Should Bob Iger Split Disney?
In recent days, a few respected media analysts have broached the same daring question.
Their belief is that Disney has grown too large and unwieldy in size, causing an imbalance that’s hurting the company’s bottom line.
During a recent Disney earnings call, one of the most respected financial minds on the planet suggested a clean break. Are they right?
Should Bob Iger split The Walt Disney Company into multiple pieces?
Is Disney Too Big to Excel?
You’ve likely heard the phrase, “too big to fail.”
In corporate terms, this philosophy applies to businesses so interconnected to the American economy that their failure would cause a cascading effect.
In short, if one of these companies/industries failed, they’d also tank the American economy.
We learned this concept the hard way with real estate during the early 2000s.
With Disney, some believe that the opposite economic principle applies. Its interconnected nature is what’s causing it to fail.
For nearly 30 years now, Disney has relied on the revenue generation opportunities created by one deal, the ABC/Capital Cities merger.
That move created a linear television juggernaut the likes of which we’ve never seen.
In one fell swoop, Disney gained control of ABC and ESPN.
Since then, Disney has leveraged those platforms and their content, especially live sports, to market Disney products.
One of the unheralded reasons why Disney films have performed so well for so long is that ABC and ESPN heavily advertise the products.
In terms of vertical integration, Disney’s use of linear networks is among one of the great business success stories of the media era. No exaggeration.
Of course, no business proves impervious to the test of time. Struggles arise, some of which are unforeseeable.
Linear in a Streaming Society
In the corporate world, we use the term disruption to describe a small company introducing a new product that upends longstanding businesses.
With Disney, the disruptor is Netflix, a former DVD rental company that developed streaming video as a side project…and the rest was history.
The popularization of streaming has eroded the linear television model, leading to an entire generation of viewers who aren’t even cord-cutters.
Instead, many people under the age of 25 never bothered to try cable television and barely used network television. They watched Hulu instead.
Not coincidentally, Disney spent $71.3 billion in 2019 to buy Fox’s assets…including Hulu.
In early 2024, Disney will write a check to Comcast for another $10 billion to gain full, permanent control of Hulu.
That’s the cost of doing business to fix a longstanding issue within Disney’s business model.
Streaming media consumption surged at the expense of linear television. It’s not a zero-sum situation per see.
Still, when a large group of companies, basically an entire demographic, chooses one form of consumption over another, there are ramifications.
Disney has delayed those ramifications for several years now, as analysts inaccurately predicted the fall of linear television from about 2010 to today.
Now, the declaration has grown accurate, though. The pandemic permanently finished the era wherein linear television was dominant.
In fact, for the first time ever, Nielsen has found that less than half of television viewers watched traditional media outlets in July 2023.
Streaming is catching up with linear television at an alarming rate, and objects in the rearview mirror are closer than they appear.
The end is nigh for the old guard. It’s a scenario Iger saw coming in 2016 and moved to counteract. But here we are.
A Closet Full of Stuff
Do you know the contents of your closet right now?
I mean, you can probably name a few things, but let’s be honest. Nobody could name everything because that’s how we use closets.
We dump stuff in there, and it’s generally the items we don’t know what to do with now. So, it goes into the closet for the time being.
How would you act if all that stuff started leaking from your closet all at once?
That’s the position where Bob Iger has found Disney since his return. The careful plans he’d made fell apart due to a pandemic.
If Iger had known about the liquidity issues that the pandemic caused, he never would have leveraged Disney with $50+ billion in debt with the Fox purchase.
Meanwhile, Iger would have sold many of his linear network properties at 80 cents on the dollar then rather than 20 cents on the dollar now.
I can’t fault him for any of this because even Madame Leota couldn’t have seen this one coming.
Still, Disney consists of a giant closet full of stuff, much of which doesn’t fit together at all.
In some instances, the assets directly conflict.
Iger is acutely aware of this problem, which is why he recently announced an Everything Must Go Sale.
I’ve likened this decision to a yard sale because it legitimately is the corporate equivalent.
When you host a garage sale, you’re trying to get rid of the junk you don’t want. In exchange, you’d like cash to buy things you might like.
Iger is currently doing pretty much that by declaring that Disney will sell its “no-growth businesses.” But a simpler answer exists.
Should Bob Iger Split Disney?
Iger spent part of Disney’s recent earnings call emphasizing his company’s three primary revenue sources.
Those linchpins are movie releases, streaming services, and Disney Parks, Experiences and Products.
Since Iger knows what will anchor the next five years of Disney, some of the other stuff no longer fits.
As an example, Disney owns National Geographic, which it uses as a loose guideline for some Adventures by Disney trips.
Disney also possesses 50 percent of A+E Television Networks, 80 percent of ESPN, the entirety of FX Networks, the Disney Music Group, Fox Networks Group, and Star India.
Does literally any of that content help Disney theme parks? You could argue that ESPN might, and Disney saves money by licensing its own music.
Overall, that’s a ton of holdings that don’t serve the parks.
Conversely, these assets definitely help streaming and could aid the theatrical division if, say, The Simpsons 2 debuted in theaters.
Along those lines, 20th Century Television and 20th Century Studios matter as well.
Disney’s holdings mirror the contents of your refrigerator. Some of it is necessary for you to live, while other parts will still be in there a year from now.
You’ve forgotten about them, you’re never going to eat them, they’re taking up space, and they’ll eventually start to smell.
Bob Iger’s decision right now is what to do with the contents of Disney’s refrigerator that aren’t ever gonna make a meal again.
Some analysts suggest that the best way to deal with this mess is to start anew.
The idea here works in two different ways, but both variants involve the same concept.
Meet Newco
Wall Street loves a spinoff, as it’s a way to buy a new asset for cheap in expectation of sustained growth over time.
Some have suggested to Iger that he spin-off Disney’s moneymaking entities into “Newco,” a new company.
Newco is a generic term akin to a widget that could mean anything. So, I’ll call the new company Mickey Magic instead.
If Iger created Mickey Magic, he’d turn those three revenue pillars – theatrical releases, streaming, and the Parks division – into a new spinoff corporation.
This strategy would differentiate the growth parts of the Disney empire from the “no-growth businesses,” most of which involve linear television.
Disney would leave those behind and start anew with all its highly valued intellectual property (IP) and forward-thinking businesses.
That’s the idea, anyway. In reality, such a move would prove bloody, as it would require Disney to decide what stays and what goes.
ESPN is integral to Disney’s streaming plans, as live sports broadcasting has grown in popularity each of the last six decades.
Similarly, Disney connected some of these entities as recently as 2019 with the Fox purchase. Now, it would need to divorce them again.
For the Parks division to remain Disney’s strongest asset, it requires intellectual property to sustain revenue and growth opportunities.
Similarly, Disney streaming collapses without the content from 20th Century Television and 20th Century Studios.
Also, National Geographic gets its own tile on Disney+.
Any changes like this would be messy, and Iger knows this hard truth.
What Iger Probably Does Instead
As such, the reverse plan makes more sense. That’s the one where Disney spins off the linear television assets into a new company.
In that scenario, Disney dumps lots of debt on the spinoff corporation, thereby cleaning its balance sheet.
Meanwhile, Disney provides itself with licensing rights to most of the content at bargain prices, assuring its IP pipeline for a generation or longer.
That’s the cleaner approach here, the one where Disney controls the process better.
Investors would rather Disney do the opposite because they’d make a LOT more money on Mickey Magic than the lingering remnants of linear television.
Also, Disney might just sell the linear television assets, again identifying a way to maximize profit and minimize debt.
Even if the company did that, it’d still likely find a way to keep a license in perpetuity for essential IP.
However, if Iger finds a deep-pocketed investor for ESPN, it probably doesn’t need to do anything.
That one move could solve most of Disney’s current financial struggles.
So, no. I don’t think Bob Iger should split Disney.
I fully understand why Wall Street would love it, but I don’t perceive the move as in Iger’s best interest.
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