Disney and Integrators Versus Aggregators – Stratechery by Ben Thompson

Disney just announced that Soul, its next Pixar film, will be released exclusively on Disney Plus, setting it up to be the most idealized piece of Disney content ever.

I’m not referring to the actual movie, which looks great; rather, consider how Disney is poised to make money from Soul:

  • Disney will earn money from Disney+ subscribers, and keep 100% of the margin.
  • Disney will create Soul-derived merchandise, much of which it will sell through its stores and at its theme parks, and keep 100% of the margin.
  • Disney will create Soul-derived features at those theme parks, most of which it fully owns-and-operates, and keep 100% of the margin.

You get the picture. And, at every transaction along the way, Disney will build an ever fuller picture of its customers. Disney, as always, will be selling Disney — it is just getting better and better at it as it more fully integrates its entire value chain.

A World of Aggregators

A central focus of this site has been Aggregators, particularly Google and Facebook. Aggregators don’t make content, because they don’t need to. Rather, by providing functionality consumers value, they become the most efficient way to reach those same consumers, which means that creators bring their content to the Aggregators.

A drawing of The Internet Revolution

Suppose, for example, a publisher commissions a piece of content about bananas. Creating that content costs money, and the publisher is eager to recoup their costs. The publisher could charge for that piece of content, but then the publisher needs to sell it, and selling is difficult and expensive, increasing the payback threshold. What most publishers have done is make the bananas content freely available along with advertising, and then done their best to drive traffic to the content. For example, a publisher might work to ensure the bananas content ranks highly in a Google search result for “bananas”, or make it easy for readers to share the bananas content on social networks. Both of these strategies have the benefit of being free, so why not? And, if the content needs a little boost, advertising on both Google and Facebook is both inexpensive and easily measurable, making it possible to achieve a positive return on investment, at least on the advertising spend.

The problem for our bananas publisher, though, is that every publisher ends up with the same strategy, and thus competing with each other for both traffic and keywords. It is not long before a positive return on that commissioned content is too high a bar to meet, which means fewer high quality bananas and a lot more stale banana bread.

Integrating Niches

That leaves the world of Never-ending Niches that I wrote about earlier this year, and the strategy I just skimmed over — going directly to customers:

That left a single alternative: going around Google and Facebook and directly to users. That raises the question as to what are the vectors on which “destination sites” — those that attract users directly, independent of the Aggregators — compete? The obvious two candidates are focus and quality:

A drawing of the Vectors on Which Destination Sites Compete
Focus and quality as the determinants of success on the Internet

What is important to note, though, is that while quality is relatively binary, the number of ways to be focused — that is, the number of niches in the world — are effectively infinite; success, in other words, is about delivering superior quality in your niche — the former is defined by the latter.

A drawing of Every Niche Competes on its Own Terms
While quality is relatively binary, the number of ways to be focused — that is, the number of niches in the world — are effectively infinite; success, in other words, is about delivering superior quality in your niche — the former is defined by the latter.

This obviously isn’t a new concept to Stratechery readers — this is the entire strategic rationale of this site. Again, though, the fact that this is a one-person blog doesn’t mean that my competitive situation is any different than that of the New York Times or any other media entity on the Internet. In other words, to the extent that the New York Times has been successful online — and the company has been very successful indeed! — it follows that the company is well-placed in terms of both focus and quality, and in that order.

It’s important to note that simply being focused isn’t enough: companies that want to capture niches in Aggregator-dominated worlds need to pursue strategies that are in almost every respect orthogonal to Aggregators. Specifically, they need to focus on integration, and the preeminent example of this approach is Disney.

Disney and Differentiation

When Disney first unveiled Disney+ in 2019, I wrote in Disney and the Future of TV:

The best way to understand Disney+, which will cost only $6.99/month, starts with the name: this is a service that is not really about television, at least not directly, but rather about Disney itself. This famous chart created by Walt Disney himself remains as pertinent as ever:

Walt Disney's Disney Map

…This is the only appropriate context in which to think about Disney+. While obviously Disney+ will compete with Netflix for consumer attention, the goals of the two services are very different: for Netflix, streaming is its entire business, the sole driver of revenue and profit. Disney, meanwhile, obviously plans for Disney+ to be profitable — the company projects that the service will achieve profitability in 2024, and that includes transfer payments to Disney’s studios — but the larger project is Disney itself.

By controlling distribution of its content and going direct-to-consumer, Disney can deepen its already strong connections with customers in a way that benefits all parts of the business: movies can beget original content on Disney+ which begets new attractions at theme parks which begets merchandising opportunities which begets new movies, all building on each other like a cinematic universe in real life. Indeed, it is a testament to just how lucrative the traditional TV model is that it took so long for Disney to shift to this approach: it is a far better fit for their business in the long run than simply spreading content around to the highest bidder.

Disney+ has been a rare bright spot for Disney during the COVID pandemic, as so many other parts of the company, from cruise ships to theme parks to sports are predicated on in-person interactions. That Disney+ existed, though, was not simply good fortune: it has been clear that the world was headed this way for years — the primary function of the coronavirus crisis has been to accelerate trends that already underway — which is why Disney ultimately had no choice but to get into streaming.

Still, there were reasons for optimism even before the company launched Disney+: back in 2015, after Disney’s stock was pummeled when former CEO Bob Iger acknowledged that cord-cutting was affecting ESPN, I argued that Disney would be OK:

That’s not to say that everything is rosy in pay-TV land. If anything, to fixate on the fate of ESPN is akin to journalism observers only caring about how the New York Times is managing the transition away from print to first the Internet and now mobile. Things aren’t going perfectly but the company is surviving and continues to produce an incredible amount of compelling journalism. However, things are considerably worse for regional papers without the cachet or resources of the Times: publications are going out of business all over the place, and the number of working journalists has been cut nearly in half over the last 25 years.

I suspect a similar shakeout is coming in TV: as the pay TV bundle erodes an entire slew of cable channels will whither away, their targeted content replaced by online video, particularly YouTube. Meanwhile there will be an intense competition waged by a few streaming giants…for consumer attention and dollars. That competition will largely work in the favor of content creators, who ultimately create the differentiation that end users are willing to pay for…Such an outcome should provide hope to content creators of all types: there is a way to escape from the commoditization effect of Aggregation Theory, and that is through differentiation. In other words, the more things change, the more they stay the same.

Capturing that differentiation via integration, though, takes time, and requires a change in culture.

The Page One Meeting

It’s not an accident that the New York Times made another appearance in an article about Disney; they are, from a certain perspective, running the same type of business: differentiated content that both accrues more to a brand than a specific creator and which increasingly monetizes from consumers directly.

By the time Disney faced its 2015 crisis the New York Times was well on the way to solving its previous dependence on print advertising thanks to its burgeoning subscription business; even then, though, the last thing standing in the way of the New York Times and its future was its own culture and traditions, particularly the obsession with Page One. Nikki Usher wrote in the Columbia Journalism Review in 2015:

The Innovation Report leaked in May detailed how the Times was stuck in a culture dominated by the print newspaper. And in my own research for my book Making News at The New York Times, as well as here on CJR and elsewhere, I’ve chronicled just how ingrained this print-first focus has been.

Even recently, when I was visiting the Times, a junior reporter showed me her Page One story from earlier in the week. She expressed how “amazing” it was that she got it on the front page, and how it would validate her abilities to the masthead editors. And she had a stack of a half dozen papers on her desk to save for posterity.

Part of the problem was that the website and other digital properties had essentially been running of their own accord, out of synch with the news judgment of what stories were considered most important by masthead editors. Instead, as my research revealed, a handful of people were in charge of what went up on the Web, and when. A single homepage editor sat next to another editor, and the discussion about what stories to place when and where on Web was almost entirely decided by them…The sole discussion of Page One meetings about digital strategy has been a rundown of stories on the Web, but no discussion of timing, analytics, placement, or importance of these stories.

That led executive editor Dean Baquet to take a radical step: the Page One meeting would no longer discuss Page One. The New York Times wrote about itself:

The larger meeting will continue a yearslong evolution away from its front-page focus, responding to the needs of a constant news cycle. In recent years, Mr. Baquet had turned discussion toward story lines and trends, resources for breaking news, and rolling out enterprise and long-form stories in a reasoned way for digital users…But for the new age, Mr. Baquet has gone a step further, declaring that the big meeting — now held around a vast wooden table — will exclusively be a forum for planning coverage and for ranking items for digital display. One focus will be presentations for mobile devices, where more than half of Times readers now obtain their news.

It wasn’t enough to change the business model: Page One had so much gravity and prestige that the New York Times had to change how it worked to ensure it properly valued its future over its past.

Disney’s Reorganization

Yesterday Disney announced what it termed a Strategic Reorganization of Its Media and Entertainment Businesses:

In light of the tremendous success achieved to date in the Company’s direct-to-consumer business and to further accelerate its DTC strategy, The Walt Disney Company today announced a strategic reorganization of its media and entertainment businesses. Under the new structure, Disney’s world-class creative engines will focus on developing and producing original content for the Company’s streaming services, as well as for legacy platforms, while distribution and commercialization activities will be centralized into a single, global Media and Entertainment Distribution organization. The new Media and Entertainment Distribution group will be responsible for all monetization of content—both distribution and ad sales—and will oversee operations of the Company’s streaming services. It will also have sole P&L accountability for Disney’s media and entertainment businesses.

From a “people changing bosses” perspective, this seems like a relatively minor change; Media and Entertainment, which were relatively untouched in Disney’s last reorganization, has been split into three divisions (studios, general entertainment, and sports) that both make sense and, frankly, already existed.

That, though, is why the last line of that excerpt is so important: profit and loss responsibility is the ultimate indicator of control, which means that Media and Entertainment now answer to distribution, which has a clear mandate to emphasize streaming. From the announcement:

“Given the incredible success of Disney+ and our plans to accelerate our direct-to-consumer business, we are strategically positioning our Company to more effectively support our growth strategy and increase shareholder value,” [Disney CEO Bob] Chapek said. “Managing content creation distinct from distribution will allow us to be more effective and nimble in making the content consumers want most, delivered in the way they prefer to consume it. Our creative teams will concentrate on what they do best—making world-class, franchise-based content—while our newly centralized global distribution team will focus on delivering and monetizing that content in the most optimal way across all platforms, including Disney+, Hulu, ESPN+ and the coming Star international streaming service.”

In this view, Disney’s streaming services are NYTimes.com, and the company’s traditional outlets like TV and especially movie theaters are Page One: sure, they represented a past that is rapidly fading away, but it is a past with prestige, and it’s easy to see Disney’s content creators favoring them over streaming, particularly before COVID when these channels still drove much of the company’s revenue and profits. Chapek, though, is not letting this crisis go to waste, taking the decision about where to display the company’s content away from its creators, as well as the responsibility to maximize short-term revenue and profits.

Disney's Reorganization
By changing profit and loss responsibilities Disney is ensuring the whole company is a beneficiary of its content efforts.

The payoff is the long run: remember, Disney+ is about Disney as a whole, not just one particular line of business, but to achieve that singularity of focus across a company like Disney means designing incentives and lines of accountability that reflect that integration focus.

Aggregators Versus Integrators

More broadly, the totality of Disney’s approach demonstrates how an integrator ought to operate orthogonally to Aggregators in the world of content.

Aggregators are content agnostic. Integrators are predicated on differentiation.

Facebook reduces all content to similarly sized rectangles in your feed: a deeply reported investigative report is given the same prominence and visual presentation as photos of your classmate’s baby; all that Facebook cares about is keeping you engaged. Content created by Disney, on the other hand, must be unique to Disney, and memorable, as it is the linchpin for their entire business.

Aggregators provide leverage. Integrators capture margin.

Modularized content creators, like our bananas publisher, spend money to create content and then seek to recoup their costs by spreading that content as far and wide as possible. Google and Facebook are the most efficient means of achieving this goal. Disney, though, is increasingly focused on capturing more and more margin from its differentiated content, both when it is created and for decades to come.

Aggregators seek to serve the maximum number of consumers. Integrators seek to monetize consumers to the maximum extent.

Google and Facebook are so attractive to content creators precisely because they reach so many consumers; a few pennies or dollars from billions of people is a tremendous amount of money. Disney, meanwhile, particularly as it restricts its content to its own services, is limiting the size of its addressable market, but increasing the amount of money it can make per user in the market that remains.

Aggregators commoditize creation. Integrators operationalize creation.

Google doesn’t care from whence content comes, it simply wants content (this, unsurprisingly, has led to a whole host of businesses primarily predicated on being organic Google search results). Disney, meanwhile, wants to create differentiated content without unduly empowering individual content creators and giving them wholesale transfer pricing power; this leads the company to invest both in animation, which is wholly owned by Disney, and franchises, which are bigger and more valuable than the actors that bring them to life.

Aggregators avoid internal integration. Integrators avoid internal aggregation.

Aggregators get themselves in strategic trouble when they leverage their horizontal services to differentiate their own attempts at integration (Google made this mistake with Android a decade ago). Integrators, on the other hand, get in trouble when they serve specific audiences that don’t accrue to the whole. This was the mistake the New York Times was making with their focus on the front page, and as long as Disney’s studio and media divisions were responsible for the company’s theater and TV business they would be incentivized to serve those pre-existing audiences instead of Disney’s overall strategic goals.

Indy Integrators

In one of the above excerpts I put Stratechery in the same category as the New York Times; what is fascinating about the sorting effect that the Internet has on business models is that I could do the same thing with regards to Disney: yes, it is perhaps audacious to compare a one-person blog to the largest entertainment company the world has ever seen, but that is only because Aggregators are that much greater.

Just think about it: the success or failure of my business is predicated on differentiated content, high margins, high average revenue per customer, controlling content creation, and not being distracted by short-term money-making opportunities. All of this applies to the New York Times too: differentiated high-margin content, high prices, operationalized creation, and, at least for now, a combination of brand and pocketbook that is attracting and keeping stars at the expense of many other publications.

This model is still in its early days, but there is reason to be excited about the future. So much content in the analog era was predicated on reaching the mass market consumer with lowest common denominator content; after all, there simply weren’t that many choices. Google and Facebook, like junk food purveyors leveraging our evolutionary impulse for high caloric food, transformed that lowest common denominator approach into content strategies that increasingly scraped the barrel in terms of both quality and effort, simply because it was easier to make a living that way, at least for a while.

A long life, though, depends on healthy living, which in this case means building a business that doesn’t just produce differentiated content, but has an entire business model and integrated approach to match. The ultimate winners are the consumers that yes, pay for the content, but happily so, because it is something they value. There is room for plenty more.

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