(Apple+) + (Disney+) = Synergy++

Professor J. Fred Weston was a giant in the field of M&A. He arrived at UCLA from Chicago in 1949 and over his career wrote 32 books and 147 journal articles, many of which dealt with corporate development. He mentored outstanding graduate students, including Nobel laureate Bill Sharpe.

I recall Fred telling the story about how the word synergy came to be used in corporate deal making. The year was 1950, and Fred was at lunch in Westwood with executives from a nascent industry that would later become aerospace. Fred saw a drink menu on the table that promoted Irish Coffee, The Perfect Synergy. (Irish Coffee blends coffee and Irish whiskey, topped with whipped cream.)

Not knowing what synergy meant, Fred looked up the term after he returned to his office and saw synergy = the interaction of two or more agents so that their combined effect is greater than the sum of their individual effects. "Now that's what M&A activities are supposed to do," thought Fred. He started using synergy in his writings to characterize successful deals, and the term became a cornerstone of professional thinking.

Enter Apple and Disney. Video streaming is vital to Disney’s future, highlighted by the announcement of Disney+ on April 11. Video streaming is escalating in importance to Apple, given the introduction of a new Apple TV app and the commitment to develop an original program streaming service known as Apple TV+.

Will these two companies alchemically blend resources in this area? Is an Irish Coffee in the making?

We used Word2Vec to process the 854 articles that appeared on Dow Jones/Factiva between April 11 and May 18, in which the word Disney+ appeared. (Word2vec processes raw text and positions words in a high dimensional vector space where semantically similar words are placed at nearby points. Factiva is a global news resource with over 32,000 premium publications.)

Here are some of the words/bigrams appearing closest to Disney+ (a score nearer 1 indicates a word is closer to Disney+):

('launch_november', 0.946),

('apple_tv+', 0.801),

('netflix', 0.774),

('india', 0.719),

('amazon_prime', 0.642),

(‘warnermedia’, 0.615

('mandalorian', 0.589)

Note that:

• India is prominent, given the planned launch of Disney+ on Hotstar, an OTT service acquired in the 21^st Century Fox deal. Disney+ could have a huge impact on the Indian streaming market.
• The Mandalorian (set after the Return of the Jedi) is also prominent, given that this will be a prestige series developed for Disney+. The Mandalarian will parallel the Game of Thrones in budget (some $10 million per episode) and hopes to rival its success.

 But here’s a key observation to consider:

• Apple TV+ appears very close to Disney+, closer than other services such as Netflix or WarnerMedia.

Although some of the “closeness” between Disney+ and Apple TV+ may result from major announcements from each company around this period of time, there’s more to this proximity to consider.

Over the next few years, Apple and Disney will likely be marching side-by-side in the upcoming streaming wars, especially for family-friendly content. And there’s a wide range of possible synergy deals that might emerge between these two companies. Here are some options:

1.  Disney distributes Disney+ on Apple TV’s app (probability = .9).  Disney has stated consumers will be able to subscribe to Disney+ on Roku and PlayStation. In a Bloomberg interview, CEO Bob Iger has stated that the Disney+ app will: “in all likelihood be available through traditional app distributors, Apple being one of them.” Apple wants its TV app to be your central hub for video content. It’s already supported by services such as Hulu, Starz, and HBO. In agreeing to allow subscription to Disney+ via Apple TV, Disney will deem access to subscriber data as a critical term in the deal. Such data is central to Disney’s future in content creation algorithms, merchandise marketing, theme park promotion, and many other DTC initiatives.
2.  Disney develops and licenses exclusive content for Apple TV+ (probability = .6). If price is right, why not consider this option – assuming Disney+ has established its audience and Apple+ is not viewed as a direct competitor. Apple wants to build a hardware/video streaming virtuous cycle, where hardware drives video streaming services and video streaming, in turn, motivates hardware sales. It’s unlikely that Apple will want to compete with Netflix (or Disney) as a video streaming behemoth. There’s no inherent reason why Disney should not join Prince Harry and Oprah as an Apple+ content development partner.
3. Apple TV+ bundled into Disney+ (probability = .5). Under this scenario, Apple’s appetite for content development subsides and wants to feature Disney+ as distinguishing video streaming content for its platform. If so, Apple may risk alienating other content providers such as HBO/WarnerMedia.
4.  Disney+ is bundled into Apple TV+ (probability = .3). Less likely, as Disney is bent on making DTC video as a core element of its future. Adding Disney+ content would give Apple TV+ an incredible streaming offering. But Apple would have to be willing to pay dearly for this opportunity.
5.  Joint venture between Disney and Apple – call it DisApp+ (probability = .25). A JV can be an exquisite form of corporate torture. Witness Hulu, where Disney’s partners included thorny competitors until Disney obtained full operational control after completing deals with AT&T and Comcast. But a DisApp+ JV with Apple could be different, pooling Apple’s massive financial resources and huge hardware base with Disney’s unparalleled family-friendly content library. Each company’s  contribution to the JV would be distinctive.
6.  Apple buys Disney (probability = .1). Apple and Disney have strong cultural and historical ties including: 1) Steve Jobs sold Pixar to Disney for $7.4 billion and sat on Disney’s board after becoming Apple’s largest individual shareholder; 2) Bob Iger has sat on Disney’s board since 2011. Yet, this would be the largest M&A deal in history, surpassing the massive Vodafone/Mannesmann deal valued at $202 billion in 1999 (inflation adjusted value = $304 billion). Disney’s current market capitalization is about $240 billion, and Apple would have to pay a significant premium to complete an acquisition. Furthermore, buying Disney would involve acquiring theme parks, ESPN, consumer products, traditional movie and TV studios, and much more. There would be a huge regulatory hurdle to overcome.

After the Disney/Pixar deal, one analyst reflected: “If an alien from Mars observed these two companies from afar, he would ask why are they separate entities.” Although it’s unlikely that Apple and Disney will be merged/married into one company, the future for these two companies will almost certainly involve living together as significant others in a video streaming relationship.

Whose Winning the Video Streaming Coverage Race?

It's a crowded field in the video streaming horse race. Netflix is clearly the first mover, but many other entrants are jockeying for position and challenging the leader.

We compared the recent press coverage that seven horses in this race (Amazon Prime, Apple TV+, Disney+, Hulu, Netflix, WarnerMedia, and YouTube) received. To do so, we analyzed 1731 articles that appeared on Dow Jones/Factiva during March and April in which the words video and streaming appeared adjacent to each other. (Factiva is a global news resource with over 32,000 publications.)

Here's what we found:

Total mentions of these seven "horses" rose to 3533 in April from 2382 in March. As expected Netflix led the field in April with 1614 mentions. Hulu and Disney+ made a strong move in April with 728 and 446 mentions respectively. (Not surprising, given Disney's big investor day announcements in April.) Apple TV+ faded after its March debut.

Here's what mention market shares looked like in March and in April:

Positioning in this race is highly sensitive to special events/announcements. Quarterly or even annual mention market share analysis will be more telling. Look for our first quarterly analysis in early July.

Disney+ v. Apple TV+

Both Apple and Disney had video streaming showcases in the last 60 days. Apple's March 25th announcement of its TV+ service yielded yawns. Disney's unveiling of Disney+ elicited enthusiasm. Steve Jobs grunted in his grave as Disney outperformed Apple.

Disney provided specifics on content, pricing and release date. Apple paraded out star power, but provided scant detail about its  TV+ offering.

A Word2Vec analysis highlights the difference.

We used Word2Vec to process the 1731 articles that appeared on Dow Jones/Factiva during March and April in which the words streaming and video appeared adjacent to each other. (Factiva is a global news resource with over 32,000 premium publications.)

Here are some of the top words closest to Apple TV+ according to our results. (Word2Vec processes raw text and positions words in a high dimensional vector space where semantically similar words are placed at nearby points.):

('jennifer_aniston', 0.739),

('steven_spielberg', 0.719),

('oprah_winfrey', 0.700),

('reese_witherspoon', 0.697),

('hollywood', 0.660),

('celebrity', 0.656)

And here are some of the top words appearing closest to Disney+:

('disney', 0.860),

('pixar', 0.655),

('star_war', 0.619),

('marvel', 0.609),

('pricing', 0.551),

('national_geographic', 0.546)

The Word2Vec/Factiva analysis demonstrates how evident it was to the news media that while Apple pulled out star power, few specifics on programming and pricing were given. On the other hand, Disney+'s neighbors in this vector space were brands, as the company detailed content on the service as well as pricing.

We are in the opening moves of a video streaming chess match. Apple is a wannabe player, driven by a shift to services in the face of stalling iPhone sales. Major assets include:

1. 1+ billion devices in customer hands and pockets
2. creative talent wanting to work with the company
3. $250B of cash powder on its balance sheet

But the company's original programming budget for Apple TV+ is modest -- a mere $1-2B drop in its cash bucket.

Apple is tiptoeing into original content. The program emphasis looks to be family-friendly, even  Disneyesque. Too bad for Apple that Pixar is not an asset in the estate of Steve Jobs.

Over the next few years, Apple+ and Disney+ will likely be marching side-by-side in the upcoming streaming wars. For now, Disney has a clearer vision of the direction of the march.