Acquired Live Show in Seattle with Dan Lewis, Convoy >>

Disney, Plus

Season 5, Episode 7

November 26, 2019


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The Flywheel is strong with this one. We dive deep into the origins of one of the boldest business strategy decisions of our time: Disney CEO Bob Iger’s attempt to buck the Innovator’s Dilemma - and forego billions of dollars in cashflow from Netflix and pay TV providers - in order to establish a direct distribution relationship with its customers for the first time in the company’s history. Is this the force awakening within the house that Walt built, or a phantom menace that will drag Disney to the dark side of unprofitability? Tune in to find out!



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Thanks to Silicon Valley Bank for sponsoring all of Acquired Season 5. You can get in touch with Dan Hardman, who you heard at the beginning of this podcast, here: http://bit.ly/35yIrNH

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Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

Ben: Disney makes it approachable, but I’vejust read all their IR stuff and it’s not hard. It’s really cogent. It’s quite refreshing moving from analyzing lost-making fast-growing tech companies to a company like Disney that just makes it plain, makes it clear. It makes a lot of sense.

David: Yeah, isn’t trying to hide the ball.

Ben: Yeah. All right, let’s do it.

David: Let’s do it.

Ben: Welcome to Season 5 Episode 7 of Acquired, the podcast about great technology companies and the stories behind them. I’m Ben Gilbert and I’m the co-founder of Pioneer Square Labs, a startup studio and early stage venture fund in Seattle.

David: And I’m David Rosenthal, and I am a general partner at Wave Capital, an early stage venture firm focused on marketplaces based in San Francisco.

Ben: And we are your hosts. This time it’s different. These are four very dangerous words that should set off an alarm every time you hear them. Bob Iger, the CEO of Disney is trying to achieve the pipe dream of what has failed so many times before in the media industry—combining content and distribution under one roof.

It has been tragic before, famously with AOL-Time Warner and recently being tried with Comcast, NBCUniversal, and AT&T-Time Warner. But Disney has to compete against digital disruptors like Netflix who have successfully built their own distribution and content in-house.

So here we are, one week after the ambitious launch of Disney Plus, where Disney will try to attempt the multi year mission to do just that. Transform their business, not just to make great content and capitalize on the intellectual property through parks, licensing, and merchandise, but to be the distribution of that content as well, directly to consumers.

Or another way to frame it, Bob Iger just kicked off one of the most ambitious attempts to buck the innovator’s dilemma of all time, compromising hundreds of millions of dollars in guaranteed revenue from keeping their content on Netflix and others in hopes of capturing the long-term asset of a direct connection with their fans. It is no understatement to tell you that David and I are absolutely giddy to dive into this episode and are hot off of reading Iger’s fantastic book, The Ride of a Lifetime.

David: Aren’t we ever? I have one question for you, though, Ben. Have you watched The Mandalorian yet?

Ben: I have.

David: What are your thoughts?

Ben: No spoilers.

David: No, no. No spoilers.

Ben: I’m a huge fan.

David: Yeah. That’s really cool.

Ben: Jon Favreau is so far proving to be an amazing steward of that franchise.

David: Yeah. I haven’t watched Episode 2 yet. I’ve only watched Episode 1, but [...]. I’ve been doing so much research for this episode.

Ben: Yeah, well that’s research.

David: That is true. That is research.

Ben: Well listeners, we have a special announcement we are excited to share with you. We are doing a live show in Seattle, which obviously is close to both of our hearts. I live here in Seattle, David previously lived here in Seattle, we started the show here. The show will be December 17th with the co-founder and CEO of Convoy, Dan Lewis, and we’ll be discussing the origin story of the company that is disrupting the trucking industry and valued last week at $2.7 billion. If you want to attend, you can click the link in the show notes or go to acquired.fm/liveshow to reserve your ticket. It’s going to be super fun.

David: It’s going to be great. I can’t wait to see many of you there.

Ben: Yup. Before we dive in, I want to thank the sponsor of all of season five, Silicon Valley Bank. Earlier this week, I caught up with our sponsor, so let’s dive in for a little Q&A.

All right, listeners, I’m here with Dan Hardman. Dan is a Managing Director on SVB’s consumer Internet team and works with a lot of companies being transformed by digital goods, purchases, and subscriptions. As the content giant turned from traditional distribution into streaming, what are some parallel disruptions that we’re seeing in the startup landscape?

Dan: Probably one of the best parallel is people developing platforms. One of the things that Uber realized really early on was the fact that they were on so many phones, gave them an opportunity to sell more to clients.

One of the things that folks are wanting to do now with owning the distribution is just increasing their wallet share among all consumers and just making it easier for consumers to buy from a trusted source, trusted so key when you’re dealing with consumers. That’s a big part of a play here, especially for someone like Disney or for someone like Amazon. They are trusted names, so they are going to see a lot of the bump from owning the distribution as well.

Ben: I love that parallel. Thank you.

Thank you to SVB. And now, on to Disney Plus.

David: All right, before we get into history and facts, I just want to set the stage for everyone so that listeners are on the same page. All of the deals and acquisitions going back to Capital Cities, ABC, ESPN in 1995 have set the stage for this momentous launch of Disney Plus.

We’ve covered most of these on their own episodes on Acquired, which we will link to on the show notes, but just as a quick recap, first, Disney acquired Capital Cities, which included ABC and ESPN (most importantly) in 1995 for $19 billion. Then in 2006, they acquired Pixar for $7.4 billion. 2009, Marvel for $4 billion. Going back and relistening to that, doing research for this, we didn’t grade that highly enough. That was one of the best acquisitions of all time in any industry.

Ben: We also didn’t know Infinity War was going to do what it did in the box office and everything before that in the franchise.

David: Highest grossing movie of all time. Okay, then also in 2009 Disney invested in Hulu for 30% stake. We don’t know how much they paid for that. In 2012, they acquired Lucasfilm for $4 billion. In 2016, as we’ll talk about later in this episode, this was rumored, but then Bob admitted it in The Ride of a Lifetime, his book, they nearly acquired Twitter in 2016 and walked away.

Ben: The day before, right? It was a Sunday when they called it off and on Monday they were going to announce it.

David: And Jack Dorsey was on the Disney board, so awkward. We’ll get into that. In 2016, though, they did. We did our episode on BAMTech, which has aged really well. Really encourage listeners to go back and listen to our BAMTech episode. They acquired first a minority stake for $1 billion and then they acquired a majority stake in 2017. In total, they spent $2.6 billion on BAMTech.

And then, the big one, 21st Century Fox. Deal closed in March of this year 2019, $71.3 billion. The final piece of the puzzle is Disney has agreed to acquire from Comcast the remaining 33% of Hulu that it does not own. They will spend at least $6 billion on that and that will close within the next five years. Disney and their legendary strat planning M&A team is the master at setting these deals of investments, with options to acquire, and over time they’ve done really well.

Okay, that’s to set the stage. Keep that all in my kind.

Ben: Thinking of Bob Iger and strat planning is like Thanos, where, after using the infinity stones, goes off to the other planet to rest for awhile. You just look at this list, it’s unbelievable.

David: Oh my God. That’s the best analogy ever. Also because Bob Iger and Thanos could not be more polar opposite. That is the perfect T up to the history of facts. We couldn’t have timed this better. Even though Bob didn’t intended it this way, his book that just came out, The Ride of a Lifetime, is so good, everybody should go buy it, read it, listen to it, whatever you need to do. This is one of the best business books. It’s right up there with Shoe Dog that have come out in the last 10 years.

Ben: Completely agree. When you say he didn’t intended it this way. are you referring to timing it with the Disney Plus one?

David: Yes. He intended to time this with his retirement from Disney, but obviously as we will see, things did not go quite according to plan. But the story that we’re going to tell here is Bob Iger’s story because the story of all of these deals, the culmination of it all in Disney Plus and going direct to consumer, this is Bob’s vision. It is very directly Bob’s vision and the story of how it came to be is an incredible one and one that is just unparalleled in today’s business world.

This is a man, Bob Iger, who has worked for every year of his life except one, his very first year out of college. He was a weatherman in Ithaca, New York for a local TV station. Except for that one year, he has worked for the Walt Disney company in one form or another, for the same company, 45 years, the last 14 of which have been a CEO of the company. He literally started at the bottom.

Ben: And of course, not the Disney of 45 years ago. Of course at the Capital Cities.

David: It wasn’t even Capital Cities, yet. Let’s rewind all the way back. Who is Bob Iger? He was born in 1951. It’s odd. When you look at him, he looks like a 50 year old. He’s 68. He is in incredible shape. He was born in 1951 to a Jewish family in Brooklyn. I believe when he was five, they move to a working class town on Long Island called Oceanside.

Bob’s father was a World War II veteran. He had been in the navy in World War II and he was a mid-level admin in New York City. He was Mad Men. He was Don Draper. The parallels are so apty and Bob talks about this in the book. His father suffered from depression, which was usually stigmatized back then from a lot of reasons. I imagine no small part having been a sailor in the Navy during the war, and he even underwent electric shock therapy to treat it. All that said, he did instill in Bob a love of both music, literature, and a very, very strong work ethic.

Bob was not a great student in high school, but he was a hard worker. He went to Ithaca College for college and he worked his way through school working at the local Pizza Hut. To this day, famously, Bob does not eat any carbohydrates except for pizza. He loves pizza.

It was his dream in high school to become a network news anchorman. He wanted to be like Dan Rather, Peter Jennings and the like, so when he graduated in 1973 from Ithaca with a degree in television and radio, he worked briefly as a weatherman for the local cable TV station there. He was not particularly talented on that side of the camera, unfortunately, but we all have strengths and weaknesses. Fortunately, though, does not take Bob long to figure this out.

In 1974 the next year after he graduates, he gives up on the dream of being in front of the camera, moves behind the camera, and he also moves back closer to home to New York City where he joins ABC, which then was an independent company, just ABC, at the bottom. He was basically a gofer on television sets for soap operas, game shows, he was cleaning the sets, fixing them up, getting there at 4:00 in the morning, getting ready for a recording, all of the stuff, for $150 a week.

Ben: And literally when you say gofer, he was the guy that when they would say, “We need two hours to do this thing. Go hang out with the talent so that we can tell you to tell him to come back when we’re ready.” That was his job.

David: Yeah. Obviously, we’re going to get into this in a sec, but literally, his big break comes when he works on a television special with Frank Sinatra. Frank needs a mouthwash. “Bob, go run to the pharmacy. Go get a mouthwash.” That kind of stuff.

In a great New York Times interview (that we will link to in our sources) with Maureen Dowd, Bob says, “I never viewed myself as exceptional, so whenever I got a job, I was relying on hard work more than anything and a level of enthusiasm and optimism,” and Bob is nothing if not an optimist. He said, “When he went to ABC, everybody there went to Stanford, or Dartmouth, or Columbia. I went to Ithaca college. I didn’t have an inferiority complex, but I knew I wasn’t one of them. I didn’t wear Gucci shoes, I didn’t wear Brooks Brothers clothes. I couldn’t afford any of that stuff, but I knew I had a work ethic that was prodigious. What happened early on is people started relying on me because they knew if they asked me to get something done, I would get it done,” and that is what Bob does.

As we alluded to, shortly after he gets there to ABC, he gets his big break. They’re televising a big special from Madison Square Garden called, The Main Event hosted by “the chairman,” Frank Sinatra. It was like a boxing-themed musical number. Television was different back in those days.

So, he meets Frank, he meets the chairman by getting him mouthwash. Frank says, “Hey, what’s your name, kid?” and he says, “Bob,” and Frank’s like, “Great job,” and he gives him $100 bill.

Ben: I did not know that he was the chairman. I didn’t know that was a nickname. I’m reading the book and I was like, “The chairman of ABC? Who’s this chairman that he’s meeting?” I am an idiot.

David: The legend, blue eyes, the chairman. This special, “The Main Event,” was produced by two legends at ABC. Jerry Weintraub and most importantly, Roone Arledge. Roone was involved, maybe because it was a boxing theme thing. I don’t know, but Roone was legendary. He was the head of ABC Sports. Now, Bob was working in ABC, what would become Entertainment, like the television shows, soap operas, game shows. He wasn’t working at sports. Sports was where the cool guys were at ABC.

Right after this special, Bob gets into a big fight with his boss in Entertainment. His boss was embezzling from the company. It was not good and Bob realized he’s about to get fired. He calls up one of the sports guys that he worked with on this event and says, “Hey, do you have any openings over there? Can I transfer over there?” They’re in a completely different building in New York.

He transfers over there and he starts working again from the bottom with then ABC Sports. What was Sports? They had Monday Night Football at the time, they had the Wide World of Sports which I remember was still a thing when I was growing up, like spanning the globe, bringing all of this seat of great content, all the stories from around the world, and most importantly, ABC at the time had the Olympics. They showed the Olympics in the US every year.

What Roone had realized and built within ABC that will then get taken over to ESPN shortly and be a big part of their success, was that they weren’t showing sports, like just televising a football game, or the Olympics, or some random event that they did on the Wide World of Sports. Without a story, it was flat, it was boring. They were selling storytelling. They were selling entertainment. What were the narratives? Who were these people? Where did they come from? What adversity have they faced? What was the storyline of the game? All of that was really pioneered by ABC Sports and by Roone.

Ben: David, we could probably save ourselves a lot of time if we had done this episode 3½ years ago because I feel like it took us 3 years to figure out the reason people like Acquired is not, “Let’s do an audio-discounted cash flow and figure out if that acquisition makes sense financially five years from now,” it’s the stories behind the deals.

David: Exactly.

Ben: Roone had this thing that, “It’s only recently occurred to me that everything is story-telling. I’d obviously work on a lot of pitch decks. Human beings absorb information best through story.” It’s a multi billion dollar realization that Roone had, that would play out over the next several years, that this the way to build enduring fanhood.

David: Yeah and what’s super cool about this is that I feel like this one of the key meta themes for Acquired that run across everything we look at on the show and Acquired itself. I’m thinking about Sequoia and Don Valentine. Hopefully, many of you have gone and watched on YouTube the talk he gave at Stanford. He says in there the most important thing is story-telling. Money flows as a result of the stories. If you can’t tell a story, you’re not going to raise money.

Ben: I love the way you phrase that. Listeners, David gave us homework, so I hope we went and watched our YouTube videos.

David: Only because it’s Don Valentine.

Anyway, to pick the story back up, the other thing that Roone really embraced within ABC Sports and pioneered was technology. This back in the 70s, so technology within media is not Disney Plus. We’re a long way from that, but this is really where the seeds of all this gets sown.

Roone embraced new camera technology, graphics overlays on live content, new camera angles, satellite feeds to be able to take content for the Wide World of Sports in the Olympics from all over the world, get instantaneously broadcast back to the US and retransmitted. He had a mantra around this, which he called innovate or die and unless you were pushing the envelope in using technology and using new techniques in the service of telling better, more engaging stories, you were just going to fall behind and someone was going to surpass you. Both of those things, both the storytelling and the “innovate or die” mindset of Roone, really, really rub off on Bob in the early days.

Ben: Yeah and it’s interesting Bob gives all the credit to Roone for teaching him this innovate or die lesson, but if you look at the parallel story that was happening, maybe a dozen years earlier with Walt Disney himself. The start of Disney Animation was incredible innovation, figuring out how to make these animated motion pictures, inventing new machines to do it. You look at the [...].

David: Yeah, it’s technology.

Ben: Totally. The start of Disneyland, the whole imagineering department at creating animatronics, Disney, too, was built on this foundation of innovate or die and use technology to tell stories.

David: Yeah. Again, such a thread on Acquired. It’s Steve Jobs who’s going to come in here in a minute. It’s technology in the liberal arts. That’s where real magic happens when the two of those things come together.

Bob rises through the ranks over the next 10 years at ABC Sports. He becomes a VP and then in 1985, when he’s just a little over 10 years, probably 10 years into his time at sports, famously as we covered in the ESPN episode, the minnow eats the whale and Capital Cities, this backwater…

Ben: Scrappy, penny pinching backwater…

David: Broadcasting company in the Northeast acquires ABC. Literally, that was the headline in, I think, The Wall Street Journal, that it was announced as “Minnow Eats Whale.” At first, there was (and Bob talks about this in the book) quite a bit of a culture clash. You’ve got these scrappy, penny-pinching Tom Murphy and Dan Burke, Warren Buffet. I wouldn’t only say disciples. They’re contemporaries, simpatico, kindred spirits. And then you’ve got Roone was many, many great things but penny-pinching was not one of them, and it certainly nor was the entertainment side of ABC. It was Hollywood.

There’s some initial culture clash, but Bob and other folks at ABC really a part of bridging this gap and get to know Tom and Dan, and they actually realized they’re cut from the same cloth. Tom Murphy, in particular, comes to really trust Bob Iger as one of the key managers within the company that can instill this ethos of the ultimate investor mindset and really excellent business management into the creative industry that is in both sports and entertainment within ABC.

Tom was a CEO of Capital Cities, Dan was COO; they were a duo. When Dan retired, Tom asked Bob to become his COO and replace Dan. That’s how much he’s, like we say, cut from the cloth of this Tom Murphy, Dan Burke, Warren Buffett style of management.

Bob keeps rising. First, he gets promoted to run ABC Entertainment, where he first started out at ABC, sort of the Hollywood side of the house. He moves out to Hollywood and entertainment have been struggling unlike sports, which was an unquestioned leader at the time, and of course then with the Capital Cities’ acquisition, ESPN came into the fold and ESPN is really taking off during this time.

Bob now gets tasked with make the entertainment side of the house great, too. This was really key because he had to learn how to navigate Hollywood. He’s a Jewish kid from Long Island, so this is not what he’s used to despite rubbing shoulders with Frank Sinatra.

Ben: Gets out there in his suit and he knows he can’t quite do business the way that he used to doing business in New York, but he also has no idea how you’re supposed to do business in Hollywood.

David: Totally. One of the things, though, that he realizes and leads to him being able to succeed is there is one commonality, which is it’s all about the stories. If you tell a great story, you’re probably going to succeed. Bob really leans on the people around him to help him learn the business and he has a very low ego about it, which is one of his hallmarks, but he has a pretty good run.

He greenlights Doogie Howser, which is a massive success for the network, Twin Peaks, which ends up being quite controversial and Bob and the company probably make the wrong decision to cancel it, but a massive risk putting a dark drama on network television.

Ben: The way to think about what Bob’s doing here is he knows that he’s put in there for a reason. He has to revamp this group a little bit. He knows that he’s not a typical Hollywood guy, so he can’t just go and pretend to be one, so what he’s trying to basically a flank attack, like, “I have to take a different approach to doing this. I have to zig when other people are zagging, and what do I do? Greenlight very nontraditional content, go with my gut, and take some risks on stuff that other people probably wouldn’t put on the air.”

David: Yeah. Well, It’s a balance. It is that outsider perspective and the willingness to take risks, that we’re going to come up again, and again, and again in this episode, but he also does his homework. He doesn’t just ride in and be like, “We’re doing things my way.” He really, really trust the people around him and says, “I’m not from this industry. I respect you all as creators, I want to learn from you, and let’s think about what are some given norms in our industry that maybe aren’t right, that we should consider challenging?”

Twin Peaks is a great example of that. NYPD Blue he launches. Roseanne is another great example of that. The Roseanne Show becomes very successful, the controversy with the reboot later more recently, but that all goes really well, and in 1992 Bob gets promoted by Tom and Dan to become president of all of ABC—sports, news, entertainment—all reporting up to Bob. The rest of Capital Cities have their own managers for.

And then, like we said in 1994, Dan Burke retires and Tom says, “Bob...” Bob just recently, two years before, become president of ABC, says, “I don’t know that I’m ready to come in and run Capital Cities with you,” and Tom says, “Nope. You don’t have a choice. You got to come in. You’re my COO. You’re running all Capital Cities with me.” ESPN at this point time is, again real quick like we covered in that episode, it’s clear that this is going to be a multi not just billion dollar business, but tens of billions of dollars of business in the future.

Enter Disney. Right after Bob becomes COO of Capital Cities…

Ben: And take us through. This is 1995?

David: We’re in 1995 right now. It’s 1994 when Bob becomes COO at the Allen & Company famous Sun Valley Conference in Idaho. Michael Eisner (who we’re going to talk a lot about), the then CEO of Disney, gets together with Tom Murphy and Warren Buffett. They cook up a plan for Disney to acquire Capital Cities, ABC, and ESPN.

To preview a little bit when we talk about Disney Plus and get into this move, Michael Eisner was an equally legendary CEO of Disney before Bob. This was his capstone. Unfortunately, Eisner stuck around a little bit too long after the capstone (as we’ll see).

Ben: His first 10 years was incredible.

David: His first 10 years were absolutely incredible and then this was the capstone that ended up in really, ABC is of course super, super important, but ESPN becoming part of Disney. Again, I remember we talked about this on the episode. When I was a media investment banker right out of college in New York covering Disney, people just basically discounted everything else within Disney—the animation, the parks, the studios, everything. Basically zero and this company is ESPN. It is that powerful. It is the most profitable by a million miles cable network and content provider in all of America.

Ben: To contextualize that for our listeners, every single person who is paying for cable in the United States and is getting ESPN, ESPN2, and the rest of the stuff that comes with it, the sports stuff, is paying about $9 directly to ESPN of whatever the bundle price is, $40–$50. It’s crazy. Let’s say it’s $50 and let’s say they’re 2Xing the COGS or their cost of goods sold of the actual channel. $9 of the $25 for all of those channels are just going to ESPN.

David: And contrast that with $6.99 a month for Disney Plus. Now, Disney is going direct to consumers, $7 a month for all of their content versus they’re getting $9 from the cable bundle just for ESPN. Wild.

Okay, so this deal happens $19 billion, Disney acquires the company, and actually a super key part of the deal, a sticking point for Disney and for Michael Eisner was he was not going to go through with the deal unless Bob committed to running ABC for at least five years after the acquisition. He was worried about Bob leaving. It was a non-negotiable point and actually held up the closing of the deal, which is amazing.

Eisner, to rewind back to him a little bit, is quite an interesting character. He had actually started his career at ABC, but he had become CEO of Disney in 1984. Walt Disney died in 1966 and for that, almost 20 years before Eisner took over, Disney was completely floundering, producing no notable IP, no new movies. I mean, they were producing movies, but they weren’t any good. They’d narrowly survived a series of takeover attempts, the parks were struggling, there was no vision, and it was a really rough period.

Ben: And if you think about what Disney Animation was in those earlier days, it was Snow White, it was Sleeping Beauty. It was these classic, enduring. You have Mickey Mouse created and that lasting the test of time.

David: And the parks, too, which are incredibly innovative.

Ben: Yeah. You think about everything you associate with Disney, it’s all in the 50s and 60s era. The early eighties for Disney tend to like the early 80s for music. It’s best forgotten.

David: Okay. There was some good stuff, but no good stuff out of Disney. The board had recruited Eisner and his partner, Frank Wells, who was the COO, and they did a couple of really important things. Most importantly, they brought in Jeffrey Katzenberg to be head of Disney Animation and head of the studio.

Jeffrey completely turned things around. Some movies that you might be familiar with, you probably are no matter where you live in the world, The Little Mermaid, Beauty and the Beast, Aladdin, The Lion King, these are all Katzenberg movies in the golden years of the late 80s through the mid-90s at Disney.

The other things that Eisner and Wells do to really turn around Disney are they get big time into the home video business, VHS and then DVDs. They’re really smart about this. I remember this growing up and they do windowed releases of, “Limited time-only, you can get Snow White VHS; pull it out of the vault.” I haven’t done enough research, really, but Disney at this time probably are big innovators in this concept of windowing, that became so prevalent in the media industry of really milking as much profits out of a set of IP and content as possible. You got the theatrical release, you’ve got the home video release, you’ve got the TV release, and building excitement around all of it.

Ben: The concept of the Disney Vault became so prevalent that SNL did a parody of looking inside the Disney Vault and it’s all these characters trapped in there, “Let me out!” It’s definitely worth looking up.

David: We said the capstone of all this the Capital Cities deal, where they bring ABC and ESPN into the company. Very, very sadly though, right before the Capital Cities deal, Frank Wells is killed in a helicopter crash in 1994. Had this not happened, history would have been really different for Disney, for Eisner, and probably for Bob Iger, too, and this really throws everything for a loop, so when the Capital Cities deal happens, Eisner is looking for a number to be his partner, to help run the company.

This a massive company. No one person, even Bob Iger, can really run this by himself or herself at this point in time, so Eisner was looking for a number two. When the deal happens, Bob is so important that there’s this clause in the acquisition that he has to stay on for five years as head of ABC. People start thinking, including Bob, that maybe he’s a good candidate, eventually, for this number two role at all of Disney.

Bob writes about in the book that Tom Murphy actually told him around this time like, “Hey, look. You play your cards right, you might be CEO of this company, this whole Disney company one day,” and indeed that would be true. The path is not quite straight to get there, though. Michael Eisner was thinking about bringing on a number two, but it was not Bob. This is like a WeWork type situation. This is the WeWork of the mid-90s. Disney was and honestly was. Not to just totally keep dunking on WeWork here on Acquired, but this was all over the news and all over America what a disaster this was. Eisner brings in super agent Michael Ovitz to become his number two at Disney.

Ben: A clear COO candidate. The clear choice. What do you want in a really operationally-strong person to help you run a large, recently combined business? Someone who’s basically never manage people.

David: Yeah, never managed people, is a founder, too. Michael Ovitz was incredible. He started started CAA (Creative Artists Agency).

Ben: Greatest agent of all time.

David: Yeah, and if you’ve seen the movie Jerry Maguire, that’s about sports agents, that whole world is Michael Ovitz. Or Entourage, the agent in entourage?

Ben: Ari Gold.

David: Ari Gold, yeah. That’s Michael Ovitz. So he comes into Disney and it is just a disaster. Incredible culture clash. Bob is now under Michael Ovitz. Remember, Bob is like Warren Buffett, Tom Murphy, Dan Burke school of manager. He’s now reporting to super-heated Michael Ovitz.

Eisner really has a foot in both worlds here. He’s an incredible guy himself, but Disney is Disney. It is not an agency.

Ben: And when you say a foot in both worlds, Eisner had that creative gift that Walt had. Bob talks about how Eisner would go through parks and be able to spot issues with line of sight and things like that, that are taking away from the experience being magical. You can imagine that also leads to micro management (which was true), but on the other hand, isn’t so far from the Capital Cities world of, figure out what’s core to a business, make it really lean, make it really operationally sound. I think Iger did a little bit more of that than than Eisner did, but Ovitz certainly had no notion of that.

David: Yeah, and put a foot in both worlds. Eisner, to maybe try and put ourselves in his mindset at this time a little bit, Jeffrey Katzenberg is very much extremely, extremely talented, but more of the Michael Ovitz type of personality and creative genius than the Warren Buffet operational style. Eisner’s gift was he recognized that talent out there. He recognized it in Katzenberg and it led to this great, great flourishing within the company. He probably hoped that Ovitz would be able to bring that spirit back to Disney. It didn’t work out, though.

Ovitz only last 14 months at the company and leaves after 14 months. This in the mid- to late-90s, leaves with $140 million golden parachute. This is the $1.7 billion Adam Newman pay out of its day and leaves the company in shambles behind him and Eisner’s reputation having gone from turned around this iconic American company and produced with Katzenberg—The Lion King, Alladin, all these great movies—to this Disney is the laughing stock of the business world at this point in time.

Eisner goes back after this. He’s wounded in more ways than one. He goes back to running the company solo and consolidating all authority and responsibility with himself. This actually becomes really prescient. He assigns Bob to what seems like, I was going to use a Siberian outpost. Actually he’s a Siberian outpost to go run international for the company.

Disney was not huge internationally at this time and Bob actually learns a lot by going and operating Disney’s business. This is when Euro Disney was getting set up in the theme park side, which was a disaster at first, famously, until they figured out that European parents want wine at lunch to deal with their toddlers running around, and that turned it around. Different countries are different. American parents probably also want wine at lunch to be able to deal with their kids.

Ben: One of the reasons that I’ve been so keyed into Disney recently is I went to Disneyland for the first time three months ago and did see Galaxy’s Edge. It was awesome.

David: And there’s a bar in the…

Ben: There is and it is the only place, but you have to get these reservations. It’s almost impossible to get in. You have to very preplan it, but it’s the only place in the entire park to get alcohol in at least Disneyland. I think California Adventure you can. I think in Disneyland you used to be able to and they took a hard pivot and got rid of it all. It’s interesting. They have a little bit of this experience with that going poorly and at Disneyland.

David: Interesting.

Ben: But importantly running international here was the very beginning of Shanghai Disney.

David: We’re not going to talk about as much on this episode, but another marquee project for him over his whole career at the company and his tenure as CEO, was opening up China to Disney from content, obviously, but also theme parks.

Ben: Right, and the crazy thing is think about the timeline of that. That started when Bob went to run international here in this time frame we’re talking about. It opened in the last few years.

David: Was some was it 2018?

Ben: 2017 somewhere?

David: 2017–2018 when Disneyland Shanghai opened, an incredibly long project. Bob does very well running international and in addition, he still running ABC as well. Finally in January of 2000, Eisner does promote Bob to COO. He has to at this point in time.

Ben: It’s like keeping it at arm’s length, you’re sort of my number two but you’re not actually my number two.

David: And the board is really starting to get really upset with Michael at this point in time.

Ben: Especially on succession planning like, “What’s the plan, dude? You’re not doing that great and even if you were, it would be nice to know where we’re going after you.”

David: Yeah, you’ve been here a long time. Anyway, Bob finally does become COO, but still, all is really, really not well. The biggest problem that’s going on at Disney at this point time in spite of all this drama and personnel stuff is animation. There’s a saying within Disney that we’re going to talk about a number of times over this next bit here, which goes all the way back to Walt, as animation goes, so goes the company. Animation and what animation really means— I can’t remember this point in time—Disney doesn’t have Star Wars. It doesn’t have Marvel. It has some live action.

One of the other really smart things that Eisner and Wells did was they acquired Miramax. That gave Disney a film studio capability targeted at grown ups, not just kids, although Disney movies are for grown-ups, too, which is the beauty of them. Anyway, animation was the core of the IP generation that flowed through Walt Disney’s beautiful flywheel that we’ve talked about on a few episodes here we’ll link to, again, in the show notes.

Back in the early days of the Walt Disney company, Walt illustrated this flywheel. It’s like an Amazon flywheel. It’s the original one of how Disney’s business model works. At the core of it all is animation and animation means the generation of intellectual property, content, and characters and that flows into movies, television, publications, theme parks, characters, visits, consumer products, all of this. But without the life cycle of constantly inventing new and refreshing old IP, that all starts to break down.

Ben: David and I have revered the Disney flywheel diagram and talked about it at length on many episodes and I actually looked at it the other day to prep for this and started thinking about it more. One thing that I thought about was sure, the film IP powers the parks and the parks made people want to buy merch, and owning the merch makes you want to watch the movies again and going to go see the sequels. But how does that actually shake out financially?

Looking at the income statement for Disney, that if you think about the year that ended this last September, this is pretty counter intuitive. So, studio entertainment did about $11 billion in revenue but parks, experiences, products, licensing, that sort of thing did over $26 billion. That’s pretty similar to what the media networks division did that’s largely ESPN. When you think about it, sure the movies are a big great business on their own. Of course, this includes Lucasfilm, Star Wars, and all that $11 billion, but more than twice as big is how they monetize in a down funnel way of that seed that they’ve planted with the audience of, “Hey, you should engage with us in these other ways.”

David: That is what really makes Disney special, and is Disney’s moat, and is the reason why we talk about it so much on this show. There are lots of other media companies out there. There’s 21st Century Fox, which we’ll talk about. There’s Time-Warner. There’s plenty of others, but nobody else has this ability to take $11 billion in film revenue and add an additional $26 billion in flywheel revenue around it.

To give you a sense of how bad things were—I remember this, this was dark—here’s a sampling of Disney Animation movies that come out during this time. You’re ready for this, Ben? I’m glad you’re sitting down. Tarzan, Dinosaur, Atlantis, Treasure Planet. Remember treasure planet?

Ben: I remember hearing of Treasure Planet.

David: Brother Bear.

Ben: The Emperor’s New Groove?

David: Yeah, The Emperor’s New Groove. That was probably one of the more successful ones during this time. Things are dark.

David: Anyway, the flywheel really starts breaking down. Parks are down. Everything’s bad. There’s one saving grace, though, during this time period, and it’s a big one. Disney has a very close collaboration with the little company up here in the Bay Area called Pixar. Pixar is an independent public company we’ve talked about, sadly was our first episode. Our history and facts on Pixar—we’re going to talk about it a little more here—is about a sentence and we really need to revisit the whole episode.

To get distribution and an additional revenue, Pixar had done a big deal with Disney where Disney distributed the Pixar films and co-licensed with them all the characters for theme parks, merch, ran the Pixar characters through the Disney flywheel. The movies and the content that Pixar has always produced, but was producing during this time was Toy Story, A Bug’s Life.

Ben: The very first one was Toy Story.

David: The very first one was Toy Story, Toy Story II, A Bug’s Life, Monsters, Inc., The Incredibles. Compare that to Tarzan. This was really keeping the Disney flywheel afloat was this second party IP that was flowing through it from Pixar.

Ben: Even Finding Nemo was pre-acquisition.

David Okay, yeah. It definitely was pre-acquisition. The acquisition was 2006. So unfortunate and this was the last straw for Eisner. Eisner and Steve Jobs get into a very public clash and the deal goes sour. Steve owns 49% of Pixar at this point and Pixar is a public company. Pixar announces that they’re going to walk from the Disney deal at the end of their original three movie contract.

Steve Jobs has already come back to Apple at this point. He started his re-ascendancy, the iPad, the iMac, the iPod have happened. He is an incredibly well-respected business person. Remember, the narrative around Disney has been this is WeWork and he calls Disney completely mismanaged, and basically a dead company.

The really interesting thing here, though, to come back to technology in this, to bring it back to Disney Plus, the content and the creative side of the house was a mess, but also the technology side of the house was a mess. Again, it was always new technology that was driving Disney Animation and they had just completely stagnated in Pixar. It was the one that had taken the lead here.

Ben: What they were doing was and still is so cutting edge. If you look back at Toy Story and think about the year that that was produced, it was in 1995. By no means, the photorealistic stuff that it is today, or the water, or the sky, it is absolutely pioneering and so unlike anything that anybody else in the industry was doing.

David: Yeah. I’ m trying to even remember what kind of computer I had in 1995, if I even had a computer. I think my family had a computer but I did not have my own computer.

Ben: My family had a Power Mac 8500, the Motorola chip that Macs ran on for awhile. I don’t know how I can compare that in regular Hertz or anything, but…

David: Yeah, and here is Pixar making Toy Story, incredible with the render farm.

Ben: As Nolan Bushnell told us, he figured out how to do render farms with gigantic server rooms of parallel computing.

David: Once the Pixar deal falls apart, the Disney board had enough. In late 2003, Roy Disney who is the nephew of Walt and stored off the Disney family’s involvement on the board and with the company, and its long-time Disney family lawyer Stanley Gold who’s also on the board, resigned from the board and they launch on the same day, the Save Disney campaign. It’s so bad. Here you have Disney family members, former board members campaigning and the goal of the Save Disney campaign is oust Michael Eisner as CEO.

Ben: Let’s not mince words about what Save Disney means.

David: Yeah. Save Disney means get rid of Eisner. They decided that how to get to run this campaign is they’re going to wage a proxy battle for the March 2004 shareholder meeting of Disney, where they’re going to encourage all the shareholders. The proxy vote is at the annual shareholder meeting of every public company. There is a vote. All the shareholders vote according to their voting rights on the board of directors and the management of the company. They’re encouraging shareholders to vote Eisner out of company and off the board. Note vote of no confidence.

At this point in time, Comcast is just a cable company. They are literally just a cable distribution company. They own the 76ers in the Philadelphia flyers at this point in time and they’re based in Philadelphia.

Ben: And they were nowhere nearly as hated as badly as they are today. The Internet hasn’t launch. You can’t see any tweets.

David: Yeah, totally. I mean they’re still hate. Everybody thinks that they’re the only person who hates them. They launched a hostile takeover bid for Disney. They offer $64 billion in Comcast stock to take over the company because they see like, “Hey, this damaged goods. We want to make this play. We want to get into content and distribution. We’re going to build an empire here,” and it’s a miracle it doesn’t work. It almost works.

Here we are 15 years later Comcast is a $200 billion company. They’ve acquired NBCUniversal, they have gotten their content side of the house, but Disney is a $250 billion standalone public company that once was almost acquired by Comcast.

Ben: For $64 billion.

David: Yeah. Pretty good that didn’t happen.

Ben: In a sneaky move, too, like that night before the earnings call.

Yeah: Yeah, while this Save Disney proxy war was going on. Interestingly, the media world is a small world, too, just as is the technology world as we talked about on this show. Comcast’s number two, I don’t know if its head was the COO or president or just what. The CEO is Brian Roberts. The number two person is Steve Burke, son of Dan Burke, who had worked for Bob briefly at ABC before the Capital Cities merger. There’s a lot of personal history here.

Fortunately for Disney, at least, Comcast’s bid eventually collapses because Disney stock runs up in price on the announcement of this takeover bid and Comcast just can’t afford it even with a share deal.

Ben: And what was it that made the stock pop there? There was a couple of movies that did well and there was one data point in earnings that got everyone excited. It was a small glimmer of hope in this otherwise pretty destitute time that made the stock pop and made this bid impossible to go through.

David: Yeah. I haven’t seen this in a while. It was history turning on at knife point. The bid collapses but the shareholder meeting still has to happen in March. An astounding 43% of Disney shareholders vote no confidence at Eisner at the shareholder meeting. That’s insane. That never, never happens.

Ben: Yeah. Whenever I get those things in the mail. I’m always like, “Ha ha ha,” like I can have anything to deal with this decision.

David: Yeah. In the immediate aftermath, literally that night, the Disney board meets and they strip Eisner of his chairman title. He was chairman and CEO. He’s no longer chairman of the board and he announces that he’s going to step down from the company at the end of his contract, which expires in 2006. He would end up leaving earlier, but that’s really a sad ignominious end. It’s an example of somebody staying too long. Again, his first 10 years with him in the company were amazing, but the second 10 were terrible.

The board runs a search for a new CEO and Bob Iger is the only internal candidate, but it’s a super uphill battle. He’s the COO to Michael Eisner, through all of these disasters. Nobody believes he’s actually going to get the job. They’re looking at all sorts of external candidates. Interestingly, the front runner external candidate is Meg Whitman, who started her career within Disney.

Ben: Which is the craziest thing I learned in this research. Of course, we know Meg Whitman as Meg Whitman for America or Meg Whitman of eBay. What’s she CEO of now? HP, right?

David: She was CEO of HP. Now, she’s now CEO of Quibi, bring it all full circle.

Ben: That’s right, yeah, but she started her freaking career in Disney’s strategic planning.

David: Yup, as did so many people. Jeff Jordan who went on to become CEO of OpenTable. He goes general partner for many years and now he’s just been promoted to co-managing partner of Andreessen Horowitz, board member of many great companies including Airbnb. Michael Deering, great seed stage investor. We look up to a lot here at Wave, many, many great folks have come out of Disney’s strat planning. Crazy.

Ben: All right, so you got Iger here, this guy that let all the bad things happen as COO. Come on, this was on your watch. Why are you CEO?

David: Why are you CEO material? This is where Bob comes up with the plan. We’re now in 2004–2005. Bob comes up with a plan that ends in Disney Plus. He realizes that, to get the job as CEO, he has to distance himself from Michael and he has to do that by making his plan about the future of Disney, like, “Forget the past. The past is done. We have to look to the future,” and it’s also the right thing for Disney. It’s innovate or die. They have not innovated in a long time and they are dying. They need to change their approach to consumers, to the market, to technology, to everything that’s happening around them.

He comes up with three key pillars of what he thinks is going to transform Disney and save it. One, make high quality content. Importantly, that’s content of all types, not just animation. It has to be extremely high quality. I’m going to quote from him in the book on his three-point there because I think they’re just super cogently and eloquently laid out. Again, remember this was 15 years ago he laid these out.

Ben: And importantly, branded content. Content that we own, that can be enduring franchises, that will enable the rest of the Disney flywheel to spin.

David: Yeah, so he says, “We needed to devote most of our time and capital to the creation of high-quality branded content. In an age where more and more ‘content’ was being created and distributed, we needed to bet on the fact that quality will matter more and more.” There are lots of people creating lots of content including YouTube and UGC creating tons and tons of content, some of which is great. “It wasn’t even enough to create lots of good content. With an explosion of choice, consumers needed an ability to make decisions about how to spend their time and money. Great brands will become even more powerful tools for guiding consumer behavior,” they believed.

That was just so spot on and not obvious at the time. Youtube is about to get started here. Web 2.0 is happening, Flickr is out there, everybody’s was like, “UGC, UGC, UGC.” It’s not obvious that the future is actually doubling down on professional, super high quality content.

Ben: It’s very interesting and we see this trend in a lot of ways as the long tail starts to exist. Actually, I think this is right around that time that the long tail book came out. There’s two different strategies and two different playbooks to run. One is to enable the long tail, which means that you create these smaller affinity groups around really niche things that go super deep, like the acquireds of the world and the 700,000 podcast that are out there. Then, at the head of the curve, if you’re going to be one of the few that wins there, you need to run a very different strategy to say, “Hey, these are the pillars. These are the things that America is going to galvanize around.”

David: Not just America but the world, which we’ll get into a second. It’s Avengers: End Game. I think Bob and Disney appreciate UGC and they appreciate all the technology companies and innovation, everything that’s happened over the ensuing 15 years. But it’s an “and.” There’s YouTube and Netflix.

Ben: Right, but they’re inherently not that. It’s partially why the Twitter deal fell apart. When they really looked at it, there like, “Boy all this user creates [...] there’s all these risks and stuff involved in it because people are tweeting all the stuff that they’re tweeting, but it’s not actually what we do. We create content.”

David: Yeah. Okay, so number two. Number two eventually becomes the most important of these three points is invest in technology. Rewind back to this point in time. I remember being a media investment banker at this time. Media companies were hating on technology companies. We just come out of the Napster era and now all the movie studios are worried about the same thing’s going to happen with video that happened to music. YouTube’s going to kill us and there’s all this pirated content. It’s all just crap and we hate these people.

Bob instead says, “We needed to embrace technology to the fullest extent. First, by using it to enable the creation of higher quality products like Pixar, and then to reach more consumers in more modern, more relevant ways. From the earliest Disney years under Walt, technology was always viewed as a powerful storytelling tool. Now it’s time to double down on our commitment to doing the same thing. It was also becoming clear that while we were still and would remain primarily a content creator, the day would come when modern distribution would be an essential means of maintaining brand relevance. Disney Plus. Unless consumers have the ability to consume our content in more user-friendly, more mobile, more digital ways, our relevance would be challenged.”

Again, this such a change. Remember the Disney Vault? Eisner-era Disney was all about protecting the content, limiting consumers access, only opening the halt at very specific moments of time. And then ESPN, back to getting $9 a month from the cable providers. This is super revolutionary here that Bob is espousing. He’s saying things like, “Nope. We’re eventually going to get rid of all that.”

Ben: Yeah and he didn’t say it in so many words until August of 2017. There’s, “We’re going to use technology both for creating better content and enabling better distribution,” but the whole industry, for a while, thought that meant when things like Netflix emerge, we will be okay putting our stuff there. I don’t think anyone thought that it meant what ultimately happened with Disney Plus.

David: Publicly, yeah, I think that’s true, but it’s a little unclear from the book. I think this was part of his original presentation to the board. He knew that the day was coming. Netflix didn’t even exist yet, but giving the clone of Netflix the right, where they had to own it themselves. The mindset of starting to build towards that started with Bob becoming CEO.

The third point was grow globally. Again, it’s hard to remember now. Actually, for our international audience, it’s probably easy to remember. For all the IP of Disney and especially now, Marvel and Star Wars have universal worldwide appeal in every country and culture, Disney wasn’t that back then. It was an American company. They had Euro Disney but…

Ben: And made no more obvious. When you go to Disneyland. you walk around and you’re like, “Oh, my God. I’m in the epicenter of Americana. This is the most glorified county fair I’ve ever been to. It exudes 1950s—”

David: Main Street USA and all that, yeah. This was the third pillar of Bob’s strategy. He has seen this from his time running international like, “Hey, guess what? There are a lot more people out there who don’t live in America than do.”

Ben: By the way, there’s an emerging middle class in huge countries elsewhere.

David: Yeah. He presents this vision to the board and it’s really compelling. It’s a brutal process. Honestly, there was no way he was going to get this job without something really compelling. In fact, he talks about in the book, he had breakfast with Jeffrey Katzenberg during this process and Katzenberg told him is like, “Dude, your career is done.”

Ben: [...] tells him to write up a resume.

David: He tells him to start doing community service to rehabilitate his image. Not even just do community service. That’s good but [...]. It’s so bad that if Bob has an anxiety attack when he takes his son to a Clippers game, he thinks he’s having a heart attack and is about to die. It’s just a brutal, brutal process.

Ben: There’s one management lesson in here. I know we’re talking about the book a lot, but it obviously inform so much of this and is really tremendous. At the end of the book, he compiles a bunch of his leadership lessons learned. The one that’s happening in this moment is he keeps redirecting all the criticism that he’s getting and all the questions from the board like, “It was a pretty big screw-up the last 5–10 years and you are a pretty big part of that, so why should we pick you?” He keeps redirecting that as, “Hey, the past is the past. We can’t change the past. Here is my plan. Here’s why I think it’s right. Here’s why I’m the person to execute that plan. Let’s talk about the future. Yeah, I understand where we are and I’m neither going to blame it on someone else nor said that was all my fault. We’re going to talk about the future.” It’s a pretty powerful insight on a way to redirect the conversation.

David: I think it’s one of the reasons why there’s been so much talk over the years about Bob potentially running for President someday. That’s the way to handle these things.

Ben: He’s a tremendous diplomat. By the way, I did look up the reason why the Comcast bid failed and Disney stock price spiked, was the tremendous success right in a row of Finding Nemo and Pirates of the Caribbean, which came out in the same quarter. Revenue spiked 19% and caused the stock to change.

David: The first Pirates of the Caribbean was so good, but it just went so far down hill.

Ben: It’s like Star Wars. I don’t remember there being other prequels.

Daid: Anyway, the board makes its decision. Bob is CEO. He does a few things when he gets [...]. He calls his parents, he calls his family, he calls his mentors, he tells them thanks, he calls Tom Murphy, I believe, but that night he called Steve Jobs. This is such an amazing olive branch. He calls him and talks as a diplomat. Eisner and Jobs were not on speaking terms. On the very day that Bob gets the most momentous news of his entire career, he calls Steve Jobs and he says, “I just want to let you know I want to come see you. I want to come talk to you meet in person, face-to-face and find a way to make this work.” Steve is super skeptical, but he’s like…

Ben: “Okay, yeah you can come and fly.”

David: “Sure, I guess.” That is exactly what he does, he goes up to see Steve. We’ll take a minute and tell a little bit more of the history of the Pixar deal here because it’s important and we didn’t do it on our episode.

Ben: And it sets the stage so much for why Disney’s in the position they are today.

David: Yeah. This really is the first step to first reconciliation with such an important partner and piece of the business, then acquisition, and then rebirth of Disney. Bob does go up to see Steve, but he doesn’t start with talking about Pixar. He says, “Hey, I have an idea unrelated to Pixar. We own ABC, we have all this content, we have our movies and television shows here at Disney, and you guys at Apple make such incredible technology.” This is the heyday of the iPod. He’s like, “I have my iPod, I love my iPod, and I love what this has done for me as a consumer with my ability to consume music whenever I want. Do you think there’s any way that we could do the same thing for our video content that we have within Disney and ABC?”

I remember all the media company executives at this point in time were like, “Tech is evil. They’re going to pirate all our stuff.” Bob is extending this huge olive branch to Steve and Steve’s like, “I have something I want to show you.” He does not show him the iPhone, which is of course already in the works at this point in time, but he shows him the video iPod. I remember when the video iPod was announced and came out. It was not that long before the iPhone, but it was a huge deal.

Ben: It was a strange product. I remember being very excited for it. I had the ad pinned up on my wall. That was the first black iPod, I think, and it was shiny. There was an ad was Bono singing on it. It was this blue light. I was excited for it, but it was a strange product once I got it because it was like, “Really? I’m going to watch movies on this thing that’s less than half the...”

David: A postage stamp?

Ben: Yeah. It’s just really odd. I get it, digital distribution of content and that’s cool. I can do it anywhere, but this is sub par. This is a halfway experience.

David: Yeah, but it becomes such an important door opening to so much comfort for Apple, Disney, Pixar, all of them, because Bob sees it he immediately says, “We’re in. Steve, you have my word. You’re going to get ABC and Disney content for your launch on this device.” This is unheard of. You think about the media rights, studio rights, media executives.

Ben: Or let’s get all of our finance teams involved and our lawyers involved. That’s what Steve was used to from Disney. He was like, “Cool. Doing a deal with you guys is no promises, a year of dragging this out, and every SWAT team of people being involved.” It’s Iger’s signature that he knows that he needs to put on Disney to just come in guns blazing here.

David: When Steve at the Apple keynote that summer, I believe, in 2006 announces the video iPod, Bob Iger walks out on stage and says, “All of our Disney and ABC content, you’re going to be able to purchase it, you will be able to download it, you’re going to be able to watch it on the go on Apple products. This the opening of the thawing of the relationships between Steve Jobs and Disney.

It takes a little bit of time after the announcement before Bob can become CEO, before Michael leaves and he officially is installed as CEO is about six months. In his first board meeting, immediately after he’s officially CEO, Bob asks then CFO Tom Staggs and the head of strat planning Kevin Mayer to put together an analysis of Disney Animation versus Pixar to present to the board. Bob has an idea that he hasn’t told anybody about. They put together this analysis and it’s brutal, like as you expect from what we’ve been talking about. In the same period of time that Pixar has been operating and had their deal with Disney, Disney Animation films have lost $400 million in aggregate.

Meanwhile, not only has Pixar had hit after hit after hit and had made immense profits on their films, Bob has Kevin and Tom commission brand research to ask parents in the US what entertainment brands they think are best for their kids. Disney has always been the number one in this. Disney has been unseated by Pixar. More American parents at this point in time believe that Pixar is the best entertainment brand for their kids than Disney.

This is real bad and he presents this in his first board meeting. He reminds the board about the saying about as animation goes, so goes the company, and he proposes three options, “One, we can keep the status quo; that’s not a good option. Two, we can go out and try and hire new talent to run our studios and revitalize Disney Animation.” He’s like, “I’ve looked. That’s going to be hard, it’s going to take awhile, and there’s no promise of success.” He’s like, “Or three, we can buy Pixar,” and he writes about this in the book.

The boardroom just erupts in chaos. This is a crazy idea. Board members are shouting. People like the Disney family members are offended. It’s crazy, but he methodically makes his case and says, “Look, I don’t know if it can happen. The relationship has been damaged. Steve is Steve, but we have to try and do this. I think this can save the company.

So, the board does give him approval to explore it finally. Bob called Steve the next day and he says, “Hey, I have a crazy idea. Can I come see you about it?” I just love this. He writes in the book, “I didn’t yet fully appreciate just how much Steve liked radical ideas. ‘Tell me now,’ he said.”

Bob’s driving in his car, he pulled his car over into this driveway, he calms himself, and he’s like, “I wasn’t really expecting to do this now.” He’s like, “Well, I’ve been thinking about our respective companies’ futures and what do you think about Disney buying Pixar?” Steve is silent for a moment and he’s like, “You know? That’s not the craziest idea in the world,” and thus begins the negotiation, which actually goes by very quickly.

Within a matter of months, they’ve reached a deal for Disney to acquire Pixar for $7.4 billion, which is a huge, huge price at the time, and still unclear as we talked about the episode. Financially, did that deal makes sense? It’s been okay, but that deal saves Disney and that sets them on the path to start and revitalizing the company, bring technology leadership back into the company, being creative leadership back in the company.

Ben: To the extent you believe that Frozen would not have happened without revitalizing Disney Animation, and that wouldn’t have happened without acquiring Pixar, bringing Lasseter and Catmull run Disney Animation? Then yes it’s worth it, but for the Pixar movies alone, it’s an open question. It’s interesting, actually, hearing the rationale for why it was $7.4 billion. The thing that made it really unique was it came with this full studio that number one, had films already in pre-production, so there was a road map of five years of Pixar films that were already in development, had teams, had directors, so of course you can sort of value that asset. But then also, it was a machine that knew how to do this and it had all the people and all the creative talent to repeatedly do it over and over again, which is a really interesting thing that made it different than buying Lucasfilm, because Lucasfilm didn’t have….

David: Or link with Toonworks Animation if they consider that or bring Jeffrey Katzenberg back and I’ll be like, “Yeah, Pixar was a machine.” They had their own process.

Ben: Process and a big team of people that are actively doing stuff. There's another excerpt from the book here, I just have to say that, it's amazing how much people anchor on price, so the $7 billion thing for Pixar, when they're negotiating with George Lucas and he says, “I want the Pixar deal,” you have Iger having to come back to him and say, “No, here's actually how it's very different, you made these great movies a long time ago that have a really and during universe, that we think we can do something about, but there's not any of the infrastructure, any of the current development that Pixar has.”

David: Or the technology.

Ben: Yeah. Well, there's ILM, which is pretty amazing.

David: Yes, but not anywhere near as valuable to Disney as Pixar's animation technology was. Bob and his team at Disney make the case to Steve, to Ed Catmull, and John Lasseter about why this makes sense. He talks about this—go read the book about it—but Steve and he whiteboard out all the pros and cons of doing this deal. Steve was like, “You guys already listed 100 cons.” Then they move to the pros and there's just a few of them, but they're really pretty big pros. The specific pros are for Disney, Pixar, John, and Ed can save Disney animation. They can bring the process. They can bring the talent. They can bring the technology, keep Pixar separate, but revitalize Disney animation.

Two, Disney get full access to the IP of all the Pixar characters and the perpetuity of all the content in the pipeline. For, Pixar, they remove this existential risk about distribution and marketing, that they were always going to have as a small independent studio. They couldn't just go off and be independent. They needed a distribution partner. It was going to Disney or it’s going to be somebody else.

Ben: Anybody would be happy to have them, but it wouldn’t have been someone.

David: Yeah, and then I think this is really to the people aspect of this, probably the most compelling especially to John and Ed, Bob says, “You guys are going to get a much larger canvas to paint on,” and what better way to inspire people whose mission is bringing creative endeavors to the world than to give them that larger canvas to paint on. Bob talks about the lesson in his lessons at the end of the book of sometimes, especially when you talk about like big bold risky bets, there are a million reasons not to do something. If you have a few really, really good reasons to do them, that can outweigh any number of cons.

Ben: It's interesting to zoom out a little bit and think about what the board was thinking and what some of the Disney old timers were thinking here. Specifically, Roy Disney hated this idea of, “We're going to go buy a new IP and new franchises,” and wanted to sort of stick to the strategy that has worked and not worked over the entire life of Disney of, it’s very much “not invented here” syndrome, whereas you look at where Bob Iger comes from being a non-Disney acquiree himself coming in through a business that was not homespun in Disney, but was this enormous part of Disney's revenue now with ESPN, you can kind of see why he had the conviction that, “Hey, this could work and it's going to change who we are as a company in some ways but it could be really powerful for us.”

David: Yeah. This becomes the blueprint in so many ways for the next series of acquisitions that we've already covered on the show, we’ll run through quickly here paying a very large price for very unique asset, whether that asset is content, or technology, or both with the belief, which is not just blind belief. Bob, Kevin, and Tom with him, and then the rest of the team over time, do a ton of work to plan out a model, the vision for what is going to become Disney Plus. The belief that together all these assets can be worth a lot more.

They pay $7.4 billion for Pixar and then in 2009, $4 billion for Marvel, which goodness again, forget Disney Plus, forget everything, that was the purchase of the century, given what would happen with the Marvel Cinematic Universe. It is funny, on our episode, we didn't see it yet, we missed it, we missed it. Then, they messed with Hulu. In 2012, they buy Lucasfilm for $4 billion.

Ben: The reason it was $4 billion, it was because the Marvel price was the floor that George Lucas was willing to accept.

David: Yeah, but the Marvel price, too, Bob talks about in the book, that was crazy at the time $4 billion for Marvel. There is an interview, I can't member if it was either an interview with Brian Roberts at Comcast or Bob talking directly to Brian and he was like, “$4 billion for a comic book company? Good luck with that.”

Ben: Right, and comic books were way past their heyday. They were doing some film licensing. The best characters had already been licensed out, Spider Man was elsewhere.

David: Yes. As were the X-Men.

Ben: It's kind of crazy, in this world, we’re rich potentially valuable IP had sort of lay fallow for many years. We're now in this era where it's all about having the best IP in the world and being able to make huge investments in that, and then get huge profits out the other side. I think it all goes back to this thing that we're talking about before, where you have to run one strategy or the other. You're in the business in a long tail or you're in the business of creating the iconic thing that the whole world cares about at once. It really manifested in Bob’s strategy here of what are the most unique and iconic pieces of intellectual property, worlds, and mythologies that we can really amplify.

David: And the ability within Pixar to create new ones of those. After those big three—Pixar Marvel, Lucasfilm—content acquisitions are done, the first piece of Bob strategy. Then they start to turn to the second piece, which is technology and specifically distribution. There's a fateful earnings call in 2015, a couple years after the Lucasfilm acquisition, where Bob and team were thinking about technology, all the way back to his initial plan.

They’re thinking about the distribution piece of this, but ESPN starts to really show signs of weakness. They lose quite a number of cable subscribers. This is the first in terms of actual numbers and chink in the armor of this colossus that is ESPN, and really the entire previous way of business for cable networks and cutting of the cord for consumers. In this late 2015 earnings call, they announce that ESPN subscribers are down and Bob and the team talked pretty honestly about the existential risks from disruption and cord cutting to their business.

Ben: To over simplify this cord-cutting thing is, people are seeing Netflix and Hulu and all these things were they're like, “Cool, I can get access to TV shows. Is it really worth for me paying $50 plus a month for this cable bundle. All I really care about there is live sports,” and freaking ESPN knows it by their carriage fees as we see in their economics, but people are like, “I don't watch that much sports.” Even though ESPN, live sports in general, would probably keep people or is the strongest tie to keep people on those cable networks, for the people who were subscribing, for the non-sports things that are mostly available on the streaming services now, they're the first to leave.

David: Yes, and of course because ESPN was getting the money regardless of if they're losing their subscribers. The stock gets hammered down 10% the next day and this is a big wake up call to Bob and the team. They realize like, “We've spent the last several years fixing the content side of the house and getting part one of the strategy in place, we now need to massively accelerate part two, and prepare for a world where pay TV and the cable bundle and everything that that means not just for ESPN, but for all of our content and that piece of our flywheel is going away.”

They start looking around for technology acquisitions that can make this happen. As we said, they come close to a deal to acquire Twitter and interestingly this never made sense. The idea was that they were going to buy Twitter for the technology and the access to consumers and they were going to use it as the distribution head for what would become Disney Plus, doesn’t make any sense.

Ben: Well, that’s exactly how a media company would think about buying a technology. First, they're like, “Well, who's got the best technology? Apple? Google? No, they're too big, they're too big. Next room down, Twitter?” It's a very blunt way to look at, “We need technology.”

David: Bob talks about their deal falling apart because of the UGC content issues, the free speech issues, the hate speech on Twitter and all that. I'm sure that was part of it, but, honestly, the deal also just doesn’t make any sense. What they do instead, as we talked about in our BAMTech episode, makes so much more sense, is they invested and then they acquire BAMTech, which is just a technology provider and the best in the business—other than Netflix—of delivering streaming content both for live sports, for powering HBO Now, and entertainment content services like Netflix, Disney Plus, and all these into the company.

Ben: Then Twitter is my biggest thing that I want to talk about in Playbook is sort of the vertical versus horizontal conflict, where if you're buying a business that already serves a bunch of other customers and has a bunch of other stuff that they do, buying them to just do your vertical thing would be tricky. Like on Twitter. Are they going to stop it from being Twitter, so that they could make it Disney's Twitter and only distribute Disney content? It just like this is massive vertical-horizontal conflict.

Whereas in BAMTech, sure they get paid pretty good money to power that tech for other people's platforms that may or may not go away over time. Even though they're doing a horizontal service to the industry there, by Disney using them for this intensely-focused verticalized capacity of disturbing their content on their channel with Disney Plus, with ESPN Plus with now Hulu, it's not creating conflict.

David: Yeah, totally. In 2017, they complete a majority purchase of BAMTech. They own 75% of BAMTech, I believe the other 25% is probably employee equity and Major League Baseball.

Ben: And the NHL owns a bit.

David: Yes, and the NHL because they did a streaming rights deal with the NHL.

Ben: Interestingly enough, this initial BAMTech deal was done to power ESPN Plus. ESPN needs a streaming service and hadn't yet conceptualized of Disney Plus.

David: Well, they were starting to conceptualize of it, but it was going to take longer because when they did this deal, they announce on their earnings call after—this is 2017—that they’re launching ESPN Plus, leveraging BAMTechnology, next year in 2018 and they are going to launch an as yet unnamed Disney content streaming service to compete with Netflix.

Ben: “We’re launching ESPN Plus and we're launching a Disney thing, it's very similar but we haven't named it.” That’s very coy, you guys.

David: Yes, they haven’t named it yet, but they're not that coy. They also announced like, “Hey, you want to know how serious we are about this? We're taking our content off of Netflix.”

Ben: That’s true.

David: “As our content agreements with Netflix expire, we're taking it all off and this is all going to only be on Disney Plus.”

Ben: If you're bored or something—we’ll link this in the show notes—August 2017 earnings call is crazy, the amount of stuff that it has. “Hey, 25 minutes ago, we just did this BAMTech thing. We're doing it for ESPN. We're launching ESPN Plus. We're going to do a Disney thing and we're going to pull off of Netflix.” It's like bam, bam, bam.

David: Yeah. This is huge, Bob writes it about the book, this was like a major turning point for the company and their mindset like, “We're all in on this.” The street loves it. The stock is up significantly after earnings call. Netflix stock drops 5%. We’ll get into ESPN Plus and Disney Plus here in a sec, but this was a hard decision for a bunch of reasons. You know who hates this? Disney's pay TV partners. The cable companies and satellite companies that Disney’s basically saying like, “Hey, in the future, we're going to end around you guys.” You also sort of knew what was coming, but like, “Nope, it's happening.”

Ben: Yeah, “You're our most important partners now, but we did just announce that we have a 20 year vision to not be, or a five year to not be.”

David: Yeah. That's number one. Number two, again, Disney's a huge company but the rights money that they're getting from Netflix…

Ben: Hundreds of millions of dollars.

David: Hundreds of millions of dollars a year, that is pure marginal profit to Disney. It doesn't cost them anything and they've already produced this content. They're just leveraging their content through an additional distribution channel. They're just getting pure cash flow margin from Netflix and they're cutting that off, to, instead, go spend $2.5 billion to buy BAMTech and invest many, many billions of dollars over the coming years to build up their own streaming service.

Ben: Yeah, it's interesting to think that one of the reasons why the innovator's dilemma is typically so unavoidable, is because you can't—especially as a public company—get the leeway that you need from your shareholders to do something really risky, that's going to take a really long time, and it's going to cost you a ton of profit in the near term. This really is like hundreds of millions of dollars of pure profit that they're just like foregoing for five years, for years to come here.

David: How are the next set of carriage agreements for ESPN going to go with the pay TV providers when now they know they're going to be like, “$9? Yeah, I don't know about that but I'm not going to pay you that anymore.”

Ben: A lot of what it comes down to is do you actually have a leader who's going to get that leeway and that really long term thinking from shareholders to be able to sort of act like a startup while you have this business that you're trying to preserve the glide path on. Typically, an executive wouldn't. I think it takes someone who's earned the trust like Bob had.

David: Contrast this decision to the end of Eisner's time at Disney. Eisner did many, many great things, but the Ovitz decision, the feuding with Steve Jobs. It was all about, “I'm so great. I built this thing and it's going to be the best forever as it is,” and this is the opposite of that. It’s saying, “Nope, this is precarious. Innovate or die,” but there is one more thing and that one more thing I think is actually both a huge piece of this and opportunity, but also it’s pretty scary and that is Fox.

There is one more acquisition of which is by far, the price that they paid to buy Fox announced at the end of 2017 and close to the beginning of 2019, $71.3 billion, many, many times more than all of these other incredible acquisitions all combined. This is a literally betting the farm on bringing in Fox. Now, so what do they get for Fox? None of the news assets. Not Fox News, not the Wall Street Journal, and not the publications. It’s all the entertainment pieces of Fox. They get the movie studio. They get studios which both new slate of films coming out and the library. Titanic, Avatar, all the great Fox films. Within the library are the rights to a New Hope to the first Star Wars movie, because remember Lucasfilm had Fox as the distribution partner for the first trilogy.

Ben: Star Wars fact time. The theme to Star Wars was actually composed in the key of B flat. I don’t know if it’s major or minor, but B flat because the 20th Century Fox opener was in that key and it was meant to be sort of like a natural lead in.

David: No way, I never realized that but you're so right. It’s the same key.

Ben: Actually John Williams in Empire Strikes Back got to re-record with his orchestra the 20th Century Fox intro to lead right into it.

David: That's amazing. I wonder if now the Fox intro is going to come back to Star Wars because now it's part of Disney.

Ben: I don't think so.

David: Probably not but it could. The other things that they get, so we mentioned a little bit of Marvel but the X-Men and Fantastic 4 movie rights were owned by Fox. Those are key Marvel franchises so that's now back in the Marvel Cinematic Universe. They get a big part of the library for Fox's television, not just film like The Simpsons specifically. All 30 seasons The Simpsons.

Ben: Thirty seasons of this is unreal.

David: Yeah, incredible. Then to the third goal…

Ben: And National Geographic.

David: National Geographic, yup, but to the third piece of Bob's plan and this hasn't been talked about as much, Fox is a much more international company than any of the other US media companies were. Fox has huge content and distribution operations all over the world. Obviously, Fox started in Australia with Rupert Murdoch, but especially in India where Fox owns Hotstar which is the largest streaming service in India. I believe both for entertainment content and for sports. They stream cricket which cricket in India is like the NFL and the NBA combined in the US, which by the way, a total side, cricket is very compelling content. I love watching it.

Ben: Do you have a Hotstar subscription?

David: No, but maybe with Disney Plus, I might now. They're getting a lot here, but $71.3 billion is a huge, huge price tag.

Ben: That was bid up from $58 billion right?

David: $52.4 billion was the initial agreement. I feel like Comcast and Carl need to do something together. We do have Brian Robertson, actually we should have Steve Burke on the show, that would be amazing. Steve, if you're listening, open invitation, both you and Carl, we'd love to have you at any point in time. Yeah, it gets bid up to $71.3 billion.

The thing that I wonder with that is—I'm curious what do you think Ben—this actually is a different thing than the marquee acquisitions that have really made Bob's career.

Ben: Yeah, I don't look at this as an IP acquisition or franchise acquisition, the way that those other big three were. This to me is kind of more distribution than it is content.

David: Here's my bull and bear case on this to pull it forward quickly. The bull case is they're launching Disney Plus and Bob talked about it. This is the stated strategy. They want Disney Plus, the whole ESPN Plus, and all that to be in the future a viable competitor to Netflix, and alternately deter Netflix. Disney has all this great content, but it's just Disney content. Does Disney plus all of this Fox content, is that enough now to make all of that exclusive to their streaming services and not on Netflix? Is that enough to really dethrone Netflix?

Ben: Yeah, actually you're right. I should walk back my “it's mostly a distribution thing.” I think you're right because one of the things I've been actually struggling with Disney Plus is on December 27th the last episode of season one of the Mandalorian is going to end. Will people stay subscribed? What's next? I think they've got plans to do 10 movies over the next two years and all these different TV shows. People are hungry for lots of content and does Disney actually have enough content and development to make this really compelling in the early days? Maybe Disney plus Fox over the next 2-3 years can make it something that feels really full and rich.

David: That's the stated reason for doing this. I think the scary thing, though, is this Bob and Disney falling victim to some of the things that brought down Michael of Empire Building.

Ben: The overreach and the great tragedy.

David: The overreach, yeah. Just reflected in the deal and the purchase price, the initial negotiated deal for $52 billion, bidding that up to $71 billion, and Bob talks about it in the book, he felt like he needed to come in with the “knockout punch” to get Comcast out and get Fox. Is that really the right thing, did they really pay the right price for this?

Ben: Or could they have continued their March of acquiring different franchises for a billion here, a billion there and come up with enough content, too, and it's not just enough content. It has to be the best content in the world that is the most celebrated, and content that the world feels the most emotion around. It has to be that content.

David: And the teams and talents to continue to keep that content fresh. They’ve already talked about the state of the studio and the slate of films for Fox that they acquired is not in as good a shape as they thought it was. I think it's an open question.

Ben: My bet is it will prove to be a generally good decision, although the $71 billion will look like a too high a price tag.

David: Yeah. I think that's probably fair. Let’s put a bow on Disney Plus then we can come back to analysis and grading.

Ben: One thing I wanted to point out here. First I want to make this point. Bob talks about how after the Fox deal got done, he stood in front of a whiteboard to sort of come up with a reorganization of the company, what does a modern media company look like. From 2005-2018 he said, “This is the only time I've stood at a whiteboard since 2005 with Steve Jobs.” I don't know if that's hyperbole in the book or if I just fundamentally do not understand the job of a global Fortune 50 CEO, that this is not in their workflow at all, but I was like, “Whoa, that's a long time before whiteboarding something out.” That’s very different than my day-to-day.

He talked about how he was whiteboarding out this organizational structure for the combined company where you have a separation from technology and from content. He sort of have this physical goods thing as well. Think about technology and content, where technology is in charge of distribution and monetization, and content is just in charge of content. I found myself laughing while reading this, because that is the traditional newspapers organizational structure from way back when. Like keep the journalist doing their journalist thing, don't bother them with this business model thing that these ad sales guys have to do over here.

That fell apart in the era of the internet. It’s just so interesting to see call it bundling, unbundling, or push and pull, or tick-tock, or what's old is new again. There's lots of aphorisms for it, they all mean slightly different things, but in this case, it is mind blowing to me. I think it's going to work that this sort of traditional newspaper org structure of separating content from the content delivery and business model around that content delivery in different organizations. That’s how it's playing out.

David: Yeah. It also highlights like they bought Twitter. This would not have worked at all. That work structure and this whole plan only works if the technology is BAMTech. It’s a distribution rails technology, not a consumer-facing content and technology married together.

Disney Plus, April 2019 of this year, they did a big investor day to announce Disney Plus. Kevin Mayer, the long-time head of strat planning, is now put in-charge operationally of running Disney Plus, running this new segment that is the future of the company.

Ben: It’s important to know that it has strat planning. He was a deal guy. He was an analysis guy, a hard-charging leader, and a deal guy, not from the creative side of the house.

David: Yes. This is his big test and a lot of people think this is his test that if he passes it, he will be Bob's successor when Bob has announced his retirement in 2021. They announced Disney Plus, all the content on it, Mandalorian, all the Fox content that's coming on with the Simpson's, National Geographic, and then they announced the price. The crowd goes wild, $6.99 a month compared to $12.99 a month for the basic plan of Netflix.

Now of course, even with all the Fox content, Disney Plus is still quite behind Netflix in terms of the amount of content that they have on there. This is a really, really bold price to go out to consumers with, and I'm sure there's been a lot of time thinking about this, but the aim is they wanted to set a price that they felt like they could get 60-90 million subscribers within the first five years. Wall Street loves it. The next day, the stock is up 11%. By the end of the month, the stock is up 30% after this announcement. Then the service finally launches last week November 12, 2019, my birthday. It’s a nice birthday present to watch the Mandalorian.

Ben: Happy Birthday, watch the second episode.

David: I do need to watch the second episode, and they get 10 million subscribers in the first week. We’ll talk about this in the analysis, but so far so good.

Ben: First 48 hours.

David: First 48 hours. Yeah.

Ben: Do we want to talk about the caveats right here?

David: Let's save it for the analysis. A very auspicious beginning that it is off to. Now, lots of questions still remain in the future, but here we are now at the end of 2019 and this company looks so different than it did when Bob took over as CEO. Back then, it was “as animation goes, so goes Disney,” and the lion's share of the revenue and profits came from ESPN carriage and advertising deals which were intermediated through pay TV providers.

Ben: Best I can tell right now I think ESPN cable affiliate fees are responsible from somewhere around 25% of Disney's revenue.

David: Yeah.

Ben: It's still a material and not an old world. Even as we talk about betting the farm, and changing the business model, this ESPN Plus thing is not going well. They only have 2 million subscribers, we’re over a year in, and it doesn't have the content, it's not like you stop subscribing to ESPN and start subscribing to ESPN Plus, it's like sort of these…

David: It’s seriously handicapped.

Ben: Yeah. ESPN, let’s be clear on this. The affiliate fees with cable companies currently are still a juggernaut. Even though they're not the entire enterprise value the way it used to be.

David: Yeah, totally. But if you look at it today and you've got revitalized animation with Pixar and Disney animation. Frozen 2 coming out in a matter of days here. You’ve got the Marvel cinematic universe highest grossing films of all time. You’ve got Lucasfilm and Star Wars, and all the revitalization there. All that on the content side and now you've got the addition of all the Fox content. Then on the distribution and technology side now, you've got not only Disney Plus of course, but you’ve got ESPN Plus which we should talk about a little bit is handicapped. This is one where they've not played the innovator's dilemma. They're really hamstrung here, but the current ESPN Plus offering is just not compelling. It contains no major sports content.

Ben: I think they're slower on that one more than they are with Disney Plus. I bet it will continue to be hamstrung until that 25%, and again, I'm ballparking there. It’s not an actual number. It’s my best guest by running some numbers. Until that comes down to 15%-10%, until it really wings off, I don't think we're going to see them throwing. There are some sports…

David: Football, NBA, NFL, and Sports Center on there. True, but it is set up to do that once that threshold gets crossed. They have the technology in place to do it. Then they have Hulu which they now own 2/3 of and are obligated to buy the other third.

Ben: Yeah. That's a little bit of a head scratcher here. I think that's the one where they're like, “This is part of the strategy because it's also streaming.” If we could play it all back, I'm not sure that that they would get it.

David: I got to imagine, they've already introduced the Disney bundle of all three of those services for I think $18-$19 a month. It's not a large leap to imagine that becoming a real bundle in all of entertainment, sports, and rights to non-Disney properties all in one subscription that as consumers going to with that, they’re like, “Wow, Netflix has a lot of stuff, but they don't know sports.” They have a dwindling amount of stuff.

Ben: And honestly, if that's $18–$19, that's not that much more than that word Netflix has raised their prices for HD and definitely when you compare to their 4K offering.

David: Exactly. It's promising, I think, but as always, they're a bunch of nuances to tease out here. Let's see. Where should we start? I think, rather than acquisition category because there's so many of them, what if we do bull and bear narratives here?

Ben: Yeah, that sounds great. So, the bull narrative is the image that I always picture in this scenario. It's the hero running out the building that is exploding behind them and managing to just barely make it out alive.

David: Would [...] say pull the brake, spin around as you're about to drive off the cliff?

Ben: Exactly. In the beginning of this episode, I proposed that combining content and distribution has failed before and may fail again. This has typically been for two reasons. One is both content and distribution businesses typically intend to keep horizontally operating but realize some synergies by working together, distributing the content that they own or on the pipes that they own. You can see the problems that arise here and that you prioritize doing deals with yourself or not.

The second one being at the clash of cultures, there's a clash of cultures and a misperception of value. That last probably, we definitely saw what the AOL-Time Warner were. Creative houses are very different than this low-margin predictable distribution businesses.

I think Disney actually has the chance to do this right. They aren't buying some other distribution company. I mean, they did buy BAMTech but they bought that for exactly the right reasons and they do nothing more than the scope of—

David: Well, it was pure distribution technology, which AOL was not.

Ben: Exactly and actually, it wasn't distribution. You're right. It's distribution technology. It's not like BAMTech already has all these relationships with consumers that Disney is going to flow through to.

David: Disney-Twitter, I think, there's a really good chance that could've been AOL-Time Warner.

Ben: Totally. They also don't have a vertical-horizontal conflict here. The only shows that are on Disney Plus are Disney. I think this time, really maybe different. That's my bull case.

David: That's the bull case. As we are just talking about the end of history and facts there, "Okay, roll the clock forward a little bit." Let's say 2024, that's the time frame that Disney is talking about in terms of their five years strategic plan here.

Say, they put real ESPN into ESPN Plus, so the price is up and there's been inflation and what not. $29 a month then, I'm offering you all Disney content, all Fox content, all ESPN sports content, and access to everything on Hulu, which they have locked up access to at least MBC content on Hulu as well as all the other small media companies that are on there as well.

$30 a month for that versus to get a similar, sweet of offerings to that one-time, you're probably looking at probably close to $20 for Netflix plus you're doing a Youtube TV or something begets sports. You may not even be able to get a lot of sports any other way. Is that compelling to you?

Ben: Hmm. Probably.

David: Yeah. Really at that point, what they're offering is a true viable alternative to an old cable description or a satellite subscription, which was $100 a month. Now, you're getting it on any device, anywhere, or wherever you are for $30 a month.

Ben: Yeah. The fascinating thing is that Disney may be able to rebundle and actually own all the content. That is the mega, megable cases.

Imagine if you're Comcast but you actually own all the content that's flowing across all the channels as well. You don't have to pay out that COGS or at least the merchs associate with the COGS.

David: Now, take it one step further. Remember, Disney was primarily an American company before. In the pay TV bundle world, they were doing great but they go and do all this carriage agreements with all these pay TV providers primarily in the US. Now, with direct, they're in every country in the world. They're in India, they're in China, they're in Europe.

Ben: True access to global markets.

David: True access to global markets. Maybe they're only making $30 a month per subscriber which is a lot less than pay TV is making with a 100 bucks a month but their addressable market went from 300 million to 3 billion.

Ben: The thing that I've been thinking a lot is really the true brilliance of the Disney flywheel in action. If we were just thinking about this as a revenue transfer where we were trying to take that money that we would make by distributing that content on someone else's platform and then figure out, "Are we going to make that money back by distributing it on our own? And just charging people effectively what our margin would've been or what those distributors would've paid us,” that's the wrong way to think about it. That's not the right way to value this streaming offering.

It's really about the direct relationship and turning Dsiney's hundreds of millions are loosely connected, I call them fans, into real and actual customers with an actual defined digital relationship, with an email address, with data analytics, with a way for Disney to reach out and actually communicate with those customers whenever they want, however they want, and not just hope that they planted some seed in their head that you love Mickey mouse.

David: And I take it one step even further. You are a Disney Plus subscriber, whatever this bundles called, and you want to take your family to your local Disney park. Whether that's in Shanghai, or Europe, or India, I'm sure they're working on something, or the US. You show up and they're like, "Mr. Gilbert, it's so wonderful to see you. Thank you for being a Disney Plus subscriber. Here are all the benefits." You can start to see this really start to make sense.

Ben: Yup.

David: Okay. That’s the bull. What’s the bear?

Ben: Well, this quarter, the Direct-to-Consumer Plus international segment that is under 2 years old, lost $740 million. It is the only unprofitable part of Disney, which if we look back at their last year, everything is crazy.

It's not they're operating profit margins, something like 25%-30% most businesses but media networks made $7½ billion, parks made $7 billion, studio made $3 billion and here, you're sitting here with nothing but losses in this thing right now.

This comes from a great bloomberg piece but there's an analyst, Moffetnathanson, that expects the three streaming services to lose a combined $11 billion over the next 4 years and finally turn it to profit in 2024. A lot can change in five years, both internally Disney and externally in global markets. Let's hope they keep the leeway that they need to make this happen.

Bob's leaving in 2021, so it's not like it's all going to be profitable and a clear good decision before he leaves, which I think is scary. I don't necessarily think this means that it isn't going well, but when Disney said, "We have 10 million activations in the first 48 hours," there are 17 million households that use Verizon, that got first-year-free offer. However many of them converted, I think there has been major discounts given or free trials given to people who are part of the existing Disney fan club, this 10 million number's a little bit of a silly number to base anything off but it definitely makes everyone feel it's going really well here in this first week.

David: I think this is super interesting. Jenny and I are Verizon wireless customers on an unlimited plan, so we got a year free Disney Plus. Yeah, for sure I signed up for that. Would I otherwise have paid to sign up for Disney Plus? I don't think so. Now, the really interesting thing though is am I going to keep it when the year ends? I think there's actually a really good chance that I might. I think this is actually probably really bold, but I think it's a really good marketing way of Disney. The 10 million, it had some help along the way.

Ben: One reason to doubt it, too, is I think Disney may be underestimating just how much content people need to stay satiated with new content.

It's a beautiful and amazing thing to have access to all these entire back catalogue of all these really storied franchises but am I going to pay $7 a month to keep an option available to go and watch those things? No. If I ever want to rewatch a Star Wars movie, I'll just reactivate my subscription at any given time. They really do need to aggressively turn on a fire hose of content here. I'm thinking about cancelling my Netflix subscription. Right now, I'm using it to watch The Office reruns and even that's going to go away.

I think we live in this world where people are going to get more and more ruthless about, "Am I really willing to give you money on an ongoing basis and are you really providing new value to me every single month to be able to do that?"

David: Yeah. Well, that's where well over a decade, two decades, ESPN was the heart of Disney and I think that's the biggest ship that Disney has that nobody else has out there, which is ESPN Sports.

Not everybody cares about sports for sure, but for people who do, that is truly unique content you cannot get except the places that have the right to show sports. That is not Netflix and that is not Youtube.

Ben: Well put. Do you want to go into what would've happened otherwise?

David: I feel like we covered a lot of stuff along the way with Twitter and whatnot.

Ben: I have one paused on that. The other cause of action here would be if Disney doesn't do a direct-to-consumer streaming thing. I touched on this a little bit, but I want to explore it a little more because I think it's important. If they had said yes to everyone who want to distribute their content, so it starts with Netflix and who knows where it goes after that, and Disney truly becomes content and really lets everyone else do distribution, Disney's business relies on the flywheel and always has. In a pre-streaming, pre-digital world, they could have the flywheel going by going through distributors like cable channels and movie theaters. But now in this era of email address logins on demand, using data to profile customers, Disney was, for the first time, facing true discernmentation if they didn't digitally own that relationship with their customers.

If you watch a Disney movie on Netflix, you probably will be less inclined to buy that toy or go to that theme park. In short, I guess what I'm saying is, Disney's customers, by becoming more explicitly the distributors customers if they have gone that Netflix route, could effectively leaked out off the flywheel in a way that Disney didn’t have to be worried about before. That's the additional bull case but I do think that what would have happened otherwise is forming digital relationships could allow for Disney to basically lose the power of their business model.

David: Yeah. Totally agree. I mean, I guess that’s why they had to do this.

Ben: Yup and it really comes down to that. That thing that honestly, I did not realize until starting to do this acquisition but that parks, resorts, licensing and products makes twice as much money for them as actual studio revenue.

David: Yeah. They can have Avengers: End Game, highest grossing movie of all time, but it doesn't end there. They get at least another trip around the bases with all the flywheel associated revenue from those properties.

Ben: All right. What do you got from playbook?

David: Number one for me is the “innovate or die” philosophy. From Roone Arledge, through ESPN, through Disney, and really has been Bob's story here. We'll see how this goes. We'll get to grading at the end. I'm optimistic. What was the film show [...]? The headphone jack.

Ben: The dongle.

David: Yeah. Courage to review the headphone jack, which is laughable. It takes real courage. You're telling your most important partners, "We're going to leave you not tomorrow, but within 20 years." You're giving up hundreds of millions of 100% margin cash flow. This is a big risk, but very well thought out they hit the right one. I think that's my biggest theme.

Ben: One we didn't talk that much about in this episode that I've been noodling on is this idea of who's running the show? Is it creatives, visionaries, and people who are thinking about innovation? Or is it people who are thinking about protecting what you have? I think for 1997–2003 or so, Disney is really in this protection mode. It's like when you're playing poker and you're up and you start playing. Some people play more loose when they've got a big chips stack. Other people go into if it's a cash game rather than a tournament going to value protection mode and figure out how to not leave the table with much less money than they currently have now.

I think there is just this big mindset shift where they said, "No. We actually need to empower the creatives to do what they do best." A big part of this, this is what we didn't talked about the narrative, but under Eisner, there was this big strat planning group that Iger basically disseminated when he came in, change what they do, and said, "Look. You don't have all the power anymore to decide what we do and what we don't do at Disney. That's going to get deputized to people who are running these businesses.

David: Yeah. Kevin Mayer is such an important executive and has been under Iger. It is, in many ways, don't seemingly apparent to him but his strat planning group under Iger became the deal group of making all this happen. Under Eisner, the strat planning group was running the actual businesses and that was not good.

Ben: Yeah. If you're getting acquired, they went from both the deal sponsor and corp dev to  just being corp dev.

David: Yeah.

Ben: The one I want to touch on here, this is a great quote, I think from Kevin Mayer in that same Bloomberg article that I referenced, where he says, "If you want to understand everything in future Marvel movies, you'll probably need a Disney Plus subscription because events from the new show will factor in the forthcoming film such as Doctor Strange in the multiverse of madness."

David: I really like the Doctor Strange movie, by the way. I think it’s [...] MCU entry.

Ben: I think so, too. I think this idea and obviously, David and I believe it too because we created the LP show. This notion that you can create on offering for people who want to go deeper and make that as subscription thing and make it so you can participate more in a franchise that you care about.

Disney's taking me to the next level where they're saying, "Look, if you want to understand everything about this movie, like you actually do need to be a Disney Plus subscriber because the movie is not going to explain it all and Disney Plus will." They're not putting too big of teeth into it where the movie trails off before the climactic event like, “Catch the rest on Disney Plus.” They're not doing that, but they are giving it a little bit of a bite where they are saying, "You got a great film that is going to make you really entertained and you're going to walk out excited." If you care about knowing the intimate full story, you really do need actually to be a Disney Plus subscriber.

David: I do this all the time. You walk out of a Marvel movie or a Star Wars movie, you immediately go to Wikipedia and you're like, "I'm going to know everything behind it." Now, Disney saying like, "Okay. You're still going to that, but you want to actually see it and experience that? Come to Disney Plus."

Ben: I have a whole routine. I go to IMDb, I read all the trivia, I read all the Wikipedia page. If there's a fandom thing, like Star Wars, Wikipedia, any of those. It's interesting, actually. There's this whole content universe that exist outside of the creators of the IP that now serves some of this need.

David: Totally.

Ben: The last one that I want to bring up is why does scale matters so much and why are we in this era of scale and consolidation? The comment that Rupert Murdoch made to Iger when they started the discussion was just alluding to the idea that, "Hey, you have the scale to succeed and thrive in a world where you need that and we at Fox don't. We're not set-up to do that in the way that you at Disney are." Now sort of the way that they said, "Hey, we want to sell to you guys." Why do you think that's so important right now?

David: Well, I have a bull and bear case here. The bull case is the same reason that it's the stated rationale for buying Fox. The scale is if you believe they are only going to be a couple of streaming services that survived in the long run, you need to have enough critical mass of content that somebody is going to be willing to pay you, in a way that Netflix is the only one that really has this, that stand alone as people want to pay for.

There's enough content on here, I'll pay $13 a month. Disney alone probably, even with all the great franchises they have, wasn't going to have that. And Rupert saying things like, "We have in Fox like we would have in Avatar. Who's going to pay $13 a month for Avatar?"

My bear case here though is like having used to work for Rupert Murdoch. He's crafty. He's wildly like a fox, especially given the bidding more on how much Disney ended up paying here. Was he really just trying to play into Bob's vision for the future just like off-load Fox for a boat-load of money? I think both things actually may be true here. It may be the right thing, it may be a good strategic decision for Disney. Rupert value maximized here, especially given that we haven't talked about the whole family business drama and dynamic around Fox. That's my take.

Ben: I like it. The only thing I'll add to that is that, again, moving into my bifurcated long tail and head of the curve thing, we've moved into an era where the head of the curve productions are so expensive and they're sure things. When you go and produce Infinity War, you know that, that is going to be in the billions of dollars of grossing. You can spend $200 plus million producing it. That's what that's what these category is now. A lot of innovation, creativity, and trying new stuff has moved down to TV and these OTT services. It's like you need scale of distribution down to amortize the cost of creating this content across so many people.

This is the classic Ben Thompson comment about why Netflix wins versus anybody that is trying to be like Netflix. Obviously Disney Plus is a different strategy because they are coming from a very different place, but in order to finance the type of shows that Netflix is financing or to pay to acquire the rights of any given show, it's a pretty simple model of how many paying customers can we amortize across? And that plays a big role in this, too.

David: It's an amazing example of scale economy's applied to technology as well in the right cases.

I have one more really quick which is going to double as my carve out, is everybody go read the book. Go read Ride of a Lifetime. It's so good and we haven't talked as much of this episode because this episode is about strategy and about Disney Plus. Bob is either we’ve alluded him being a diplomat. The way he manages, the way he lives is so inspiring.

I texted a little bit with one of my good friends, Ryan, a friend on the show who worked in Disney strat planning for Kevin Mayer for a number of years. I asked him, "What is Bob like really?" He's like, "I will be in meetings with him and he would listen to me as intently, as a 24 year old kid, as he did to Kevin. He truly has a very low ego, very low pride. He wants the best decisions and he respects everybody.” It’s such an inspiring way to go about things.

Ben: It's awesome. I had a different one but I'm going to follow a year lead and do a theme-appropriate curve out. I've watched the first couple episodes of the Imagineering Story on Disney Plus. It is the documentary behind the scenes of creating first Disneyland, then Disney World. Basically, showing a lot of behind-the-scenes stuff in areas that have previously never been filmed or at least never had the film released because a lot of it is from the 50s and 60s of what it is to be a Disney Imagineer and how they built all the amazing things they did decades before other people played with that type of animatronics technology. It's really cool. If you're into this episode and you've read that book like it's the next logical thing to go and do.

David: Disney's got me. I'm going to go pay at the end of the year. Try all the episodes. We got to grade it, though, before we go.

Ben: We do. This is definitely one where we can actually issue a grade. Now, we can only issue here what we think an A+ would be and how that could happen or why that would happen, and here's what an F looked like.

We basically painted both pictures in the bull case and in the bear case. To me, the way this truly becomes an A+ is if I hadn't realized until you said it, David, but if a Disney Plus, ESPN Plus, and Hulu replaces the full gamut of the cable bundle which is $50-$70 a month thing, plus replacing some of the old like going and buying VHS movies, plus some of going to movie theater revenue.

Now, with a great 4K TV at home, if they're going to drop the next, they probably won't do it for Star Wars, but you could imagine some more to it like drop a Star Wars movie and you just watch it at home.

David: Or they put the live action Lady and the Tramp on [...].

Ben: Totally. So, you think about it, you got $60 from the effective replacement of the cable bundle. You've got replacing and buying DVDs a month, so it's another $15 plus going to see a movie, you're in this about $100 a month category that you're paying and Disney owns all the margin there because they are the content producer and the distributor. With the bull case is that they actually pull that off and don't have to go to other people for the content or the distribution.

David: Yeah. The only thing I've added is my take this into an A+. I think that’s an A. Take this to an A+ is international, too. Just like Netflix, that becomes not only true in the US but they go to every country in the world, too, and massively increase their [...] for this.

Ben: One bear case I had and this isn't quite related to Disney Plus, is more related to ESPN Plus. In the same way that Apple will probably never release a product that is more widely purchased and within a higher profit margin than the iPhone, Disney may never stumble onto business as good as the carriage fees for ESPN to cable companies, ever again. That may have just been a complete and total anomaly.

David: Yeah. George Bodenheimer.

Ben: Yeah. In some ways, how can we preserve what we have with ESPN now that all the cards are changing around? We may not be able to. But that's not exactly grading Disney Plus and that's not exactly grading all these acquisitions including Fox to get us there. What's the bear case for doing Disney Plus?

David: I think the F is that Fox becomes an albatross, starts losing a ton of money, the studios don't pan out, can't maintain and produce new IP. As a result, Disney Plus doesn't enough compelling content to be a compelling alternative to Netflix.

Ben: Yup. You don't think that somehow it would fail? I don't how this would fail but if they somehow, by doing this actually decrease people's fandom to go to parks and buy goods, and buy licenses, but I don't think that's [...].

David: That seems so far [...]. Can't wait to go to Star Wars.

Ben: This is Disney.

David: We’re planning a trip for next year.

Ben: Oh, nice. I think my next step is I haven’t been to Disney world since I was six. At some point, they're going to open a Star Wars themed hotel outside a Galaxy Edge in Disney world. That'll probably the time to go.

All right. Well, listeners, if you want to hear more acquired, you should go and check out the four individual episodes on Pixar, Lucasfilm, Marvel, and BAMTech.

David: And [...] ESPN.

Ben: And ESPN. That's right. And thank you for being with us on this journey to a galaxy far, far away. If you want to go behind the scenes on company building, you should consider becoming an Acquired Limited Partner.

Recent episodes have included Chetan Puttagunta, general partner at Benchmark, and Tracy Lawrence, the Founder and CEO of Chewse. Tracy took us into the mindset of a founder growing a 300-person company in the food industry and everything that it is to found, grow a company, and frankly, deal with that as a human.

To listen, you can click the link on the show notes or go to glow.fm/acquired and all new listeners get a 7-day free trial. If you stick around after this, we're going to apply a little excerpt from that episode here. With that, thanks again to Silicon Valley Bank and we will see you next time.

David: Talk to you next time.

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