Bob Chapek’s Sun Valley Challenge: Define His Vision for Disney

This week Walt Disney Co. CEO Bob Chapek, joined by dozens of others representing the business and political elite, is in Sun Valley, Idaho, for the annual Sun Valley Conference, hosted by the boutique investment bank Allen & Co.

Instead of conducting business next to the wood-paneled walls of the bank’s New York office (many of which are adorned with fine art featuring a Western motif), they gather in the foothills of the Rocky Mountains proper and take stock of the state of the world … and their businesses.

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Since taking over as CEO of Disney in February 2020, Bob Chapek has been fond of noting the company’s 100th anniversary, which will be next year.

Chapek has used the anniversary to rally the troops and call for leaning into the company’s strengths while reimagining what it is capable of. He has also sought to create his own vision for the company following the departure of former CEO Bob Iger (who is also in Sun Valley this year).

“I believe our mission for this year is clear: set the stage for our second century, and ensure Disney’s next 100 years are as successful as our first,” Chapek wrote to employees in a Jan. 10 memo.

While there have certainly been bumps along the way (looking at you, Florida), Disney’s board reaffirmed its support for the CEO with a new three-year contract effective July 1, 2022. And the unanimous decision referenced Chapek’s desire to plan for Disney’s next century.

“The board’s decision Tuesday left little doubt that it was committing to his vision for the company, adding in its announcement that Chapek ‘has set Disney on a course to lead the entertainment industry well into the company’s next century, with a keen focus on storytelling excellence, innovation, and audiences,’” Wells Fargo analyst Steven Cahall wrote in a June 29 note.

It’s no small decision, and Chapek will have to navigate a number of critical business challenges, even as he explores new areas for Disney to invest in. With the Disney CEO hanging with the global elite this week at Allen & Co.’s annual Sun Valley Conference, it’s a subject that may very well come up during the confab.

STREAMING

In one of Chapek’s first major moves as CEO, he reorganized the company to focus on streaming. He created a new division, Media and Entertainment Distribution, led by a top deputy of his, Kareem Daniel, who would be responsible for profits and losses, and would have final say in distribution decisions.

“Given the incredible success of Disney+ and our plans to accelerate our direct-to-consumer business, we are strategically positioning our Company to more effectively support our growth strategy and increase shareholder value,” Chapek said at the time.

Disney’s streaming efforts remain its biggest bet on the future, with Disney+ topping 138 million subscribers, Hulu hitting 45.6 million subs and ESPN+ reaching more than 22 million subscribers.

And it has a two-pronged strategy to continue that growth trajectory: adding more general entertainment to Disney+ and launching a cheaper ad-supported tier.

“Given how under-monetized Disney Plus is today, in our view, we see [advertising] as an accelerant to revenue growth and helpful to bringing the business to breakeven over time. It is unclear, however, how incremental it will be to driving additional subscriber growth,” Morgan Stanley’s Benjamin Swinburne wrote in a June 30 report. As for general entertainment fare: It “may be the primary variable in determining Disney’s ability to deliver on its FY24 streaming guidance.”

But with Netflix’s subscriber slowdown, and with Disney set to lose the streaming rights to cricket matches in India next year, there are already concerns about just how fast Disney will be able to grow in the space. The company has long set a target of 230-260 million global subscribers to Disney+ by the end of fiscal 2024, but the cricket rights threaten to hinder that growth.

“The loss of digital IPL cricket rights could lead to greater-than-expected churn for subscribers in India,” Swinburne added.

As it happens, talks for Chapek’s next contract renewal would likely begin in late 2024, conveniently timed to the results company’s long-term subscriber target, although the company may opt to lower expectations and its target in the coming months.

COVID RECOVERY

While the worst of the COVID-19 pandemic may be behind us, it continues to leave a lingering impact on Disney’s business. (Disney board chair Susan Arnold said in renewing Chapek’s deal that the company “not only weathered the storm, but emerged in a position of strength.”) Consider that Disney’s theme parks, which have rebounded mightily since their 2020 shutdowns, are still capping attendance to manage crowds, and some of the international parks remain subject to tighter restrictions (Disney Shanghai just reopened June 30 after being shut down for months).

“We think pent-up demand is clearly playing a role in the current Parks strength, which along with Disney’s yield management investments may allow the business to grow even in a modest recession,” Swinburne writes.

While the U.S. parks are unlikely to see future shutdowns, COVID spikes could impact attendance, and shutdowns in China, Japan, or France are not out of the question.

On the cruise front, this month Disney launched its newest ship, the Disney Wish, which could drive demand for that segment of its business.

And then there’s the company’s theatrical strategy.

While movie theaters appear to be making a comeback, mixed results for Pixar’s Lightyear leave open the possibility that Disney continues to shift some titles straight to streaming. While no one doubts that future Marvel tentpoles (Thor: Love and Thunder is opening this weekend) and other franchise fare will get an exclusive theatrical window, Pixar and other Disney studio films may still need to prove their value, or instead be used to drive Disney+ subs.

And of course, it is not at all obvious that this summer’s theatrical performance will continue in the fall or winter, should another spike in COVID cases hit.

ESPN AND THE FUTURE OF LIVE SPORTS

For years, ESPN was the linchpin of pay television. Its live coverage of the NFL, MLB, the NBA and dozens of other sports, combined with its powerhouse studio shows, justified enormous rate increases, and brought Disney billions of dollars in annual revenue.

On the content front, ESPN has been aggressively innovating, adding multicasts produced by Peyton Manning to Monday Night Football, golf, and college sports, and investing in new mediums like podcasts to bolster its relationship with sports fans.

ESPN’s TV channels remain a critical piece of the bundle, and in the words of Chapek, a “huge cash generator” for the company, but instead of padding Disney’s profits, that cash is being reinvested in streaming. Chapek said during the company’s last earnings call that the company is prepared to launch a fully direct-to-consumer ESPN (“it will be the ultimate fan offering,” he said, suggesting they have a broad outline in place), but no such launch appears imminent.

Instead, Disney is adding sports at the margins through its ESPN+ service, which mostly has events that aren’t available on the linear channels. A deal with the NHL also makes some games available to Hulu subscribers.

For a company that is home to the “Worldwide Leader in Sports,” figuring out where sports fit into the larger streaming ecosystem will be a critical challenge over the coming years.

THE METAVERSE

One recurring theme from earnings calls and conference appearances has been Chapek’s interest in exploring the “metaverse,” an idea that the digital world and the real world can connect in some way, or that digital worlds can be created that are as fun and engaging as the real world. No company has put more into that effort than Meta (formerly Facebook), but Disney, which knows a thing or two about transporting people to other worlds for entertainment purposes, is actively thinking about the idea.

In his January memo Chapek framed the metaverse as a “new canvas … on which to paint,” but whether that means creating virtual experiences that feel real, or enhancing the company’s theme park attractions to create even more engaging experiences remains uncertain. A clue can be found in Chapek’s memo announcing Mike White as the executive in charge of the effort. White will report to both Kareem Daniel and Josh D’Amaro; the latter leads Disney’s parks and experiences business.

“While the storytelling that will define our metaverse presence will of course emanate from our creative teams, Mike will establish our overall vision and strategy for the consumer journey through these new story worlds,” Chapek wrote.

Expect more clarity in the years ahead.

IS THERE A “TRANSFORMATIONAL DEAL” TO BE MADE?

When people talk about Bob Iger’s run atop Disney, they often mention the “transformative” deals he made. Acquiring Pixar from Steve Jobs, buying Marvel for a mere $4 billion, acquiring Lucasfilm (owner of Star Wars and Indiana Jones), buying Major League Baseball’s streaming video division BAMTech, and of course the $71 billion 21st Century Fox acquisition.

And while the market for M&A over the past two years has been frothy (despite the pandemic), Chapek’s Disney hasn’t done any major dealmaking, preferring to invest in-house at its parks and streaming services first. That is unlikely to remain the case. At the very least, Disney will be forced to strike a deal with Comcast over the future of Hulu, with the cable giant able to force Disney to buy out its 33 percent stake in 2024 for market value. Given Chapek’s ambitions in streaming, an early buyout could give Disney more optionality in its plans.

“Operationally, we would expect a greater product and marketing convergence of Hulu into Disney Plus in the U.S. following the buyout,” Swinburne writes. “This would include offering Hulu content inside the Disney Plus app, for example. Over time, we could see Disney move to a single app across Disney Plus, Hulu and ESPN Plus.”

But Chapek also touts the company’s “franchise ecosystem,” which has turned Marvel into a juggernaut, has kept Star Wars relevant in pop culture (theatrical strategy notwithstanding), and turned films like Frozen and Encanto into household product staples.

Surely Chapek and his team would be on the lookout for other IP that could become available that the company could incorporate into that ecosystem. And that could be the enduring stamp Chapek has on Disney’s content legacy.

Sun Valley might be just the place to kick-start those conversations.

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