Key Takeaways

• According to ScreenRant, Disney's success in 2010s can largely be attributed to creative choices made by its former Chief Creative Officer, Alan Horn. He joined the company after it had suffered several notable failures, including "John Carter" and "Mars Needs Mom." In addition to repairing the company's reputation as a specialist in animated blockbusters, he diversified the creative portfolio and led the decision-making on first successful streaming productions such as The Mandalorian.
• Disney outlined the increased focus of its original content on streaming to make project distribution more flexible. The company also indicated that it is not neglecting the theaters, but instead is focused on leveraging data-driven insights to strike a balance that allows it to pursue consumer preferences and trends.
• The planned release of Mulan in theaters was revised, and the movie launched first on Disney+ with an additional $30 charge to gain early access.

Introduction

Role of the Chief Creative Officer

• According to ScreenRant, Disney's success in 2010s can largely be attributed to creative choices made by its former Chief Creative Officer, Alan Horn. He joined the company after it had suffered several notable failures, including "John Carter" and "Mars Needs Mom." In addition to repairing the company's reputation as a specialist in animated blockbusters, he diversified the creative portfolio and led the decision-making on first successful streaming productions such as The Mandalorian.

 

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• The article notes that Horn's impact on the company's creative decisions was so significant that his departure puts a question mark over whether it will be able to continue at the same success rate without him. At the same time, instead of looking for his replacement, Disney decided to give more creative freedom to separate departments, which means that a bulk of decision-making now happens within specific entities.
• Among the changes, Gary Marsh was recently named the president and chief creative officer of Disney Branded Television. He oversees all Disney-branded content developed for children, teens, and families by Disney General Entertainment Content (DGE).
• The chief creative officer will also oversee unscripted specials and series content, including shows produced by Disney TV Studios, e.g., The Mighty Ducks and all Disney+ shows.
• Subsequently, Disney+'s Unscripted Content and Production departments were restructured to operate as part of the DGE group under Marsh, as directed by the chairman of Disney's General Entertainment Content, Peter Rice.
• This latest restructuring completed DGE's new role as Disney+'s content creation unit, excluding Pixar, Lucasfilm and Marvel productions. It was also part of the recent content-distribution split announced in October 2020.
• Rice's memo regarding the restructuring read, "We will be responsible for content strategy, development, greenlighting, casting, production, talent management, and budget management for all the entertainment and news that DGE creates."
• In Rice's statement, he also outlined, "First off, to better reflect the nature of our new role as a producer of content, the name of our overall organization will become Disney General Entertainment Content (DGE). Our new name creates a clear statement of our function and aligns us with the company's film and sports content engines."

How the Focus on Streaming Impacts Creative Decision-Making

• Disney has clearly outlined the increased focus of its original content on streaming. The company restructured the groups in charge of its original content programming, including theatrical films (movies, sports, and TV shows), TV network programming, and originals.
• It revealed that its new focus would make its project distribution more flexible. The COVID-19 pandemic drove the company to experiment with its distribution of the Hamilton film, switching from a planned theatrical release in 2021 to launching it as an exclusive streaming offering.
• Also, the planned release of Mulan in theaters was revised, and the movie launched first on Disney+ with an additional $30 charge to gain early access.
• The company has adjusted Disney+'s role as a more prominent outlet for debuting its films. Currently, it rakes 60.5 million subscribers. However, Disney projected between 230 million and 240 million paid subscribers by the end of the 2024 fiscal year and between 300-350 million total global streaming subscribers.
• However, the company also indicated that it is not neglecting the theaters, but instead is focused on leveraging data-driven insights to strike a balance that allows it to pursue consumer preferences and trends.
• In a statement, Disney CEO Bob Chapek said, "We build those franchises through the theatrical exhibition window, and we did $13 billion back [at the box office] in '19. So for us, it's about balance. It's about following the consumer as they make that transition. And so part of why we did the reorganization that we did is to ensure that we've got an organization that's flexible to read all the cues, whether it's the cessation of COVID, or it's changing consumer behavior so that we can very nimbly make decisions as we go forward."
• Chapek also spoke regarding Disney's premium access strategy, indicating that "releasing certain films on Disney Plus on the same day they premiere in theaters is one that suits the company well - for now."
• It is worth noting that in 2019, when Disney was entering the streaming space, Kevin Mayer, Chairman of Direct-to-Consumer and International at the company, stated that the company's creative and production choices would not be as data-driven as Netflix's. He further explained that the experience and instincts of Disney's leaders were more valuable compared to data points, while acknowledging that Disney+ would likely need to find a compromise between data and creative freedom.

Research Strategy

Key Takeaways

• China is the most important international market for Hollywood, given that it has already surpassed the US and Canada in terms of box office revenue, raking $7.3 billion in 2021 compared to $4.5 billion by the largest North American market.
• Harvard International Review notes that making creative decisions under China's influence contradicts Disney's recent efforts toward inclusiveness, such as including warnings about racist content in its past productions. As the article states, "It’s important to remember that conceding to censorship demands by any foreign nation compromises creative integrity at best and cripples freedom of speech at worst."
• In January 2022, Disney announced the creation of the international content creation hub, led by Rebecca Campbell. Together with the Studios Content, General Entertainment Content, and Sports Content, there are now four content-creation groups within the company. The goal of the new hub is to "expand the pipeline of local content." By 2023, it plans to approve at least 50 originals for APAC.

Introduction

Importance of the Chinese Market

• The size of the Chinese economy makes it particularly important to Disney's expansion strategy. The country's middle-class population is 500 million, which is higher than the US total, and the overall population is above 1.4 billion.
• Urban consumption in China is expected to reach $4.08 trillion in 2022. Disney is also seeking to capitalize on its high sales growth in China.
• Furthermore, China is the most important international market for Hollywood, given that it has already surpassed the US and Canada in terms of box office revenue, raking $7.3 billion in 2021 compared to $4.5 billion by the largest North American market.

 

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• Furthermore, the Chinese video streaming market is projected to reach $18.36 billion in 2022 and grow at a CAGR of 11.83% until 2027. This adds up to China being the best opportunity for increasing the reach of Disney's programming, given that it is nearing saturation in many of its current markets.
• However, while Disney and Netflix compete for streaming subscribers in Asia-Pacific, neither is available in China, which is the largest market in the region. According to Luke Kang, Disney's President in APAC, legal restrictions make it impossible to launch Disney+ in mainland China in the near future, so the company is focusing on Taiwan and Hong Kong markets.
• Overall, Kang notes that Disney made significant progress in China in the long term. It has many businesses there and enjoyed notable successes (e.g., $600 million in revenue from "Avengers: End Game").
• Still, an analysis published in Advances in Economics, Business and Management Research states that "Disney’s financial statement shows that from 2011 to 2020, Walt Disney mainly gains its revenue through Canadian and American market, but fail to effectively gain profit in Asia, especially in China--Shanghai Disneyland fails to provide respectable income for Disney. This phenomenon, known as inorganic growth, needs to be improved to ensure Disney’s successful development in the future."
• To quantify the company's presence, in 2021, Disney's Asia-Pacific revenue was about $6.6 billion, or about 9.7% of its total revenue ($6,571/$67,418*100%).
• Shanghai and Hong Kong theme parks brought $350 million.
• For additional context, while this is not the most relevant metric given the shift to e-commerce and the closures of many of Disney's retail stores globally, China has always only represented a tiny fraction of its overall number of stores, which can be seen in the chart below.

 

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China's Impact on Disney's Creative Strategy

Self-Censorship

• According to the Council on Foreign Relation China has "one of the world’s most restrictive media environments." The country imposes strict policies, which media organizations have to comply with to avoid libel lawsuits and arrests, among other penalties. While these are more relevant for local companies, international players are also impacted by restrictions, since they determine whether their content will be approved to enter the Chinese market.

• To meet China's strict media regulations, media corporations self-censor their productions. According to Harvard, Disney, along with the rest of Hollywood, has been censoring "plots, characters, and dialogues for decades."
• The media believe that Disney has been censoring its movies to avoid controversies in markets such as Chinese by eliminating LGBTQ+ characters. However, possibly in light of recent controversies around the company's support for the "Don't Say Gay" bill in Florida, in 2022, Disney/Pixar refused to cut the same-sex couple kiss from "Lightyear," despite alleged requests from Chinese authorities. So far, the movie has not been released in China.
• Specific productions that were heavily impacted by Chinese censorship requirements include Kundun (1996) and Doctor Strange (2016).
• Marvel's (Disney) Doctor Strange (2016) casts British actress Tilda Swinton in the place of a character who is Tibetan in the original comics. The change was due to the fear of Chinese regulations.

 

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• Importantly, it is difficult to estimate the full impact of the Chinese Communist Party (CCP) and its censorship requirements on Disney's creative strategy based on the examples of censored content. According to the report by PEN America, decision-makers from major studios factor in whether a movie will be approved for the Chinese market when greenlighting specific productions. It is possible that multiple works have not been made as they were not CCP-friendly.

• This restriction of creative freedom goes beyond controversial topics. For instance, PEN America notes that some Hollywood professionals believe that no one would even consider making "Ghost" (the popular movie starring Demi Moore) today, because Chinese censors typically don't approve movies about ghosts and supernatural topics.
• While some cite the Chinese officials' unwillingness to promote "superstitions," others point out that the true reason is political, as in China, "evil ghosts" traditionally symbolize corrupt government officials. Thus, banning ghost stories likely "carries the deep-rooted, historical fear that the government feels about its own people."

Long-Term Consequences of Censorship

• Harvard International Review notes that making creative decisions under China's influence contradicts Disney's recent efforts toward inclusiveness, such as including warnings about racist content in its past productions. As the article states, "It’s important to remember that conceding to censorship demands by any foreign nation compromises creative integrity at best and cripples freedom of speech at worst."
• If major studios continue succumbing to pressures from China, they may tarnish their brand reputation and eventually become irrelevant.
• The industry at large is also negatively affected. Since China has a quota system for approving international productions, only 34 international movies a year can be approved "under a revenue-sharing basis." The influence of the five largest studios is so significant that it is almost impossible for an independent movie to be allowed into China.

 

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Localization

• Chinese audiences are typically not interested in foreign brands and have a deep sense of nationalism. As a strategy to appeal to them, Disney is localizing the creative process by including Chinese content in the development of theme parks, films, and media productions.
• For instance, the launch of the first Chinese Disneyland featured "distinctly Chinese" characters. The theme park is different from other Disney parks in Asia, specifically in Hong Kong and Tokyo, which are often similar to their US counterparts.

 

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• Furthermore, Luke Kang mentions that Chinese-language content for streaming services is part of Disney's long-term strategy in the APAC region, even though Disney+ can't launch in mainland China. The company wants to reach and leverage Chinese talent and initially use the content in Taiwan and Hong Kong, as well as South Asian markets.
• In late 2021, The Hollywood Reporter listed five upcoming original dramas by Disney for the Greater China region, along with several other Asian productions. By 2023, it plans to approve at least 50 originals for APAC.
• On the global scale, the focus on China and APAC dictates increased investments in international content. In January 2022, the company announced the creation of the international content creation hub, led by Rebecca Campbell. Together with the Studios Content, General Entertainment Content, and Sports Content, there are now four content-creation groups within the company. The goal of the new hub is to "expand the pipeline of local content."
• In 2021, Bob Chapek, Disney's CEO, stated that the company would increase its investment in Disney+ until 2024, with the main focus being local and regional content.
• Jessica Kam-Eagle, the company's Head of Content and Development for APAC, commented that expanding local production is a reflection of Disney's "long-term commitment to Asia."

Research Strategy