Bob Iger Tears Up Disney’s Playbook for High-Risk Bet on Streaming

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(Bloomberg) -- After announcing that Walt Disney Co. was launching a new streaming service featuring the company’s classic movies and TV shows, Chief Executive Officer Bob Iger knew he needed a fresh way to compensate executives who’d be contributing their best ideas to the new venture.

Rather than reward them based on the profitability of their businesses, as Disney had always done, Iger wanted to bestow stock awards tied to a more subjective measure: what he thought they were doing for the new service.

Bob Iger Tears Up Disney’s Playbook for High-Risk Bet on Streaming

“I know why companies fail to innovate,” Iger relates in his new book, “The Ride of a Lifetime.” “It’s tradition. Tradition generates so much friction, every step of the way.”

That’s the message Iger delivered to skeptical members of Disney’s compensation committee. And it’s what’s guided Disney’s CEO as he rips up 40 years of tradition in a bet that the future of film and TV will be online. In doing so, he’s essentially created two Disneys: one aimed at the new world of streaming and another managing legacy TV businesses. The result has been wrenching change at the world’s largest entertainment company.

Last year, he restructured the company along these lines, creating new divisions and giving Kevin Mayer, the head of Disney’s streaming services, unprecedented authority. Old hands have been let go. And Disney began pouring billions of dollars into the new video services which — as the company projects — are unlikely to turn a profit for five years.

On Nov. 12, Iger will debut Disney+, part of a three-pronged charge into streaming. Rather than wait for regularly scheduled programming, as they do on conventional TV, subscribers will be able to watch, for $7 a month, thousands of hours of Disney movies and TV shows on demand, from classics like “Snow White” to new, original programs, such as “The Mandalorian,” a “Star Wars” spinoff from director Jon Favreau.

For fans of ABC and other broadcast networks, there is Hulu’s $6-a-month package. For sports lovers, there’s ESPN+, a $5-a-month assortment of college sports, baseball and boxing. And customers can have all three for $13 a month, the same as Netflix Inc.’s standard subscription.

At a company known for premium pricing, Disney’s streaming businesses mark a big change. In August, the company offered a prepaid, three-year Disney+ subscription to fan club members for $141, less than the $149 cost of a one-day ticket to Disneyland at peak times.

The Burbank, California-based company is coping with the classic innovator’s dilemma. Disney’s traditional TV business generated $6.63 billion in profit last year, 42% of the company’s total, led by the ESPN sports network. But ratings at the company’s channels are plunging.

Bob Iger Tears Up Disney’s Playbook for High-Risk Bet on Streaming

At ABC, total prime-time viewers fell 7.6% last season. At the Disney Channel — where the loss of young viewers to streaming has been most apparent — the prime-time audience shrank by 32% in the past year.

Iger’s solution was a massive reorganization. In March 2018, he handed Chief Strategy Officer Mayer command of all the new streaming businesses and international channels, along with the advertising and program sales for channels such as ESPN and ABC.

Iger’s biggest move, of course, was the $71 billion acquisition of 21st Century Fox’s entertainment assets, which closed in March. In addition to gaining control of Hulu and Fox’s film and TV library, the deal brought new managers to the business, including Television Chairman Peter Rice, who heads Disney’s traditional TV businesses and its TV studio.

In July, Iger gave Mayer’s division the added responsibility of negotiating with cable providers such as Comcast Corp. That means the heads of Disney’s TV networks —  ESPN President Jimmy Pitaro and Rice — no longer run advertising, distribution or syndication sales for their businesses.

In “The Ride of a Lifetime,” the 68-year-old Iger said he originally thought Disney might be able to take “baby steps” into the digital future.

In 2015, the company launched DisneyLife, an online video service for viewers in the U.K. But the service lacked original programs. And within months the company cut the monthly price in half to 5 pounds ($6.25). Other features of the service, such as games, didn’t drive traffic, Iger has acknowledged. 

A turning point came in August 2015, when Iger flagged “some modest” subscriber losses at ESPN during a conference call with investors. Disney shares plunged — and wouldn’t fully recover for three and a half years.

“We’d watched our stock get clobbered as I spoke frankly about disruption,” Iger wrote.

The following year, cable profit began to fall. The company fought for and negotiated a place for ESPN in a new generation of lower-priced TV packages such as Dish Network’s Sling TV. But after a growth spurt, those skinny bundles have failed to reverse the overall decline in subscribers.

In June 2017, Iger asked the heads of Disney’s divisions to present to the board at a yearly retreat at the company’s Orlando, Florida, resort. He asked them to talk about the disruption they were seeing and the impact it would have on their businesses.

The board’s takeaway: “Speed was of the essence.”

Which brought Iger to his current plan: a huge streaming push, priced low, with the company’s best content and a string of costly original productions.

Veteran Disney executives got the message. At a fan event in August, longtime Disney Channel chief Gary Marsh said he’d been searching 10 years for the right story to revive the channel’s hit “High School Musical” franchise. He finally had it, he said, and it would premiere on Disney+.

©2019 Bloomberg L.P.

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