Disney and Twitter in a Pickle
🤷♂️ What is going on?
Since Elon's takeover, half of Twitter's top 100 advertisers have left/paused advertisements on the platform. In other words, a disaster for a company that generates 90% of its revenue via ads.
Elon now has an even steeper hill to climb. He not only has to realize profitability to make up for this $44 billion acquisition but also pay $1.3 billion in recurring interest payments starting in 2023
To put things into perspective, Twitter never generated more than $1 billion in free cash flow; in other words, there is no way Twitter can meet these debt obligations.
❓ Why?
With his "free speech" publicity stunts, Elon has effectively transformed Twitter into a hellscape.
"An average of 1,282 tweets with slurs against Black people appeared daily on Twitter before Musk took over; that number jumped to 3,876 after he bought the company. During the week of Musk's tweet, it increased even further to 4,650 tweets a day on average." - NY Times
Brands are concerned over Twitter's content moderation policy and have pulled out of the platform until a clear moderation policy is in place.
📝 Commentary
There are two ways Elon could get out of this sticky situation.
The straightforward path: You cannot have the cake and eat it. Elon can't make Twitter an ad giant while also tweeting about being a "free speech absolutist." Like it or not, Elon needs to reinstate strict content moderation on the platform and tone down/stop his publicity stunts to build advertiser confidence, preventing a potential bankruptcy.
The alternative: Before meeting interest payments becomes a more significant problem (a high possibility given how things are currently going), Elon could buy the debt from the banks for cents on the dollar.
I believe this alternative would be in the best interest of both Elon and the banks that sponsored this deal.
By buying off the debt, Elon would effectively remove interest payment requirements, redirecting cash for more productive investments into Twitter. At the same time, he is getting a great price to buy these loans, possibly even buying them for 50% discount as a relatively few player want to buy loans in a failing company.
As for the banks, they have the opportunity to minimize their losses before things turn from bad to worse. If they sell their loans now, they book $500 million in losses, which have the potential to become larger overtime if no tangible change is made at Twitter.
🤷♂️ What is going on?
Disney has lost ~$100 billion in market cap this year alone, following a string of disappointing profitability news.
Consequently, Disney has fired Bob Chapek, and reinstated Bob Iger, one of Disney’s most successful CEOs, to steer the company in the right direction.
❓ Why?
Disney’s overall profits have taken a huge hit due to its highly unprofitable streaming business, which lost $1.5 billion in 2022 alone.
🧐Consulting Side Box
Cost-cutting across Disney’s different business units will improve overall profitability — a strategy Bob Iger is pursuing in the coming years. However, cutting costs does not address the larger issue plaguing Disney: How can the firm profitably scale in the streaming market?
This is an important question to answer.
Disney’s video streaming business will eventually replace its cable network segment to become the firm’s core revenue driver. However, there is one problem with this transition — on-demand video streaming, unlike cable network (30% operating margins), is highly unprofitable ( -20% operating margins).
There are a couple of ways Disney could make Disney Plus a profitable business:
Lowering Costs
Lower Customer Acquisition Cost: Significant marketing spending was necessary for Disney to catch up with its competitors. However, now a more cost-effective customer acquisition strategy needs to be implemented.
Disney needs to partner with local players with large, existing customer base to lower customer acquisition costs. In my opinion, telcos would be the perfect partners for Disney.
Local telcos are launching their streaming platforms but cannot successfully scale them. They lack the expertise to create engaging, original content to onboard customers, relying solely on third-party content for their streaming services.
Disney could bundle its streaming services alongside the telco’s mobile offerings, sharing a percentage of its revenue while gaining access to a large customer base with little-to-no marketing spend.
As for the telcos, they can now bolster a more attractive bundled offering while eliminating licensing and content production costs. A win-win scenario for both parties.
Be strategic with content investments: There is a mismatch between Disney plus’ existing customer base and the overall streaming market’s age composition. Hence, Disney needs to be strategic in its content investment, producing content targeted towards millennials that have the purchasing power
Increase Revenue:
Build a new revenue stream via ads: A no-brainer strategy. Due to its cheaper pricing, an ad-based subscription would enable Disney to acquire customers who would have otherwise avoided the service altogether.
But, I want to focus more on how can Disney increase revenues from advertisements themselves, emerging as an ad leader in the streaming space?
As iterated in my previous articles, superior ad-targeting capabilities are crucial to winning in the ads space, which are a product of the type and depth of customer data collected on the platform.
However, in the streaming space, Netflix, Amazon, and Disney are collecting the same data points on their customers (e.g., users' watch history, search queries, and time spent watching a show/movie). This undifferentiated product offering makes it harder for one player to have better ad-targeting capabilities than the other.
To work around this, Disney’s management needs to uncover a way to leverage customer data it collects across its different services (e.g. theme parks) to create more targeted ads on Disney plus. The firm is sitting on pile of data and needs an effective way to monetize them on their streaming platform.
After strengthening its ad-targeting capabilities, Disney needs to consider the different advertisement formats it could offer on Disney +. Why?
Ad revenue is a function of the number of advertisers on Disney+ and their frequency of advertisements. If Disney were only to offer video ads, small businesses ( a growing advertiser segment), for instance, would not market their products on Disney + as video ads require high production costs.
There is a lot of room for Disney to experiment with different ad formats -- large home page banner ads and in-between movie/show selection ads, among other formats -- to ensure it acquires a broad range of advertisers.
Increasing ARPU: Disney’s current bundle (Disney +, Hulu, and ESPN +) is solely based only on media content. However, I believe that a diversified offering would increase the bundle's attractiveness; consequently, increasing its uptake. For instance, Disney could explore a potential partnership with other media service providers (e.g., Spotify and Microsoft's X Box Pass).
Entering into such a revenue-sharing agreement has its difficulties (e.g, what % cut each player gets and how that % cut is determined), but the management should take this option seriously as it would ease the firm's scaling journey.