Member Mailing #213: A PARQOR lens on Kevin Mayer's exit from Disney+
Key themes from these mailings play out in a surprising move.
This newsletter was supposed to be about how two conversations this past week forced me to revisit my assumptions about how Disney+’s business model works.
As I was writing it, Disney+ Chairman Kevin Mayer announced his departure from Disney to become CEO of TikTok.
Wow.
So much for everything we once assumed. And, so much for my original planned mailing (which I will send out later).
First, what I was in the process of writing. A conversation shed light on the unbelievable value of Hamilton being live-streamed to consumers. A reader, who is a father of three, told me tickets to see Hamilton live would have cost him $2,000. Now, he will pay $6.99, once, and perhaps ongoing as a Disney+ subscriber, to Disney to watch it repeatedly (his children already know all the lyrics).
Had he waited until summer 2021, when Hamilton was supposed to be released in theaters, he would have paid ~$50 (somewhere around or over $9.16 average U.S. ticket price) to see it with his entire family. At 55%-63% margins (the letter which Disney negotiated with theaters for Avengers: Endgame, Disney is giving up anywhere from $20 to $25 in profit per ticket buyer for this event. And, they are doing so on top of the $75MM being paid to Hamilton’s producers.
Second, I saw a bunch of arguments emerge that Disney could “mop the floor” with Netflix if it released Black Widow on Disney+. I do not buy that argument and I went down a rabbit hole with data yesterday to prove it, comparing and correlating domestic U.S. Box office data for Avengers: Endgame and Stars Wars Episode IX: Rise of Skywalker with Disney+ growth data.
The key takeaway from that argument is that if you believe in the flywheel, or simply the logic that rising tides float all boats, the loss of theatrical audiences emerges as an extraordinary pain point for the future of Disney+. But, more on that in a future mailing.
On that note, back to Kevin Mayer: it is easiest, and most helpful, to look at his departure through the themes from past newsletters:
Fiduciary vs Visionary executives;
Legacy media model vs DTC Conversion Funnel;
Curse of the Mogul;
Value Proposition Design/Product-Market Fit;
Scripted vs Unscripted marketplaces;
1. Fiduciary vs Visionary
Kevin Mayer is a perfect example of a fiduciary executive. As I wrote before:
CEO Bob Chapek has an explicit fiduciary duty to shareholders to manage the /current/ Disney Corporation (and he has already been responsible for ~50% of its operating income, to date); and, Mayer as head of Direct-to-Consumer (DTC) now has an implicit direct fiduciary duty to shareholders to build and lay the groundwork for direct-to-consumer, Iger’s “number one priority” and the future of Disney’s business.
That said, I think there are multiple reasons why Kevin Mayer left Disney. Back in March I mentioned that there were rumors Mayer was likely to leave because he did not get the CEO position.
I was skeptical of those rumors for one reason: Disney+ has been an extraordinary rocket-ship for Disney. Even in a disappointing quarter with even more disappointing projections, its international growth was the star (54MM subscribers!). Mayer has been at the helm of an extraordinary success story.
Until now: once production delays hit all the planned Disney+ shows for 2020 and early 2021, the number of feasible wins in 2020 and 2021 for Mayer as Disney+ dwindled. Even Hulu, which seemed to have a positive story in earnings, was revealed to have its international expansion plans on hold by CEO Bob Chapek. As of today, Mayer's only win for 2020 looks to be the releases of Hamilton on July 3rd, and of The Mandalorian Season 2 in October 2020.
I also think there are very good reasons Mayer was not named CEO, mainly because Chapek has managed a majority of the Operating Income for Disney via Parks, and that source of income is now at risk. Mayer built the Disney+ rocket-ship, but Disney is still a business that sees 95% of its revenue from theme parks and Media Networks.
So, I am sure Mayer started looking for new jobs when Chapek named, but I would bet it was because he foresaw fewer feasible wins, and less because he had a wounded ego. Disney+ may be his “baby’ but it is not his vision: it is Robert Iger's vision [NOTE: this point may be debatable, as Mayer is Iger's fiduciary and therefore it could be Iger taking credit for Mayer's vision]. Like any self-interested fiduciary, he served his bosses and shareholders until a better opportunity came along.
It is a fantastic opportunity: CEO of TikTok and COO of Bytedance. If ego played any role it is because TikTok is a rocket-ship, and this is an extraordinary promotion.
Only yesterday was Mayer in the same company as Reed Hastings and Ted Sarandos, Jason Kilar and Richard Stankey, and a rotation of executives at every other major streamer. Today, he is now in same elite company as Instagram’s Adam Mosseri, Snapchat’s Evan Spiegel, and YouTube’s Susan Wojcicki. Except for Spiegel, who is a visionary, he is in the company of an elite version of a fiduciary: the CEO of a social media platform in 2020 [Notably, Mosseri is a fiduciary filling in after the visionary for Instagram, Kevin Systrom departed].
2. Legacy media model vs DTC Conversion Funnel
I think Disney+ is still a rocket-ship, but a fragile rocket-ship, at best. I have highlighted before how Disney+ has “a weak creative pipeline that is now effectively broken for 2020 by COVID-driven delays”. Mayer leaving, now, reveals just how broken that pipeline is.
I also think COVID has ruined Disney’s “flywheel” business model for the foreseeable future, and in particular, it has ruined a new flywheel effect they were building out for Disney+. There is plenty of evidence that Disney has been timing its theatrical releases and Disney+ original series releases to drive audiences into each other (more so the former into the latter). That was the analysis I was doing when the news broke (and will release in a future newsletter).
Disney+ can no longer leverage the existing scale of the larger company’s other assets to drive awareness and conversions. That is an extraordinary pain point for a business that relies heavily on a flywheel effect from other businesses, as Walt Disney himself once designed. Kevin Mayer is not sticking around to wait for a stalled flywheel to regain its momentum.
3. Curse of the Mogul
The Curse of the Mogul argues CEOs believe the media industry involves managing creative talent and artistic product”, and therefore the media industry “is not subject to appraisal using traditional strategic, financial or management metrics.” For this reason, the “curse” ends up being for shareholders, who often see content creators reap greater returns than they do
I do not believe there was anything intangible in the Mayer and his team built out. I also do not believe the Curse of the Mogul fairly applies to Disney, given its ability to continue to extract value from IP it owns: the value of the IP is proven, and pre-COVID, the operations continued to deliver returns to shareholders.
But, Disney is still a legacy media company. So, if anything, the Curse of the Mogul applies here because Mayer was effectively the first head of successful DTC business at scale within Disney. Meaning, he had clear business metrics and did not rely on the argument that the media industry is not subject to appraisal using traditional strategic, financial, or management metrics. Yet, that in itself was not enough to keep him in the company.
I think Mayer leaving hurts Disney in that it loses a voice who was trained to be a potential Disney CEO who understands the DTC marketplace unusually well. His replacement, Rebecca Campbell, is a Disney veteran who most recently served as president of Disneyland Resort, was part of the team who wrote the launch plan for Disney+. She is very much a fiduciary executive, too, having beein at the company for 23 years. She has schooled in more traditional ways of running the business, and may have some DTC in her background (resorts share inventory with DTC travel booking sites), but there is nothing to suggest she shares much else in common with Kevin Mayer.
So, to the extent the Curse of the Mogul does apply to Mayer's departure and Campbell's hiring, I would imagine it raises questions about her understanding of the core strategic, financial or management metrics of Disney's DTC businesses, and how they deliver value to shareholders.
4. Value Proposition Design/Product-Market Fit
In November 2019, Disney+ had a simple value proposition at launch: Disney, Pixar, Marvel, Star Wars, and National Geographic libraries for $6.99/month, and an exciting slate of original content from all five verticals, the most popular being The Mandalorian.
On November 2020, Disney+ will still have the same simple value proposition for all five vertical, but with the musical Hamilton launching in July, and a second season of The Mandalorian having premiered the month before.
This basic stasis relates to a question I asked before: when facing COVID, “how Disney executives will prioritize helping the Direct-to-Consumer division, where Disney+ sits, adapt to changing market conditions relative to other divisions.” I think this question becomes a bit more difficult to answer with Mayer gone.
There is no doubt it will continue to be a priority. But. because the streaming business relies so heavily on the production of new original content, and there are few new productions able to emerge from the global shutdown of all productions anytime soon, the value proposition of Disney+ for now and the foreseeable future is an older library.
In a previous mailing I quoted Stratchery's Ben Thompson arguing "Disney wants to learn more about its "billions" of fans worldwide who may not go to theaters or theme parks, and Disney+ and Hulu enables them to reach more of those "billions" of people". I think Disney+ could scale exponentially according to this logic: billions of people no longer have access to theme parks, and Disney+ can become the cheapest default access point to the Disney experience for billions of consumers, worldwide. That would be a fantastic win for Disney and Disney+.
But, as I will highlight in a later mailing, Disney+ is supposed to be a robust platform with original content driving subscriptions, and for the foreseeable future, that is not a likely outcome. As I have highlighted before, the original content marketplace reflects that audiences stay for new and original content. A legacy library, at scale, is not the win Disney, or Kevin Mayer, set out to accomplish.
5. Scripted vs Unscripted marketplaces
Lsat, TikTok is a platform dominated by unscripted content. Disney+ is a platform dominated by scripted content. Moreover, Disney+ is sourcing unscripted content is on an as-needed basis (as a recent Mandalorian documentary proved).
I have written before about Discovery CEO David Zaslav's bet on unscripted content was "much more cost-effective and generating 2x more revenues than Iger's bet on a smaller library of extraordinarily valuable brands and IP." That is no longer true given Disney+'s scale. However, whereas Disney+ is now handicapped by its reliance on new, original content, TikTok has a constant flow of short-form, unscripted content. Its library is never-ending, constantly being fed new and original content.
Mayer is making a fascinating trade of a limited, high-quality library of extraordinarily popular brands worldwide to an exponentially large library of lower quality, unscripted user-generated content. Mayer told the WSJ, "I will be looking at TikTok and looking at closely related and adjacent businesses that are large... Gaming, music comes to mind." Whereas before he was limited to the video vertical, at TikTok Mayer will be able to build out other DTC verticals at an existing, extraordinary global scale. That opportunity is being driven almost entirely by the cheaper economics and extraordinary existing scale of unscripted video on TikTok.
Conclusion
I have been one of the more outspoken skeptics about Disney+, poking holes in its story and raising red flags despite its extraordinary growth. My approach has never been to be a doomsayer, and I believe that my work to date reflects the furthest thing from doomsaying.
Rather, a core lesson of my time at Viacom is how fragile digital businesses run by fiduciary executives can be. A business run by visionaries like Netflix has followed a clear, linear trajectory, both evolving with and driving the evolution of the Internet towards video streaming. That was the core of my argument when I wrote “Surprising executive changes at Disney reveal surprising weaknesses”.
But, every single other service has suffered from pivots in product and/or related management changes as this tweet highlights.
Disney+ was no different, as I wrote “Iger’s aggressive bet on DTC has created incredibly complex, complicated dynamics between Disney’s creative pipeline and conversion funnels for its platforms.” Complexity and complicated dynamics reflect fragility. Mayer’s road to success was effectively shattered by COVID’s negative impact on Disney. Despite the extraordinary optics of Disney+’s rapid growth, just over 60 days after Disney shut down its production and theme parks businesses, Mayer told Disney and the marketplace that effectively there were no more wins at Disney for him.
Disney+ is no longer a solid rocket-ship, but TikTok is. TikTok was downloaded 315 million times from January through March, according to analytics firm Sensor Tower, surpassing any other app ever for a single quarter. TikTok now has 2 billion downloads, double its total from just 15 months ago. In non-gaming apps, TikTok ranked third for global in-app revenue in March, after dating app Tinder and YouTube
Mayer’s move to TikTok confirms some other themes in these mailings, to date. He is now faced with the challenge of monetizing unscripted, user-generated content. He has a clear business model (ads) which is currently DTC and can only evolve deeper into DTC and direct-response.
But there is a disadvantage to TikTok being very much NOT Disney: TikTok has ties to China’s government, and faces allegations that TikTok continues to violate a U.S. children’s privacy law. Kevin Mayer is heading into new territory for very good business reasons. He has a completely different road ahead of him.