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Disney faces digital dilemma despite streaming success

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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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'It’s more than sport – every day we are fighting for our rights to be equal’

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French pro basketball player and podcaster Diandra Tchatchouang on her role beyond the court



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Emily Dean on how allyship amplifies the female experience on film

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When I was six years old, I decided to be an artist. When I was 12, I decided to be a filmmaker. And instead of saying no, you can’t do that, or it’s not possible, my mum bought me a video camera.

After several years of working in the industry, I’m working with a female director for the first time. And it’s been such a gratifying experience. Women express leadership in different ways. Maybe you don’t have to be the loudest person in the room. But you can have great ideas.

And the best thing about being mentored by women and being a mentor to women is that make friends with women.

There’s something so powerful the women coming alongside other women, especially in a group setting. Because it means that you can and back each other up. You can support each other’s decisions, and you can amplify each other’s voices.

It’s about seeing yourself in your work. Seeing some part of yourself reflected is really gratifying. It’s also important that we speak up for female characters. I want to see girls and women on screen who have the whole cacophony of experience of what it’s like to be female.

I want to see their flaws. I want to feel their struggles. I want to see their joy. That is so important to making a character feel real. And it took me a little while to settle into myself and realise, if the characters I like to come up with are not your everyday run of the mill characters you see in animation, that’s fine. Because this is who I am.

When you walk into a story room, when you’re working on a film, you have to leave your ego at the door. I think that can be interpreted like keep your ego out of the work. But I’d also say for women who are maybe more shy that leaving your ego at the door means you walk in. And your job is to focus on what’s best for the story and for the film.

The story needs you. The film needs you, and it needs your best ideas. It won’t thrive unless you speak up.



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Crimea ‘water war’ opens new front in Russia-Ukraine conflict

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When a cyclone drenched Crimea in rainfall last month, rivers burst their banks and thousands of people in the Russia-annexed peninsula had to be evacuated from the floods.

The silver lining to the deluge was that the rains also filled Crimea’s depleted reservoirs, temporarily alleviating a crisis brought on by an extended drought and a Ukrainian blockade of the Soviet-built canal that previously provided up to 85 per cent of the peninsula’s water supplies.

Moscow’s struggle to supply Crimea’s 2.4m residents with fresh water has become a flashpoint in an undeclared war, seven years after Russian troops seized Crimea from Ukraine. An even longer conflict between Kyiv and Russian-backed separatists in eastern Ukraine has claimed more than 14,000 lives.

Russia has accused Ukraine of “genocide” over the building of a concrete dam across the North Crimean Canal, in addition to the existing sandbag and earth dam that was built in 2014. Kyiv fears that Moscow is plotting a military incursion to secure water flows from the nearby Dnipro river.

Coupled with surging food prices and international isolation because of western sanctions, the water shortages threaten to undermine President Vladimir Putin’s promise of a better life for Crimeans under Russian rule.

Though state-run pollsters claim Putin remains more popular in Crimea than on average across Russia, the patriotic fervour that sent his approval ratings to record levels after the 2014 annexation has long since subsided.

Map showing Ukraine and the North Crimean Canal, Crimea

“The water reserves and fields have dried up,” said Viktor, 47, a Crimean who regularly travels to Ukraine for work. “Each year it’s getting worse and worse. We didn’t have this problem before annexation,” he said, adding that most Crimeans blamed Ukraine for the crisis.

A $3.7bn bridge across the Kerch Strait linking Crimea with mainland Russia has become a conduit for trucks ferrying water for locals to take away in plastic containers. Popular Black Sea tourist resorts can turn on their taps for just a few hours a day during peak droughts, while the canal has filled with grass and weeds.

Crimea’s agricultural output has fallen owing to a lack of irrigation, making it all but impossible to grow water-intensive crops such as rice.

Construction of the canal began in 1957 after the Soviet Union transferred the arid peninsula to the Ukrainian Soviet Socialist Republic to manage rebuilding after the second world war. The waterway allowed for the cultivation of arable land and helped transform Crimea into a haven for tourists.

“The canal symbolises the stupidity of the Kremlin in occupying Crimea. They didn’t weigh the consequences at a moment of electoral euphoria that was fed by their own propaganda,” said Oleksiy Reznikov, Ukraine’s deputy prime minister in charge of reintegration policies for the occupied territories.

“Why didn’t you think about water?” he asked.

The North Crimean Canal is seen with a low level of water
The severely depleted North Crimean Canal previously provided up to 85% of the peninsula’s water supplies © Pierre Crom/Getty

Workers collect potatoes on the North Crimean Canal
Workers collect potatoes on the North Crimean Canal. Ukraine blocked the irrigation channel after Russia’s 2014 annexation of Crimea © Pierre Crom/Getty

Russia, while pressing Ukraine to reopen the waterway, has launched a Rbs50bn ($680m) programme to bolster Crimea’s supplies, repairing crumbling infrastructure, drilling wells, adding storage and desalination capacity.

Russian prosecutors last week filed a lawsuit in the European Court of Human Rights accusing Ukraine of “flagrant violations” over the issue. Crimea’s governor plans to file a separate complaint demanding up to Rbs1.5tn in compensation.

“Kyiv has essentially used Crimea’s infrastructure dependence on Ukraine, which came about in the Soviet era, as a weapon of mass destruction against all Crimeans. The water blockade is an act of state terrorism and ecocide, but the international community is failing to notice the Kyiv regime’s crimes,” Sergei Aksyonov, the peninsula’s governor, said in written comments to the Financial Times.

Reznikov said Russia, as the occupation force, was responsible under the Geneva Conventions for securing water and other basic needs for local the population. Ukraine has filed its own multi-billion-dollar claims against Russia, citing losses caused by what it describes as an illegal land grab.

With tensions rising, Russia deployed tens of thousands of troops and advanced weapons to Crimea this spring, as well as to the border of the two breakaway eastern regions where Moscow-backed separatists have battled government troops into an eighth year.

Col Kyrylo Budanov, chief of Ukraine’s army intelligence unit, said Russia was looking to seize the canal as well as adjacent territory to connect Crimea with the breakaway regions. Russian troops could advance on Nova Kakhovka, the Dnipro river town where the canal begins.

Some Crimean Tatars, an indigenous ethnic group whose members largely opposed Russia’s annexation, have set up a makeshift camp near the dams to make sure the water flow does not resume.

A Crimean Tatar activist on the North Crimean Canal
A Crimean Tatar activist enters his base on the North Crimean Canal. Tatars have set up camp to make sure the water flow does not resume © Pierre Crom/Getty

A Ukraine military vehicle drives past a Soviet monument marking the entrance to Brylivka
A Ukraine military vehicle drives past a Soviet monument marking the entrance to Brylivka, a village on the North Crimean Canal © Pierre Crom/Getty

“It will be a full-scale war,” said a 55-year-old activist who gave his name as Alibaba. He said he and his fellow activists were willing to take up arms to defend the blockaded canal. “There will be nowhere to hide in these fields. Let them try,” he added.

At the Kalanchak border crossing near the new dam, Russian and Ukrainian troops have dug trench positions a few hundred meters apart.

Tensions have also flared in the Black Sea, not just with Ukraine but also with western navies. Russia fired warning shots in the path of a British destroyer sailing through contested waters off Crimea last month. Sevastopol, Crimea’s largest city, is home to Russia’s Black Sea fleet.

Moscow has insisted it would not go to war over Crimea’s water supplies, even as it conceded that Ukraine was unlikely to restore them. “All these hysterical statements from Ukrainian politicians are completely baseless — they’re just stupid, aggressive propaganda aimed at inciting hatred between the Russian and Ukrainian people. There won’t be any ‘water war’,” Crimea governor Aksyonov said.

Reznikov, the Ukrainian minister, said Kyiv was ready to provide Crimea with humanitarian assistance, including drinking water, which it already does for the separatist-run eastern territories, but no request had been made.

“For Russia to admit they’re weak is very difficult . . . it would amount to an admission that they made the wrong decision,” he said.



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