Disney's troubles show how technology has changed the business … – The Economist

“Why do we have to grow up?” Walt Disney once wondered. As it launches its centenary celebrations on January 27th, the Walt Disney Company has sustained its appeal to the young and young-at-heart. This year Hollywood’s biggest studio will invest more in original content than any other firm. It dominates the global box office, with four of last year’s ten biggest hits, and has more streaming subscriptions than anyone else. Its intellectual property (IP) is turned into merchandise ranging from lunchboxes to lightsabers, and exploited in theme parks that are churning out healthy profits even as covid-19 lingers. More than just a business, Disney is perhaps the most successful culture factory the world has ever known.
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So the upheaval rocking the company today has relevance far beyond its empire. Uncertainty about the future profitability of Disney’s enormous entertainment portfolio has caused a rollercoaster ride in its share price. It threw out its chief executive in November and will soon replace its chairman. It also faces a rebellion from an activist investment firm that wants a board seat in what could turn into the biggest face-off since Michael Eisner, a previous CEO, was forced out in 2005. Disney’s trials are not just a boardroom drama. Similar crises are unfolding at other leading culture factories, from Warner Bros to Netflix. The reason is a technological revolution that is turning Hollywood upside down.
The continuing pre-eminence of a centenarian like Disney has confounded many predictions. Since the days of “Steamboat Willie”, Mickey Mouse’s first outing in 1928, there has been an explosion in the supply of video entertainment. Television, cable, home video and then the internet have offered increasing amounts of choice. Anyone with a phone can record video and make it accessible to billions of people, free of charge. More content is uploaded to YouTube every hour than Disney+ holds in its entire streaming catalogue.
Many predicted that this surge of niche content would bring down mainstream hit-makers. They were mostly wrong. Infinite choice in entertainment has ruined the companies which produced middling content that people watched because there was nothing else on—witness the collapse in broadcast-television ratings. But those at the very top of the business have thrived. When anyone can watch anything, people flock to the best. Global streamers like Netflix and Amazon have more than 200m direct subscribers, once an unimaginable number.
Those who have fared best at a shrinking box office are the owners of IP that is already popular. As people visit cinemas less often and competition intensifies, studios have pumped money into films people will turn out to see even when they go only three or four times a year. America’s ten biggest films last year were all sequels or parts of a franchise; Disney’s upcoming slate includes an 80-year-old Harrison Ford returning for a fifth outing as Indiana Jones. It has not been a golden age for cinema, but for those at the top it has been a profitable one.
Now technology is shaking things up again. Online distribution has enticed tech firms that make the hardware and software used for streaming. Silicon Valley is of a different scale from Tinseltown (Amazon’s growing advertising business is already three times bigger than Disney’s) and its moguls have no need to make money from streaming, which they see as an add-on to their main business. Hollywood initially wrote off the nerds. But the nerds have enough money to take creative risks. Last year Apple won the best-picture Oscar with “CODA”, a comedy-drama partly in sign language, less than three years after it entered the film business. The more fine content these new producers make and sell below cost, the greater the risk that older studios will fall from the top tier of media into the perilous middle.
At the same time, new technology is allowing those lower down the “long tail” a better chance of reaching the profitable top. Inventions like game engines, which help with the creation of virtual sets, are lowering barriers to entry. Generative artificial intelligence, which can already make rudimentary video, may eventually lower them further. The first beneficiaries have been non-American film studios, which until recently struggled to nail first-class special effects. No longer. Two of the world’s highest-grossing films last year were Chinese—and when covid ebbs in China, expect that number to rise. China has yet to convert foreign audiences to hits like “Wolf Warrior 2” (tagline: “Anyone who offends China, wherever they are, must die”). But don’t bet that this will always be the case. China already has a globally successful social-media app in TikTok and produces video games that are international hits, including Tencent’s “Honour of Kings”, which is the world’s highest-earning mobile game.
Perhaps the most dramatic way technology could disrupt the culture business is by creating new categories of entertainment. Young adults in rich countries already devote more time to gaming than to broadcast television. Hollywood has been slow to catch on, but its Silicon Valley rivals are snapping up gaming IP. Microsoft’s proposed acquisition of Activision-Blizzard, whose games include “Call of Duty” and “Candy Crush”, is worth nearly ten times what Amazon paid for Metro-Goldwyn-Mayer, home of James Bond and Rocky Balboa. Movies based on games are becoming as popular as games based on movies. A series based on “The Last of Us”, a post-apocalyptic game, seems to be a critical success. Sonic the Hedgehog was among last year’s biggest films and Mario is likely to be among this year’s. Nintendo is opening a new Mario theme park next month—in Hollywood, no less.
The great creative factories of Hollywood will have to adapt if they want to survive. Another successful era is not beyond their reach. Disney’s century has been one of endless reinvention, in business terms as well as artistic ones, as the company has moved its output from projectors to cables to cassettes and now bytes. It will probably continue to innovate. Still, there are already signs that much of the coming century’s popular culture will be dreamt up in places other than Hollywood. For audiences tiring of sequels, that may be a welcome twist. ■
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This article appeared in the Leaders section of the print edition under the headline “Disney’s second century”
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