How Iger Broke Disney's Netflix Addiction - The Information

4/11/2019 How Iger Broke Disney’s Netflix Addiction — The Information
EXCLUSIVE ENTERTAINMENT
How Iger Broke Disney’s

Netflix Addiction
ByTom
Tom
Tom
TomDotan
Dotan
Dotan
DotanandJessica
Jessica
Jessica
JessicaToonkel
Toonkel
Toonkel
Toonkel Apr 09, 2019 6:32 AM PDT
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I
n the spring of 2015, Tom Staggs, who had just become Disney’s chief operating officer,
held a strategy discussion with his top TV executives about the future of television. Mr.
Staggs issued warnings about Disney’s licensing of TV shows to Netflix, worrying that the
entertainment giant was selling Netflix “the bullets” to fire at Disney’s hugely profitable
cable TV business, according to four people familiar with the meeting.
https://www.theinformation.com/articles/how-iger-broke-disneys-netflix-addiction?fbclid=IwAR2flz-MbsTMLFh2fuoUYoY-16t1qBfXdjIjsO8qqEs8xxFdjR44POkf… 1/14
In making these comments, Mr. Staggs was allying himself with a group of senior Disney
executives, including ESPN chief John Skipper and Chief Strategy Officer Kevin Mayer, who
had already raised concerns that selling Disney shows to Netflix could be indirectly fueling
cord-cutting, the growing trend of cable subscribers canceling cable service in favor of
streaming alternatives. Privately, CEO Bob Iger acknowledged the dangers—but he saw the
financial benefits and was reluctant to change strategy, two of the people said.
THE TAKEAWAY
• Biggest opponent of Disney’s Netflix deals was ESPN executives

• Iger complained to Netflix’s Hastings About Disney’s Branding
• Disney and Viacom Discussed Joint Kids’ Streaming Service
And in public, Mr. Iger defended Disney’s actions. On a quarterly earnings conference call
with Wall Street analysts only a few months after Mr. Staggs’ strategy discussion, the CEO
noted that selling shows to Netflix might encourage cord-cutting. But he said that as a buyer
of Disney’s TV shows and movies, Netflix was “more friend than foe.” Shortly afterward,
Disney sold the streaming rights to its hit ABC show “How to Get Away with Murder” to
Netflix after a heated internal debate and despite the fact that Disney’s partly-owned Hulu
streaming service was prepared to at least match whatever Netflix paid.
These internal debates among top Disney executives show in previously unreported detail
how the company’s top management couldn’t agree on how to respond to Netflix and the
broader threat posed by digital streaming. Eventually, Mr. Iger changed his mind. In the
summer of 2017, he announced that Disney would pull all its content from Netflix and
would establish its own streaming service, now scheduled to launch at the end of the year.
Mr. Iger changed strategy when the evidence of cord-cutting’s impact on the cable TV
business, which supplies the bulk of Disney’s revenue and profits, was unmistakable. By
September 2017 ESPN had lost 11% of its subscribers in five years, according to Nielsen
figures cited in Disney’s securities filings. Ratings for the company’s children’s channels
were plummeting.
Mr. Iger’s slowness in reacting to the dangers posed by Netflix, despite repeated concerns
raised by his lieutenants, reflected the importance of meeting short-term earnings targets,
said several people with knowledge of the situation.
“I don’t remember Bob ever saying ‘don’t stream, we shouldn’t try new things,’” but you had
the pressure of needing to make numbers,” said one of the people.
“The question was, are you willing to invest the money it takes to build streaming
capabilities and renegotiate deals to take less money…[Mr. Iger] was under the same pressure
to deliver results as everyone else,” the person added. Mr. Iger's bonus compensation, like
that of other Disney executives—and as is commonly the case among entertainment
companies—was based on growth in profits, among other financial metrics. This account of
how Disney embraced streaming is based on interviews with more than a dozen people close
to the company.
To be sure, none of Disney’s rivals, which include the former Time Warner that is now part of
AT&T, Comcast, Viacom, CBS, Discovery and Sony Pictures, moved any faster than Disney.
All sold content to Netflix for much of the past decade—and some continue to do so. Even as
evidence emerged that Netflix’s subscriber growth was eating into the cable TV business,
which provides the bulk of the profits for the entertainment industry, the companies didn’t
change their ways. It’s only been in the past couple of years, when Netflix had passed 100
million subscribers globally and the cable TV industry was clearly shrinking, that
entertainment companies acted.
Now, as it pushes into streaming, Disney is willing to take a short-term hit to earnings. Mr.
Iger has committed to pull back movies and TV shows such as its recently released film
“Captain Marvel” from Netflix and other TV networks, to make them exclusive to Disney’s
new service, a decision that hurt licensing revenue. MoffettNathanson analyst Michael
Nathanson has estimated Disney generated $4.45 billion in licensing revenue last year—
money that could largely disappear in the next few years as a result of the new strategy. In an
interview, Mr. Nathanson said he wished “other media companies would have the fortitude
that Disney does.”
How long shareholders will be patient for the strategy to work is a big question for Disney.
“Disney’s success and impact will depend on how much they invest in the service,” said
Brian Wieser, global president, business intelligence at GroupM, the media buying arm of
WPP. “It seems they are willing to invest, but the problem or threat for Disney is how tolerant
will investors be of margin erosion.”
Longer term, the costs could be even greater. The streaming push could fuel cord-cutting,
eroding Disney’s cable revenue. Disney would have to sign up nearly 250 million streaming
subscribers, across existing services like Hulu and new ones like Disney+, to replace
revenues it is losing from licensing and what it could ultimately lose if the cable industry
disappears, we have previously calculated.
Netflix, in contrast, has 139 million global subscribers. And the market is crowded and
becoming more so. Aside from Amazon’s Prime Video, HBO Now and hundreds of niche
services, Apple announced last week it was introducing its own service. WarnerMedia and
Comcast both plan their own.
But Disney is the biggest entertainment company in the U.S.—with a market capitalization of
$207 billion—newly expanded with last month’s purchase of the Fox film studio and
entertainment cable channels. By making its streaming service the sole place to find much of
its content—something WarnerMedia and Comcast aren’t doing—could give it an edge in
signing subscribers. Its globally famous brand name is also likely to help.
The service it plans to roll out at year-end, called Disney+, will offer new and old Disney
movies—from Star Wars to Snow White—and TV shows. Disney plans a presentation April 11
to show off the service to investors and the media.
Ahead of publication, Disney declined to comment for this story. On Tuesday afternoon,
Disney said in a statement: “This story is pure fiction and we will not give credence to
anonymous sources who choose to fabricate facts.” A spokeswoman declined to elaborate.
Disney’s Role in Netflix’s Rise
Disney helped make Netflix the juggernaut it is today. In 2008, Netflix, then a DVD rental
business, launched a small-scale streaming offering initially called Instant Watch. It was free
for DVD-rental subscribers.
At first, it had only a few programs available. But it did have something valuable: recently
released Disney movies, available via a convoluted deal struck by Liberty Media’s small pay
TV service Starz. The channel had the rights to show Disney movies on television under a
separate deal, and in 2008, Starz agreed to let Netflix stream its content online for what
analysts then estimated was close to $30 million a year. At the time, few people in the
entertainment business ever imagined Netflix would rival cable.
But the big entertainment companies were dipping their toes into online video. In 2007, Fox
and NBC had agreed to launch a service that would show episodes of their hit network shows
online, Hulu. Two years later, in 2009, Disney’s ABC bought a 30% stake and added ABC
shows to the menu. But the decision to invest prompted an enormous battle internally—
details of which haven’t previously been reported and contributed to fights that reshaped
Disney’s priorities in the years ahead.
Anne Sweeney, then head of the company’s television division, argued that investing in Hulu
was problematic on many fronts, including the challenges of working with competitors, the
limits it would impose on selling programming to other services and the negative impact it
would have on the ABC.com streaming site. In several contentious meetings, Disney’s chief
strategy officer Kevin Mayer said that if the company didn’t participate, its competitors would
have a leg up in the incipient streaming space. Mr. Mayer triumphed.
Despite the investment, it was Netflix that would get more of Disney’s valuable
programming. In 2011, Netflix carved off the Instant Watch streaming service as a separate
offering. It had signed 21 million U.S. subscribers by year-end. That year, Starz abruptly
decided not to renew its Netflix deal. But a year later, Disney decided to sell its movies
directly to Netflix, ending the Starz TV deal. Netflix got recently released movies starting in
2016 and older films and direct-to-video releases starting in 2013, all for a price reported
reported
reported
reportedto
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to
be
be
be
bemore
more
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than
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than$300
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The movie agreement was separate from deals Disney struck to license individual TV shows
to Netflix. Disney even started making shows specially for Netflix: In 2013, for instance,
Disney’s Marvel unit agreed to make several new series for Netflix.
The expanding business with Netflix sparked tensions within Disney. ESPN’s then-President
John Skipper, whose business was reliant on cable operators, complained to Mr. Iger that the
deals would hurt ESPN’s negotiating leverage with cable operators, said two people familiar
with their discussions. ESPN earned the highest fees of any cable channel, making it
vulnerable to pressure from cable and satellite operators.
On the other side of the argument was Janice Marinelli, who led Disney’s content distribution
negotiations. She argued that the Netflix deals were a huge boon to the company’s bottom
line. She was right. Disney’s revenue from licensing TV shows and movies to streaming
services and TV networks rose 64% to $7.4 billion in fiscal 2018, compared to $4.5 billion in
2012. Revenue from pay TV fees and advertising, long the main business, rose only 24% in
that same six-year period to $21 billion.
Mr. Iger, too, was thrilled with the bottom-line benefits. For years he boasted in meetings
about the richness of the Netflix movie deal, said two people familiar with the matter.
Meanwhile, Hulu was languishing as its owners decided whether to invest more. In 2013,
Mr. Iger tried to sell Disney’s stake in the service, offering it to one of its partners, Fox. Hulu
was losing money and Mr. Iger along with other top executives was tired of in-fighting
between Hulu’s partners and management team. (NBC by this time had been swallowed up
by Comcast and couldn’t take control of Hulu.)
But Fox declined. Instead, Disney and Fox explored whether to sell Hulu entirely. They
talked to potential buyers like DirecTV, before deciding to keep it and invest $750 million
each. They launched an ad-free tier, and turned it into a more direct competitor with Netflix
by funding original programming, leading to hits like “The Handmaid’s Tale.”
Falling Ratings
Meanwhile, evidence that cord-cutting was having an impact on Disney’s TV business was
growing. The Disney Channel’s average primetime audience fell 10% between 2014 and
2015, according to Nielsen. Netflix had poured money into expanding programs for children,
which included licensing several kid shows from Disney in 2013 such as “Jake and the Never
Land Pirates.” (Disney Channel’s ratings decline worsened sharply in subsequent years:
since 2014 to the start of this year, the channel’s average audience has shrunk 72%.)
The decline in ratings for the Disney Channel was the canary in the coal mine for competition
posed by streaming services, said one person familiar with the matter.
Looking to capture some of the viewership shifting online, Disney Channel considered
creating a subscription video-on-demand streaming service aimed at children. Executives at
the network considered doing a joint venture with Viacom’s Nickelodeon on the service,
which would feature programs from both the networks. But the idea didn’t go anywhere.
Next, Disney Channel executives proposed a Disney-only streaming for kids, but it failed to
gain traction with corporate management. One problem was that Disney had already
licensed streaming rights to many of its children’s shows to Netflix, according to two people
familiar with the situation.
That was the atmosphere surrounding the 2015 strategy session overseen by Mr. Staggs.
A few months later, Disney’s senior management and the board of directors met at the
board’s annual spring long-term planning off-site meeting, in Orlando, Fla.
“I don’t remember Bob ever saying ‘don’t stream, we shouldn’t try new
things,’” but you had the pressure of needing to make numbers.”
At the meeting, chief strategy officer Kevin Mayer arranged for Mr. Skipper and TV networks
chief Ben Sherwood to make presentations on issues facing the TV industry, including the
decline of pay TV subscribers and rising adoption of streaming services. Among several
recommendations, Mr. Mayer emphasized that the company needed to explore having a
direct relationship with consumers, rather than selling its TV service via cable and satellite
operators, as it historically had done, according to three people familiar with the matter.
The board was receptive, with some directors, particularly Fred Langhammer, voicing their
support for the need to move quickly.
“There was a revelation that this was not business as usual,” said one of the people.
Meanwhile, Mr. Iger was beginning to have some misgivings about Netflix. In particular, he
worried that the streaming service was getting more of a boost from its Marvel shows than
Disney. A few weeks after the board offsite, Messrs. Iger and Staggs were in Sun Valley,
Idaho, for Allen & Co.’s annual media mogul conference. They met with Netflix CEO Reed
Hastings and content chief Ted Sarandos by the resort’s duck pond where Mr. Iger raised his
concerns.
Mr. Hastings responded that the prominence of Disney’s brand could be a term of negotiation
in the future, according to two people familiar with the matter.
No Radical Steps
The debate about the Netflix deals and cord-cutting intensified a few weeks later, when
Disney released its June quarter earnings. On a conference call with Wall Street analysts,
Disney Chief Financial Officer Christine McCarthy said Disney’s cable channel group
wouldn’t show as much growth in profits over the 2013–2016 period as previously forecast,
due to subscriber declines at ESPN.
On the call, Mr. Iger conceded that ESPN had “experienced some modest sub losses.” Still, he
argued that “we don't really see dramatic declines over the next, say, five years or so” in the
pay TV world “and therefore we are not taking what I will call radical steps to move our
product” into streaming. “We just don’t think it’s necessary.”
And while acknowledging that “one could argue” that growth of services like Netflix was
giving people an incentive to cut the cord, the streaming service has become a “really
important” Disney customer of TV shows and movies.
But investors paid

paid
paid
paidmore
more
more
moreattention
attention
attention
attentionto his comments about ESPN’s subscriber losses, seeing
them as confirmation of the threat posed by cord-cutting. Until then, analysts had followed
the lead of the entertainment companies, and largely ignored the threat. That changed with
the call. Disney’s stock fell 9% on the day, triggering a sell-off in other media stocks.
Mr. Iger was upset by the market’s response, according to two people familiar with his
thinking. He debated whether he should have addressed it differently. He had decided to talk
about cord-cutting to calm market fears. Instead the opposite was happening. Disney now
looked like a troubled bellwether for ailing media companies.
A few weeks after the call, Disney announced it struck a deal to license “How to Get Away
with Murder” to Netflix, bypassing Hulu, which had offered to match whatever Netflix paid,
plus $1.
In a contentious debate involving both Disney executives such as Mr. Mayer and top Hulu
executives, Ms. Marinelli argued that if the bids were that close, the show’s producer,
Shonda Rhimes, would want the show at Netflix. “Shonda Rhimes is going to want to go with
Netflix if it’s a close call because they have more cachet,” as one person familiar with the
discussions characterized Ms. Rhimes’ view. Hulu executives were frustrated that Disney, a
30% shareholder in Hulu, was once again passing them over while continuing to arm the
service’s chief rival, two people familiar with the matter said.
Despite the debate, Disney was getting ready to expand more aggressively in streaming.
“Bob’s tone changed” after the 2015 turmoil, said one of the people. “It wasn’t ‘we are going
to figure out what to do.’ [It was] ‘we are going to start moving faster. We are done just
discussing it.’”
DisneyLife’s Glitchy Start
A more aggressive stance to streaming would soon face a test. In November 2015, Disney
launched a streaming service in the U.K. called DisneyLife, showing Disney movies, shows,
music and publishing. The service was championed by Disney’s international business
chairman Andy Bird, who argued it could be the company’s beachhead in the streaming
world.
But it was a flop. One problem is that the content was available already on U.K. satellite
service Sky, and Disney charged a pricey 10 pounds a month for the service. Another issue:
DisneyLife’s app, which was developed internally, was buggy. Despite Mr. Iger’s public
public
public
public
statements
statements
statements
statementsat
at
at
atthe
the
the
thetime
time
time
timethat Disney would expand the service to other European countries,
Disney has only expanded it into Ireland, more than two years later.
A few months later, Disney got an opportunity to invest in a streaming infrastructure firm,
giving it more direct access to streaming technology. In early 2016, Major League Baseball
was looking to find investors to expand its technology division, BAMTech, that built the back
end for its live sporting events. Because ESPN used BAMTech to power its app for cable
subscribers, BAMTech CEO Bob Bowman contacted Mr. Skipper to see if Disney wanted to
invest. Mr. Skipper, Mr. Staggs and Mr. Mayer later met with Mr. Bowman to discuss the
possible investment. (Mr. Staggs resigned shortly afterward when he learned he would not be
Mr. Iger’s successor.)
In a deal worked out by Mr. Mayer, Disney invested $1 billion to buy a 33% share in
BAMTech with an option to buy it after three years. Disney announced its investment in
August 2016 along with plans to launch an ESPN subscription streaming service.
The investment was a way for Disney to dip its toe into selling subscription services directly
to consumers, rather than a significant shift in strategy, according to one person familiar
with the matter. At the time Disney was also interested in BAMTech’s business value as a
service provider for outside streaming apps.
Meanwhile, the company explored other ways of expanding in digital. In the fall of 2016, Mr.
Iger and other executives discussed buying Twitter as a way to reach consumers directly
without relying on cable companies. At the time, Twitter stock had dropped to less than $15,
from a high of around $50 two years earlier.
Disney quickly backed off the idea after rumors of its interest—along with that of Salesforce—
sent Twitter’s stock price soaring. Mr. Iger was also worried about how the site’s toxic
content would reflect on Disney’s brand, said two people familiar with the matter.
https://www.theinformation.com/articles/how-iger-broke-disneys-netflix-addiction?fbclid=IwAR2flz-MbsTMLFh2fuoUYoY-16t1qBfXdjIjsO8qqEs8xxFdjR44POk… 10/14
In the wake of the Twitter discussions, executives within Disney, along with members of its
board, began to agitate for a more aggressive move into streaming. Mr. Skipper suggested
that Disney accelerate its option to buy BAMTech outright. Mr. Iger agreed and he reached
out to baseball Commissioner Rob Manfred.
Left Turn
A few months later, in August 2017, Mr. Iger announced Disney was buying a controlling
stake of BAMTech. At the same time, he revealed that Disney would launch a Disney-branded
streaming service by the end of 2019. And, in what was a momentous shift, Mr. Iger also
announced Disney would not be renewing its high-priced Netflix movie deal, which would
expire at the end of 2018. Instead, Disney would put its movies onto its own service,
Disney+, when that launched.
How radical a strategy change wasn’t immediately clear. Mr. Iger didn’t initially, for example,
rule out continuing to license Star Wars and Marvel movies to Netflix. But a few months later,
he decided that the best way to get a large subscriber base for Disney+ was to make those
titles exclusive to the service, according to a person familiar with his thinking. With that
decision, Disney was committing to cease licensing its content—to Netflix and eventually to
most of its partners around the world.
Some employees within the television group were relieved at the shift, feeling Disney’s
strategic priority finally had clarity, according to a person familiar with the matter.
At around the same time, another deal presented itself that would firm up Disney’s resolve to
go all in on streaming. On August 9—the day after Disney’s earnings call—Mr. Iger met with
21 Century Fox Chairman Rupert Murdoch. The two began discussions about Fox selling
most of its Hollywood assets, including its TV and movie studio, entertainment cable
channels like FX and its 30% stake in Hulu. The deal was finalized in December 2017,
although it didn’t close until just a few weeks ago.
As Disney awaited regulatory approvals for the Fox purchase, Mr. Iger reorganized the
company. He created a brand-new division to oversee the new streaming services, as well as
content licensing and advertising—all reporting up to Mr. Mayer. That meant Ms. Marinelli
and her licensing team now reported to Mr. Mayer.
With the Fox deal complete, Disney finally has all the assets it needs to build a formidable
streaming service, the structure to avoid factional conflicts and the commitment to make that
strategy the company’s top priority.
The only question now: Is it too late?
UPDATE: This story has been updated to include a Disney statement.
3 SUBSCRIBER COMMENTS
Aaron Wall
2 days ago
Founder, SEObook
" (Disney Channel’s ratings decline worsened sharply in subsequent years: since 2014 to the
start of this year, the channel’s average audience has shrunk 72%.)"
That could be as much related to YouTube as other paid streaming services. Ad-driven TV is not
that differentiated from ad-driven YouTube to a young child, though a Disney streaming service
with no ads could be appealing to parents who keep hearing about some of the crazy YouTube
niches like autogenerated Elsagate stuff & whatnot.
Like· Anthony Eales, Taewon Yun and 2 others liked this.
Arthur P. Johnson 2 days ago
I couldn’t agree more with Aaron Wall about YouTube being the unmentioned and possibly
unplanned-for streaming superpower that may already be eating away at Disney’s traditional
audience of young people.
I see YouTube as perhaps the biggest reason why Disney must be very careful about pricing
Disney+ —because, if the initial price is regarded by parents as a no-brainer, they’ll pounce upon
it to keep the kids away from YouTube.
I would guess that kids could care less about YouTube’s reputation, but there’s a decent chance
recent revelations about its engagement algorithm promoting hate speech and crackpot beliefs
will trickle down to the public at large. If Disney isn’t following this story and factoring it into its
ad plans, they’re missing something big.
Like· Amir Efrati and Taewon Yun liked this.
Arthur P. Johnson 2 days ago
P.S. I realize that Tom Dotan and Jessica Toonkel are writing about Disney’s relationship with
Netflix, and they’ve done a magnificent job. No other newspaper could produce so
knowledgeable a piece—and the org chart is the cherry on top!
Like· Saneel Prabhu, Michael Porter and 1 other liked this.
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4/11/2019 How Iger Broke Disney’s Netﬂix Addiction — The Information

How Iger Broke Disney’s

• Biggest opponent of Disney’s Netﬂix deals was ESPN executives

Disney’s Role in Netﬂix’s Rise

But investors paid

DisneyLife’s Glitchy Start

The only question now: Is it too late?

UPDATE: This story has been updated to include a Disney statement.

Like· Anthony Eales, Taewon Yun and 2 others liked this.

Arthur P. Johnson 2 days ago

it to keep the kids away from YouTube.

Like· Amir Efrati and Taewon Yun liked this.

Arthur P. Johnson 2 days ago

Like· Saneel Prabhu, Michael Porter and 1 other liked this.

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