neela, for your disclosures.

NBCUniversal, Paramount Global, Warner Brothers, Discovery, all of these companies who are trying to innovate for the future and invest in it, but are tied down by these legacy assets. This was why for so long they didn't get into streaming because they were like, we're not going to cannibalize our audience on linear. If you remember the Hulu launch, part of the reason that Hulu didn't take off the way Prime Video did, and they launched around the same time was Prime Video invested in originals, Netflix invested in originals. Hulu, which was a kind of bundle offering between Fox and Disney and I think NBC Universal, they didn't know what to make of it, but they knew they had to be in streaming. And so they were like, okay, we'll do this thing and we'll put some of our shows here, but we won't agree on how we're going to do our shows or when they're going to come here.

And so it confused consumers. It's really hard to train habit. It is even harder to train different habit. And so this is always my concern. To your point about licensing to other players.

If you license Netflix again, again, you just train your audience to go to Netflix. Eventually they stop opening your app. I always like to say the hardest part is getting someone to download an app. The second hardest part is getting them to actually open it day after day. And so with Disney, the hum of anxiety they're feeling is this, is this hum of anxiety in Hollywood, which is how do we hold on to these legacy assets for as long as possible?

Because they are still generating revenue in the billions. But how do we also price these products that way? We're generating a significant profits, not just revenue, but significant profit that is going to allow us to continue paying for the investment in new titles, in new acquisitions, in new technology. And Disney is in the middle of figuring out, I think they're a very close number two, right? Netflix, Amazon kind of sitting at the top, Paramount plus Peacock, Max, all of those are still really struggling to figure it out.

And then the great tension hanging over all this, the undisputed Beast is YouTube. And that's something where they're very scared. Think about this from the Disney standpoint. I think a lot about how they're. We call them a legacy media brand, right?

I compared them to Nike and Apple. Great brand. There was a really worrisome moment for me during the chapek era. He was, he had an earnings call and he said, we are losing the preschool audience to YouTube and Netflix. And I remember thinking, like, you own Mickey Mouse.

Like, what are you talking about? But kids are going to YouTube. And anyone who listens, who's got kids knows this, and they're going to the YouTube and they're playing Roblox. And that's where they're spending their time. If kids grow up with something that's not necessarily Disney, they don't have the adoration that's going to compel them to go to parks now.

They still watch Disney. This isn't being beeping. Like, Disney has totally lost the kid audience, but YouTube keeps eating away at it day after day. The other really concerning factor about YouTube is that Disney has to be premium. It has to be great.

Netflix has to be premium. HBO Max has to be premium. Just has to be good enough. Shapek saying, we're losing the preschool audience to YouTube. He was talking about Cocomelon.

Speaker C

Like, straight up, Cocomelon is a YouTube phenomenon. That thing is a rocket ship. It's not rolled up in a company that Kevin Mayer runs, which is kind of funny in its own way. They have a big Netflix deal. It's a franchise, but it started as a bunch of YouTube videos.

And anybody who has children is watching wheels on the bus from Cocomelon on YouTube 100 times a day. Then there's Bluey, which is also a phenomenon that is on Disney, but that is not a Disney property. They don't own it. Bluey might be going away. There's all these rumors that it's at the end of its run.

I hope not, because my own child will be devastated if that happens. But the two biggest phenomenons in children's programming right now, one is straight user generated content that turned into an enormous franchise, and the other one is a quirky australian government funded program. Where is Disney in making the new franchise? Are they capable of doing it? This?

Speaker D

I think it really gets to the heart of a lot of the concern around Disney. And I do think they are best poised to combat it, more so than any other company, because they're not the only company dealing with this. If you ask people what the biggest issue with Netflix is, and I promise this gets to your Disney question, but the biggest problem with Netflix film, for example, is that it's totally forgettable, right? You can't name a Netflix franchise. They've spent more than $100 billion at this point on content.

And they maybe have, like, three or four franchises that you could point to and be like, this is something like, I can see a stranger things t shirt in a Walmart. And I get it. When we look at Disney. Disney not only wants to build these amazing franchises and find new ip to acquire, they want to own the whole thing, because they want to be able to put it into parks and do the merchandise and own the streaming rights and whatever it might be. And so I think that gets really complicated, especially if you're in a bit of a creative, dry route.

They've made a few mistakes along the way that have hurt brand value. So a great example is Marvel and Star wars on Disney. And so when they were announcing that they were going to increase the amount of content they were putting on Disney in order to meet fans, they said, we're going to do, like, five or six Star wars shows a year. Like, five or six Marvel shows a year. At some point, you can get the same level of audience attention and subscriber activity.

With two shows. You don't necessarily need the six shows, but you're also devaluing your brand, because the more content you make, the likelier chance that not all of it's gonna be great. That's just how hit rates work. That's why Apple TV has a pretty strong hit rate, because they've only done a handful of things compared to Netflix, which has a very low hit rate. And so when we look at Disney and its ability to create franchises, it creates them, and then with streaming, it leaned on them to a place where we then said, okay, this is now what we're supposed to expect out of Marvel.

And I don't necessarily know if I need to return to this if it's gonna be at a level that I don't really care about anymore. And there's 10,000 other things fighting for my attention, and I can just give it elsewhere. Marvel and Star wars were devalued. It got complicated, started feeling like homework, and that was something they shouldn't have leaned on to as much. It's really hard for that company to understand how to be a steady heartbeat, how to have something that is there for different audiences at a broad level without relying too much on their four or five verticals that burn out the audience and force that audience to go find something else.

Speaker C

We need to take another quick break. When we're back, Julie and I get into why the Marvel rocket ship came back down to earth, what that means for Disney.

Speaker D

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Speaker F

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Speaker A

Everywhere you look, people seem to be worried that kids are suffering an unprecedented mental health crisis and that smartphones and social media are to blame. But how accurate is this belief? It is a compelling narrative because it. Allows you to think as a parent. Like, oh, it's not me or choices I'm making.

Speaker D

It's this thing that has reached out and affected my child. I'm Taylor Lorenz, and this week on Poweruser, we're talking about the moral panic around kids and technology and what we can all do to actually help children. It's not what you think.

Speaker C

We're back with Julia Alexander from para analytics to discuss what really went wrong with Disney's Marvel strategy. Do you think they just got confused by the success of the Iron man version of Marvel? Right. Like, everyone shows up to all those movies. They were, all the stories were tight, they were well made, but they were phenomenons in their way.

And then you have Avengers, Endgame, and you kill most of them. You kill most of the beloved characters. You got a whole bunch of news stories. Maybe all those movies seem extraordinarily messy. I think fans are very mixed on the newer Marvel movies.

Is that just because they were making too many? Is it because they didn't have a good idea? That seems like the heart. If ESPN drove one version of Disney, Marvel definitely drove another version of Disney. But at least ESPN had sports there were always going to be more sports.

There's not always going to be another Iron man. Right, right. Well, you could argue that the first three to four phases of the MCU, so that Iron man to Endgame kind of era was like the greatest 22 episode television series, right? Like, that's what it was. It was.

Speaker D

There was a new episode, and they just happened to be $250 million movies that brought in, you know, 800 million, 900 million, a billion dollars. Iron man felt like an event the way that the Dark Knight did. Right. They came out the same year. Like, those two movies felt like very specific comic book events.

One was a big Christopher Nolan movie. Movie once got, you know, this Robert Downey junior. S redemption arc as they went through the period. Marvel definitely connected, right? The Captain America teams up.

That was the whole Avengers. But they did it at a rate that was understandable, and it was enjoyable. Guardians of the Galaxy was like c list superheroes, but you had James Gunn come in with Chris Pratt and a very lovable cast, strong writing, good music, and all of a sudden, it was like their next big thing. Ant man had Paul Rudd and was relatively funny. And so you had these different styles of film, but they never lost that creative edge, and they were easy to follow, and you wanted to see where they were going because you weren't putting in homework.

This is my point. Half of Netflix consumption is licensed programs, which means it's older tv shows and older films. The other half is original programming. But Netflix, as we can see through their licensing strategy, really understands that people mainly just want something to throw on. This is not new.

Our desire for television has not changed. Our desire for how we receive the television has shifted irrevocably. And so Disney approached streaming, which is inherently a television product, as a movie product. By that, I mean they used a movie strategy. They said, we're gonna have a ton of big events, and we're gonna have this within the same three or four verticals.

And at some point, people are like, this is boring. So now you're seeing that kind of happening on the Marvel and Star wars side, Star wars under Kathleen Kennedy over at Lucasfilm, and it just totally derailed the phenomenon of the brand. And so when you try to get that audience who's now dissatisfied to go pay $30 for a movie with a character they're not that really interested in and the storytelling isn't that great, you've now made your huge event feel commonplace, and you can't do that in tv, and you especially can't do that if the tv function is to support your film function. Why don't they just lean on ABC? Like, they have a huge archive of hit sitcoms from ABC.

Speaker C

They have a huge archive of ESPN documentaries or whatever. Why not lean on that expertise instead of pushing into these handful of franchises that couldn't take the weight? Disney has always been, in my opinion, a scale niche platform, which feels like an oxymoron, right? But compared to Hulu or Netflix, which are scale for quadrant services, so they have programming for male, female, old, young, that is what they really focus on. That's what television is.

Speaker D

That's what television's always consisted of. But I think they saw the launch of Disney and its first few years as onboard at any cost. And so that was, we'll rely on our big tent polls because that's what people really care about. They had this huge ABC library that was also helping Netflix retain a lot of their customers. They had free form for teenage girls.

They had ESPN content, which they weren't going to touch at the time because they didn't want to cannibalize their audience. They didn't want to upset their partnerships with Comcast and charter and bring that content elsewhere. And so they said, what do we have full control over? What do we know that audiences want? And what makes us special, what makes us differentiated?

A significant misunderstanding that I think most of these companies understand now is that they thought their content was differentiated. The vast majority of it is not. And if you lean too much on your differentiated brands, it takes your event and turns it into ordinary. And if you have ordinary, good luck. Selling that, again, is extraordinary.

Speaker C

Let's talk about what happens next for Disney. They fended off nelson pelts, but the anxiety is still there. The problems are there. They are integrating Hulu, which does seem like a really big deal, to just fill out the service. To say, there's more stuff here that might put the Disney brand at risk, because Hulu has a lot of stuff on it that isn't traditional Disney.

But they're filling out the service with Hulu. They are going to integrate ESPN next year. They're doing the tie up with Fox Sports and others to make the ultra sports service, which will be really interesting. Bob Iger needs a successor. What does the next year or two look like for Disney?

Speaker D

Lots of exciting times at the Walt Disney Corporation. So fundamentally what I would expect to see once the Comcast deal with Hulu closes. So once they pay Comcast whatever they decide the amount is to really just own Hulu. I would expect heavy investment in Hulu there's no real reason for Disney to have done that beforehand because why pay Comcast more? But I think they understand the way we view streaming services is the way we talk about them, is how we used to talk about channels, right?

So you say, I watch something on Disney, I watch something on Netflix. We used to say, I watched something on ESPN. I watched something on Bravo. And so to say that we're treating each service as a channel means that you really have to find ways to make that channel as engaging as possible possible. To your point about the dilution of the brand, I think it's really important to acknowledge that Disney's brand has changed again and again over its hundred year history.

When it launched, right, it was like an animation studio then. It was a theme park company by the time that they had the ABC merger, because they realized that they needed to be within cable, because it seemed like a great business and to be within linear television and to further extend its distribution efforts globally, it became a tv company by the time ESPN comes around. It's like the not a cable operator, but it is the cable company in many ways. Then it became the Marvel and Star wars company. It was big brand again, right?

Went back to live action. So now it's a streaming company and a parks company. And so I think this idea of, well, does Hulu dilute the brand? Disney has to really reignite the idea of what the Disney brand is. And that's going to change.

It's going to come back to, it's no longer just Mickey Mouse and Captain America, but it's also going to include FX programming, right? So it's going to include Shogun. Like, it's going to include Abbott elementary. Like, there's just these elements that are going to feel very Disney in a way where they were segregated before because now it all exists within one app. So it's like one channel.

It is this idea of that is Disney. So I think you'll see much more investment in Hulu. I think you will see them really iron out their international strategy. The vast majority of revenue for streaming companies will eventually be international. It will not be domestic netflix.

Right now, I think the percentage is like 70% of its new net ads come in from international markets. And so they really, like the US, is a churn prevention market. Every growth opportunity, including opportunity to scale revenue, is international. But that does not mean you have to be in every country. Disney can go to theaters with big movies.

They can license their content to parties who are going to be there. They can even take potential minority stakes in direct to consumer platforms that come up. They do not need to be owned and operated. I think you'll see Disney really determine, okay, we want to be a platform here, we want to partner with a platform here, or we're just going to license here. Like we're just going to have theatrical and licensing.

So international will be a big deal, far more focused on parks. And then lastly is the succession. So a big part of the Nelson Peltz argument was not just streaming, it was the succession plan for Bob Iger. And the question was, who succeeds Bob Iger? There's no one who can really take over for him.

This is a concern that has gone around Hollywood for years, and it was made arguably worse by the Bob chapek conundrum where Bob Iger then came back. There's four names who are rumored. The three top ones are really Jimmy Pitaro, who's head of ESPN, Dana Walden, who's head of kind of Disney content in general, and Josh D'Amaro, who's head of parks. If I was in charge, and I've been told I am not, I would recommend that the Disney company going forward is not just a content company. It's not just a parks company.

It's both. And you need both those things. And to have someone like Dana and Josh come in together and really operate as to create the future of Disney, that would be my recommendation. But as a company much more hulu, much more focused on international strategy, the succession thing happening, for sure, and then also focus again on returning back to what Disney has done well, which is event programming at scale and then finding ways to monetize that throughout an entire pipeline as opposed to just moving it directly to the direct consumer services. Well, that is a good prescription.

Speaker C

Hopefully you are actually put in charge. That would be great for me personally. I've always wanted to know the CEO of Disney, Julia, thanks so much for coming on. Thank you.

Thanks again to Julia Alexander for joining us on the show. You can read her excellent analysis work over at Puck News, and I really recommend it if you want to understand Disney and the entertainment industry. If you have thoughts about this episode or what you'd like to hear more of, you can email us@decoderge.com. Dot. We really do read all the emails.

You can also hit me up directly on threads. I'm echless 1280. We also have a TikTok. It's ecoderpod. It's a lot of fun.

If you like Decoder, please share it with your friends. Subscribe wherever you get your podcasts. Decoder as a production the Verge and part of the Box Media podcast network. Today's episode was produced by Kate Cox and Nick Stat. It was edited by Kelly Wright.

Our supervising producer is Liam James. The Decoder music is by breakmaster cylinder. We'll see you next time.