Bob Iger Is Re-designing The Disney Flywheel By Making Six Key Changes

Bob Iger Is Re-designing The Disney Flywheel.

Bob Iger’s talk with Michael Nathanson, always a must-listen LINK, gave insights into the six key changes he is making at Disney:

1) Simplify Organizational Structure:

When Iger took over as CEO in 2005, he decentralized decision-making and gave P&L responsibility to each Disney division. Historically, empowering the people running the business has led to decisive and effective decision-making.

In his short tenure as CEO, Bob Chapek’s ambition was to grow Disney Plus into a general entertainment brand and a Netflix competitor. To facilitate growth, he put the distribution business (streaming) in charge of Disney’s decision-making. This change in authority misaligned incentives and created a series of problems (discussed later), which are now clear in hindsight.

When Bob Iger returned in 2023, he redesigned the business into three segments: 1) Entertainment, 2) Sports, 3) and Experiences (Parks). Iger also returned the financial responsibility to each division.

2) Recalibrate Disney Streaming’s strategy:

To grow subscribers, Bob Chapek needed Disney to produce more content. To turn the dial on content creation, he made a strategic decision to sacrifice quality.

This was a grave mistake.

The Disney Flywheel starts with Creative and then flows to parks, media, and merchandise. Disney isn’t the same without its incredible high bar for its creative storytelling. In pursuit of volume, Chapek diluted Disney’s brand.

Upon his return, Bog Iger refocused Streaming to its family entertainment roots. With a smaller target market, the content strategy is recalibrated for high-quality and low-volume output. This content strategy is also consistent with the financial goal for Streaming to reach double-digit profitability.

3) Improve Studio Quality:

From 2015-19, Disney made an average of 14 movies annually that grossed $3.4 billion in total inflation-adjusted gross and averaged $250 million per movie. In 2022 and 2023, the average gross per movie fell to $156 million and $121 million respectively. The disappointing reviews from hard-core fans Marvel fans are even more disturbing than the lower profitability. The low-quality movie output was a byproduct of the strategic decision-making of Disney’s leadership.

With the quality bar now back to its historical standards, the profitability of the studio business should slowly return to its historical standards.

4) Make Parks The Focal Point:

The Parks business is truly the differentiated experience within the Disney portfolio. Bob Iger is doubling down on Parks with an explicit goal to invest $60 billion over the next 10 years.

With the decline in the Media business over the years, Parks drive Disney’s profitability and is rightfully getting most of the growth capital.

5) Reinforce the Disney Bundle:

ESPN will be fully integrated into the Disney bundle by year's end. The combination of Disney Plus (family), Hulu (general entertainment), and ESPN (sports) into a bundle should reduce churn.

Given the lack of real demand for its broadcast assets (ABC Network), the content strategy is to optimize entertainment content creation and recycle it for multi-purpose use. For example, a show on ABC will move to Hulu rather quickly. This strategy is unproven so far. However, if this works, Disney may be able to reduce its marketing spend and re-direct it towards streaming tech improvement.

6) Maintain ESPN’s Sports Leadership:

Transitioning ESPN from a linear to a streaming entity will be Bob Iger’s biggest challenge. For decades, ESPN had capital, content, and distribution advantages. While ESPN still has a content advantage, Google, Netflix, and Amazon have greater capital and distribution moats.

Sports rights are fragmenting.

Amazon Prime now carries Thursday Night Football as well as a Thanksgiving Night game. Netflix will show two Christmas Day games in 2024. YouTube TV (Google) is the home of the NFL Sunday Ticket.

The NBA deal will be renewed at $2.5 Billion annually, at double the $1.2 Billion current price tag. While ESPN will remain a partner, Amazon Prime is in the running to be a broadcast partner for the NBA. NBC Peacock is in the running to replace Warner Bros TNT and is willing to pay the $2.5 Billion.

Without the NBA on TNT, the allure of the new Sports bundle LINK is unclear. How does the Sports bundle mitigate churn?

It is clear to me that Cable Subs will decline at a faster rate once ESPN is fully available outside the cable bundle. Can Disney offset its cable losses through the gains in the Disney bundle and the Sports bundle?

Bob Iger has decisively reorganized and re-focused Disney over the past 15 months. However, lots of questions remain.

Thanks for reading!