Rich Greenfield of BTIG has been a thorn in the side of Disney and CEO Bob Iger for a while now. Rich believes that Disney has done too little to respond to the changing shifts of consumers away from linear TV to digital. He specifically has attacked ESPN's shedding of linear subscribers in the traditional cable bundle and how it's been too slow to launch a direct-to-consumer over-the-top version.
In a recent blog post, Rich lays out what he would do today if he had Bob Iger's job running Disney:
- Stop Buying Back Stock
- Terminate ESPN President John Skipper
- Buy Twitter and Reinvent SportsCenter
- Buy Spotify To Plant Direct-to-Consumer Roots
- Acquire EA or Activision
I don't agree with some of Rich's points.
Why is it necessary to stop buying stock? Continuing to do so doesn't preclude them from looking at future attractive deals.
Skipper doesn't deserve to be fired. He is very well-liked within ESPN. He made some comments 18 months ago to the Wall Street Journal about requiring new hires to the Worldwide Leader to bring their cable bills on campus to demonstrate their loyalty to the cable bundle which seemed tone-deaf, but his comments since have been on the mark. He's cutting costs (although he's likely going to have to do more). All their bidding on sports rights a couple of years ago seems smart now rather than stupid, with live sports viewership up in Q1 vs. a year ago compared to scripted shows demonstrating declines.
I actually think it's more likely that Skipper re-ups with ESPN again in 2018 when his contract is up rather than him getting sacked. (He has some good internal potential successors too.)
M&A should certainly be considered, but a huge buy is not the way to go. Disney is riding high currently as a result of three canny acquisitions: Pixar, Marvel, and Lucasfilm -- all done by Iger.
In Rich's blog post, he brings up the transformational Disney acquisition of Capital Cities/ABC back in August 1995. Back then, the deal valued Capital Cities at $19 billion. That made it the second biggest deal of all-time after KKR/Nabisco. The deal also brought Bob Iger to Disney to start working under Michael Eisner and later succeed him.
The day before Disney bought Cap Cities/ABC, Disney's market cap was only $29 billion, or only 60% of the combined value of the companies. Talk about betting your company on a big deal.
To put that into modern-day perspective, Disney today is worth $170 billion in market cap. To make a similarly-sized "bet the company" type of transformational deal, Disney would need to spend $113 billion. That would definitely get some business press attention.
Another way of thinking about it is to think of Rich's M&A list. Disney could buy all the targets mentioned at their current market caps -- Twitter for $13 billion, Spotify for $12 billion (its rumored target IPO price), EA for $37 billion, Activision for $45 billion, and add a 10% premium for good measure for a total of $117 billion.
It's hard to imagine Disney doing such a series of deals today, yet that's how enormous the Capital Cities deal was at the time.
Capital Cities wasn't even about ESPN
But if you think the deal was a slam dunk at the time because of Capital Cities' 80% ownership of ESPN, consider this article about the deal from the New York Times at the time.
Very little about ESPN's growth potential was mentioned. In 1995, ESPN had 67 million subs and ESPN2 only 26 million. It was estimated to be worth $4 - 5 billion in 1995 and produced $350 million in annual free cash flow.
Instead, the highest growth potential was seen in ABC:
The combined company would bring together the most profitable television network and its ESPN cable service with Disney's Hollywood film and television studios, the Disney Channel, its theme parks and its repository of well-known cartoon characters and the merchandise sales they generate [emphasis mine].
What Disney brings to ABC, a company that has usually bought its television programs from outsiders, is a highly creative culture committed to developing and distributing original and innovative programs. That should make the ABC network a more formidable rival to its counterparts and to the cable programming services that continue to erode the networks' share of audience.
What Disney gains is a national distribution network for its programming, perhaps a Saturday morning television home for its cartoons, and a company known for its news and sports coverage, as well as hit comedies like "Roseanne" and "Home Improvement."
Mr. Eisner has toyed for some years with buying a network and has talked about a merger with the CBS chairman, Laurence A. Tisch, reportedly as recently as several weeks ago. But yesterday, in a clear indication of his preference for Capital Cities/ABC, Mr. Eisner described it as a company that "has been moving forward strategically."
There's no focus in that initial take on the deal on the potential for ESPN . It's all about ABC and Disney getting access to one of the "big three" networks. ESPN hadn't yet exploded in consumer popularity and fat per sub affiliate fees.
Eisner did speak about the potential for ESPN, but he focused on two key areas: "international expansion and exploitation of the ubiquitous ESPN brand at Disney's theme parks and retail stores."
Neither of these areas represented the real potential for ESPN.
Sometimes it's better to be lucky than good.
Not every company follows the Innovator's Dilemma narrative
It might be flashy to say Disney should blow up ESPN as a cable network of go all in on OTT, but it's just not good business to turn your back on cable networks which are generating $16.5 billion a year in revenues.
Not everything has to follow the Innovator's Dilemma narrative of a big profitable company getting disrupted by the nimble start-up.
Not every big company has to end up like Nokia in the dustbin of history.
Who Says Elephants Can't Dance?, asked Lou Gerstner after successfully reinvigorating IBM without blowing it up.
Disney and ESPN need to protect that $16.5 billion a year Cable Networks business as long as they can while doing lots of experimenting with new direct-to-consumer over-the-top services. That's why they made the investment (which will lead to control later) in BAMTech. But they can't stop there. They should look at more deals which will help them experiment with new services and revenue streams.
But to "bet the company" again just because the CapCities deal worked out for reasons that Eisner never anticipated? No. The story of Capital Cities and Disney shows that we all need to stay humble about our ability to predict the future.
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