IN1528

Case Study

Disney and 21st Century Fox:

Reshaping Disney’s Strategy for the Digital Age

08/2019-6400
This case study was written by Guillaume Roels, Associate Professor of Technology and Operations
Management, the Timken Chaired Professor of Global Technology and Innovation, and Anne-Marie
Carrick, Research Associate, both at INSEAD. It is intended to be used as a basis for class discussion
rather than to illustrate either effective or ineffective handling of an administrative situation.
To access INSEAD teaching materials, go to cases.insead.edu.
Copyright © 2018 INSEAD
COPIES MAY NOT BE MADE WITHOUT PERMISSION. NO PART OF THIS PUBLICATION MAY BE COPIED, STORED, TRANSMITTED, TRANSLATED,
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 The mission of The Walt Disney Company is to be one of the world’s leading producers
and providers of entertainment and information. Using our portfolio of brands to
differentiate our content, services and consumer products, we seek to develop the
most creative, innovative and profitable entertainment experiences and related
products in the world.1
The Walt Disney Company’s Mission Statement

On 14 December 2017, Disney announced a deal with 21st Century Fox to acquire their film library,
broadcast networks (e.g., Fox Sports, FX, National Geographic), together with their international
satellite broadcasters Sky Plc in Europe and Tata Sky in India.2 The news followed an earlier
statement by Bob Iger, Disney’s CEO, that Disney would develop its own streaming service to be
operational by the end of 2019 when its contract with Netflix expired.3

These moves seemed to indicate a new direction in Disney’s corporate strategy. Since the
company’s creation in 1923, content creation and production had always taken precedence over
distribution. Iger’s predecessor, Michael Eisner, had reportedly said that:

Content is king… [we] have faith in all media. If you have a great story to tell, it will
work on any delivery system.4

Disney’s accumulation of original offerings had led the company to become the media giant it was,
with record revenues of US$55.6 billion in 2016.5 Although its creativity machine was more
effective than ever, with Disney owning the four highest-grossing films that year,6 its content-
centred business model had started to show signs of fatigue. Indeed, over the last few years the
home entertainment model had been disrupted, notably with the arrival of streaming services such
as Netflix and with it the decline of cable TV subscriptions. Distribution, it appeared, was becoming
just as important as original content creation.

There had been several occasions for Disney to integrate forward into streaming services. In 2016,
it was rumoured that Disney was considering the acquisition of Netflix.7 Despite the rumours, a
year later the media giant – with its zero customer base – was still lagging Netflix’s 109 million
subscribers worldwide.8 Ironically, Disney and Fox had contributed to the latter’s spectacular
growth by licensing their content to Netflix.

If Disney’s acquisition of Fox was approved, it would significantly expand Disney’s content, from
its own Pixar, Marvel and Star Wars to Fox’s Avatar and The Simpsons. As such, the acquisition
could be interpreted as a continuation of Disney’s content-centred strategy, enabling it to grow
horizontally through content creation and production. However, many pundits interpreted Disney’s
move as a radical change in strategy, enabling it to scale up content to allow vertical integration

1 https://www.thewaltdisneycompany.com/about/ (March 2018).

2 N.B. Fox News and Fox Business channels were not included in the deal.
3 After the Fox deal was approved, Disney would own 60% of Hulu, a streaming service co-owned by four studios.
4 https://www.screendaily.com/content-remains-king-michael-eisner-tells-mipcom/4041380.article (April 2018)
5 The Walt Disney Company, November 2017 - https://ditm-twdc-us.storage.googleapis.com/q4-fy17-earnings.pdf
6 https://www.forbes.com/sites/markhughes/2016/08/26/disney-owns-2016-box-office-with-four-highest-grossing-films-of-
the-year/#290b6e5265ef, (April 2018).
7 http://fortune.com/2016/10/04/disney-acquisition-netflix/ (April 2018)
8 The Mouse Gets the Fox – Disney’s purchase of Fox’s entertainment assets is a gamble on media’s future. The
Economist 14th December 2017.

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into distribution, in particular by establishing its own streaming service (one focused on sports, the
other on movies and shows) as an alternative to Netflix.9 Was this Bob Iger’s attempt to reinvent
Disney in response to the digital revolution that was transforming all aspects of business and
society?

There were many decisions to be taken and issues to resolve before Disney developed its own
distribution channel: How to align Fox’s content (with R-rated movies10 such as Deadpool) with
Disney’s family-friendly image? Should the content be available exclusively through Disney or
should others (including Netflix, Amazon Video) be allowed to distribute part of its offering?
Besides Disney and Fox productions, should the streaming service offer other value-added
services?

Alternatively, rather than spending resources integrating forward into distribution, should Disney
consider expanding its content portfolio to include Chinese or Indian characters as a way to reach
these fast-growing economies? With the impending expiry of its copyright on Mickey Mouse, Iger
understood the importance of change for the company. His mandate at Disney had been extended
until 2021 – the third time he had agreed to do this.

The Walt Disney Company

Founded in 1923 by Walt and Roy Disney, the Walt Disney Company had grown to become the
world’s largest media company and licensor of branded merchandise. Its portfolio included films,
television, theme parks and publishing. It operated four business segments: Media Networks,
Parks and Resorts, Consumer Products and Interaction and Studio Entertainment (Exhibit 1). In
2016, the company reported the highest revenues (US$55.6 billion) and net income (US$15.7
billion) in its history,11 with Media Networks generating most revenues for the group (Exhibit 2).

Disney’s corporate strategy from the outset had been “content is king” (Exhibit 3). Its unique
offerings were available through various distribution outlets and synergies across its multiple
activities. Customers included television channels (distribution rights), cinema theatres and
streaming services – notably Netflix, with whom it had an exclusive deal since 2012 to stream its
more recent films.

Competition traditionally came from other major film studios: Time Warner, 21st Century Fox, NBC
Universal, Sony and Viacom. More recently, streaming services such as Netflix and Amazon Video
(which were Disney clients) and YouTube had started to compete for Disney’s customers’ attention
(as did other forms of entertainment such as video games, sports, music), as well as for content
creators’ talent.12

9 https://stratechery.com/2017/disney-and-fox/ (April 2018).

10 Rated R: Restricted – under 17 requires accompanying parent or adult guardian.
11 The Walt Disney Company, November 2017 - https://ditm-twdc-us.storage.googleapis.com/q4-fy17-earnings.pdf
12 https://www.nytimes.com/2018/02/14/business/media/streaming-wars-ryan-
murphy.html?rref=collection%2Fsectioncollection%2Fbusiness&action=click&contentCollection=business&region=rank
&module=package&version=highlights&contentPlacement=1&pgtype=sectionfront (April 2018)

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Acquisitions – 21st Century Fox

The Walt Disney Company agreed to buy much of 21st Century Fox in a merger worth
US$66 billion. The deal will accelerate Hollywood’s transformation from a film capital
to a streaming-video town.13

The Walt Disney Company had a history of acquiring studio entertainment companies to enrich its
content offering, including Pixar (2005) for US$7.4 billion, Marvel (2009) for US$4 billion and
Lucasfilm (2012) for US$4.1 billion (Exhibit 4). In December 2017, it announced its largest deal to
date with the acquisition of a majority of 21st Century Fox (Exhibit 5).

At first glance, it appeared to be a horizontal expansion. Fox’s international assets could help
Disney market its brand directly to consumers outside the American market where the US brand
was limited to films and theme parks. Some analysts considered Star India, a fast-growing TV
provider in India (with the world’s second largest population) invaluable for Disney.14

However, others saw it as a response to the disruption of the old business model, as film house
ticket sales declined and Fox’s cable networks lost subscribers as consumers turned to streaming
rather than paid-TV (Exhibit 6). Although streaming services were perceived as pure distributors,
recently they had integrated ‘backward’ into content production. By 2017, they were comparable
in size to, if not larger than, Disney in content production. Netflix spent US$6.3 billion in 2017 on
non-sports content, but was expected to increase it to US$8 billion in 2018, whereas Amazon
spent US$4.5 billion and Disney spent US$7.8 billion on non-sports content.15

Digital Transformation
In 2012, the decision to engage with Netflix to stream Disney’s most popular titles was born out of
Iger’s conviction that while Disney’s content remained distinctive, the distributors would do their
utmost to ensure customers paid for it. With the arrival of Netflix, Iger saw a new way to distribute
content and generate revenue. It was, he said, “an exciting time for intellectual property owners.”16
By 2018, Netflix was a sizeable customer: according to one estimate, Netflix paid Disney US$325
million annually to license its films.17

Netflix

However, Netflix was more than another distribution channel for Disney; it was a competitor to
Disney’s other (lucrative) content customer – cable TV. Since the arrival of Netflix and other
players such as Amazon, Hulu and YouTube, many customers had switched from cable to

13 The Mouse Gets the Fox – Disney’s Purchase of Fox’s Entertainment Assets is a Gamble on the Media’s Future. The
Economist 14th December 2017.
14 https://www.economist.com/news/business-and-finance/21732649-ceding-ground-rupert-murdoch-pivoting-pivotal-
moment-disneys-purchase-foxs, December 2017.
15 https://www.recode.net/2018/2/26/17053936/how-much-netflix-billion-original-content-programs-tv-movies-hulu-disney-
chart
16 https://seekingalpha.com/article/993561-walt-disney-management-discusses-q4-2012-results-earnings-call-
transcript?part=single (April 2018).
17 Disney’s Big Bet on Streaming Relies on Little-Known Tech Company. The New York Times. 10 October 2017.

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streaming – a process known as “cutting the cord” (Exhibit 7). Netflix also attracted new customers
that had never paid for cable TV.

The streaming service initially offered a wide selection of available content (e.g., in DVD format)
with no restrictions on time to watch and unlimited viewing. Leveraging its user base, Netflix then
acquired streaming rights, which further boosted its user base and strengthened its brand and
buying power. Going one step further, Netflix began to produce its own material, giving creators
full control and a guarantee that they would create an entire season at a time.18 This signalled
another change: Netflix was now a competitor for differentiated content like Disney’s.

Whereas Netflix laddered-up to its vertical model and used its power as an aggregator
of demand to gain power over supply, Disney is seeking to leverage – and augment –
its supply to gain demand. The end result, though, would look awfully similar: a
vertically integrated streaming offering that attracts and keeps customers with
exclusive content, augmented with licensing deals.19

Disney Streaming

There is a huge battle going on between Silicon Valley and Hollywood for the big
studios, they need to decide whether they want to go big or go small or go out.20
Rich Gelforn, CEO, IMAX

We’re going to launch big, and we’re going to launch hot.21

Bob Iger, CEO, Disney

The idea of developing its own streaming platform was not new. According to Kevin Mayer, Chief
Strategy Officer, Disney had started discussing streaming options in 2006. However, it had to
tread cautiously since this implied embracing a new business model at the expense of the existing
profitable model (through cable TV and other distribution outlets). Disney investigated different
services and even considered purchasing Twitter and Netflix22 at one stage.23 In 2010, Disney
introduced TV Everywhere that allowed viewers to watch television shows on mobile devices if
they subscribed to cable or satellite services, but it was not a huge success. In 2015, its DisneyLife
app offered old Disney movies, series, children’s e-books, games and music in the UK for a
monthly subscription (of US$13), but soon realized that without new films or exclusive content it
would never generate much interest. The app was not launched outside the UK.

After repeated failures to develop its own streaming service, Iger came across the Manhattan-
based technology firm BamTech.24 The 850-employee company had an excellent record for

18 Disney and Fox – Stratechery, 12 December 2017, Ben Thompson.

19 Ibid.
20 The Mouse Gets the Fox – Disney’s Purchase of Fox’s Entertainment Assets is a Gamble on the Media’s Future. The
Economist 14th December 2017.
21 Disney’s Big Bet on Streaming Relies on Little-Known Tech Company. The New York Times. 10 October 2017.
22 https://www.ft.com/content/9c7256a6-f7fe-11e7-88f7-5465a6ce1a00
http://time.com/4521350/netflix-disney-apple/
23 Twitter’s reputation at the time as a platform where hate speech could be disseminated could have posed a problem for
the Disney brand.
24 BamTech was established in 2015 as a spin-off of MLB Advanced Media – the digital media arm of Major League
Baseball, focused on providing streaming video technology, particularly for over-the-top content (OTT) services. The

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delivering millions of live streams simultaneously without glitches. With its advertising technology
and reputation for attracting and maintaining viewers, it was “as good as it gets”, said Mike
Vorhaus, President of Magid Advisors, a media and technology consultant.25

Among its many achievements, BamTech was responsible for building HBO Now, which had
delivered “just in time” for the season 5 premiere of the popular “Game of Thrones”. Impressed by
the small company and with a view to it developing its own streaming service, Disney paid US$1
billion in 2016 for a 33% stake in BamTech, with an option to buy a controlling in interest in 2020.
Michael Paull who had overseen Amazon Prime Video and introduced Amazon Channels, was
recruited as BamTech’s CEO by Disney.

In June 2017, BamTech agreed to accelerate Disney’s controlling stake option, resulting in a 75%
stake in the streaming company for an additional US$1.58 billion.26 This raised concerns among
investors about the cost of developing a streaming service, as well as the loss of revenues from
Netflix as of 2019 when the contract with Disney expired. Uneasiness mounted when Disney
announced it would produce original films and series for the non-sports service.

Regulatory Issues

If approved by the regulatory authorities, Disney’s deal with 21st Century Fox would signal a radical
change in the media landscape.27 Together they represented 40% of US box-office revenues for
2016. The joint company would have significant bargaining power to negotiate affiliate deals with
distribution partners. Yet this horizontal dominance was not the main concern of the anti-trust
authorities. They were more concerned about Disney’s intended vertical move into distribution, for
similar reasons to those that blocked AT&T’s acquisition of Time Warner.28

Whatever the regulators decided the pressure to create new media combinations would continue
as the incumbents faced a new wave of competition from Netflix, Amazon and YouTube. The old
guard began to realize that content was perhaps no longer king and were eager to scale up and
acquire the ability to distribute content directly to consumers.

The Future
With the Fox deal, Disney would have a wealth of differentiated content to include in its streaming
library, including several of Netflix’s most streamed programmes, albeit some content conflicted
with Disney’s family-friendly image. Alternatively, it could choose to grow content more gradually
and organically. Instead of a vertical move into distribution, Disney could remain true to its roots,
focusing on content development and extending its presence in fast-growing economies. The
Disney brand was still very “American” and had room to grow by acquiring or developing content

company's major clients included the NHL, HBO (for its HBO Now service), the PGA Tour, Riot Games, WatchESPN,
PlayStation Vue, WWE Network and TheBlaze.
25 Disney’s Big Bet on Streaming Relies on Little-Known Tech Company. The New York Times. 10 October 2017.
26 Ibid.
27 The Mouse Gets the Fox – Disney’s purchase of Fox’s entertainment assets is a gamble on media’s future. The
Economist 14th December 2017.
28 Vertical foreclosure is the exclusion that results when a downstream buyer is denied access to an upstream supplier
(upstream foreclosure), or when an upstream supplier is denied access to a downstream buyer (downstream foreclosure).

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that would appeal to a global audience, perhaps with a focus on the world’s largest economies in
the next decades (Exhibit 8).

Another concern was Disney’s copyright on Mickey Mouse, which was set to expire in 2023.
Although extended several times, usually coinciding with the imminent loss of the Mickey Mouse
copyright (Exhibit 9), it was uncertain whether Disney would be able to do so again.

Given these challenges and opportunities, was it wiser for Disney to pursue a horizontal strategy
of growing its content portfolio, rather than pursuing a vertical strategy with a move into
distribution?

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 Exhibit 1
The Walt Disney Company

Media Networks
Media Networks comprises a vast array of broadcast, cable, radio, publishing, and digital businesses across
two divisions – the Disney/ABC Television Group and ESPN Inc.

Parks, Experiences and Consumer Products

Parks, Experiences and Consumer Products brings Disney’s stories, characters and franchises to life
through Parks and Resorts, toys, apps, apparel, books, and stores.

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Studio Entertainment
For over 90 years, The Walt Disney Studios has been the foundation on which The Walt Disney Company
was built. Today, the Studio brings quality movies, music and stage plays to consumers throughout the
world.

Direct-To-Consumer and International

Comprised of Disney’s international media businesses and the Company’s various streaming services, the
Direct-to-Consumer and International segment aligns technology, content, and distribution platforms to
expand the Company’s global footprint and deliver world-class, personalized entertainment experiences to
consumers around the world.

Source: https://www.thewaltdisneycompany.com/about/ (2018)

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 Exhibit 2
Revenues and Operating Income by Segment – The Walt Disney Company

Year End Year End

1 October 3 October
2016 2015
Revenues
Media Networks $23,689 $23,264
Parks and Resorts $16,974 $16,162
Studio Entertainment $9,441 $7,366
Consumer Products & Interactive Media $5,528 $5,673
Total $55,632 $52,465
Operating Income
Media Networks $7,755 $7,793
Parks and Resorts $3,298 $3,031
Studio Entertainment $2,703 $1,973
Consumer Products & Interactive Media $1,965 $1,884
Total $15,721 $14,681

Revenues by Segment year end 2016

Consumer Products
& Interactive
Media
10%
Studio
Entertainment
17% Media Networks
43%

Parks and Resorts

30%

Source: Adapted from The Walt Disney Company, November 2017

https://ditm-twdc-us.storage.googleapis.com/q4-fy17-earnings.pdf

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 Exhibit 3
Disney’s Corporate Strategy: Content is King

Source: https://www.economist.com/news/briefing/21684138-disney-making-fortune-and-safeguarding-its-future-buying-
childhood-piece-piece

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 Exhibit 4
Disney’s Acquisitions

Source: https://www.wsj.com/articles/disney-finalizing-pact-to-acquire-assets-from-21st-century-fox-1513203075

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 Exhibit 5
Fox’s Selected Content

Source: www.commonsensemedia.com

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 Exhibit 6
Netflix Subscribers: DVD vs. Streaming

Source: http://jllcampaigns.com/jlltechspec/articles/napster-netflix-how-streaming-has-changed-way-we-consume-media

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 Exhibit 7
Cutting the Cord

Source: https://www.economist.com/news/business/21702177-television-last-having-its-digital-revolution-moment-cutting-
cord

Source: https://www.emarketer.com/Article/Netflix-Users-Look-Amazon-Instant-Video-Hulu-Fill-Content-Gaps/1016285

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Source: https://www.economist.com/news/business/21721664-sports-fans-are-producing-their-own-bootleg-highlights-espn-
losing-subscribers-it

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 Exhibit 8
The World in 2050

Source: PWC (2015), The World in 2050

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 Exhibit 9
Copyright Law

Source: https://atp.orangenius.com/how-mickey-mouse-keeps-changing-copyright-law/

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