Disney's Annual Shareholder Meeting (2017)

Disney shareholder pin-- from Beauty & the Beast

Disney held its annual shareholder meeting in Denver, Colorado on March 8, 2017 at the Colorado Convention Center.  Shareholders were treated to coffee, tea, and bottled juices, but no food or pastries. (It's possible D23 members had a better selection after the regular shareholder meeting.)

Shareholders could also take pictures--available later at www.shareholderphotos.com--with characters Moana, Mickey Mouse, Captain America, and two Star Wars stormtroopers.  The stormtroopers seemed to be the most fun, making authoritative comments like "Affirmative," "Stand there," and "Let me see your badge."

Robert "Bob" Iger, Disney's CEO, opened the meeting in a suit and no tie, reading from a teleprompter until the shareholder proposals and Q&A session.  He expressed optimism about Shanghai Disneyland, which opened in 2016, the result of a "17 year journey."  He then lauded Disney's successful movie franchises, listing four films topping $1 billion each in box office revenues. On the matter of Disney's corporate image and its desire to be a "stellar corporate citizen," Iger mentioned Disney had added 30,000+ jobs in the U.S. since 2005; hired 8,000 military veterans since 2006; and donated $40 million to children's hospitals.

Throughout the meeting, Iger showed several videos, including ESPN clips featuring Denver and many other sports teams; a Disney movie mashup; and extended scenes from Beauty and the Beast (it's a musical!) and Guardians of the Galaxy 2.  The most anticipated clips were from Star Wars, The Last Jedi.  After presenting the end of the most recent Star Wars film, The Force Awakens, shareholders saw a very short clip of Luke accepting the lightsaber from Rey and another short clip of scattered one-second scenes from The Last Jedi.

The Last Jedi will be released in December 15, 2017, with two more Star Wars films already in the works. Fans of the franchise will be interested in knowing Iger expressed sorrow over Carrie Fisher's death and mentioned two Star Wars theme parks, including one where visitors will be able to pilot the Millennium Falcon.

After his prepared remarks, Iger progressed to shareholder proposals. The main ones involved 1) greater proxy access with respect to influencing the composition of the board of directors; and 2) greater transparency in Disney's lobbying efforts and its influence over trade associations.  Regarding the first item, some background: regular shareholders, even if they pool their votes together, have an extremely difficult time under existing rules putting anyone on the board.  The proposal would make it easier for "regular" shareholders--as opposed to hedge funds and insiders--to put more than two directors on Disney's board.  After all, it "takes more than two directors to change the corporate culture."  Disney's rebuttal is that it's not a good idea to spend too much time battling outside or regular shareholder representatives who may not know much about Disney's operations or business.

Regarding the second proposal, Disney doesn't issue a comprehensive report detailing its lobbying efforts, its lobbying payments, or its work through trade associations like the Chamber of Commerce.  Why not make it easier to see Disney's lobbying?  Disney remarked that it complied with all disclosure laws.  One person rebutted the argument for greater transparency by accusing the shareholder group making the proposal of wanting transparency only to demand conformity with its own political agenda rather than Disney's best interests.

The Q&A session was very political.  Several shareholders asked Iger to resign from a presidential council.  Iger patiently explained that being on the council and working with the president didn't mean he agreed with everything the president said or did, and it was better to have a "voice in the room" and be able to influence the direction of the country than be on the outside looking in: "I want to be in the room when it happens, but I respect your opinion."  He further elaborated by saying Disney projected its values through storytelling, where it would have the largest impact and reach, repeatedly referring to Zootopia, a movie about tolerance.

After a question on climate change, Iger said the "changes we see in climate are real," and Disney is doing everything it can to "not contribute to the problem." He expressed concern over Disney's Hong Kong and Tokyo parks, which are on the water and which may be affected by rising sea levels.

A shareholder alleging Disney was biased in its news reporting was met with strong resistance from Iger, who said ABC News and other channels were critical of the last president's administration, and he appreciated the "freedom to be adversarial, even to those in power."

I asked about Disney Tokyo's profit structure, where Disney lacks an equity stake in its park's management company, a different set-up from Shanghai and other international theme parks.  Iger explained the Tokyo park was negotiated back in the 1970s, when Disney didn't want to put substantial cash upfront and was comfortable delegating to a local management and operating company. Basically, Disney appears locked into the original contractual terms because the Japanese management company fronted all of the money for the initial development and land.

I also reminded Iger about unpaid student-athletes, from whom ESPN makes millions of dollars.  At a meeting a few years ago, I raised the same issue, and Iger referred me to the NCAA's role and Disney's documentary work through its 30 for 30 series.  Having heard nothing from Disney or Iger on the issue since then, I responded that waiting for the NCAA--a nonprofit--and its lawyers to take the lead on this issue would mean waiting forever.  As for documentaries, an excellent documentary was indeed made on this topic--Schooled: the Price of College Sports--but it was distributed by Viacom, a Disney competitor, not Disney itself.

As it stands, Iger, Disney, and ESPN look like modern-day plantation owners profiting from the blood, sweat, and tears of primarily African-American men who receive only food, shelter, and a piece of paper at the end of their service--a piece of paper that may not be worth much, if the expose of the University of North Carolina is any indication of nationwide D-I academic practices.

I said Iger might try to argue Disney had no direct control over colleges or the NCAA, but its million dollar payments to colleges gave it substantial influence as well as a "seat at the table" when it came to student-athletes' working conditions.  Years ago, Gap and Nike also tried to deflect exploitative practices at international suppliers and factories but soon realized they needed to be more hands-on to prevent consumer backlash and brand devaluation.  Colleges are ESPN's suppliers, and it has a responsibility to do more.  As Marvel's Spiderman says, "With great power comes great responsibility."

Iger provided the kind of response you'd expect from a rich and honest businessman.  He said he didn't know the current status of the 30 for 30 documentary he had mentioned years ago; it wasn't Disney's role to tell colleges how to run their programs; Disney's financial contributions helped colleges create numerous programs college athletes wouldn't otherwise have access to; and there are "two sides to this issue."

After all the talk about Disney values and corporate citizenship, I was sorely tempted to remark, "I didn't know it was a Disney value to profit indirectly from unpaid labor," but I held my tongue.  Iger's response minimized ESPN's influence in American college athletic programs.  It's as if the affluent cotton apparel retailer, upon being told of labor violations in the fields, responds that the fields are not his bailiwick, and the gentleman having an issue about field conditions should talk to the owner in the next city over.  Such an approach deliberately ignores Disney's vast influence over its suppliers of content--the colleges--in the same way Gap and Nike earlier tried to deflect blame for exploitative worker conditions on "independent" suppliers, many of whom derived almost all their business from a few primary American retailers.  If Iger is going to argue being on a presidential council allows him a voice, but paying colleges millions of dollars doesn't entitle him to help set or influence any student-athlete policies, he is either apathetic, hypocritical, or willfully blind.  I hope he changes his mind, but I'm not holding my breath.  Being a rich, successful businessman has its advantages, but identifying and empathizing with minority student-athletes probably isn't one of them.

Disclosure: as of March 8, I own an insignificant number of Disney (DIS) shares.

Bonus: ESPN's current troubles may be linked to how it is handling the unpaid student-athlete issue. Consumers are becoming more educated about their choices and do not want to support exploitation, even indirectly.  Iger's neutral stance--there are "two sides to this issue"--reminds me of Desmond Tutu's quote: "If you are neutral in situations of injustice, you have chosen the side of the oppressor."

Paying hundreds of millions of dollars each year to broadcast college football games has other consequences.  From a college football fan: "Hey Disney, you have this network called ABC. It is available for free and reaches far more viewers than ESPN. Try putting some of these games on ABC so people without cable can watch."

News of the Weird, from Disney's 10K (2016): "[B]roadcast channels are generally required to provide a minimum of three hours per week of programming that has a 'significant purpose' meeting the educational and informational needs of children 16 years of age and younger." (pp. 7)

Update:

Snap Out of It: GoPro or Go Home

Most software is fungible these days. Snap (NYSE: SNAP) has called itself a "camera company," which is clumsy shorthand for its goal of becoming a premier consumer hardware company. While Snap has successfully created exciting marketing events with its filters and is well-situated to promote blockbuster movies, this expertise alone cannot justify its current valuation. Following Larry Ellison's unrelated comments many years ago about "going back to the future," hardware is becoming sexy again because software features are easily replicated.

My main concerns are 1) Snap's main user base is between 10 and 29 years old; and 2) GoPro (NASDAQ: GPRO) is already the premier camera company.

With respect to 1), this group lacks high levels of disposable income and isn't known for brand loyalty, indicating hardware margins or profit may be stressed. As for 2), if Snap plans on avoiding competition with GoPro by focusing on teenagers and younger adults with cheaper products, Polaroid and vintage cameras have already been done. Spectacles is not revolutionary, unless you count flashing lights as a remarkable innovation over Google Glass. How does Snap plan on differentiating itself long-term?

Unlike Amazon (NASDAQ: AMZN), Snap cannot displace existing software and hardware companies, which have entrenched users and their own "sticky" ecosystems. Furthermore, how many different ecosystems will consumers tolerate before they become frustrated? A quick online search shows several apps capable of adding both filters and special effects to pictures, such as BeFunky.com. In short, Snap lacks a "wide moat" from a technological standpoint and needs to quickly capitalize on its accomplishment of being first to market and capturing younger users.

Being first to market can be a long-lasting advantage in the consumer market. Success begets success as retailers provide more prominent shelf space to faster-selling products, leading to relationships between suppliers, advertisers, and manufacturers that are hard to displace. If a consumer company is first to market, competitors often end up vying for second place, fighting over shelf and virtual space that hasn't already been allocated to the market leader. Older readers might remember that Gameboy was first to market and maintained its leadership position in the videogame industry, even though Sega later produced a much better product. In fact, Nintendo continues to ride the success of the Gameboy today, while Sega sputtered with its Dreamcast console, becoming the Reebok to Nintendo's Nike.

How can Snap ride the wave of its younger user base and its "first to market" unique filters? One interesting scenario would be for Snap to partner with existing hardware companies like Fitbit (NYSE: FIT) and GoPro. More specifically, Snap could leverage the retail relationships smaller hardware companies have already built and offer access to its software and user base--for a fee, of course--as a way for smaller hardware companies to combat Apple and Samsung. Trying to displace Fitbit and GoPro shelf space in existing retail establishments doesn't make much sense--there's only so much shelf space to go around--and Snap doesn't have enough hardware products to open its own stores yet. If Snap tries to go against Apple, Google, and Samsung alone, it risks becoming exactly like Fitbit and GoPro, i.e., hardware companies desperately trying to hang onto to existing customers as larger companies copy their products and force the smaller companies to spend more dollars on each additional user, delaying profitability and making it harder to maintain margins.

One potential scenario involves GoPro CEO Nick Woodman pledging his own net worth as collateral and taking GoPro private, with the understanding that Snap would be a long-term partner and GoPro would design its products to be compatible primarily on Snap's software platforms. With either Snap or a consortium of equity funds buying a 49% stake in GoPro, Woodman could direct GoPro into new areas, diversifying his own user base and continuing to spend dollars on marketing and retail relationships rather than software engineers. (Note: most of GoPro's open technical careers are currently in Romania and the Philippines for software-related positions.)

Once software costs are minimized, GoPro could quickly move into new areas such as 1) food delivery by drone; and 2) tourism/travel.

Right now, Walmart (NYSE: WMT) is attempting to solve the "food desert" problem in inner cities, which tend to have cheap fast food and not enough healthy food. Using drones and online grocery ordering could revolutionize healthy eating in inner cities or isolated areas like First Nation lands. GoPro could offer to work with Walmart, Costco, and Target in delivering fresh food to consumers--a low margin business, but one that could serve as indirect advertising for its drones and other hardware products and a way to gain feel-good content.

Users, especially younger users, are tired of meaningless news and will quickly warm up to a software platform bringing them creative and positive content, such as tourism videos. GoPro CEO Woodman originally wanted to create content through an entertainment channel, but it wasn't profitable to do so, or he would have done it. As a private company in a cooperative setting, and with Snap handling the software, GoPro could focus on content development and capturing more users outside of Snap's existing demographic. Snap would broaden its demographic reach and save money and time leveraging GoPro's existing retail channels, and GoPro would maintain its financial strength by avoiding the costs of building and maintaining a competitive software platform.

Netflix once advertised with Amazon in its early days when it was trying to build its brand, and Jeff Bezos put a stop to it as soon as he found out about it, but GoPro and Snap don't compete directly with each other or larger food retailers, airlines, or travel agencies, making it easier to build relationships.

Once Snap demonstrates it can be a reliable partner, it can branch out to other consumer companies like Fitbit and discuss partnerships or demand a premium to reach its users in more substantive ways. For example, if Snap receives a movie licensing deal, it would normally create filters and receive payment for its marketing. However, in a longer-term partnership where its platform is used as a conduit to attract self-made content--such as mini-movies--it could become the purveyor of cool.

Right now, YouTube and other larger companies focus on all types of users to gain the most advertising dollars possible, but in doing so, fail to differentiate themselves. People sometimes go on YouTube to search for music and random videos, but they don't look forward to opening its app every day because Google relies on algos rather than curated content guaranteed to "wow" users. If Snap and GoPro create a mutually beneficial relationship establishing themselves as content curators and conduits for creativity, they can attract other companies experiencing difficulty breaking through the usual Apple, Google, and Facebook channels.

Snap's 12% drop on March 6, 2017 shortly after its IPO indicates it needs to think outside the box. In the hardware world, Apple and Samsung already dominate. Smaller companies like Snap need to figure out a coordinated way to take on the established behemoths or end up bleeding cash trying to avoid becoming fads. Meanwhile, GoPro CEO Woodman needs to do something soon. In 2015, he ordered a 180-foot yacht, to be delivered in 2017. It won't look good to be in a custom-made yacht while his shareholders suffer. Unless Woodman does something soon, his yacht might end up being called "French Revolution" or "Marie Antoinette." Will GoPro and Snap work together, or will they try to displace Apple and Samsung, two companies with marketing budgets larger than most companies' market capitalizations? Shareholders of Snap and GoPro should hope their CEOs make the right choice.

Bonus: the kind of partnership I envision is similar to the way Disney runs international resorts, i.e., a hybrid licensing and royalty model. Basically, Snap could license its software and platform to GoPro (and other smaller hardware companies like Fitbit) and also negotiate royalties based on revenues to incentivize a true partnership.  In the first few years, the licensing fees would be smaller and the royalty percentages higher, but as both companies learn each other's channels and execute more efficiently, the licensing fees could increase while royalty percentages to Snap decrease. More here on the overall model. 

Update on March 8, 2017: great comment from another website: "I like your Nintendo vs. Sega analogy but you compared apples to oranges. Gameboy was a portable handheld. Dreamcast was a console system. A better comparison would be how Sega's 16GB Genesis was better than Ninendo's 8bit NES system or how their full color GameGear portable was better than Ninendo's black and white, dinky Gameboy. But like VHS and Beta, Nintendo won out."