Member Mailing #277: Are Disney CEO Bob Chapek's "Top Lieutenants" the Right Fiduciaries for DTC Streaming?
Both a recent WSJ piece on the Scarlett Johansson lawsuit & the “All-you-can eat” vision being evangelized by Third Point's Dan Loeb suggest the answer is, no.
Key Takeaways
Disney CEO Bob Chapek and his “top lieutenants” Alan Bergman and Kareem Daniel may be incentivized to do less — and disincentivized to do more — than they may need to for more continued streaming success.
This is evident in last week’s must-read Wall Street Journal article, “How Disney and Scarlett Johansson Reached the Point of No Return”, which surfaces a problem of incentives at Disney
A particular line from that article — “The win gave Mr. Chapek support from Disney’s board of directors” — suggests Disney’s Board becoming fiercely protective of Disney’s streaming growth story has become a necessary cost of doing business.
A big, visionary bet like the “all-you-can eat” proposal from Dan Loeb of Third Point is unlikely to happen this Board, or under Chapek and his lieutenants.
After the Wall Street Journal piece, it is worth asking is whether Bob Chapek has the right fiduciaries in place for Chairman Robert Iger’s streaming vision.
Last week’s Wall Street Journal article, “How Disney and Scarlett Johansson Reached the Point of No Return” is one of the best reads on the streaming marketplace of 2021.
The piece is explicitly about the Scarlett Johansson lawsuit against Disney. But the most significant takeaways in the story are the disconnects it highlights between what Disney management is incentivized to be responsible for, and what is reported to have transpired between CAA Co-Chairman Bryan Lourd and Disney management.
There were two particular disconnects I highlighted on Twitter last week:
there is the implication that Chapek needed a streaming “win” last summer in exchange for support from the Board of Directors; and
when Chapek’s “top lieutenants… didn’t return calls or emails from the Johansson team or engage in serious talks”, the implication is no one seemed to want to touch this negotiation, much less take the lead.
There are other disconnects in the story, including the decisions by both Chairman Robert Iger and departing Disney Studios head Alan Horn not to intercede.
But, I think these disconnects reflect a theme of recent PARQOR mailings best summed up in Mic Drop #18: Some Rewards for Skeptics of Disney+:
What we have been seeing in original content announcements, and in A/B/C/D market tests of UI and UX in different global regions, is Disney confronting some more sophisticated outgrowths of its original strategy. In other words, its real challenge is indeed whether it has the pieces in place to evolve in a way that reduces churn and drives continued growth.
So, one way to look at the disconnects in “How Disney and Scarlett Johansson Reached the Point of No Return” is as “sophisticated outgrowths” — or unforeseen or unintended consequences — of Disney’s pursuit of scale in streaming.
New problems are the price of exponential progress.
But “How Disney and Scarlett Johansson Reached the Point of No Return” reveals a surprising degree of uncertainty playing out operationally in Disney DTC streaming, both in public and behind-the-scenes.
In particular, it is not clear how much of Chapek’s relationship with Disney’s Board of Directors is driven by the “carrots” of incentives vs. the “sticks” of disincentives. The story also raises questions about what Chapek’s lieutenants are incentivized to be responsible for in streaming.
The “all-you-can eat” model that Third Point’s Dan Loeb recently has been evangelizing for Disney serves as a particularly helpful contrast here. In the context of the Wall Street Journal story above, it helps to highlight how Chapek and his lieutenants may be fiduciaries incentivized to do less — and also disincentivized to do more — within the constraints of Chairman Robert Iger’s vision for streaming.
Why the Timing Matters
It is worth revisiting some key reasons for my skepticism of Disney’s streaming story, to date.
First, as I wrote in Mic Drop #18: Some Rewards for Skeptics of Disney+ back in February:
Disney seems to be running an A/B/C/D test of different models. Specifically:
Test A (U.S. only): Bundle of Disney+, Sports (ESPN+), and vMVPD (Hulu + Live) and/or adult audience content (Hulu)
Test B (Latin America): Bundle of Disney+ and Star+ (ESPN and adult audience content)
Test C (Europe, Canada, ANZ, Singapore): Disney+ app with Star Branded Tile (adult audience content)
Test D (India, Indonesia): Disney + Hotstar (Disney+, adult audience content, and sports)
Those tests reflect how “Disney+’s extraordinary library of older IP no longer appears to be able to solve for growth anymore.” I predicted that the tests “point to more regional-specific decisions for Disney+ UI/UX”.
That prediction was confirmed in Disney’s FY 2021 Q3 earnings call. I wrote about that in Mic Drop #41.
In this same essay, I pointed out two other concerns:
North American growth was flat (~3%) in Q3, and
Disney+ scale relies heavily on low ARPU subscribers from Disney+ Hotstar.
I argued the solution for both was better personalization in the UI and UX of Disney+:
Disney+ has a long way to go to catch up to Netflix. It understands that it needs bundles as one solution.
But, with Bob Iger exiting in December, is it time to open the door to personalization on Disney+?
I think so because I think Disney+ as a product needs personalization to scale better, with or without bundles.
In short, Disney has a growth story that the market loves (37% growth in stock price since September 8, 2020). But within that story are some “sophisticated outgrowths” that reflect obstacles to that growth story, especially around personalization and library.
Chapek & Disney’s Board of Directors
This paragraph in the Wall Street Journal article stood out most (emphasis added):
Mr. Chapek and his team last year redirected such would-be theatrical releases as “Hamilton” and “Soul” to Disney+, which drew subscribers and kept them glued to their screens. Disney shares soared to record highs on the streaming figures, even though Covid-19 suffocated other entertainment divisions. The win gave Mr. Chapek support from Disney’s board of directors, said a person briefed on the CEO’s relationship with the board.
This last sentence may reflect a problem of phrasing (meaning, it may not mean much), but it poses a logical question: why would this win with day-and-date give CEO Bob Chapek support from Disney’s board of directors after only four months into the job?
In other words, what was the relationship between Chapek and the Board in the four months before “Hamilton” and “Soul” were redirected from theatrical to Disney+ in FY20 Q4 and FY 21 Q1?
The implication is there was pressure from the Board on Chapek to solve for pandemic-related distribution decisions to the benefit of the streaming service, enough that perhaps his title might have been on the line.
The pressure seems reasonable, but an implied threat of losing the CEO title seems dramatic given Chapek’s sterling reputation as an excellent operational manager of the Parks Division within Disney.
Is the disconnect that the Board leveraged the “stick” of unusual pressure on Chapek to make decisions - at whatever cost - to drive streaming growth during the pandemic?
Or, is the disconnect that Chapek — who had been promoted largely because the pandemic threatened a core part of the business he managed and 40%+ of operating income — needed to earn the confidence of the board around the media and DTC sides of Disney’s business, too?
Amazingly, these are reasonable questions to emerge from that lone sentence in a much longer article.
Operational Incentives
This was another surprising detail, specifically about the negotiations between Scarlett Johansson’s team and Disney:
The deal, as pitched, would pay Ms. Johansson a total of $100 million for the movie, including her $20 million salary. It was an eye-popping sum, but her team saw it as a starting point.
Disney never responded with a counteroffer.
One reason was uncertainty in the company over who should be leading the negotiations, according to Disney employees and associates. Mr. Chapek, faced with the pandemic’s existential threats to live entertainment, gave underlings the power to make a deal.
His top lieutenants, including Disney Studios Content Chairman Alan Bergman, and Media and Entertainment Distribution Chairman Kareem Daniel, didn’t return calls or emails from the Johansson team or engage in serious talks, said people involved in negotiations for the actress. Disney didn’t make the executives available for comment.
It is made clear four paragraphs into the article that these top lieutenants were responsible for solving this problem:
As Mr. Chapek had done throughout his career in entertainment, he left talent relations to underlings, rejecting a potential opportunity to forestall what has blown up into the most acrimonious star-versus-studio battle in decades.
This implies that Chapek relied on top lieutenants Alan Bergman and Kareem Daniel to negotiate a deal with Lourd and Johansson. So why were they not returning phone calls or emails?
And why don’t they seem to have been conscious of the fact that, internally, key Marvel stakeholders were sensitive to the dispute?
The uncertainty and acrimony between Ms. Johansson and Disney has frustrated executives at Marvel Entertainment, the Disney division responsible for creating the most lucrative franchise of modern Hollywood, said people who work with the division.
Matt Belloni of Puck News reported a similar dynamic of uncertainty and acrimony with Marvel in his newsletter with a bit more detail:
And make no mistake: Feige is pissed. He’s a company man, and not prone to corporate showdowns or shouting matches. But I’m told he’s angry and embarrassed. He lobbied Disney against the day-and-date plan for Black Widow, preferring the big screen exclusivity and not wanting to upset his talent. And then when the shit hit the fan, the movie started tanking, and Johansson’s team threatened litigation, he wanted Disney to make this right with her. (Disney declined to comment on Feige.)
The implication is there is a disconnect between the jobs Chapek’s top lieutenants have been hired to do, much less incentivized to do, and what they are actually prioritizing in their roles.
The bigger implicit takeaway is that Bergman and Daniel come across neither as fiduciaries constrained by corporate strategy, operations, or finances, nor as visionaries empowered by their superiors.
Rather, available evidence suggests they are more politically sensitive to their own jobs, and politically insensitive to other key stakeholders like Marvel executives.
Something reads objectively amiss.
Dan Loeb & “All-You-Can-Eat” on Disney+
Notably, the timing of this story has coincided with a proposal by Third Point’s Dan Loeb in a Second Quarter 2021 Investor Letter:
In our view, the combined strength of Disney’s various sports, general entertainment, and blockbuster franchises remains unparalleled in the global media industry. We continue to believe that the best way to capitalize on this strength to maximize future earnings potential globally (both reach and pricing power) is by providing an all-you-can eat DTC offering on a single platform under the Disney+ brand, where all theatrical content is available day-and-date with no additional fee to subscribers.
The ambition and vision of Loeb’s arguments offer a helpful contrast with these operational disconnects, above, in Disney DTC streaming.
There is certainly evidence that these operational disconnects may matter little:
Disney+ will start increasing the number of originals on the platform towards the end of 2021 (full list here)
Jan Koeppen, Disney’s EMEA president, said Disney was now “far more focused and far more invested” in telling European stories, adding that the company was now expecting to produce 60 originals from the region by 2024, up from its previously announced 50.
Disney+ Hotstar launched in Malaysia and Thailand in FY Q3
Star+ launched in Latin America this month
Disney+ will launch in South Korea, Hong Kong and Taiwan - three key Asian markets - this November, prior to which Disney+ Japan will also be expanded to feature additional general entertainment content in October.
The launch of Disney+ in Eastern Europe has moved from late 2021 to summer of 2022, primarily to allow for an expanded footprint that will include parts of the Middle East and South Africa.
Marvel theatrical blockbusters Shang Chi and Black Widow will be coming to Disney+ over the next three months, too.
Looking ahead, Disney will be spending up to $16B per year by 2024 on original DTC content, globally.
Loeb’s argument is, effectively, as the platform scales internationally in these different directions, Disney’s DTC streaming value proposition will need to be simplified into one app.
Given the objective complexity of this growth, “all-you-can eat” is both a reasonable operational and strategic suggestion.
The Bear Case for “All-You-Can-Eat”
But, I think there is a simple counterpoint to “all-you-can eat” made by Chapek on Disney’s FY 2021 Q3 earnings call (emphasis in bold added):
….You noticed that across the world, we’ve got different business models. We’ve got different business models for two reasons. Number one, the unique situation that we find ourselves in each market whether it’s Europe or LatAm or Asia or North America tend to be different in terms of what rights we have and what the consumers are actually looking for. But that also gives us an opportunity to test out different propositions. Obviously, the proposition that we have in Europe with Star as a 6-brand title looks significantly different than our relatively unbundled approach that we have in North America. Again, we’re in the first inning of the first game of all the long season, and we’re taking all this into account.
There may also be certain constraints that were under that could, at least from a short-term standpoint, limit our ability do what long-term we might feel was ideal. But frankly, we don’t know what’s ideal yet. I will say that we’re extremely pleased in every market that we’ve launched our direct-to-consumer services. We’ve exceeded our expectations in every marketplace. So, in terms of the way that we’ve approached the market so far, it’s worked really, really well. Is there an opportunity for improvement by considering something different going forward? Possibly. But, we’re going to continue to learn. And as we learn, I’m sure we’ll refine our offerings in the marketplace, as time goes on.
In other words, there is not enough evidence to support the current approach Disney is taking in streaming, nor is there enough evidence to support an alternative approach like “all-you-can eat”.
Disney is still on a learning curve.
But, there is a marketplace standard emerging that a regional-specific, local content approach is necessary for growth in streaming (driven primarily by Netflix’s success with local production models).
Disney’s Star+ in Latin American particularly reflects that need, separating the near-religion of fútbol into a separate app from Disney+’s content library (both are offered as a bundle with Combo+).
“All-you-can eat” bulldozes past the obvious consumer logic of Star+ in the name of simplicity for users.
Another problem is, it bulldozes past the problem of a lack of personalization I highlighted in Mic Drop #41. Even with an “all you can eat” model, it would still need to solve for when then-CEO Robert Iger pushed back on a personalization recommendation engine in Disney+ prior to its launch.
Chapek as Fiduciary & Not A Visionary Executive
“All-you-can eat” is a third party’s vision, and not Chapek’s vision nor an internal Disney visionary’s proposed business model (Fiduciary vs. Visionary Framework).
Chapek is clearly the fiduciary of his predecessor Robert Iger’s vision for DTC streaming. Loeb is arguing to replace Iger’s vision with his own.
With both Chapek and Disney’s streaming business “in the first inning of the first game of all the long season”, neither Chapek nor his lieutenants seem positioned or willing to make any dramatic moves anytime soon.
In light of The Wall Street Journal article, above, their most aggressive moves — day-and-date releases of Hamilton, Soul, and Black Widow — seem to have been less in the service of a broader vision and more to ensure the support of Disney’s Board of Directors.
But for argument’s sake, let’s assume Dan Loeb’s vision of “all-you-can eat” is the right move. When it comes time to make dramatic moves in the direction of “all-you-can eat”, is Bob Chapek incentivized by the Board to be the visionary? And does Bob Chapek have the right lieutenants in place to speed up execution of “all-you-can eat”?
Investors are saying yes, this management team is incentivized, and can and will execute this visionary move.
But I think this WSJ story is strongly suggesting the answer is, no. Not only are Chapek and his team highly constrained fiduciaries, but his top lieutenants may not be the right fiduciaries for the streaming business.
Conclusion
I think what makes the Wall Street Journal article on Scarlett Johansson unusually valuable is how it surfaces a problem of incentives at Disney: CEO Bob Chapek and his lieutenants acted like they were not incentivized to solve an escalating crisis with talent.
The question is, why?
One implication from the above is that Disney’s Board has tightly managed both the optics of Disney’s streaming business and CEO Bob Chapek’s purview after the pandemic crisis threatened a majority of its operating income (Parks and theatrical distribution have made up over 60% of Operating Income in previous years).
Another answer can be found in something I wrote in A Short Essay on Scarlett Johansson v. Disney, Transparency & Incentives last month:
Disney+ has an extraordinary good growth story to date (though according to The Information, not much longer?), and Disney needs to tightly manage it.
How Disney reached $60MM of PVOD revenue with Black Widow, globally, is a complicated story that invites more questions from investors and Hollywood talent than Disney is currently ready to answer.
Why risk control over that story by agreeing to contracts that share valuable details with Hollywood talent, and worse, their chatty Hollywood agents?
Meaning, the Board is fiercely protective of Disney’s streaming growth story to the point where avoiding transparency with talent and investors has become a necessary cost of doing business. There is also the implication the Board has been leveraging more “sticks” than “carrots” in its relationship with Chapek.
In that light, the “all-you-can eat” vision is a threat to Disney’s Board because it demands more transparency from Disney at a time when Disney prefers to tightly control its optics.
More importantly, the executives and Board running Disney are very much fiduciaries to the vision of Chairman Robert Iger.
That seems unlikely to change anytime soon. After the Wall Street Journal piece, above, the better question worth asking is whether Bob Chapek has the right fiduciaries in place for Iger’s vision.