5 Things Disney's Thomas Staggs Must Consider When He Is CEO

| About: The Walt (DIS)

Summary

Disney COO Thomas Staggs most likely will be the next CEO when Bob Iger leaves in 2018.

The media company is doing extremely well with all its characters and assets, but there are still issues to address.

New content initiatives should be explored, ESPN must be addressed, content-production costs could be more contained, more "Star Wars" films are needed ... plus a crazy idea for an acquisition.

disney Disney's (NYSE:DIS) Chief Operating Officer Thomas O. Staggs will be the media company's new CEO in summer 2018. At least, that's what many people suspect; no official announcement has been made, but it looks fairly obvious to most that Staggs is the one who will take over, barring any new decisions on the transition of leadership that may happen between now and then.

It might be a little early, but I have five things in mind that Staggs should concentrate on once he gets into his next position of power. I assume he is already thinking about what his first moves should be. Here are some suggestions, completely free of charge.

Sell ESPN

Yes, sell ESPN. The division has been great to Disney over the years, and it certainly will be a good asset for many years to come. But it's also a headache. Consumers are resisting the obligation to pay good money for channels they don't watch on any sort of regular basis. It's understandable. They are therefore canceling subscriptions to cable companies like Comcast (NASDAQ:CMCSA) and searching elsewhere for their episodic fix. Companies like Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN) are offering more and more content; additional streaming sources will become available as time goes on.

This makes it tough for ESPN to grow over the long-term. Of course, there's a bull argument to be made as well. Not everyone will avoid cable subscriptions; and many who cancel may eventually come back, not wanting to put up with the hassle of watching shows on this streaming service or that ad-heavy web address.

ESPN is an odd division for Disney, though. It isn't about storytelling; well, not really anyway. I suppose sports competitions also tell tales of drama and action, the non-fiction kind. Disney probably would be better off sticking to fictional storytelling and not exposing itself to increasing sports fees. Let someone else worry about it. Staggs should consider ESPN the first problem he needs to study and solve.

Cut movie production/advertising costs

Movie budgets are out of control. Of most concern is compensation to talent. In many ways, this is a more complex issue than ESPN.

Disney is in the blockbuster industry. It specifically made a strategic choice to focus on expensive product. A lot of filming days are required to produce reels of quality moving images; the technical talent of the below-the-line personnel can only be cut so much. That leaves the egregious above-the-line spreadsheet as the prime opportunity for cheaper filmmaking.

Is a big star always necessary? Does a celebrity always need a percentage of the gross revenue and the backend? Do agents needlessly inflate compensation packages so they can make more money even if a star might be okay with a lighter salary?

These are important questions Staggs must ponder. In my view, Disney could simply refuse to pay the stars/agents what they want and perhaps negotiate other forms of compensation, such as perhaps funding ideas stars may have and placing the resultant projects on digital platforms such as Maker Studios (if a project caught the attention of viewers, perhaps it could be ported over to ABC, or developed into a new movie production). Disney could use lesser-known talent, or new talent.

The point is, more effort must be made to reduce compensation packages. It has been reported that Robert Downey Jr. made $50 million for The Avengers and $75 million for Iron Man 3. Let that sink in for a moment. That's just what Downey made. What about the rest of the cast? It adds up. This 2014 Variety article is extremely noteworthy. Not only does it source those reported numbers, but it discusses the importance of the Marvel franchise to Downey in the sense that he can leverage that exposure to help him promote his career in other pictures. Well, that could certainly be used to garner a lower pay structure - I think it's entirely possible that the actor would see the value of his association with Marvel/Disney if he suddenly were dropped from the superhero product.

Release Three Pixar Films, Two Star Wars films per year

I know. Sounds too ambitious. The creative muse can't be rushed. Saturation. Not enough good release dates in a calendar year.

All of the above are risks, I concede. But you know, I think both Pixar and Lucasfilm are up for it. And Disney shareholders are more than up for it - they (we, because I'm a shareholder) have to demand more movies because, whether or not a transaction with ESPN happens or not, problems in other areas of the company must be made up for by overachievement in the studio division. This is the part of Disney that I actually see as growing significantly in the next five, ten years.

Let's consider 2017. The eighth outing for Star Wars will arrive in May. Imagine in November, one of those spin-off movies is released … would it be too much too soon? Probably not. Star Wars is dense with mythology. There are many stories to be told. There's Yoda's tale, young Han Solo's tale, Obi-Wan Kenobi's tale, the tale of the construction of the Death Star, etc. There's probably a mystery/action movie that could be set in the Mos Eisley Cantina; there's a movie where all the bounty hunters have to get together to rescue Boba Fett from the Sarlacc Pit for one reason or other. Take any corner of this universe, there's a spin-off movie to be made. And merchandise to tie into it. The point is Staggs should see if he can figure out a way to increase the output of this ongoing saga without people experiencing Skywalker fatigue (or withdrawal, since Luke certainly can't be in all of them). Disney hinted at one point that a streaming service/channel devoted to all things Wars was a theoretical possibility; I doubt that would ever happen, but I can say this - just thinking along those lines means more movies - as well as episodic series - need to be placed on a slate devoted to a galaxy far, far away.

Pixar released two films last year: Inside Out, The Good Dinosaur; the former was a big hit, the latter was, relative to the historical performance of the famed animation concern, something of a miss. It happens. But it shouldn't deter Chief Creative Officer John Lasseter and eventual (probable) Disney CEO Staggs from increasing Pixar's cinematic footprint. The company, like Lucasfilm, has a plethora of parables and fantasies to inculcate into the culture, and it would be a shame to deny the public extra CGI offerings in the coming years … and by that I mean a financial shame. The key is to expand the company's depth of human resources to allow this to happen. As aforementioned, talent costs will have to be carefully managed so they don't create higher budgets to go along with the higher frequency of releases. Overhead will be taken care of by the economy of scale created by a larger slate.

Buy DreamWorks Animation

What.

What?

I admit, I go back and forth on this. It can make the pundit's mind go wild with disbelief when such an idea is brought up. Yes, it is unimaginable, and probably has the same chance of occurring as a single ticket in a $1.5 billion Powerball lottery has of being the winning number.

Here's why it should be considered. When (or if) Staggs becomes CEO, he's going to want to buy something. It's what media chiefs do; it's what Iger did. Iger became famous for his asset collection. It should have been a gameshow sketch on some CNBC-version of Saturday Night Live - "What Will Bob Buy Next?"

DreamWorks Animation (NASDAQ:DWA) had a market cap of around $2.2 billion last time I checked. The effort CEO Jeffrey Katzenberg has invested in turning the company's fortunes around have been impressive. He's explored other revenue concepts, such as acquiring YouTube's popular AwesomenessTV channel. He's working very hard on ensuring that the company's cartoon portfolio turns out more hits than misses (it's turned out some high-profile misses recently, such as Turbo). He's made investments in China. Unfortunately, he wants to sell out. He's tried to sell the company in the recent past; remember when, for example, Hasbro was interested? Didn't work out.

It would be an easy acquisition. Disney could simply buy the company with stock currency. It eliminates a competing actor in the marketplace, and it could cross-pollinate Pixar's brain-trust-best-practices with DreamWorks Animation's own formidable storytelling skills to improve the latter's creative quality, thus increasing the chances for success at the box office. There's also opportunity for synergy between Pixar and DreamWorks Animation. What if Pixar created a sequel to Shrek, or DreamWorks Animation made another film in the Planes series? What if the monsters and aliens from Monsters vs. Aliens showed up in Pixar's Monsters, Inc. world for an ABC Halloween special? What if the animals from Madagascar starred in a Thanksgiving special with the fish from Finding Nemo? How about combining The Incredibles and Rise of the Guardians for Christmas, or some other project? Cars and Turbo? The Croods and The Good Dinosaur? Maybe Pixar and DreamWorks Animation could team up to make a big franchise picture no one would expect. The two entities could also release collections of shorts from both talent pools.

Right now, Fox has a distribution deal with Katzenberg's studio, but I'm sure something could be worked out (or it could be waited out). Disney gets more movies to release, and if Pixar for some reason can't get up to three movies per year (or, as it had to do in 2014, it needs to take another year off), then DreamWorks Animation is ready to pick up the slack. Anyone who knows about the problems Katzenberg had when he was at Disney knows there are a lot of politics involved, but I believe he nevertheless is a motivated seller who no longer wants to feel the scrutinizing stare of Wall Street's eyes on his company's quarterly reports; besides, a different chief executive in 2018 will evaluate Katzenberg with a cleaner slate.

To me, this would be a fascinating, unexpected move by a Disney CEO that would certainly set a unique tone to a new tenure.

Create a cable hit like The Walking Dead

AMC Networks (NASDAQ:AMCX) made a name for itself with Breaking Bad and The Walking Dead. Disney should attempt to get in on this kind of action.

The company actually probably is trying to create shows like those for all I know, but I'll still say that more effort needs to be made. Recently, Disney's ABC Family channel changed over to Freeform. Although nothing about the change, as described in the linked article, would seem to indicate that Disney would try to compete with various cable outlets and their quality programming slate via Freeform, I consider the channel an opportunity. As it evolves, Staggs could certainly order the channel's executives to explore new ways to capture some of that Comic-Con audience. Going in a different direction, stepping outside of a preexisting comfort zone, might be what's needed.

ABC certainly could be used to go after the AMC/HBO audience, but honestly, broadcast networks simply don't play that game as well as the cablers. Even when they try, the tone is always different. I think placing a zombie epic on ABC would be a worthwhile risk to take, but it wouldn't be executed in the way it would need to be; that's just the game. In fairness, it probably would interfere with the brand equity already cultivated via the network's current curation of episodic series. Affiliates likewise could offer resistance to such a radical change. (Then again, NBC's Hannibal did run for three seasons, and it was an excellent collection of story arcs; still, if it was on HBO, the presentation would probably have been even more impressive.)

Freeform, as the name implies, will probably have more freedom over time to truly attract its intended audience by means of programming that would be considered quite radical compared to ABC Family's previous mission statement. Let's hope Staggs look at the channel as a laboratory for much-needed innovation. When the channel was purchased years ago by erstwhile CEO Michael Eisner, there was criticism centering on the overpayment for an asset that was merely meant to be a vehicle for repurposing ABC programming in an age when cable on-demand wasn't relevant. Today's multiscreen digital environment comes with a completely unique set of rules, and I've always wished for the channel to be more than it is, or, perhaps to be shut down or sold (assuming there were any interested bidders out there). I like that the brand is pivoting to some extent, but the programming needs to more aggressively reinforce the course adjustment.

Thomas Staggs has a big job ahead of him. Sure, he may not end up being the next CEO, but I - and probably everyone else - assume he has the promotion. These are all things I think he should consider. Some bonus items:

  • Do more with Maker Studios
  • Make Disney Infinity more valuable by increasing the output of different figures but making less of each one (also, allow the figures to unlock content, such as TV episodes, trailers, old Disney video games, etc.)
  • rReally think about what Disney can do to enhance the value proposition of Hulu, or perhaps reevaluate the company's investment in the service
  • Order Marvel to investigate the feasibility of selling old comic issues through print-on-demand technologies

Disney is a powerful business that is iconic, not only for its characters but for its cash flows. Nothing can be taken for granted, and execs must always assume that fresh thinking is requisite to foster continued growth.

Disclosure: I am/we are long DIS, DWA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.