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Disney faces digital dilemma despite streaming success



The Walt Disney Company, in its 97th year, has decided its television future lies in streaming. But what happens to its past?

Disney Plus has been a knockout success, signing up more than 70m subscribers in its first year to cement the Mickey Mouse empire as a serious competitor to Netflix, whose boss Reed Hastings had expected its new rival to secure 20m customers “at best”.

As the group re-engineers itself around video streaming, giving up lucrative licensing revenue, it must also manage the decline of its ageing TV channels and movie studios. Taking the long view, Bob Iger, executive chairman and former chief executive, recently told friends that once-mighty channels such as Disney-owned ABC were “over”, and that Disney’s future was streaming and theme parks. 

But unlike the lossmaking Disney Plus, these networks bring in billions of dollars a year.

The predicament has left Disney with an uneven strategy for TV channels such as the sports network ESPN and the entertainment networks that feed Hulu, the US-only streaming service Disney took majority control of last year. It also reveals that even for the world’s best-positioned traditional media company, the transition to streaming will be bumpy and financially uncertain.

Disney Plus has grown rapidly since its launch

Despite a dreadful 2020 in which the pandemic knocked $7bn from Disney’s operating profit, its stock is up 3 per cent, principally on the promise of streaming. Shareholders will look for the company to strengthen its commitment at an investor presentation on Thursday, devoting even more money to prized content.

“Why doesn’t The Bachelor premiere on Hulu?” said Rich Greenfield, partner at Lightshed research group, referring to ABC’s hit dating show. “The question is: how far does the TV universe have to decline before they decide to start shifting high-profile content over? It would rewrite their whole economic livelihood.”

Disney’s dilemma is that all options to accelerate its digital ambitions carry financial risks and practical challenges.

Two years ago, when Mr Iger and top executive Kevin Mayer were mapping out Disney’s streaming plans, internal research predicted that offering Disney Plus along with Hulu would attract the most subscribers.

Bob Iger, pictured at a ceremony for Minnie Mouse in 2018, recently told friends that Disney’s future was streaming and theme parks, rather than channels
Bob Iger, pictured at a ceremony for Minnie Mouse in 2018, recently told friends that Disney’s future was streaming and theme parks, rather than channels © Stefanie Keenan/Getty/Disney

But they did not want to leave behind ESPN Plus, the sports video streaming service launched in April 2018 that had gained little traction, according to people familiar with the plans. And so Disney’s big streaming launch last year offered a bundle of Disney Plus, ESPN Plus and Hulu for $13 a month.

Since then, however, ESPN Plus has served more as a place holder for the future than an active product, with most premiere content kept exclusively on cable television. The roaring success of Disney Plus has diminished the company’s interest in Hulu, according to current and former executives.

The ESPN cable channel has been shedding viewers for years, with signed-up customers down to 80m on average this year from 90m in 2016, according to the data group Kagan. Last year, Mr Iger and Mr Mayer discussed moving some of ESPN’s popular sports programming to its streaming service as early as 2022, after the expiry of licensing contracts requiring games to be broadcast on ESPN’s cable channel, according to people familiar with the talks.

The amount of people watching Disney's traditional TV channels has fallen the past 5 years

Adapting sports to streaming is particularly punishing because media companies have to pay hundreds of millions of dollars every few years for the broadcast rights to games. Prices have risen as broadcasters such as Fox and NBC have looked to compete with ESPN, locking the network into a costly, rigid business model that would be difficult to convert.

“When they did those deals, they did not anticipate ESPN would go from 95m subs to 80m,” said a former senior Disney executive. “In the long term it created a real question about how ESPN can be profitable.”

To match its cable profits, ESPN Plus would need to be priced at $40-$45 a month, according to the former chief executive of one streaming service who warned that “there is not a spreadsheet in the universe that gives you similar economics to pay TV”. In the latest quarter ESPN Plus reached 10m subscribers who paid on average only $4.54 a month.

ESPN has been locked into a costly, rigid business model based on television broadcasting that would be difficult to convert to streaming © Carlos Herrera/Icon Sportswire/Getty

Cannibalising ESPN would only worsen the situation at shrinking cable channels such as A&E, which is jointly owned by Disney and Hearst. In 2019, bankers worked up options for Disney to sell A&E networks and Freeform, an entertainment channel for young adults, according to people familiar with the matter.

The effort did not advance and cable has only deteriorated further. The networks are now declining assets that would be difficult to divest, according to industry bankers.

Instead, Nat Geo was integrated into Disney Plus and FX, a more edgy entertainment channel, was given a digital “lifeboat” through Hulu. Disney has shut down the Disney Channel in the UK and is wringing money out of A&E by selling licensing rights to Discovery for its upcoming streaming service.

But while in secular decline, these channels bring in a significant amount of money. For the year to October 3, Disney made $6bn in operating income from its cable channels.

Disney’s traditional TV networks are still profitable while its streaming services are lossmaking

In Mr Iger’s view, Disney’s biggest problem is cash. This is the first time he has had to run the company with constrained capital, he has told associates in recent months, as revenues from theme parks and cinemas have evaporated.

Disney on Thursday cut about 100 employees at its TV and film divisions, including several veteran ABC executives, according to reports — the latest round of job losses as the company restructures itself for a streaming world.

With leadership focused on protecting Disney’s balance sheet, and armed with a shiny object to please Wall Street with Disney Plus, Hulu and ESPN Plus have become less of a priority.

Disney this year scrapped ambitious plans for a global rollout of Hulu, according to people familiar with the matter.

Executives expected the cost of beefing up the 37m-subscriber platform with local-language shows for an overseas expansion to be upwards of $5bn, the people said. An agreement to buy Comcast’s remaining stake in Hulu in 2024, meanwhile, means Disney will have to pay billions more if its valuation rises.

Instead, Disney announced in August it would expand Star, the Asia pay-TV network it bought from Rupert Murdoch, as a streaming service to Europe and the rest of the world.

Reese Witherspoon stars in ‘Little Fires Everywhere’, an original drama series featured on the streaming service Hulu © Hulu

Potential buyers have expressed interest in Hulu but Disney has not entertained conversations so far, according to people familiar with the matter. Verizon Media would be interested, and potentially Bill Ackman’s special purpose acquisition vehicle, say media bankers.

This week all eyes will be on Bob Chapek, who became chief executive in February just weeks before the pandemic pummelled the businesses that keep Disney financially buoyant.

Mr Chapek is ploughing ahead with the streaming strategy, perhaps with even more gusto than his predecessor. But just as importantly, he has begun to promote pivotal allies within Disney as he begins to assert his authority on an organisation where Mr Iger was the lodestar.

In October, Disney gave Kareem Daniel, a former chief of staff to Mr Chapek, a powerful new position overseeing the distribution of all Disney’s creative content — what one colleague described as “the single biggest P&L in Hollywood”.

Mr Iger has told friends the recent Disney reorganisation was not the precise approach he might have taken. He has taken a more back-seat role in recent months. Relations between Mr Iger and Mr Chapek were strained by a New York Times report in May suggesting Mr Iger “had effectively returned to running the company”, according to people familiar with the matter.

But Mr Iger remains publicly supportive of his successor, recently telling Bloomberg that while he was “there for him” during the worst of the pandemic, it was always Mr Chapek “running the company”. Allies of Mr Chapek, in turn, say he is never one to be “timid or gingerly” about setting his own agenda.

“What Chapek is doing now is not laying the foundation for the future of Disney. He is actually taking control of the Disney organisation from Bob Iger,” said another person who has worked closely with both. “Chapek will change the company, and the scale of change will only accelerate once normalcy returns and Iger moves away.”

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The UK mental health crisis coming in Covid’s wake




Owen O’Kane grew up well-acquainted with the psychological damage that bombs and bullets inflict on communities long after their immediate impact, having witnessed first-hand the troubles in Northern Ireland.

Now a psychotherapist and author based in London, he is convinced that Covid-19 risks leaving similar long-term distress in its wake. In anticipation, he has given the phenomenon a name: “Post pandemic stress disorder.”

“A lot of people have been affected by trauma. Whether its PTSD (post-traumatic stress disorder) or PPSD you won’t see the full impact at the time. You only see it a few months later. If we don’t take this seriously we are going to have a very unwell group in the population for years to come,” said O’Kane, who was formerly mental health lead for the NHS in west London.

With Boris Johnson, UK prime minister, setting out England’s gradual and cautious exit from lockdown earlier this week and the rollout of the country’s vaccination programme still going well, there are some causes for optimism.

But O’Kane and his peers worry about the long term toll the pandemic is taking on the nation’s mental health.

Owen O’Kane: ‘If we don’t take this seriously we are going to have a very unwell group in the population for years to come’

By the middle of 2020, one in five people in the UK was suffering from depression, twice the number in 2019, according to the most recent data released by the Office for National Statistics.

The Centre for Mental Health, an independent UK charity, has predicted that this will translate into up to 10m people needing new or additional mental health support as a direct consequence of the pandemic. But that may be a conservative estimate given that these figures predate the latest and deadliest wave of the virus as well as a winter of intensified lockdown.

“Why I am on my soap box at the moment is that I feel all of the energy is still on getting the R (the disease’s rate of reproduction) down when we have this other pandemic brewing,” O’Kane said.

Part of the answer, he and other specialists argued, will be in allocating sufficient resources to deal with rising demands on services. Another part, argues O’Kane, will be clinical.

“A pandemic is invisible. It’s not like bombs dropping,” he said. But cumulatively its effects are no less traumatic. “If you don’t address the underlying trauma [in patients], they will relapse,” he said.

The stress associated with home-schooling children while sustaining work, of indebtedness, loneliness, or of being forced to confront at close quarters relationships that are fatally cracked, alongside the continuous threat of the virus itself, for many people has taken a grim toll.

“When you have 120,000 families who have lost someone, many of whom have not been able to say farewell; hundreds of thousands of doctors and nurses who have struggled . . . why would you not expect there to be a large number of people with psychological problems?” said Alastair Campbell, the writer and former director of communications to Britain’s former prime minister Tony Blair. “It would be very weird if you didn’t.”

Campbell, who published a book last year on his own experience of severe depression, is frustrated at the lack of preparation for this crisis in the making.

“It’s not just that services are terrible in some parts of the country. It is also that the government is missing a massive opportunity,” he said, arguing that the shock of the pandemic has brought mental wellbeing to the forefront of everybody’s minds except, apparently, those in government. “They still think that if you talk about mental health it makes it worse,” he said.

The government has pledged £500m of extra spending on mental health services this year to address waiting times for specialists, which can stretch to months and more, and to invest in the workforce.

“As part of the long-term plan we have committed an additional £2.3bn a year,” said Nadine Dorries, the minister for health, suicide prevention and patient safety.

Dr Adrian James, president of the Royal College of Psychiatrists, said that it was vital this funding sustained increases in trained psychiatrists, and other specialists while addressing a hangover from years in which mental health has been treated as the poor cousin to its physical relative.

“There is a huge backlog of investment in the mental health estate,” he said, adding: “We need to be on the front foot around mental health in relation to Covid rather than reactive.”

That means taking into account what’s to come. While Johnson’s plan for lifting lockdown aims to remove all restrictions by the end of June, the end of economic support for workers and businesses will cause fresh anxiety.

“As some of the measures that have protected employment security and finances of those in unemployment come to an end, we are facing a cliff edge,” said Catherine Seymour from the Mental Health Foundation, the think-tank. It is calling for temporary £20 weekly increases in welfare payments to be made permanent in next week’s Budget and for a ban on evictions to be extended.

The Samaritans, often the last resort charity for people in distress, has been making similar pleas, pointing to the proven link between recession and increased suicides,

Jacqui Morrissey, the charity’s assistant director of research, said 1.7m people had called on the Samaritans for emotional support between March and December last year, a period, she said, when many people had been deprived of their usual coping mechanisms.

It was imperative, she said, that the voluntary sector, which provides an essential supporting role to the state when it comes to mental health, remains afloat. “We need to make sure that there is a fully funded mental health renewal plan as we come out of that pandemic and that this is at the top of priorities with government working in collaboration with the sector to deliver it,” she said.

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‘Their hair is on fire’: Trump fans await return to political stage




On his final day in the White House last month, Donald Trump told a small crowd of supporters at Joint Base Andrews, the military airport, that he had no intention of leaving the stage quietly.

“I will always fight for you, I will be watching,” the outgoing president said before boarding Air Force One for the last time. “We will be back in some form . . . we will see you soon.”

Now the 45th US president is set to make a splashy return to the fray on Sunday with a keynote speech at the Conservative Political Action Conference (CPAC), an annual gathering of Republican politicians and media personalities that has become a kind of rock festival for rightwing activists, especially college students.

Ford O’Connell, a Trump supporter and former Republican congressional candidate, said attendees were “dying” to hear from Trump, whom he described as the “leader of the Republican party, even if he is not in office in the traditional sense”.

“These folks are unhappy about how the 2020 elections turned out, but their hair is on fire after a month-and-a-half of the Biden administration,” O’Connell said.

“What they want to hear from Trump is: how do you move forward in 2022 and 2024,” he added, referring to the midterm elections in two years and the next presidential contest.

Trump’s speech will end an unprecedented stretch of near silence for the former reality TV star, who built his political career on regular cable television appearances and constant tweeting. After leaving Washington, he took off for Mar-a-Lago, his resort in Palm Beach, Florida, and has stayed there since, playing golf and shunning the spotlight.

Shorn of his ability to communicate with to his millions of supporters on Twitter and Facebook — which banned him for his role in the deadly January 6 siege on the US Capitol — Trump has made just two notable interventions: he called in to Fox News to eulogise the late rightwing radio host Rush Limbaugh, and released a blistering statement attacking Mitch McConnell, the top Republican in the Senate.

Advisers had encouraged Trump to keep a low profile during his impeachment trial, which ended this month with his acquittal.

Trump will be the final speaker at the four-day conference, which is being held in Orlando, Florida — a city that is just two-and-a-half hours drive from his home and that has looser Covid-19 restrictions than CPAC’s usual location of Washington, DC. The former president is expected to speak in person, although event organisers have not confirmed the details of his speech.

Ted Cruz, Republican Senator from Texas © Getty Images
Ron DeSantis, Governor of Florida © AP

The list of the other CPAC speakers reads like a who’s who of his fiercest defenders, including Florida’s governor, Ron DeSantis, and Republican senators Josh Hawley and Ted Cruz — all of whom have been suggested as possible 2024 contenders that could carry Trump’s torch if he does not run again for president.

Trump has not ruled out another bid for the White House, despite mounting legal troubles, including criminal investigations in New York and Georgia.

His appearance at CPAC — an event dating back to a speech by Ronald Reagan in 1974 that has become increasing populist and Trump-centric in recent years — has also drawn attention to Republican party infighting.

Mike Pence, the former vice-president, who fell out of favour with Trump supporters after he certified Biden’s election win, is not attending the event. Nor is Nikki Haley, the former South Carolina governor who told Politico in an interview that ran earlier this month that Trump could not run for office again because “he’s fallen so far”.

The party’s divisions were laid bare in an awkward encounter on Capitol Hill this week, when reporters asked House Republican leader Kevin McCarthy whether Trump should be speaking at CPAC.

McCarthy replied, “Yes, he should,” before Liz Cheney, one of his deputies, interjected: “I’ve been clear in my views about President Trump . . . following January 6, I don’t believe he should be playing a role in the future of the party or the country.”

After Cheney contradicted him, McCarthy abruptly ended the press conference, saying: “On that high note, thank you very much.”

Cheney was one of 10 House Republicans who joined all House Democrats in voting to impeach Trump last month, and is among a handful of critics on Capitol Hill who have openly castigated the former president despite knowing they run the risk of losing the support of party voters.

While a few elected Republicans, like McConnell, have joined Cheney in rebuking the former president, CPAC will serve as a stark reminder of how popular he remains among party activists.

A Suffolk University poll out this week found 46 per cent of people who voted for Trump last November said they would abandon the GOP if the former president broke away and formed his party. Half of those polled said the Republican party should be “more loyal to Trump”, compared to one in five said the party should be less loyal.

Matt Schlapp, a Trump ally and chairman of the American Conservative Union, the group that organises CPAC, told Fox News this week the Republican establishment should recognise that it must now cater to a much broader church; one made up by the old party faithful and the supporters that Trump brought into the fold with his “Make America Great Again” movement.

“It’s Republicans, it’s conservatives — who are this big, big minority in this country — and then it is these new MAGA supporters,” Schlapp said. “This is now a coalition.”

But more moderate Republicans warn that by sticking with Trump, the party will never be able to win back the centrist conservative and independent voters who abandoned the party at the ballot box in November.

“It is important to remember there is a whole other wing of the party, and virtually no one from that . . . wing is being represented at CPAC,” said Whit Ayres, a veteran GOP pollster. “It is a gathering of the most conservative and some of the most active members of the Republican party, but it represents only a portion of the party.”

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McKinsey partners sacrifice leader in ‘ritual cleansing’




The news this week that Kevin Sneader would be McKinsey’s first global managing partner since 1976 not to win a second three-year term stunned many of the consultancy’s partners and influential alumni. 

Few could point to any one mis-step that had felled the 54-year-old Scot. “It added up,” one veteran said simply of the litany of reputational crises he had tried to resolve. 

But nor did many think that Sven Smit or Bob Sternfels, who beat Sneader to the last round of voting, would represent a cleaner break with the past — or that whoever won the final vote in the next few weeks would face an easier task than he had. 

Within days of taking over in 2018, Sneader flew to South Africa to apologise for failures that had embroiled the firm in a corruption scandal. “We came across as arrogant or unaccountable,” he admitted in a speech that began with the word “sorry”.

That set the tone for a tenure defined by the need to make up for other crises that largely predated his promotion, from damaging headlines about McKinsey’s contracts in authoritarian countries to US states’ lawsuits over its work to boost sales of highly addictive opioids

Speaking to the Financial Times less than two weeks before senior partners voted him out, Sneader said he had focused on making the private firm more transparent, more selective about which clients it took on and better structured to avoid surprises in a global group whose rapid growth had made it more complicated. 

According to people who witnessed those efforts, though, pushing them through consumed much of the political capital Sneader needed to win re-election. For some, particularly younger staff, his reforms did not go far enough. For an older group more prominent among the 650 senior partners who vote on their leadership every three years, they went too far.

Kevin Sneader’s failure to win a second three-year term as McKinsey’s global managing partner has stunned many at the consultancy © Charlie Bibby/FT

Sneader’s downfall looked like a case of “the partners not wanting to take the medicine”, one former partner said. Another argued that Sneader’s push for more oversight over partners who prized their freedom had made the firm “too corporate”, while some Sneader allies saw the “protest vote” as a rejection of his reforms rather than a clear mandate for Smit or Sternfels. 

Sneader was not helped by the timing of this month’s $574m opioid settlement with 49 US states, added Yale School of Management professor Jeffrey Sonnenfeld, who said that consultants outside the US did not understand why he agreed to the payout.

Sneader might have been able to reassure them in person, but with McKinsey’s frequent-flyers grounded by a pandemic, “there are limits to what you can do with Zoom”.

‘In business, as in poker, there is uncertainty’

Laura Empson, author of Leading Professionals, said one question now was whether the vote against Sneader was “a ritual sacrifice to appease the bad PR” or a sign that McKinsey’s partners were willing to take more radical action. 

The run-off between Sternfels and Smit may not resolve that issue, say people who know them both, who note that they are of a similar age to Sneader and members of the leadership council that signed off on his reforms. 

Sternfels, a California-born Rhodes scholar who joined McKinsey in 1994, was the runner-up to Sneader in 2018. As head of “client capabilities”, he has a role akin to that of a chief operating officer and is closely associated with the rapid expansion of the firm under Dominic Barton, Sneader’s predecessor. 

Based in San Francisco after six years in Johannesburg, the former college water polo player is known as an effective operator and, the second former partner says, “the guy who built the new business models”. 

But some of McKinsey’s newer activities have dragged him into controversies: last year, he was called to testify in litigation brought by the restructuring specialist Jay Alix — the founder of rival consultancy AlixPartners — over McKinsey’s disclosures while advising clients in bankruptcy. 

When a frustrated judge asked whether he was dealing with “a group of people who are so educated, so arrogant, that they just can’t admit that they’re wrong”, Sternfels apologised, insisting that “we try and not foster arrogance”. 

Smit, who joined in 1992 and is based in Amsterdam, is known inside McKinsey as a more cerebral figure. Now co-chairman of the McKinsey Global Institute, the consultancy’s research arm, “there’s not a university campus he couldn’t parachute into and be received as one of the smartest people in the room,” Sonnenfeld said. 

The Dutch mechanical engineer earlier ran McKinsey’s western European operations and may attract less support from US peers, but the first former partner describes him as “the conscience of the firm”, who will say no to ideas with which he disagrees. The second thinks he may “take the firm back to more of an old-school McKinsey”.

Smit’s writing on topics from urbanisation to the future of work made him popular with clients and provided a glimpse into his thinking on strategy, which he likened in one report to poker. “In business, as in poker, there is uncertainty, and strategy is about how to deal with it. Accordingly, your goal is to give yourself the best possible odds,” he wrote.

Discontent runs deep

Whether the cards fall for Smit or Sternfels, colleagues past and present question whether either will reverse the reforms that seem to have triggered unrest about Sneader. 

“I don’t think Kevin had any choice but to centralise,” said one Sneader ally.

One of the former partners added: “What were the alternatives? It’s a large firm to govern and you do need structures.”

What the election result has already revealed, however, is that discontent with the state McKinsey finds itself in runs deeper than had been obvious outside the firm. 

Whichever candidate triumphs, they will need to listen seriously to the concerns of alumni, clients and policymakers and make clear that he plans meaningful cultural reforms, Empson says.

Sneader’s successor will also have to defy the odds in professional services firms, she adds. “Often with partnerships, when something goes wrong, they appoint someone else in reaction to the problem and that isn’t the solution either and they cycle through another round of leaders quickly,” she says: “It’s almost as though they have to go through this ritual cleansing.” 

McKinsey, which does not disclose its financial performance, earned annual revenues of $10.5bn in 2019 by Forbes’ estimate. Sonnenfeld points to the irony that the firm, which charges a premium for its services, has stumbled in this way.

“It’s odd that McKinsey doesn’t create the kind of leadership that would thrive in a crisis,” he reflected. Before the succession process starts again in 2024, “they need to go into overdrive on leadership development”.

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