Hollywood has been decimated by the rise of streaming. At Disney, Warner Bros. Discovery, Paramount, and Sony, profits on TV, film, and streaming went from $23 billion in 2013 to about zero in 2023. Nothing tells this story more clearly than a brief history of Disney. In the early 2000s, Disney under CEO Bob Iger went on one of the most extraordinary runs in modern business history. ESPN was the most valuable network in the cable bundle. They acquired Pixar, Marvel, Lucasfilm, and Fox. As the company shifted to streaming, it seemed set up to lap Netflix and eat the box office at the same time. But today, Disney’s stock is at a nine-year low. Operating margins are down 75 percent. Disney+ lost $4 billion last year.
What happened to America’s greatest entertainment company? To discuss, we have two great guests: Julia Alexander, director of strategy for Parrot Analytics and a writer with Puck News, and Matthew Ball, a writer and investor and author of the book The Metaverse.
If you have questions, observations, or ideas for future episodes, email us at PlainEnglish@Spotify.com.
In the following excerpt, Derek, Julia Alexander, and Matthew Ball explain what made Disney so successful in the past few decades—and why that success has dwindled recently.
Derek Thompson: Matt, let’s start with you. I think a really good way to understand what’s happened to the entertainment business in the last 20 years is to trace the story of the Walt Disney Company in this century.
Let’s go back. Let’s wind the clock back to Bob Iger’s first tenure, which I think is rightly considered one of the most successful CEO spans of any major entertainment executive in the last few decades. What did Iger do in his first regime, and what did he get right?
Matthew Ball: There were a few things, and that relates to both the active decisions that he had made, as well as the ways in which the Walt Disney Company was specifically arranged to reap the benefits of those decisions. The first was that Iger was really the first to understand the potency and the overall market shift toward what I call sequels, franchises, blockbusters, and IP.
We look back, and we often make the argument that he spotted the value in Lucasfilm, that he was first to recognize the criticality of the Marvel IP, but the truth is, in the mid-to-late 2000s, he was really the only one running these big motion-picture studios to say the future of the business is not a diversified portfolio. It is a concentrated one of not 20 to 30 films per year. It’s 10 to 15, all of which can appeal to all four quadrants. That’s men and women above and below 25. The best way to do that is with sequels, franchises, blockbusters, and IP. That was supported with remarkable creative execution.
Back in the 2000s and 2010s, the average studio would aspire for 50 percent of their films achieving an A-minus or better CinemaScore. That’s an audience evaluation. And they would hope that half of their portfolio was achieving profitability. Pixar has gone now [24] films with an A-minus or better. Marvel went [over] 20 with an A-minus or better.
For a number of years, 100 percent of Disney’s films were seeing profitability. One hundred percent of them were achieving all different elements of success: creative success defined by commercial support, creative success defined by critic response, and creative success defined by audience scores. We had that first, that strategy. Then, we had the execution.
Then, we had the two things that were underpinning that. One was the theme park division. We often think of Disney as having a flywheel of all different components: merchandise, theme parks, TV, motion pictures. That’s true, but close to two-thirds of Disney’s cash flow last decade was coming from its theme park division. That was because, as successful as the films were, they were primarily monetizing through those parks.
So as we saw all of that IP built into the parks—obviously they didn’t have a strong Marvel presence pre-acquisition, they didn’t have a strong Star Wars presence pre-acquisition—there was this parallel period of investment in the parks and exploitation in the most mass-market medium globally, in the theme park, that drove remarkable success.
To put this into perspective, [in] 2019, the high point of the Walt Disney Company, they had eight of the 10 biggest films of the year. They had three times as much revenue as the no. 2 player and three times the margin, so nine times the profit. And then lastly, they had ESPN, which, though not core to Disney as we think about it, was the primary beneficiary of one of the best business models of all time: the cable bundle.
And so we see everything. We see two core assets in the parks and ESPN, we see strategy, and then we see execution. You want to talk about a company that excels for two decades, you want to talk about an extraordinary tenure as a leader: That’s it right there.
Thompson: I think it’s so important to emphasize that Disney’s success in the first 19 years of this century was not just a function of great execution, but great execution matched up with, as you said, Disney’s perfect opportunity to seize on what was the going business model of entertainment at the time. People were going to see sequels, adaptations, and reboots over and over. Many of them were—at least until the last few years, last decade maybe—subscribed to the cable bundle, from which Disney was reaping an enormous amount of money.
Julia, I want to go to you here, because a really important piece of Disney’s golden age was the strength of its TV business. For shits and giggles, I took a look at Disney’s 2011 annual report. I just kind of picked that number. I just wanted to pick an annual report from about a decade ago and see exactly how big the TV business was. That is the affiliate fees plus the advertising.
In 2011, they made $40 billion in overall revenue. Media networks, that is essentially the cable bundle—most of which was ESPN or much of which was ESPN—was $19 billion of that $40 billion. So almost 50 percent of revenue was coming from the cable bundle. If you look at operating income, so revenue minus operating expenses, total operating income in 2011 for Disney was [nearly $9 billion]. Media networks, that’s the cable bundle, was $6 billion, 75 percent of operating income.
I don’t think most people understand the degree to which Disney in the early 2010s was a TV business if you were just looking at operating income. TV, traditional TV, that is the cable bundle, has just had a horrible, horrible decade in terms of growth. Fold into this story that Matt is telling: What happened to the TV business in the last decade?
Julia Alexander: Well, I think, and also specifically with Disney, there are two parts of the story that are inherently interesting. But if we look at what you were just saying about the revenue and the operating income of Disney alone, in the last quarter, Disney saw its operating income within the media networks division drop about 23 percent to about $1.9 billion, [with] revenue sitting at, I believe, just around $7 billion for the media networks. Really concerning if you are an investor in the Walt Disney Company.
A big portion of where they were seeing the revenue come from in the media networks side was from the cable bundle. That, as Matt pointed out, was one of the greatest inventions in kind of capitalism history, I would argue: this kind of beautiful democratic or socialistic experiment that we really saw play out, where Disney was able to reign supreme because it had the most valuable part of the pay-TV bundle, which was ESPN and then ESPN2 and ESPN3 and the Disney Channel and all these other networks that they forced the cable carriers to carry in order to have access to ESPN.
We saw this play out a little bit recently with the Disney-Charter deal. And although that went in a different direction, and I’m sure we’ll get into it, it kind of really centered around this idea of, “How valuable is ESPN?”
But what I think is really interesting about Disney and Hollywood as a whole is that Hollywood is a system that is built on acquisition. They don’t build as much. You kind of look at what happened with television and cable within Disney.
Disney looked at Capital Cities and ABC and said, “We need to really take control of this company so that way we have a distribution front. We are a great content supplier at this point with the films. We want to be within TV. And we have the parks business, which is really growing this love for our content. But we’re looking at Blockbuster coming into play and straight-to-video films, and we’re looking at this new way to monetize attention, to monetize that consumer relationship.”
And so they acquire not just the company, but they acquire Bob Iger. Bob Iger comes into the fold via that direction. And then, when we look at what the cable business allowed Disney to do, to what Matt was saying about all these great films and sequels and franchises, they were able to acquire Marvel, and they were able to acquire Lucasfilm and really build out these worlds beyond even, I would imagine, George Lucas’s or Stan Lee’s greatest visions. But they were able to do so via acquisition.
What’s interesting about this current moment of television is that as all of these companies have tried to figure out what the next direction is—and they’ve all kind of collectively said, “It’s direct to consumer; it’s streaming”—it really marks, in my opinion, the first hurdle that Hollywood is encountering that they cannot necessarily just acquire their way [out of].
Although Disney acquired BAMTech, which was then used to create Disney+ and its own streaming services, and although Disney acquired Hulu and aspects of this, Disney cannot acquire its biggest competitors going forward, which, in my opinion, are Google (or Alphabet) and Amazon and Apple.
It’s this really interesting moment for Disney, which relied on the television business. It then decimated its own business by pivoting to direct to consumer in many ways and kind of neglecting the bundle that was already slipping away. We could see that the attention from younger audiences was really no longer within this pay-TV bundle as they were moving toward streaming. But now they’re faced with this next question of, “Well, how do we compete with companies that have an insane amount of cash flow and opportunity compared to ourselves?”
This excerpt was edited for clarity. Listen to the rest of the episode here and follow the Plain English feed on Spotify.
Host: Derek Thompson
Guests: Matthew Ball and Julia Alexander
Producer: Devon Manze
Subscribe: Spotify
