What Disney's big reorganization really means

It's not just a shift in priority, but giving the powerful even more power

I wanted to spend this week’s newsletter writing about everything happening with Disney’s Parks. The situation happening in California, and the tens of thousands of people affected by major financial strain being placed on the company’s Parks division, is one of the most important Disney stories playing out. It’s a story, however, that I want to give the proper attention to, and want to ensure I’m talking to the right people to get the full picture. 

Next week’s issue of Musings on Mouse will be dedicated to Parks. Then we’ll dive into Mandalorian returning and Disney+ in November before Disney’s big investor day focused on its streaming initiatives in December.

This week, I’m running an excerpt from an interview I did with Walter Hickey, creator of the extremely popular and fantastic Numlock newsletter. You can subscribe to his newsletter here — I highly recommend it. The newsletter is an excellent round up of top stories across media, science, tech, politics, culture, and so much more. Walter also runs special deep dive interviews on Sundays. It was an honor to be featured in Numlock. The full interview can be read here.

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Walter: When I was at FiveThirtyEight, it was owned through ESPN, which is owned by Disney. So by the transitive property, we were castmembers. But one thing that I always got a kick out of there was that Disney had aggressively for years avoided being the person who was directly charging your credit card while still benefiting from that, like ESPN got a ton in carriage fees, but they were never the cable company, who you didn't like, directly charging you. Now you've increasingly seen that change, to the point that DTC is such a big deal to them, so much so they did a big reshuffling this week. In general, how has Disney evolved from that point of being a company that was deliberately discreet about where the money was coming from to one that's made it a centerpiece now?

Me: That's a really great observation. I think that is absolutely the question, and it's something that's forced Disney's hand.

I think Disney would have loved to have just kind of been the theatrical giant for the next few years, I would think Disney would have loved for Disney channel to have remained the number one kids network. And their hands were forced, they realized aside from Marvel and Star Wars, for the content that they have, people aren't necessarily going to theaters and they're not necessarily going to keep cable. Those customers were going to Netflix for general entertainment. Those customers were going to Amazon and waiting a month or two or three after the movies came out because they didn't really care. They were willing to wait. They'd rather watch it at home.

Disney's shift to direct to consumer and going all in was something that we would have seen happen over the next five to six years, but as with everything in the pandemic, it's just been accelerated. They had to do it now. If we were going to break down Disney's revenue over the last year, it's only direct to consumer, because every single other vertical's been hit. Theatrical has been hit, their TV networks have been hit by advertising problems and content delays and production delays. Their parks business is obviously floundering right now. Cruises are basically out of the question. You can go through each one, all of them, and there's a problem here because of the pandemic. The one area that was going to grow anyways, even without this, but was just forced to grow faster was streaming. And it feels like what we're seeing is Disney figuring out on the fly what works and what doesn't.

So, if we look at the reorganization, my read from that was basically, we want to get rid of the middlemen, we want to give power to our heads of content from your Alan Horn down to your Kathleen Kennedy. They can go, “this makes sense for Disney Plus, we can invest in creating a little universe here" or "We can invest in making this a two or three or four times a year situation," and then choosing which of their projects they can bring to theaters in a few years that they know are going to make $1 billion, $1.2 billion, $1.3 billion dollars and are worth the investment. What we're seeing happen is basically the top executives at Disney going, “we have to kind of give them the control to shape up what that is going to be," with the primary focus on growing out Disney Plus.

If we think about projects that Disney really likes, but they couldn't bring or they tried to bring to theaters and they really failed, that's your McFarlane, USA, that's your Queen of Katwe. Those really didn't do well at theaters, so they stopped bringing them to theaters. But those movies might do well on Disney Plus and bring in subscribers and reduce churn because they just need content. And if they can do that, then Disney continues to win, because Disney Plus becomes a super profitable business in however much time it takes. What we're seeing was just their public affirmation or public confidence in something that me and many of the reporters were hearing about behind the scenes, which is this very fast shift to realizing where their majority of revenue was going to come from for the next little while and that's DTC.

This is a company with a very large international footprint, this is a company that is increasingly trying to be DTC, and you wrote a really great post earlier this year about how Disney is doing something really interesting in India with Hotstar. Do you want to go into a little bit about that? This is a big slice of this company that people do not necessarily know exists, but could very well be laying the groundwork for a lot of the future of digital media, is kind of what I took away from this.

Disney purchased Hotstar when it was moving into India, thinking, “we need to exist in this territory, it's a massive territory, it's a territory where people are streaming and they tend to stream more on mobile." And so Disney comes in and instead of trying to just launch Disney Plus from the ground up in India, Disney goes, “we're going to purchase this company and increase our subscribers tenfold overnight.” What they do in India, which is really interesting at the time, is they decide we're going to take a few Bollywood movies that are really popular — that Disney owned the rights to via Hotstar, which Disney had also acquired — and we're going to release them directly through Disney Plus Hotstar, and we're going to charge a certain amount of money, it worked out to be the equivalent to what Disney Plus introduced to the people around the world as premier access of Mulan.

This idea being you could watch this on our subscription service if you just pay a little extra. It's an interesting concept, and whether or not it worked with Mulan, we'll see. But it's an interesting concept because in India, it hyper-targeted a very specific form of entertainment that is extremely popular in that country. They had a whole slate of how they were going to do this and then how they're going to kind of get past the issues in theatrical release right now. When Disney releases something via Disney Plus they get a higher cut if people purchase it through them. Even if people purchase it on their Apple TV device, their Roku device, Disney is still going to take a higher cut of that overall revenue than they would get through theaters. And at a time when they're trying to figure out would this beat work as a theatrical exclusive or would this work as something we can just bring to Disney Plus, I think we're going to see them continue to experiment. This is something we could charge 20 dollars for and maybe make a decent amount more here than we would get at theaters, and we keep theaters to 10 to 11 movies that are just our blockbusters that are going to do extremely well, your Avengers, your Star Wars, your annual Pixar movie.

It's an interesting thing that they're trying to figure out. It's going to take time. Mulan had a bunch of issues before it came out, I don't think Mulan had the hype that a lot of other movies might have that people would have spent money on. Bob Chapek, the CEO, says it was a one-time thing, just to get them through, an experiment. I think they wanted to see if there could be return on investment through that. And I think we'll see it happen again. I don't know whether that's in the next six months or the next year, but I do think that Disney wants to control what we call the premium video on demand window as well. And that means offering exclusively through their streaming service. Why this is important is because it also reduces churn, and this is the biggest issue with streaming services. Netflix, for example, has very low churn. It's there, but it's low, which means that people aren't canceling their subscriptions. They're continuing to subscribe. Part of that is because Netflix releases 50 to 60 new movies, new seasons, new shows every month, there's 50 to 60 titles. So, if you're opening Netflix, there's something new you're going to want to watch, you end up keeping your subscription.

Disney Plus — partially because they've been hit by the pandemic, partially because they're still new — does not have that as much. They've been trying to figure out how to bring people in, and they're really relying on families subscribing so kids can watch Frozen 2 over and over again to keep those subscriptions. Going forward, if they can find ways to sell something that people are willing to buy and then those people have to keep a subscription for three or four months in order to continue to watch that movie, and the movie is maybe something like a Frozen 3 or whatever it is, where it's something that families would buy and they would keep watching. That's the way for them to reduce churn, make a little extra revenue on top of subscription fees and build a subscriber base in a way that is going to help them turn that revenue into profit.

What you're describing is kind of an interesting question for me, because you've only really mentioned Disney Plus there, whereas they do also own Hulu. Is anything going to happen with them?

It's an excellent question. I wrote a newsletter I think that was basically called, pardon my French, but What the fuck is Hulu? What is their plan for it? Because for a long time, we were told Hulu is going to expand internationally, up until I believe right before Iger stepped down. I think that would have been the last earnings call, which I think was in February of this year, maybe even late last year. He was like, "Our plan is to expand Hulu internationally to 2021, that's the goal."

Then in one of the more recent Disney earnings, Bob Chapek goes, "No, we're not expanding Hulu. We're launching a new service called Star and that will effectively kind of be like a Disney Plus meets Hulu offering." In the sense that it's things Disney owns, so it's not third party content, but it's not just Disney. It's ABC and FX and a bunch of other things. It's an interesting predicament because how much can you expect Hulu to grow if Hulu doesn't grow internationally? It's already at I believe 32 or 33 million subscribers. In the States, once you hit 50 million, 60 million, there's not that much more room to grow. People who want to have it are probably going to have it by that point.

Which is not to say that you can't continue growing — Netflix is doing it, Amazon does it — but once you hit 50 or 60, it slows down quite a bit. I just don't know what their plan for Hulu is. For a period I thought they might try to turn it into their version of HBO, because we saw the FX on Hulu initiative, they seemed like they want to bring prestige programming to Hulu. I want to say Hulu is one of my favorite streaming services, I genuinely I use Hulu and HBO Max more than anything else, just because the content offering is extremely good in terms of what you were getting for what you paid for. But I think what Hulu is going to be for Disney is kind of the bundle version, where you buy the bundle because you're going to get Hulu. Because if Disney Plus is really for kids and families, which I know that they keep saying it's not, but let's be honest, it is, with the exception of Marvel and Star Wars. With the exception of that, Hulu really is your general entertaining platform with more adult stuff.

And so if you're a 35 year old and you've got a two-year-old at home or a four year old at home, you buy Disney Plus because you want them to be able to watch kids shows all day while you're working. But you get the bundle because you would like to watch whatever the next FX show is. You want to re-watch It's Always Sunny or whatever's happening, you want to watch on Hulu. So you get the bundle because you're like, "Hey, I'm also going to get ESPN Plus on the side, maybe I want to watch a soccer game on Saturday."

And I think that is what Hulu is for Disney going forward. I think it's just the sweetener. It sweetens the deal and they're going to invest in it from an FX standpoint to continue making it a sweeter deal. But it's pretty clear even from their most recent reorganization and the way they wrote about in the press release that Disney Plus is really what they're trying to sell. Disney Plus is where they see their future. And I think that's in part because Disney Plus is based on the franchise tent poles that Hulu isn't. But I don't think Hulu is going away. They're going to continue investing in it. And I think Hulu will just be a sweetener.

Studios

First trailer for Raya and the Last Dragon

• Disney first showed off concept art and brief footage for Raya and the Last Dragon at D23 last year, and I was basically all in. Now, Disney has released the first trailer for the film and chances are if you’re into The Legend of Korra, Raya and the Last Dragon is right up your alley. The film is slated for March 2021, but like all movies these days, don’t get your hopes up.  (The Verge)

  Shang-Chi and the Legend of the Ten Rings has wrapped filming!

  • After suffering a brief halt on production in March after a unit member contracted COVID-19 before picking back up in July, Shang-Chi has finished filming. Director Destin Daniel Cretton confirmed the news through an Instagram post, noting that Shang-Chi will now go into post-production work. Shang-Chi is one of four Marvel movies set to be released in 2021, alongside Black Widow, The Eternals, and the third Spider-Man movie. Shang-Chi is scheduled to be released in July. (The DisInsider)

  A reminder that 20th Century Studios is releasing a movie in theaters this month

  • Most studios aren’t releasing movies in theaters anymore, but 20th Century Studios is still trying to find some revenue. The Empty Man hails from 20th Century Studios, Disney’s studio that it acquired as part of its 21st Century Fox acquisition. It looks….well, it looks pretty bad. It’s a horror movie that centers on a town trying to figure out why teens are disappearing. Based on the trailer, it’s definitely not worth risking your life over. (YouTube)

Streaming

• The Falcon and the Winter Soldier will bring back older Marvel characters

  • Musings on Mouse readers know there’s nothing I’m more excited about than The Falcon and the Winter Soldier. Writer Derek Kolstad recently went on a podcast to talk about the show, and it only increased my excitement! Kolstad said that “characters from the earliest Marvel movies that are coming back,” adding that “we’re layering them in and reinventing them in a way that’s gonna shift the storytelling structure.” The Falcon and the Winter Soldier was supposed to be Marvel Studios’ first big Disney+ shows, but instead won’t premiere until next year. The show is currently filming. (Script Apart)

• Reminder: The Mandalorian returns this week!

  • To say that Disney+ has felt a little empty over the last few months would be quite the understatement — no offense to Hamilton or Artemis Fowl. Disney+ needs something exciting to get us all amped about opening the app again, and this Friday we’ll finally get that in the form of The Mandalorian’s second season. If you haven’t seen the latest “look” at the show’s second season, I’ll link that here. (The Verge)

• A Willow remake is headed to Disney+

  • Remember Willow? Lucasfilm’s movie about an aspiring sorcerer, played by Warwick Davis, who has to ensure that an infancy princess gets to safety with a little help from his ragtag bunch of friends? I don’t — but Disney is working on a TV series follow up. The series will boast a pilot directed by Crazy Rich Asians director Jon M. Chu. Ron Howard is set to produce, and Davis will reprise his role. (The Verge)

Parks

• What’s going on with Disneyland? 

  • We’ll really get into this next week as the story develops, but a quick rundown on what’s happening at Disneyland:

    • California Governor Gavin Newsom came out with a strict set of guidelines theme parks have to follow in order to reopen. Under the new guidelines, Disneyland (and other large theme parks) can only open when the county risk level is at a minimum. I’ve thrown in a chart below (thank you to The DisInsider) to better understand the various levels. Then, and only then, can Disneyland reopen, but the mark can only operate at 25% capacity and must require reservations. 

      

    • That didn’t fly with Disney executives, many of whom were already exasperated. Executive chairman Bob Iger quit Newsom’s public economic recovery task force earlier in the month after Newsom refused to budge on reopening policies. After Newsom’s new guidelines, Disneyland president Ken Potrock and Anaheim mayor Harry Sidhu issued statements calling out the state for instituting “arbitrary guidelines that it knows are unworkable.” (The DisInsider)

    • At the center of Disney’s main concerns is its revenue. Remember, Parks is usually a $20 billion business. The parks haven’t really been able to open at all in Anaheim the way Disney World has in Florida, but revenue at both parks have dropped significantly over the last several months. Disney has laid off tens of thousands of people as a result of not being able to open and massive revenue misses and, alongside issues with studios and media networks, Disney is looking for any opportunity to make some money. 

    • It’s also impossible to ignore that roughly 28,000 people will lose jobs because parks can’t open. More notices are being sent out by union reps about incoming layoffs and dates for when layoffs will begin. It’s a scary time for employees. (New York Times)

    • BUT, and this is the big but, the overarching issue is that COVID-19 can’t be ignored. California is seeing an increase in cases, and opening a theme park that could possibly lead to more cases both within the state and outside of it as travelers return home is a risk that Newsom — and many other governors — are unlikely to take. Like everything in the pandemic, it’s a matter of people’s lives and public health versus economic recovery and jobs. There’s no easy answer, but it’s clear that Newsom isn’t going to risk people’s lives just so Disneyland can reopen, and Disney executives aren’t going to sit quiet about their displeasure with his decision. 

Media Networks

• What’s up with ESPN?

  • This is an entire newsletter essay in and of itself, but questions about ESPN’s future are appearing following Disney’s big reorganization. The Hollywood Reporter has a great take on it. Look, ESPN’s future is a much loved topic for media people, but with Iger’s comments earlier this year about ESPN trying to figure out a digital way forward and Chapek putting a public emphasis on prioritizing streaming services, everyone wants to know — what’s next for ESPN? (The Hollywood Reporter)