“Mickey in the Middle of It”

Almost 100 years of Disney magic is about to fight its biggest battle yet, and the digital experience could be the golden ticket.

Disney is facing the biggest challenge of their existence

COVID-19 has upended a lot of lives, and even the magical world of Disney cannot escape this global pandemic. The Walt Disney Company has a broad portfolio of core business units, but without the ability of large groups of people to assemble, a large chunk of this portfolio is choking. All five theme parks and the fleet of cruise liners, representing $26.2 billion in sales, are on hold. Worldwide closure of movie theatres has halted all live-action film production representing another $1.54 billion. And if that were not enough, the suspension of sports has put pressure on Disney’s ESPN, eroding some of the $24.8 billion in TV revenue (1). The Disney experience relies on people coming together, but without that underlying premise, the current model is breaking.

The Magic has left the park (2)

These changes could be long term, or worse, permanent

A blip in time, a terrible storm to weather out. As countries begin to lift their stay-at-home orders, Disney could wake from the nightmare. But even with the quarantine lifted, the damage could be long term. Will people be willing to cram into parks, stadiums, or movie theatres again? Will it be business as usual? The inertia of a gutted service industry might second guess this assumption. This, compounded by the hit to disposable incomes, might dampen a rapid recovery. With a sputtering economy and a timeline affixed to a vaccine at a minimum, Disney might want to plan for more than just a storm.

The digital lifeline of Disney+

Just before the outbreak, Disney made what many referred to as a “bet the company” pivot. Former CEO Bob Iger called it the “biggest initiative in his 45-year tenure” (3). In 2019, Disney entered the highly competitive, digital space of streaming. With industry titans like Netflix, HBO, Hulu (majority Disney owned), and Amazon, this dive into the digital fray was a high-risk gambit. They packed a powerful punch, however, with brands such as Marvel, Star Wars, National Geographic, Pixar, and Disney Classic. The early signs showed promise, with Disney+ acquiring 28.6 million users in three months, an astounding number for a market entrant (4).

The timing of this digital pivot could not have been more fortuitous, parrying the blow of COVID-19 on other business units. With people forced on couches, returns from streaming TV jumped 32% during the week of March 16 (5). Streaming is one of the few industries to be on the right side of the crisis, and Disney+ entered in the nick of time.

Is this pivot enough?

Surveys suggest that average customers will pay for three to five streaming services (6). Though this reflects a natural multihoming space, there is room for Disney+ to hold on and take a bite out of the massive pie. This comes at a cost however, with a $740 million quarterly loss used to propel Disney+ onto the streaming podium (7). And this doesn’t answer the problem of empty parks, cruise liners, and theaters. Is it enough for Disney to be just another streaming service, or can they keep the Disney magic alive in another way?

Double down on Digital

Think forward, reason back; nothing could be more critical during a Black Swan event. If the days of large crowds are over, or these crowds only return with a trickle, then Disney needs to rethink its asset-heavy model, especially if pandemics happen several times in a lifetime.

Disney has an edge though.

Unlike Netflix, Amazon, or other streaming services that rely on producing entertainment at volume to stay competitive, Disney has built a kingdom. Rather than a collection of linear, mutually exclusive narratives, they can harness the alternate realities that have been cultivated over decades. Theme parks were the original immersive experience, so why not leverage that edge and make it a digital one. One that includes the sights, the sounds, the emotion, and the magic. Google and Facebook are moving quickly into this space, and Disney might need to follow suit. It’s Virtual Reality, and it’s making enormous strides in bringing the most faraway experiences right to your home.

Getting a consistent forecast for the Virtual Reality market is a futile exercise given the wide range of estimates and CAGRs, but this is proof of a blue sky opportunity. Facebook made a $2 billion acquisition of Oculus in 2014 (8), and Google’s Magic Leap has been valued at $3.7 billion (9). Disney has made a half-hearted attempt to capture its theme park experience with Virtual Disney World and its 46,000 subscribers, but a YouTube channel won’t cut it (10).

Let’s also be upfront that spending more money and incurring more risk while bottom lines are enduring the coronavirus crunch will be a tough sell, especially on the heels of the previous “bet the company” gamble on Disney+. But if the crowds truly are a limiting factor, they may have no choice.

Implementation is also a sticking point. Buy, build, or partner? If Disney is confident in their edge and confident that VR can capture those Marvel, Star Wars and Mickey Mouse moments, building in-house could make them leaders in the home entertainment market. The other two options, however, could help speed up the move and dilute the risk, but Disney would have to share its lovable brands.

Conclusion

When life gives you lemons, make lemonade. When a lethal virus tethers people to their homes, bring the experience to them. Disney might have a chance to wait and see if COVID-19 has indeed rewritten the script completely. In the meantime, however, it will need to start planning, and thinking very big. Because if those wild projections turn out to be true, there will be a race to own the couch experience, and Disney better make sure there is room on it for Mickey.

Bringing the Theme Park to your Living Room (11)

Next:

ClassPass – COVID-19 not a threat, just an occasion to innovate and bond more with partners & clients

27 thoughts on ““Mickey in the Middle of It”

  1. Very interesting analysis, Nicholas!

    You talked a lot about the underutilized fixed assets that Disney will have to contend with in this pandemic (cruise ships, hotels, theme parks, etc.), and how streaming services and VR can help subsidize those unprofitable properties in the near-term.

    One aspect that I worry about is supply of live TV/movie content at this time, particularly for their broadcast networks. Production studios have been shuttered and the ability to physically bring together actors and crew to make a film is likely to be gone for some time. I think Disney’s disproportionate focus on animated and CGI-enabled entertainment gives it a leg up to keep making content for its viewers to watch, but is that enough?

    1. Interesting! I had not thought about the advantages of animated and CGI-enabled entertainment. I wonder how easy it would be to develop content remotely. One of the other articles I read was an AR/VR company that is trying to layer graphics on Zoom chats to give users a way to exchange ideas and imagery over chat. This might be a perfect fit to help production studios work on CGI and animation from home.

  2. Great article, Disney’s fate is going to be a super interesting one to watch in this pandemic. I’ve also thoroughly enjoyed watching the Disney’s famous DisneyWorld fireworks show go digital.

    I think one massive competitive advantage that Disney has that its competitors do not have is the value of their IP in a world where new content releases will be extremely limited for all studios. Disney’s IP and its focus on young entertainment make a lot of their movies infinitely more “rewatchable” than others. For example, part of what made Disney+’s release particularly huge was not just the new series developed especially for Disney+, but access to the vault of Disney classic movies.

    Another question I’d love to know is how Disney might need to think about restructuring its organization or making some key business or cultural changes as its adapts itself into the new normal. Thought this article was quite thought provoking, published by the FT only yesterday (27th April).

    https://www.ft.com/content/5152fd4a-861a-11ea-b872-8db45d5f6714

    1. Great point. I actually got Disney+ for that exact reason – to rewatch my old shows with the kids. I definitely think Disney+ is a huge asset for them, and it was the right move. But given that it is such a small portion of their revenue streams, it might be too little too late. If the world does change permanently, and they do go fully digital, I wonder how they might optimize the huge amount of fixed assets they have on the balance sheet.

  3. Thank you for sharing! I’ve been curious about Disney’s business in the COVID-19 era, as part of its business is the hardest hit and another very much advantaged by the stay-at-home orders and increased screen time. I wonder if the sheer size of the Disney empire both protect Disney from getting completely destroyed and prevent it from completely crisis-proof. In other words, the fact that it will likely always remain an integral online and offline business simply limits its speed and extent of any possible pivot.

    1. Do you think size will help Disney? This would be a great discussion in class about asset-heavy businesses in a crisis like this. I wish I would have added this to the article, but a company that has a lot of fixed assets on its balance sheet must mean their operating leverage is huge. So their size could be what actually ruins them if they can’t pay off the fixed costs.

  4. Interesting article! I’m more on the optimist side of post-pandemic consumer behavior and I think the recovery of their “offline” business is going to be quicker than expected. This does not mean that they are not going to sustain considerable losses during the next few months! But they have the opportunity to strengthen their digital brand as you said. One option, for example, is to create new bundles such as incorporating tickets or visits to the parks in a subscription model (including Disney+, Hulu, and ESPN), this would help families with kids to start “saving” for a trip in the future, accelerating the recovery of the parks in the mid-term. The bet on AR/VR is also a good idea but I think we’re a few years away from mass adoption, they surely can start now if they want to be leaders.

    1. Great idea about cross-selling to link the digital and physical experiences together. So if I understand you correctly, digital subscribers could get some discounts when it comes to theme park tickets. What might be even more interesting is some sort of points scheme (like credit cards) to encourage users to make more in-app purchases to earn points for discounts. Netflix and Amazon could never replicate this feature.

      1. Exactly! A points scheme sounds even better, you may trade points for toys of your favorite movies! (maybe even have toys that are exclusive to points holder)

  5. Great article. Like other commenters I too am optimistic about Disney’s future. While the Parks are closed, it’s been great to see some of the creativity coming from cast members quarantining at home – from the Dapper Dans serenading with “Great Big Beautiful Tomorrow” to the JAMMitors playing with pots and pans at their homes. Other programming collected in the #DisneyMagicMoments site has been a source of connecting with the Parks from home, and has provided ways to engage across the world.

    Of note, one other interesting thing to consider regarding Parks: while Disney has halted construction across parks, Universal has continued to forge on with its new park project in Orlando. While Disney is hunkering down, Universal is building its way out of the pandemic. Two different approaches for two different companies.

    1. Interesting. This would be a great side by side comparison case to see how a large, asset-heavy business should handle demand shocks. I am very curious to see the outcome with Disney vs. Universal. I must say that doubling down on CAPEX when revenues have come to a screeching halt is very risky.

  6. Nicholas, thanks for the very interesting post. I completely agree that COVID-19 affects importantly the traditional business of Disney, while it presents an opportunity for the streaming service of the company. Although I agree that multi-homing is a possibility in the streaming area, I believe that competition of multiple platform can lead the reduction of margins for the company. While in the traditional business the company has a competitive advantage (there are no many direct competitors in the resorts), in the streaming sector they have more competitors. I think that the actions that they have taken are correct, but I believe that their long-term success will be dependent on its traditional business.

    1. Great point – I will have to go back to the Netflix case to analyze their P&L to see how streaming looks as a business. I know that it is incredibly expensive to create your own content vs. license. My sense is that the top players will to some degree price fix (in a legal way) to prevent a price war that ruins everyone. I am honestly surprised that there is a price differential currently between streaming companies – the threat of a price war would have me match my competitors.

  7. Super interesting take Nicholas! I particularly worry about the long term effects that travel fears might have over the Parks and Cruises businesses. I particularly wonder whether it would even stronger to pivot and expand Disney+ from merely a streaming platform to a one-stop shop for all types of entertainment.

    1. Yes, the fully digital experience is a possible option for them in the very long term future. The part I left out is what they would with their huge amount of fixed assets left on their balance sheet. Is there a way to still monetize them in any sufficient way?

  8. Great post Nicholas! You bring up some really great ideas of how Disney can pivot into more digital products. I would love to understand a bit more around how the bail outs (for instance the US and a lot of cruise lines) might help cushion Disney’s losses. Additionally, I think there is a large focus on the US arms of the Disney experience but was wondering if there are differences in the international spaces. What do streaming services look like in China for instance? Do domestic regulations impact/improve Disney+’s market share in certain regions and if there are promising markets how can Disney+ create stickiness for other Disney digital solutions?

    1. I think Disney’s content is a huge advantage internationally provided they can keep trademarks as they have done in the US. I know there was a huge amount of controversy behind Disney extending their trademarks in the US by influencing lawmakers. I believe the one on Mickey Mouse was supposed to have already expired (or expire soon). A big question, therefore, is whether they can protect their IP abroad too and maintain this advantage with the digital pivot.

  9. Hi Nicholas! I’m a big fan of Disney (although who isn’t?) and loved reading your post.

    I couldn’t agree more that Disney should make up for theme park losses with immersive experiences in the digital world. Most of us have more time than ever and are looking for ways to engage online yet are getting increasingly tired of TV series and films, however many are available – leaving incredible opportunities for Disney to digitalize virtual and immersive journeys. The beauty of such offering is that customers will not only be able to visit Disney’s world once every 5, 10, or 20 years, but continuously whenever they need a dose of Disney – as we all do. To make such immersion feel live and interesting however, not only does it require initial investment, but continuous engagement requires repeated investments to create many different journeys with new additions added regularly. Disney should thus not see such investment as another theme park, although digital. Rather, it should become a completely new and unique category of experience that temporarily may compensate for losses in theme parks but that will bring in its own devoted fans (and accompanying $$) also in the future by taking Mickey and Cinderella to children and families globally.

    Fingers crossed this will become reality!

    1. Definitely, fingers crossed! You mentioned that the digital experience could take a cycle that is 5-20 years and make it something that is accessible every day (i.e. continuous). A thought I hadn’t brought up was the risk that doubling down on digital could cannibalize the theme park experience, should it end up recovering after COVID. Perhaps a good reason to wait and see how it pans out before making the switch.

  10. Thanks a lot for sharing this article, Nicholas. I agree, Disney is in big trouble with its cruise-ship business and parks, which are the most profitable segments in their income statement along with blockbuster movie production. I think Disney will have tough times ahead – if 50% of your revenues and 60% of your profits are tied to businesses that are no longer generating value during the pandemic that is a major issue. One thing we shouldn’t forget though is Disney’s strong balance sheet that will help them to weather this storm – the company has easy access to large sums of debt through its decades of moderate capital-structure. On top of that, many of the cost items that Disney has on their income statement can be foregone through furloughs and other cost sheding measures. But the question on the long-term answer remains.

    1. Thanks Marius! I would love to be a fly on the wall during a board meeting. I wonder much time the combination of debt access and cost-cutting could buy them before they have to start considering drastic pivots such as the one mentioned.

  11. Thanks Nicholas for the well-written post. I agree Disney should consider frontier technology such as VR to bring the experience to consumers at home in the long run. Even though there’s a chance of a quick economic recovery post Covid-19, consumer behavior may change as people are more used to staying at home to do things, which would be detrimental to Disney’s bottom line. On the execution front, I think Disney could consider partnering with existing VR players such as Google or Facebook rather than building the hardware technology in-house, not just because of the huge R&D expenses associated with VR but also it could allow Disney to focus its resources on what it does best: storytelling.

    1. I wonder who the ideal partner would be. Disney is such a valuable (and therefore fragile) brand, that partnering has always been a risk for them. Would partnering with Facebook, for instance, be too risky given their issues with user privacy and data collection practices? How would you weigh this risk with the money required to go it alone?

  12. Great post! My main concerns at the launch of Disney+ was how long the company would be willing to invest in what was likely to be a cash negative and capital inventive business for many years to come given how many profitable business segments Disney already had. I agree that the halt of operations in their parks and cruise lines may give them no choice but to double down on their streaming capabilities.
    I think your suggestions of introducing a layer of AR and VR are really interesting! I wonder how well Disney is set up to do this. Their RPPs have traditionally been much more skewed towards the creative and story telling than to technology, hopefully they can pivot their capabilities to add and retain the talent required for these innovations.

    1. On your last point, I think that is a very good argument for partnering given that this would be a very new ground for Disney. They do have some digital immersion experience at the parks, but I am not sure this would translate into the at-home AR/VR experience. A question though, given Disney is such a precious brand, is who to partner with? Can Disney, for instance, afford to partner with Facebook given all the heat that comes with Facebook and privacy.

  13. Fantastic article! Thanks, Nicholas! Was curious how you think Disney should proceed with the virtual park experience? Is further investment throwing good money after bad, or should they double down on this initiative? It seems that there is value in having digital be fully digital, and in-park experience being fully in-park. The hybrid model may cannibalize sales or dilute the magic of the Disney experience. That said, the rise of digital platforms and accessibility / low barriers of entry with these channels may threaten Disney longer term by putting smaller players on a more even footing with the traditional legacy industry giants.

    Furthermore, how will Netflix and HBO respond? Will they build their own Game of Thrones and Stranger Things parks? For the content they own, will license agreements become a battle zone, or might there be an opportunity for Disney to own the physical arena? Will a character-less King’s Dominion or Six Flags player be able to team up as a white label park for other content providers to bolster their omni experiences?

    It seems that Disney has very strong branding and its partnerships with Pixar, Lucasfilms, and Marvel have enabled the company to build a moat around its IP, but as other players begin to expand their own empires, Disney must resort to licensing, acquiring, or developing new stories and characters on an ongoing basis. Is this really sustainable, or will the Harry Potter Worlds continue to crop up and chip away at the enviable position Disney has held for so long? Seems digital will become increasingly relevant to Disney’s strategy moving forward.

    1. Thanks! Great point on the cannibalization. This is probably one of the main issues that would give me reservations about doubling down on digital. Someone else brought up a really good point about perhaps coupling the two experiences together – Disney+ earning points to get a more high-quality experience at the physical park – an interesting idea to perhaps prevent the cannibalization.

Leave a comment