Via Financial Times

Walt Disney has spent the past three years making a high stakes transition to online streaming, as the century-old owner of films, television shows and theme parks looks to confront entertainment industry disrupters such as Netflix head-on.

Bob Iger, Disney’s well-regarded chief executive for the past decade and a half, has repeatedly called the shift the “number one priority” at the world’s largest media company. 

It therefore came as a surprise on Tuesday when Disney abruptly announced that Mr Iger was retiring, with nearly two years left on his contract, to be replaced “immediately” by Bob Chapek, a little-known company veteran who has minimal experience in streaming. 

“You thought you were going hard right, and all of a sudden you went hard left,” said Rich Greenfield, a media analyst and partner at Lightshed, the research company. He likened the choice to Apple’s decision to replace Steve Jobs with Tim Cook: “You’re choosing the operating executive instead of the visionary, dynamic CEO.” 

In an interview with the Financial Times, Mr Iger defended the choice of Mr Chapek as his successor. “No one knows the Disney brand better than Bob [Chapek]. That is a prerequisite to being able to run this company well,” he said. “It’s less important that he knows the specifics of one business, and more important that he appreciates how all of these businesses fit into one company.”

However, analysts questioned the timing of the news: on a random Tuesday afternoon just a few weeks after Disney reported quarterly results, and with no pressing reason to announce a succession plan.

Line chart of Share prices (rebased) showing Disney's three-year performance

Mr Iger told the FT that Disney’s board had considered both internal and external candidates in what was a “thorough” succession process. 

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“We’ve been working on this for a while,” he said. “There’s no magic to the date, other than I felt the sooner we do this, the quicker it gives Bob the chance to run the company and for me to shift my priorities.”

Mr Chapek has worked at Disney for almost three decades. The 60-year-old Indiana native, who holds degrees in microbiology and business, worked in brand management at Heinz before joining Disney in the 1990s, where he helped craft the company’s VHS and DVD strategy. He later led Disney’s consumer products division, and most recently ran theme parks, which have been a strong source of profitability for the group in recent years. 

Mr Chapek told investors on Tuesday that his experience gives him a “broad overview” of how Disney operates but admitted: “obviously I have not spent as much time on the media side or the direct-to-consumer side”. 

Mr Iger, 69, said he told the board that he needed to focus on “creative endeavours”, which should be the “real priority of the company”, and to do so needed to hand the reins of day-to-day management to someone else. He will remain as executive chairman, with Mr Chapek reporting directly to him, until the end of next year. 

When asked what “creative endeavours” entails, he said: “I intend to really focus on the creative engines of the company . . . movies and TV, very specifically . . . encouraging people to take smart creative risks.”

The appointment of Mr Chapek came as a surprise because analysts had thought that Kevin Mayer, another longtime Disney executive, was being groomed for the top job. Mr Mayer has made a name for himself as a dealmaker, helping orchestrate a string of successful acquisitions — Pixar, Marvel, Lucasfilm and 21st Century Fox — that built Disney into the powerhouse it is today. 

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More recently, Mr Mayer was appointed to run Disney’s streaming and international businesses — a high-profile job given Mr Iger’s emphasis on streaming as the future of the entire group. The promotion, in early 2018, heightened speculation that Mr Mayer would eventually become chief executive. 

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Mr Iger has bet the group, and his own legacy, on an ambitious push into online streaming. He postponed his retirement to guide Disney through the transition, having gained Fox’s prized entertainment assets from Rupert Murdoch in a $71.3bn deal 18 months ago.

Last April, Disney laid out its ambitious plans for its new streaming service. During a crucial pitch to investors Mr Iger greeted them at a sound stage on Disney’s studio lot, followed by Mr Mayer, who took the platform to demonstrate a prototype of Disney+, the new service. Nearly a dozen other executives also presented during the hours-long event, but Mr Chapek was not among them.

FROZEN 2 - In Walt Disney Animation Studios’ “Frozen 2, Elsa, Anna, Kristoff, Olaf and Sven journey far beyond the gates of Arendelle in search of answers. Featuring the voices of Idina Menzel, Kristen Bell, Jonathan Groff and Josh Gad, “Frozen 2” opens in U.S. theaters November 22. © 2019 Disney. All Rights Reserved.
‘Frozen’ was a mega-hit for Disney, the 2013 animated feature taking almost $1.3bn worldwide and winning 2 Oscars © null

The plan went down well with analysts on Wall Street, with Disney’s stock having risen 10 per cent since.

The early results have been promising. Disney has already lured nearly 30m US subscribers to Disney+, which offers programming from Marvel, Pixar and Star Wars for $7 a month, in the first three months since its debut. In comparison, it took Netflix a decade to reach 60m US subscribers. 

But the push is an expensive gamble and one that the group expects to lose money from for years. Earlier this month, Disney revealed that its total costs in the three months to December had jumped to $18bn, up 51 per cent from a year ago, partly due to the launch of Disney+. The group’s consumer and international business that is responsible for the streaming service reported an operating loss $693m.

In its last set of annual results, for the year to September, Disney reported net income of $10.4bn, down 17 per cent year on year.

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Brian Wieser, president of business intelligence at GroupM, noted that in Mr Chapek Disney’s board have chosen an executive with extensive experience in the more profitable parts of Disney’s business. 

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“Look at the businesses he’s been in charge of. They have nothing to do with streaming, but everything to do with profitability,” he said. “What Disney is doing [with streaming] almost certainly erodes margins. If I were the board, I would probably have been questioning that.”

On a call with investors on Tuesday, both Mr Iger and Mr Chapek looked to reassure investors that there was no big strategic shift ahead. “We just had a fairly major reorganisation,” said Mr Chapek, adding that Mr Iger’s strategy was “well entrenched” at Disney. 

But the out-of-the-blue announcement still took Wall Street by surprise, sending shares down 3 per cent in after-hours trade.

“Companies usually go to great pains to telegraph these things in advance. They typically make sure the executives have some exposure to the analyst community,” said Mr Wieser. He added that the abrupt nature of Mr Iger’s succession announcement “raises questions: is Disney+ really going all that well?”.