“The decision to disrupt businesses that are fundamentally working but whose future is in question—intentionally taking on short-term losses in the hope of generating long-term growth—requires no small amount of courage.”
— Robert Iger
The risk of potential disruption strikes fear in the hearts of corporate executives in long-established and highly profitable industries. Basic economic theory has long held that consistent profits well in excess of the cost of capital will inevitably attract additional investment in the long run which will tend to drive down returns over time. Comfortable industries such as newspapers and network television enjoyed high profitability for decades due to economic moats that led to natural oligopolies. Until close to the end of the twentieth century, such industries seemed nearly immune from serious disruptive pressures. The economic moats around businesses in the media industry did not eliminate competition by any means, but competition was well defined and predictable. The internet forever changed this dynamic as the twenty-first century began and formerly comfortable executives have been scrambling ever since.
Robert Iger has been running The Walt Disney Company since 2005 and has published an interesting account of his business career in The Ride of a Lifetime. The first half of the book is a relatively slow account of Iger’s early years moving up the management ladder at ABC which was acquired by Capital Cities in 1985. During those early years of his career at Cap Cities, Iger worked for Dan Burke and Tom Murphy who encouraged a decentralized and spartan organizational structure. Iger thrived in this culture, finally rising to President and COO of Cap Cities in 1994, just before the company was acquired by Disney. At Disney, Iger found himself working for Michael Eisner in a much more centralized corporate structure. Iger provides a dramatic account of his rise to the top of Disney which finally took place in 2005 and the narrative runs all the way to the remarkably well received introduction of Disney+ in 2019.
Michael Eisner was one of the most highly regarded CEOs in America at the time he turned over the reins to Bob Iger in 2005, but by the end of his tenure, there were significant areas of conflict with Disney’s board as well as with important business partners, including Steve Jobs. Disney had a longstanding relationship with Pixar, which Jobs controlled, but a series of business disputes led to a near dissolution of the relationship by the time Iger took over as CEO of Disney. Iger believed that it was essential to repair the relationship with Pixar due to the poor state of Disney’s animation business. Iger needed a better relationship with Jobs, and reached out to him immediately after becoming CEO.
Jobs was initially cautious but he and Iger hit it off and they were soon collaborating on providing content for the first version of Apple’s Video iPod which was released in October 2005. That collaboration increased the level of trust between the two men and soon they were in discussions for Disney to acquire Pixar. Iger was still very early in his tenure and did not have a great deal of political capital with Disney’s board, but he decided to bet his future on the $7.4 billion acquisition. Perhaps more important than the addition of Pixar to Disney, Steve Jobs became a very large Disney shareholder after the acquisition and his influence on Iger was apparent from this point forward.
Acquiring Content and Talent
Steve Jobs was a fanatic and a perfectionist when it came to product design, and his innovations ended up disrupting many industries. The rise of the iPhone, accompanied by the destruction of the seemingly impregnable mobile phone incumbents, is the most obvious example. Iger developed a close friendship with Jobs and he was one of the first people outside of Jobs’s family to learn about the return of his cancer in 2005. Jobs thought it was important to let Iger know about his diagnosis prior to moving forward with selling Pixar, but Iger declined to pull out of the deal. Jobs would end up being a key member of Disney’s board until his death in 2011.
In addition to the Pixar acquisition, Iger made two additional transformational acquisitions with the purchase of Marvel Entertainment and Lucasfilm. In both cases, the acquisition of these companies allowed Disney to greatly expand its library of content and, perhaps more importantly, acquire human capital that would drive future content forward. Iger learned a great deal about managing creative talent by watching how Jobs handled the Pixar sale.
Steve Jobs was known as a mercurial manager and he had little patience for mediocrity, but the flip side is that when he found talent that he felt was indispensable, he showed it and this created tremendous loyalty from those who worked for him. This was a lesson Iger took to heart when he saw how Jobs treated John Lasseter and Ed Catmull:
Steve told me he would seriously consider it [Disney buying Pixar] only if John and Ed were on board. After we talked, he contacted them to say that he was open to a negotiation, and to promise them that he would never make a deal without their blessing. We planned that I would meet with each of them again, so I could explain in more detail what I was imagining and could field any questions they had. Then they would decide if they were interested in going forward with a negotiation.The Ride of a Lifetime, p. 140
It is extraordinary for a controlling shareholder of a company to give his employees effective veto power over selling the business. However, in creative fields, a company is often highly dependent on the talents of a few individuals and, without those individuals, future prospects would look bleak. Iger obviously came to the same realization and would likely not have wanted to acquire Pixar without Lasseter and Catmull on board. The reader gets the sense that Iger learned critical lessons from watching how Jobs interacted with creative talent.
The Courage to Disrupt Yourself
In Chapter 12, entitled “If You Don’t Innovate, You Die”, Iger outlines the major challenges facing media companies in the 2010s. Traditional distribution of content was still highly profitable for Disney and there did not appear to be a need to change course immediately. Iger believed that Disney needed to get ahead of the curve by developing a technology platform that would allow the company to start delivering its own content without intermediaries. Iger had seen the type of disruption that had already affected newspapers and his business relationship and friendship with Jobs clearly played a role in his aggressive posture. He was convinced that Disney could either disrupt itself or find itself disrupted anyway.
In mid 2017, Iger decided that Disney needed to buy a controlling stake in BAMTech and use that company’s technology platform to launch Disney and ESPN streaming services directly to consumers. This was the original genesis behind the Disney+ rollout that took place in 2019. Iger announced the decision in Disney’s August 2017 earnings call:
That announcement marked the beginning of the reinvention of The Walt Disney Company. We would continue supporting our television channels in the traditional space, for as long as they continued to generate decent returns, and we would continue to present our films on the big screens in movie theaters all over the world, but we were now fully committed to also becoming a distributor of our own content, straight to consumers, without intermediaries. In essence, we were now hastening the disruption of our own businesses, and the short-term losses were going to be significant.The Ride of a Lifetime, p. 192
Iger was choosing to accept short-term losses with the expectation that future growth will more than make up for it. Although Wall Street is often ultra-short term oriented, Disney stock reacted favorably to Iger’s August 2017 announcement. But Iger had additional work to do in order to make this radical change work. He had to revise compensation policies that incentivized executives to protect the old model. Iger ended up making executive compensation more subjective than it used to be in order to be in a position to reward executives who made progress with streaming even if it came at the expense of short term profits.
As of early 2020, it appears that Iger’s bet on Disney+ will be a success. The $6.99 per month price point for the service is very aggressive and Disney has spared no expense in making compelling original content that is available exclusively on Disney+. Iger leveraged the Star Wars franchise acquired with Lucasfilm to develop The Mandalorian, an eight episode series about a bounty hunter that includes an unexpected star popularly referred to as Baby Yoda.
Pick Your Poison
One of the key takeaways from Bob Iger’s memoir is that it is not possible to hide from disruption. Sometimes, disruption comes from out of the blue leaving executives with little time to react, but at other times one can see that changes are coming far ahead of time. If you are leading a dominant company in an industry that appears vulnerable to disruption, you can choose to either ignore the threat, take defensive steps, or go on the offense using the strength of your current position as a springboard to turn the tables on your new competitors.
The final verdict on Iger’s tenure as CEO of Disney is yet to be determined. He still has two years left on his contract and it is likely that we will have a better idea of the progress made in the streaming initiatives by the time he departs. However, he does deserve credit for having the foresight to accept the fact that streaming of content is the future and taking concrete steps to be relevant in this new environment. He understood that owning not only the content but also the distribution channel would be critical to success. Ten years from now, we will be in a much better position to evaluate the outcome of his strategic moves.