Memo: Disney and That One Atlanta Episode

One is known as an entertainment savant of sorts: he is a writer, rapper, actor, director, comedian, film and television producer. Donald Glover’s show “Atlanta” can be watched on Hulu, a streaming property owned by the Walt Disney Company.

One is known for his successful replacement of Michael Eisner and his ensuing acquisition of Pixar films, returning the Walt Disney Corporation to its animation roots. Bob Iger also led negotiations to acquire Marvel Entertainment, and then three years later acquired LucasFilm. And six years after that, Disney purchased assets from Fox. But most importantly, Iger self-identifies as a centrist and has been appointed to positions by two of America’s most powerful political families: The Clintons and The Trumps. According to his Wikipedia page, Iger considered a 2020 election run but later chose to discard his political ambitions. Netflix Founder and CEO Reed Hastings nodded to both key attributes of the latter:

Ugh. I had been hoping Iger would run for President. He is Amazing.

Two days after the firing of Bob Chapek, Iger assumed his role as CEO (again).

Glover’s most fascinating episode of his final season of “Atlanta” featured an odd story about the hiring and firing of a Disney CEO amidst the backdrop of cultural and political change.

Chapek’s tenure as CEO was cut short, not for any other reason than Iger realized he was not going to be able to run for Governor of California or President of the United States. It is a dream deferred for Hastings, who now must match up against the industry’s most capable executive. While the narrative will likely hold that Chapek’s missteps cost him his seat, it’s more likely that Iger is just better at the job and is much better at managing the political pressures of the time we’re in.

It was Bob Chapek and Chairperson of Distribution Kareem Daniel who ultimately signed off on the Donald Glover-led “Atlanta” episode that featured a fictional documentary about an African-American man named Thomas “Tom” Washington. The show featured a faux-disclaimer at the show’s beginning, taking a subtle jab at Disney’s management. It was surreal. In the episode (S4E8) that I highly recommend that you watch, Washington was CEO of the Walt Disney Corporation leading up to the 1995 release of “The Goofy Movie,” a film that has long been viewed as Disney’s first film for black millennials. Vulture Magazine presented the best summary of the Atlanta episode’s premise:

As racial tensions rose in L.A. and across the country, Disney happened to lose its CEO due to ultimately fatal health complications. The executive board voted for Tom Washington — a man whose real name was Thompson Washington, not Thomas — thus installing a Black CEO due to a clerical error. Not wanting the optics of quickly hiring and firing a Black man, and being unable to sweep things under the rug because of Tom’s insistence that he is rightfully the CEO, Disney moved forward with the accidental decision.

In the faux-documentary, the first black CEO of Disney radically changed the organization’s creative process to promote stories of inclusivity. In this narrative, The Goofy Movie was a film about Black-American fatherhood, produced by a Black-American father. As CEO, Tom Washington turned the organization inside out to build a company that highlighted its black talent and black stories. Then, the Board of Directors unceremoniously saw him to the door and course-corrected by hiring someone more suited to lead the company in a centrist manner. The Goofy Movie hit theaters as a less-radical version of the vision Washington had for the film.

In a way, this feels so meta to write. The episode of Atlanta was a stroke of genius. And it may go down as somewhat prescient given the recent critiques of Disney mirrored the critiques foreshadowed by the episode of Atlanta. The three executives who likely signed off on the project were CEO Bob Chapek, Kareem Daniel, and Dana Walden, Disney’s current Chairman of Digital Content.

Walden was promoted into the role after Chapek’s unceremonious firing of Peter Rice. Like Atlanta’s episode on Disney’s executive management, the company seems to be adept in firing executives without warning. Variety wrote about Rice’s firing:

By all accounts, Rice didn’t see it coming — at all. He was blindsided as he learned of his fate in what was described by a source as a conversation with Disney CEO Bob Chapek that lasted less than 10 minutes. Chapek simply felt that Rice was not, in fact, Team Chapek, according to multiple sources close to the situation.

So, after one of the most surprising terminations in the entertainment industry, Chapek suffered the same fate just five months later. And Bob Iger is back at the helm at Disney after two years. Iger’s return is effective immediately, will last two years and comes “with a mandate from the Board to set the strategic direction for renewed growth and to work closely with the Board in developing a successor to lead the company at the completion of his term,” according to Disney’s press release. The board fired Chapek, who was handpicked by Iger to replace him, on Sunday. In a way, a Disney property (Atlanta can be seen on Hulu) foreshadowed its own corporate concerns and changes.

It’s been a turbulent two years for Disney under Chapek and some of it is Chapek’s own doing. The company’s shares have fallen 40% this year and it reported in the most recent quarter that Disney+ lost $1.5 billion despite growing its digital subscribers. But how do you follow the leadership that bought Pixar, Marvel and Stars Wars over 15 years? A series of Chapek’s early moves were not very well received by the industry or by customers. Quartz sums up a series of misfires:

It was a given that Iger would be a tough act to follow but Chapek made his own leadership blunders including a bungled reorganization, an ugly public spat over Black Widow star Scarlett Johansson’s streaming remuneration, and his botching his response to Florida’s controversial “Don’t Say Gay” bill, which restricted instruction on gender identity and sexual orientation in classrooms. (Iger did not explicitly call him out on the latter, but did say it’s a matter of “right or wrong” and “you have to take a stand.”)

Under Chapek’s leadership, Disney was often mischaracterized with that eye-roll of an adjective: “woke.” This characterization was used for every content decision and park strategy. Chapek managed to anger both major political ideologies by action or inaction. By comparison, Iger was more comfortable dealing in political proxy wars by being direct and decisive. Variety explained:

Chapek’s reluctance to wade into the controversy came in contrast with his predecessor, Bob Iger, who tweeted his opposition to the bill on Feb. 24. Chapek is said to be less willing than Iger to take political stands in general. But he is facing a climate in which employees have become more emboldened to demand action from their bosses.

Ultimately, it may be the firing of Rice that most contributed to Chapek’s own firing. It wasn’t just Disney’s struggles with its park division, poor viewership ratings, or the unit economics of its streaming product. According to ScreenRant:

In the end, though, Chapek’s fate was likely decided by a disappointing financial statement at the beginning of November 2022. The core problem lies with streaming; although Disney+ has exceeded expectations for subscriptions – ironically helped by the pandemic – it is still making a loss.

Chapek’s answer to his streaming concerns and Disney+’s failed unit economics was to fire the well-liked Peter Rice and to replace him with Dana Walden. Chapek didn’t give much reason, according to Variety’s recounting of the incident, but the opinion was that Chapek “didn’t think Rice was fully behind him.” I read this as “Peter Rice could be CEO after me, potentially shortening my tenure.”

Iger has two years to reset the company’s path and find another successor. Iger’s decisions and rationale for them will be definitive and unwavering – surely changing the perception of Disney and its politics.

The faux Disney documentary was larger than life and just believable enough to confuse some of Atlanta’s casual viewers. There were archival clips, nostalgic details, and real events that peppered the narrative. The story seemed both far-fetched and believable. But this week, a CEO who just received a three year extension was fired over a weekend with no notice. This was also far-fetched and believable.

One of the first changes made was Iger’s termination of Chapek’s top lieutenant Kareem Daniel, the Chairman of Disney’s Media and Entertainment Group. To Daniel’s credit, he helped streaming services grow to 235 million active users. The decision places more power with the content creators and less with the streaming service executives who distribute their work.

In a September interview with Daniel, he explained:

So you fast-forward to this new organization that is two years old next month … There’s incredibly talented content teams that are making things that are entertaining people all over the world. I feel like I have a bit of understanding of what that’s like having spent time in a creative organization without that ultimate authority, where I know that collaboration is absolutely critical. You can’t operate a business without having a true appreciation and connection with that creative group.

Disney’s DTC division (which includes Hulu and ESPN+) lost $1.5 billion in Q3 2022. In Q3 2021, that figure was $630 million. Daniel’s distribution strategy was an obvious flaw. Within 24 hours, Iger showed an appreciation and connection with the creative group. And in the process, he established that streaming may no longer be the holy grail for Disney. Atlanta’s four season run on Hulu ended at the right time and Reed Hastings may be happier after all. Disney+ may be less of a concern to Netflix.

By Web Smith | Edited by Hilary Milnes with art by Alex Remy and Christina Williams

Memo: Stockholm FTX Banco

This past weekend in Sao Paulo, the Grand Prix’s top drivers had a sudden change of plan. George Russell and Lewis Hamilton’s Formula One racers were without FTX branding, within hours of the bank run on Samuel Bankman-Fried’s cornerstone of the cryptocurrency exchange industry. Mercedes AMG reacted in kind.

The Bitcoin currency has seen a 77% decline from its trading peak in November 2021. The dot com bubble was a 76% decline from its peak in March 2000, according to a study administered by Bank of America. The only two steeper declines on record were the 83% decline in the stocks of US homebuilders between 2005-2008 and the preceding months of the Great Depression. A recent report by Fortune explains:

The economic events of 100 years ago also share similarities with today. Following the first world war, the U.S. government was spending more than it was earning back in tax revenue, and high inflation ensued. American industrial power, though, created a flood of jobs as the country emerged as a major international player.

According to an NBC poll in May 2022, one in five Americans have invested in cryptocurrency. Nearly half of men between the ages of 18 and 49 have traded cryptocurrencies and around 40% of African Americans polled as traders of the digital currencies. These are staggering figures that may help to explain why the failure of the second largest crypto exchange has shaken many users and enthusiasts. But there was a striking paragraph just a few beneath this demographic rundown:

But without a major legislative effort, the crypto market still looks like the “Wild West,” according to Securities and Exchange Commission Chair Gary Gensler. That may be why only 19% of those polled by NBC News said they view crypto positively and 25% indicated they view it in a negative light.

A quarter of those polled indicated a negative view of “crypto.” This report, just six months removed, will be remembered as one of the many prescient ones. In a number of ways, the “crypto collapse” mirrors the first of many bank runs: the Stockholms Banco run of 1660. Within three years of the bank’s founding, the first to ever issue banknotes, its illiquidity issue became the first of many examples throughout history. A greater irony is that just 1,213 kilometers away from the Stockholms Banco, the first speculative bubble in history came and went: Tulipomania. Both events occurred within 25 years.

Written just 30 days prior to the bank run on FTX, a found essay by Bank Underground highlights the fact of the matter. That there remains a number of old problems for the new assets:

New assets don’t always mean new problems or new solutions. Ironically, despite being promoted as alternatives to traditional finance, the crypto ecosystem faces many of the same problems. Some challenges relate to the underlying currencies – ideally you want a currency with stable value whose quantity can be changed to supply liquidity. But unbacked cryptocurrencies like bitcoin or ethereum which are the cornerstones of the system have the opposite properties: unstable value and a quantity that can’t be easily changed.

FTX has contrasts and similarities to the forefathers of modern banking. Due to the SEC’s mismanagement of regulatory clarity, it was not uncommon for exchanges to move offshore (FTX is currently based in the Bahamas). Aaron Klein, a senior fellow in economic studies at the Brookings Institution:

The US regulatory system is not well-designed to handle crypto. But part of the appeal of crypto was that it’s not well-regulated and that it disrupts the existing financial system.

The implosion of FTX means a financial reckoning is certain; there are lessons to gather from the past. Risks can come with reward, but to ignore history in pursuit of high-stakes gambling is historically ill-fated. Web3 and crypto have largely been distractions from the real-world infrastructure that is worth the same investment.

The fallout has been swift. Many FTX holders are still in the lurch, unsure if they’ll regain any of their investments following the company’s bankruptcy filing and the stepping down of CEO Sam Bankman-Fried, once considered a genius entrepreneur, unchecked by the common oversights typical of companies that size. Bankman-Fried was once worth $24 billion. In the course of the week, his former company began bankruptcy consideration and awaited potential investigation by the US Department of Justice. FTX’s undoing has been explained thoroughly elsewhere but here is the debrief. Last week, competitor Binance’s CEO Changpeng Zhao announced that his company was withdrawing its FTT holdings from FTX based on the belief that the company may not be stable. The bank run ensued as spooked customers rushed to cash out. FTX didn’t have the funds for the payouts – about $8 billion were owed. Binance nearly stepped in to buy FTX and bail it out, but further review of the company and its business practices led to it pulling out of the deal.

People who had money tied up in FTX’s exchange, or held its coin FTT, are now at risk of losing their investments and savings. WIRED magazine detailed the crises that people are now facing, including a person whose $25,000 nest egg may never be reimbursed and one who was locked out of their account for 24 hours, unable to cash out funds before it was too late. Why the black hole in the balance sheet? FTX shifted customer deposits around into external investment vehicles – against the terms of services of the FTX platform. From WIRED:

Aaron Kaplan, a securities attorney and co-CEO of trading platform Prometheum, says that although the final outcome for FTX and its customers is not yet crystal clear, there is precedent in scenarios such as this for people never to recover their funds. Unfortunately, those caught up in the collapse are left with little in the way of legal recourse, says Kaplan. “The facts will come out in time. What is clear at this present moment is that FTX was taking advantage of a gray area at the heart of which was the expectation of profit, irrespective of the best interest of customers.”

The founder and CEO of Binance (FTX’s chief competitor), Zhao recently tweeted a reflection meant to serve as, both, a rebuke and an assurance.

Two big lessons:

1: Never use a token you created as collateral.

2: Don’t borrow if you run a crypto business. Don’t use capital “efficiently”. Have a large reserve.

FTX’s ripple effect means that the entire crypto community is being viewed through a skeptical lens. Bankman-Fried’s firm had links to multiple crypto exchanges, including BlockFi, which had been bailed out by FTX earlier this year. Also, Solana sold 50 million units of its currency to FTX.

Many have been wiped out and the way forward is unknown. Crypto is largely unregulated, and investments were essentially bids on digital-first infrastructure and the idea that it could replace more traditional (and to some archaic) ways of building and transferring wealth. At the same time, the parallels between this crypto crash and the 2008 crash are strikingly similar. Bank Underground drew the points clearly:

But crypto lenders such as Celsius allowed collateral to be rehypothecated – ie the lender could then use the collateral itself and re-pledge that asset to another lender. The collateral then gets passed along with multiple claims on it. If any party in the chain gets into trouble, there can be a domino effect. Rehypothecation by shadow banks and others was identified as a problem after the 2008 crisis by Singh and Aitken and others.

Other key tentpoles of Web3 and the crypto space have broken down. Meta’s bet on the metaverse is not materializing. Layoffs are expected to continue across the entirety of the tech sector. And it’s hard to overemphasize how much money and trust has already been lost. Consumer trust in crypto has been fractured since the products’ year-long collapse sustained and this will only make it far worse.

If it wasn’t for the 2008 economic crash, it’s like that Bernard Madoff’s ponzi scheme would have survived much longer. If it wasn’t for the 2022 crypto crash, FTX would be in good standing. Has crypto been a distraction, all along? Existing infrastructure, real world problems, and improvements are all in need of investment, sweat equity, and proper management. Web3 will be there waiting when we’re ready for it. But for now, we’re not – and there’s historical precedent that suggests that stability is far more valuable the speculation.

By Web Smith | Edited by Hilary Milnes with art by Alex Remy and Christina Williams

Memo: Working Capital

A recent WSJ article began: “Rising Rates Boost Companies’ Focus on Working Capital Management.” Times are getting tougher for small business owners and Shopify sees an opportunity to expand its market position by stepping into fortify its suite of service to merchants.

Shopify has smartly built efficient systems to manage payments and approval processes based on an “instant settlement of eCommerce sales” (according to PYMNTS) within days of the capital request. Working capital is the company’s next frontier. It represents a flow of information between Shopify’s clientele and the company itself.

PYMNTS’ research has estimated that there remain more than a trillion dollars of outstanding receivables out there that smaller firms are “carrying” for larger suppliers on a given day. Part of the proverbial stutter step is tied to hiccups in back office approvals or the simple fact that SMBs are understaffed.

Shopify’s lending business is just six years old but it’s never been more important. It remains a small but influential part of the company’s organization. It’s poised to grow as more merchants benefit from cash loans to keep operations humming. A new report from The Information details how lending could emerge as a bright spot for the eCommerce services provider, pointing out that the company’s new loans jumped 30% in the third quarter over last year, to more than $500 million in gross revenue. That outpaces merchants’ sales volume growth in five of the past six quarters, underscoring the position that these businesses are in as inflation and a looming recession depresses eCommerce growth after a boom.

Business loans to merchants are a sure sign that Shopify is (smartly) doubling down on expanding its suite of services it offers to its merchants, feeding the ever-important Shopify ecosystem it’s built to become a one-stop shop for anything a business owner needs to run a retail business. With lending, Shopify makes it possible to keep the flywheel going: merchants can reinvest the upfront cash into their businesses, including continuing to spend on marketing, logistics and fulfillment. From The Information:

Shopify’s services revenue as a percentage of its overall merchant sales volume hit a record high in the third quarter, which the company attributed in part to merchants leaning more on those services to help pay for costs like inventory, marketing and hiring while inflation soars. Offering merchants cash advances can also keep them hooked on the Shopify ecosystem. “You have those particular merchants captive, and it’s an audience that’s very focused on Shopify—just throw the kitchen sink at them and see how much stickiness there is to the platform,” said Ken Wong, managing director for software research at Oppenheimer & Co.

Investing money into its merchant pool to keep them from suffering cutbacks and further blows to their businesses is a move that favors Shopify and its ability to stay competitive: brands are less likely to bite the hand that feeds it by, say, defecting to another platform in the midst of this turndown. Even as competitors like Stripe and PayPal offer cash advances, they aren’t as well-positioned to offer the complete suite of services that Shopify does. And that’s even more so when you line up the competitors Shopify has worked hard to box out and could offer merchants similar services.

Here’s an example of Shopify’s hold on the payments ecosystem and this is just the B2C side of its business.

Take Amazon: When Amazon launched a “Buy with Prime” service that would be compatible for Shopify merchants to enable Prime benefits into their checkout flows, Shopify retaliated by discouraging use of the plug-in. It was a muscle move to convince merchants that Shopify offers merchants all they need – and that they don’t need Amazon’s assistance. Whether that’s true or false remains to be seen. For Amazon, Buy with Prime was a bid for the dollars of Shopify merchants. We reported on the risk Amazon posed to Shopify in September, when the company changed its tune around Buy with Prime to be more explicitly opposed:

And that could be a bad thing for Shopify as Amazon aims to become more of a discovery platform for DTC brands, essentially letting them get a piece of the pie without fully committing to being an Amazon brand. Shopify is still at a disadvantage here unless it becomes more of a marketplace on its own. Lutke has spoken against Shopify becoming a “kingmaker” for brands. It prefers to remain brand agnostic. But leaders change their minds often; sometimes it only takes three months to change tune.

The rise in loans comes as Shopify continues to bulk up its merchant services to keep them housed within the Shopify ecosystem. On Monday, it announced a global alliance with EY that’s designed to help merchants scale faster with fewer risks, as well as reduce friction in selling certain products globally such as alcohol and pharmaceuticals. In short, Shopify understands that “very large merchants want to use Shopify, but demand that we work with them through existing system integrators.” Deloitte and Accenture round out the shortlist of SIs. Past investments and partnerships like Deliverr and Klaviyo also bulk up Shopify’s one-stop services for merchants who may be feeling the squeeze in areas like fulfillment and marketing.

It’s still a sign of precarious times – Shopify offering cash loans to merchants is not unlike mall real estate companies bailing out struggling retailers in the early days of the pandemic. But by positioning itself as a necessary lifeline to its small businesses, Shopify’s setting itself up to be a necessary force in the next era of eCommerce, one that looks more like fintech than eCommerce. It’s making it more difficult for companies, adjacent and competitive-minded alike, to step into Shopify’s ecosystem.

By Web Smith | Edited by Hilary Milnes with art my Alex Remy and Christina Williams