Most Important Story of the Week – 16 Oct 20: Dueling Re-Orgs by Disney and Netflix

This felt like a light week on the big stories. In entertainment at least; in politics, well good luck keeping up. 

My eye was drawn, then, to the Disney news of Tuesday that they’ve re-organized to focus on streaming. Meanwhile, another Netflix executive left the original side of the house. By most measures, Netflix is the global and US leader in streaming, and frankly I think Disney+ is second.

So let’s look at these org chart changes for the two most important streamers and what they mean for their respective strategies.

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Most Important Story of the Week – Dueling Re-Orgs by Disney and Netflix

Disney Re-Orgs the Chart To Focus on Streaming

There is nothing like re-organizing the org chart to prove that you mean business in a given strategic pursuit. Thus, The Walt Disney Company–under all sorts of stress, from theme parks to sports ratings to a letter from Senator Elizabeth Warren about firing employees–has re-organized their business units and leadership to focus on streaming. 

Or so they said. In reality, I’m not sure. 

Let’s start with what we know, and what we know about who reports to whom. Kareem Daniels, who used to head consumer products, video games and publishing, is taking over all media operations and distribution, that includes both the US TV networks business, the US direct-to-consumer business and worldwide P&L. His title is ostensibly “head of distribution”.

Notably, it doesn’t include the movies studio (and subsidiaries), the TV production, the sports group, or the theme parks and merchandise group. Further notably, the head of international direct-to-consumer (Rebecca Campbell) will report to both Daniels and CEO Bob Chapek. Daniels has worldwide P&L, but Campbell reports to both.

The problem this is supposedly supposed to solve is that the TV groups will finally forget about all that cable revenue from ESPN and broadcast ad revenue from ABC and focus on making TV for the streaming future. It also may bury some of the losses from media networks and streaming in the same org chart, making it unclear how Disney is or isn’t making money on media.

My worry is first with the dual org chart part. If streaming is the future, it should have one leader who is responsible for it on a global basis. Which is really Disney’s goal here. Instead, my gut is Campbell will end up thinking in international terms whereas Daniels will focus on the United States. (Which still is the majority of Disney’s current revenue, mainly driven by ESPN.) Meanwhile, can US based production studios really think globally for content? Especially on the TV side?

The biggest driver of success this decade at Disney–feature films–remains independent. Though, I don’t hate that. If anything, this acknowledges that while home entertainment, Pay 1, Pay 2 and Pay Infinity are collapsing, the box office isn’t quite dead. Which means Disney’s films will still plot a course through theaters…whenever they come back. Of course, does Daniels have control over theatrical distribution too? Meaning that even the studios are just glorified production companies? Maybe there are more questions in this re-org than answers.

Long term, this change reinforces another constant struggle at Disney to differentiate between “the United States” and “the rest of the world”. If anything, it looks like Disney will have one streaming strategy for the states (America is Disney+, Hulu and ESPN+) whereas the globe is Disney+ and Star (with a TBD on ESPN+). As I wrote a while back, I don’t hate this. The jury is still out on producing global TV content holistically versus buying good local programming. 

Netflix Loses a Third Content Executive in a Month

When Netflix promoted Bela Bajaria to head of global TV content, this seemingly foreshadowed Disney’s move. Netflix had bifurcated content teams and they want all content decisions made by the same person, but this time the person previously focused on international content. This aligns with their global strategy, which is good.

But that’s old news. What drew my eye this week was the departures at Netflix. Last week, Channing Dungey, Vice President of Original Content and Drama, departed. This week, the head of original series followed her out of the door, as Jane Wiseman left

Those departures are not necessarily good news. If you’re Netflix, though, they’ve managed to spin every firing, or even wave of firings, as insanely positive. You “fail the keeper test” and they let you go.

That explanation doesn’t pass my own test, “the smell test”. In other words, I smell BS.

What is happening at Netflix right now isn’t some clever, new tech, disruptive approach to human resources. Nope, this is an old school Hollywood power struggle. A new executive takes over (Bajaria, by the way, trained in the classic dark arts of Hollywood politics) and then cleans house to bring in “their” people. 

If the strategy is going great, then firing a wave of executives responsible for that strategy seems…foolish? No? But then again, this is Hollywood and it wouldn’t be the first time an executive came in and cleaned house even when things were working. (For instance, Alan Horn leaving Warner Bros after winning the 2000s to go to Disney…why did they let him go?!?!?) 

If the departures gain steam, then serious questions are raised with only two negative explanations: Either Netflix is firing quality execs in a power struggle, or they had a content strategy that wasn’t working (despite press to the contrary). 

Do Executive Reshufflings Matter?

Yes and no.

(A point I’ll keep making until I die.)

They do matter because structure is one of the pinnacles of internal strategy exemplified by the McKinsey 7S framework. (I haven’t “explained” this framework yet, but I do love using it.) 

Screen Shot 2020-10-16 at 10.35.08 AM

Often we focus on external strategy and disruption. But having an internal strategy (skills, structure, shared value, systems) to execute that external strategy can be as important as the value creation business models. So critiquing whether or not Disney and Netflix have got that right makes sense.

But you’ll note I haven’t commented on the personal qualities of any of these executives. This is the no side of the equation. We don’t have a lot of good “metrics” for executives. So judging whether or not Kareem Daniels or Rebecca Campbell is better than Cindy Holland or Bela Bajaria feels like a fool’s errand. And half the time the celebrated new executive flops in their new role.

So these moves are critical, but it remains tough to judge if they’re doing the right thing.

Other Contenders for Most Important Story

Netflix Ends Free Trials

The masters of PR are at it again. And I don’t say this begrudgingly for a Netflix “bear”: I genuinely consider their press relations to be a source of competitive advantage. (I’d add their deal teams are particularly creative too.)

Thus, in August, Netflix announced they are making some content free for everyone, and got praise in outlets across the spectrum. Then in October, they shut down free trials in the United States–following a global trend–and no one reported on it until friend of the website Hedgeye’s Andrew Freedman asked about it on Twitter. For two weeks, no one realized Netflix had stopped free trials. Not a single article!!!

Ending free trials is fairly smart for Netflix, though it’s a warning sign for the streaming wars. It’s smart because increasingly customers are signing up to a service simply to binge the wares and bounce to the next streamer. Given that more folks know what they are signing up to watch and when, allowing this sampling is unnecessary for Netflix. 

(Anecdotally, I’ve heard that Starz, Showtime and HBO saw much, much higher churn numbers on Amazon Channels, which is one driver for HBO insisting that HBO Max stay off that platform. Amazon promotes churn, which is bad for the SVODs.)

The worry, for Netflix, is that the behavior is still there where folks churn in and out of streaming services. Netflix is as close as any service to the “universal” streamer. The “must have” everyone must own. But even they are seeing customers opting in and out of Netflix after customers have binged most of the stuff folks want to watch.

If you’re looking for numbers for the streaming wars, churn is in the top 5. Arguably the most important number. If churn goes up for everyone–including Netflix–that’s bad for everyone. My favorite theory of the streaming wars–from Richard Rushfield–is everyone is losing the streaming wars simultaneously. Churn is how that could happen.

(By the way, Apple TV+ is extending free-trials for some customers into February 2021. So maybe they really need free trials.)

Coming 2 America 2 is Coming to Amazon for $125 million joining Borat 2

Amazon is on a movie buying spree. Frankly, they’re taking advantage of films that can’t get distribution in the shut down theatrical landscape, but it doesn’t make sense to hold until 2021, which will be brutally crowded. Of course, they can overpay for this privilege because we don’t know how much money they make on streaming. I tend to agree with others that I don’t see how they break even on this film. (Past math on streaming video economics here, here, or here if want to see why.)

Context Update – Stimulus This Year Looks Unlikely

Which is bad for the economy. That’s plain and simple. The more stimulus going to consumers and businesses the easier it is to handle lockdowns while shortening the recession. Even waiting until January will likely cause the recession to deepen sharply. This is easily the biggest economics story to monitor.

Data of the Week – HBO Max Saw a Rise in Downloads

If Disney is in “hit-driven business” club, well HBO Max wants to join. This week, they featured a read-through of an episode of The West Wing with the original cast and it drove new downloads according to Apptopia:

This in particular solves HBO Max’s biggest business problem, which is converting HBO users to HBO Max users. So adding a few hundred thousand new users is a win. Future events like The Friends reunion–in particular–should help further.

M&A Updates – The DoJ Is Preventing a Dish and DirecTV Merger

Not all M&A deals are getting approved. (Though it likely doesn’t help AT&T that they angered the current administration by owning CNN.)

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