DISNEY: Bob Chapek Did Nothing Wrong | Streaming Industry Primer
Economies of Scale is still the secret to winning in the Media/Streaming industry... little has changed since John Malone was the The Cable Cowboy
Dear paid subscribers: Happy Thanksgiving! I humbly request for an extra week to complete my follow-up Disney Part 2 stock report; as there has been significant scope creep in my research of this incredibly large company. Please rest assured that this is an extremely high-quality deep-dive of Disney (just like Part 1)… and will be completely worth the extra week’s wait. Also, this will still count towards October’s paid stock report… November’s report will be about a new stock!
Much ado has been made of former Disney CEO Bob Chapek’s unceremonious defenestration from the ivory towers of the House of Mouse — only for him to be replaced by the primordial Bob (Iger) in the Kingdom of Hearts. For the uninitiated, Chapek was fired by Disney’s board in Nov 2022 following a series of gaffes that led to his loss of credibility within the company. This amazing CNBC article covers the story in its full glory.
In the Game of Thrones, history is written by the victors. And so it comes as no surprise that Chapek was branded as an incompetent buffoon who lost his grip on the company due to an inconceivable number of sequential mistakes. Yet when I reread the CNBC article above which unpacked The Unravelling of Chapek in glorious detail, it struck me how the truth was less one of unimpeded management hubris and more a snowballing of unfortunate events which culminated in Chapek losing popular support within the company, and ultimately his job.
More specifically, none of Chapek’s “mistakes” were seriously irredeemable errors. It’s true that he was responsible for how things turned out, and should have made a more concerted effort addressing things before they unravelled — and it’s also true that he did make some unforced errors. But to describe it briefly, they were the kind of mistakes I could also see myself making. It was just one thing after another for Chapek — you know how compound interest works. This was it happening in reverse to Chapek’s career.
Perhaps more crucially, none of these mistakes were strategic errors regarding the direction he was taking the company — which is how he is often branded. In fact, many of the “wrong” decisions that Chapek made which threw him off Disney’s buckling horse are the very same decisions that his successor Bob Iger is being praised by consensus for pursuing today. These include the internal restructuring of Disney’s operational structure with a refocused “Ecosystem” corporate strategy, a concerted effort to re-bundle Disney+ and Hulu (and now ESPN+) into an all-in-one app to increase subscriber engagement and reduce churn, the firing of longtime Disney lieutenants who didn’t agree with their visions, and a doubling down on Streaming as the future of Disney.
It is important to emphasize that there were different approaches to both of their executions in each of the above examples; so it’s fair to say that this isn’t an apples-to-apples comparison. But it’s also fair to remember that the needs of Disney were wildly different during the respective tenures of Big Bob and Little Bob, and in principle they were pursuing similar strategic objectives. For instance, as we shall see below, doubling down on Streaming meant different things to Disney+ during both Bob’s tenures — one required rapid expansion to acquire economies of scale for survival, while the other required refocusing operations for profitability for survival.
I won’t argue about all the nitty-gritty of Chapek’s relationship dynamic mishaps with the powers-that-be within Disney (i.e. corporate politics) that led to his firing — as the CNBC article above already does a great job covering them. But there might even be room for forgiveness in those — if you’ve read the CNBC article closely, you’ll see that most of them actually didn’t start with a major blunder by Chapek. most of Chapek’s known gaffes — the Scarlett Johansson lawsuit, the #Disneysaygay controversy, the theatrical release of Strange World — were all informed by cool-headed business logic, rather than any sort of overt emotional input. And Chapek’s responses following each of these missteps were what you would normally expect from a CEO — sombre, repenting and accountable. Certainly not worthy of being branded as hubris.
Nonetheless, my focus in this article won’t be on his relationship gaffes, but solely on evaluating his business decisions while he was CEO — i.e. whether his strategic direction for Disney as a company was correct. This is the main thing which he is frequently accused of “hubris” for — and the genesis which led to most of his internal disagreements with Disney’s warlords, Iger and its board which ultimately spiralled into his firing.
Chapek: Acquiring Sufficient Economies of Scale To Compete Effectively with Netflix
Firstly, Chapek is often derided for pursuing a “growth at all costs” approach at Disney+, which pummeled Disney’s profits deep into the red — even after the Fed had already started dramatically hiking interest rates, and the public narrative around “growth-first” had changed. 4Q22 was by far Disney+’s worst quarterly loss despite being a full year after Powell had already begun hiking interest rates, and most of the industry had already pivoted to a profit-first focus by then. This is frequently argued as hubris on Chapek’s part — why didn’t he follow in lockstep with the rest of the industry, actively driving Disney+’s profitability further into the void instead?
However, anyone who has read John Malone’s biography Cable Cowboy will know that he employed Economies of Scale as his main weapon of choice when he was CEO of TCI (where TCI’s share price handily outperformed over his 25-year tenure as CEO, with a LT track record of 30% CAGR). The US Media landscape has decades of history and firmly entrenched positions — and without sufficient scale Disney would not have a strong hand in negotiating with fellow industry participants for good broadcasting terms. Without enough viewers on their platform, media networks (whether in Cable or Streaming) wouldn’t have sufficient leverage to negotiate good syndication terms with hit show Producers/owners for viewing on their own platforms (e.g. watching DC Universe shows like The Flash on Netflix). Not having enough customers would also be a concern when acquiring exclusive broadcast rights (e.g. ESPN vs. sports Big Leagues), as the latter will prioritize broadcasting their content on the network with the greatest ease of accessibility and reach to the greatest number of viewers.
To summarize the moral of the story in Cable Cowboy, by far the most important business factor in the Media industry is Economies of Scale — and little has changed in the industry since John Malone’s era. If Disney+ had significantly less subscribers on its platform as compared to Netflix, it would be have been far more difficult for it to achieve the illustrated business outcomes above on behalf of its upstream suppliers (i.e. Producers). Imagine if Disney+ only had 90 million subscribers on its platform today while Netflix had 230 million — who do you think would have the better hand in negotiations for better shows, broadcast rights and contract terms (i.e. pricing/costs)? Subsequently, who would have greater ability to strong-arm their legacy media competitors into exclusive syndication rights of their precious libraries of hit shows, or negotiate for better distribution terms with MVPDs? (e.g. the recent Disney-Charter deal) Obviously it would be the company with greater scale, i.e. greater number of subscribers. And such greater number of subscribers would beget lower unit costs and a more robust show library, which would beget more paying subscribers… see how the flywheel spins in the Media industry?
Bob (Iger) the Builder: Building on Chapek’s Momentum
Secondly, it’s worth pointing out that much of Iger’s current turnaround successes at Disney’s Media businesses are actually building on top of the foundation that Chapek had set. Disney+’s current 230 million odd paid subscribers have managed to catch up with Netflix’s similar subscriber count — and Chapek achieved that in just three years, an impressive speedrun regardless of context. But keep in mind the context: Chapek was operating in a pandemic business environment — arguably the best time to lean into the momentum to maximize Disney+ subscriber acquisition, rather than focus on profitability. Without those 230 million paying subscribers, Iger would probably have to redo today what Chapek was crucified for — acquire them at painful losses in intensifying price competition with an emboldened ad-supported Netflix. He probably wouldn’t have much of a choice either, since as we explored above, little has changed in the Media industry since Malone’s era — Economies of Scale are still all that matters.
In that sense, there is a quirky logic to Chapek’s strategic direction for Disney+ (i.e. “growth at all costs”) which contributed to his loss of internal credibility at the company and ultimately snowballed into his firing. Arguably Chapek’s biggest gaffe while he was Disney CEO was his corporate restructuring efforts — where he made many enemies internally by upsetting Disney’s status quo reporting structure under Iger, which ultimately snowballed into mutiny as one Disney management elite after another became disillusioned by his seeming decision-making naivety. One oft-mentioned example was how Chapek stepped on the many toes of Disney’s creatives by wresting decision-making power away from them — in favor of a more streamlined reporting structure under his lieutenant and Media division head, Kareen Daniel (“MBA-ifying Disney”). Putting the political considerations aside, one could actually follow the logic of Chapek’s direction — he was merely following Netflix’s lead by separating the Creatives from Operations, something which Netflix had already done successfully for years. Obviously he can be criticized for not anticipating the immense blowback (i.e. poor execution) — but as I mentioned above, this is the kind of mistake that I could see myself making too. Certainly not hubris-worthy.
More importantly, Chapek’s corporate restructuring of Disney was probably done in pursuit of gathering Economies of Scale at Disney+ to compete on equal terms as Netflix. As I’ve mentioned above, Disney+ actually managed to catch up to Netflix in terms of number of subscribers by end-2022. Chapek’s contract as CEO was renewed until July 2025 — he probably thought that he had enough time after having caught up to Netflix’s economies of scale to right the ship and return Disney+ to the black. He probably saw it as a parallel to when Disney+ achieved its first 100 million subscribers — the board forgave his past transgressions, and even heaped praise on him.
He would probably not be wrong. Iger is currently forecasting Disney+ to be profitable by end-2024, and Disney’s 100-year history has given it a far superior library of entertainment IP and original content as compared to Netflix. Chapek was also considering rebundling Hulu into Disney+ before his firing, which Iger previously voiced his hesitancy over while Chapek was still CEO. Ironically, Iger is also currently attempting to rebundle Hulu into Disney+ — which is much of the reason for my excitement about Disney’s future in Streaming. Remember the key word: Economies of Scale.
I won’t try and whitewash Chapek’s tenure as CEO, as he certainly didn’t manage his internal optics well during his time there. However, I would argue that the heavy losses incurred by Disney+ was just the straw that broke the camel’s back — it was everything else that really contributed to his firing. And as I mentioned at the start of this article, there might even be room for forgiveness in those too.
With the benefit of hindsight, it’s actually possible to argue that Chapek didn’t demonstrate hubris from a purely business standpoint — and if given a bit more time, might actually still be Disney’s CEO today. As TSOH so elegantly puts it in this excellent article about Disney’s role in disrupting the industry, “he (Chapek) ran out of time”.
And now Iger is riding on Chapek’s coattails — with Disney finally having acquired the economies of scale necessary to compete as Netflix’s equal in Streaming during Chapek’s tenure. But can Disney beat Netflix? If you’d like to find out why I’m so excited by Disney’s current trajectory, check out last week’s Disney Part 1 report below… and look forward to next week’s Disney Part 2!
Great take. Not to mention: Iger is such a legend, like literally anyone who stepped into those shoes would look like a clown for a few years.