Disney: Restructuring for Success With Video Streaming Service Disney+

Abstract

The case follows the restructuring efforts of the Walt Disney Company’s (Disney) media and entertainment division, under the leadership of Robert A. Chapek, CEO of Disney. In October 2020, Disney restructured the media and entertainment division to emphasize the direct-to-consumer strategy through Disney+ (Disney’s online streaming service). A leading shareholder and activist, Dan Loeb, suggested that Chapek should also invest dividend capital into content production for Disney+ and shift entirely to streaming videos and eliminate cinema halls from its distribution channel. Experts were concerned both with the restructuring efforts and Disney’s focus on primarily the online video streaming business to compete against Netflix. Will the restructuring of Disney’s media and entertainment division help Chapek grow Disney+? To what extent should Chapek follow the advice of Loeb? Should he switch Disney media completely towards streaming?

Case

Learning Outcomes

By the end of the case study discussion, students should be able to:

  • Evaluate what types of business model shareholders value: subscription versus digital.
  • Explore the reasons for the success or failure of organizational restructuring.
  • Critically analyze the extent to which CEOs should follow shareholder activists’ strategic directions for organizations.
  • Understand the basis of competition in the video streaming industry.

Introduction

In October 2020, Robert A. Chapek, CEO of the Walt Disney Company (Disney), restructured Disney’s media and entertainment division to focus more on streaming video services and be valued like Netflix Inc. (Netflix) (Donnelly & Lang, 2020). By implementing a direct-to-consumer strategy (Whitten, 2020b), Disney was aiming at centralizing its media businesses “into a single organization that will be responsible for content distribution, ad sales and Disney+ [Disney’s online video streaming service]” (Whitten, 2020b). Chapek said, “We are tilting the scale pretty dramatically [toward streaming].” Shareholders cheered at this news as Disney’s share price increased by 5% on the restructuring announcement (Whitten, 2020b). Disney was also planning to redirect dividend payments towards streaming after Dan Loeb, shareholder activist investor, recommended Chapek to divert a USD 3 billion dividend payout towards Disney+ content (Whitten, 2020b). Such requests from activists were considered unusual as they generally pressurized companies for more dividends (Sherman, 2020a). Industry analysts, however, expressed concerns. Some of Disney’s media and entertainment division's senior executives did not figure in the unit heads’ list as Disney was restructuring the division (Donnelly & Lang, 2020).

Moreover, when shareholder activist Loeb advised Chapek to completely give up movie theaters as a distribution channel and focus on video streaming, cinema players expressed disappointment. They mentioned it might be difficult for Disney to return to cinemas if, in the future, they decide to do so (Pulver, 2020). In January 2021, as Netflix was planning to offer a movie every week of 2021 (Faughnder, 2021), will the restructuring of Disney’s media and entertainment division help Chapek grow Disney+? To what extent should Chapek follow the advice of Loeb? Should he switch Disney media completely towards streaming?

Background

Disney is an American diversified multinational mass media and entertainment conglomerate with headquarters in Burbank, California. After Comcast, it was the world’s second-largest media conglomerate in terms of revenue (“Walt Disney Company,” 2012). Brothers Walt Disney and Roy O. Disney founded Disney on 16 October 1923, as the Disney Brothers Cartoon Studio (“Walt Disney Company,” 2012). The company first established itself as a leader in the American animation industry and then diversified into live-action film production, television, and theme parks. Later, Disney also diversified into theater, radio, music, publishing, and online media (“Walt Disney Company,” 2012). Disney’s divisions included Walt Disney Parks and Resorts, Disney Media Networks, Disney Direct-to-Consumer, and Disney Consumer Products and Interactive Media. In 2020, Disney generated USD 65.40 billion in revenue, a 6% decline from 2019 (see Table 1). In the same year, Disney had 223,000 employees (Ziady, 2020). Also in 2020, Disney Media Networks generated the most revenue and profits. Yet the COVID-19 pandemic adversely hit its Parks, Experiences, and Products segment (see Table 1).

Table 1. Disney Segments’ Financials, 2016–2020 (USD billion)

2016

2017

2018

2019

2020

Revenues

Revenues

Media Networks

23.7

23.5

24.5

Media Networks

24.8

28.4

Parks and Resorts

17.0

18.4

20.3

Parks, Experiences, and Products

26.2

16.5

Studio Entertainment

9.4

8.4

10.0

Studio Entertainment

11.1

9.6

Consumer Products and Interactive Media

5.5

4.8

4.7

Direct-to-Consumer and International

9.4

17.0

Eliminations

-2.0

-6.1

Total

55.6

55.1

59.4

Total

69.6

65.4

Segment Operating Income

Segment Operating Income

Media Networks

7.8

6.9

6.6

Media Networks

7.5

9.0

Parks and Resorts

3.3

3.8

4.5

Parks, Experiences, and Products

6.8

-0.1

Studio Entertainment

2.7

2.4

3.0

Studio Entertainment

2.7

2.5

Consumer Products and Interactive Media

2.0

1.7

1.6

Direct-to-Consumer and International

-1.8

-2.8

Eliminations

-0.2

-0.5

Total

15.7

14.8

15.7

Total

14.8

8.1

Source: The Walt Disney Company: Form 10-K (2020, p. 41; 2018, p. 32).

Launch of Disney+

The following subsections present a brief overview of the launch of Disney+, its subscriber base, and issues with the platform.

Launch and Subscribers

Disney+ was launched in the United States on 12 November 2019 (Spangler, 2019) when Robert A. Iger was the CEO of Disney. Iger quit Disney’s CEO position in February 2020, after which the role was assumed by Chapek (“Bob Chapek Named,” 2020). Before becoming the Disney CEO, Chapek held leadership positions across Disney’s Parks, Consumer Products, and Studio businesses (“Bob Chapek Named,” 2020).

Disney’s direct-to-consumer decision implementation speed was partly influenced by the global COVID-19 pandemic, which resulted in losses for theatrical business and drove customers toward streaming options (Whitten, 2020b). Chapek said, “I would not characterize it as a response to Covid” (Whitten, 2020b). He further added, “I would say Covid accelerated the rate at which we made this transition, but this transition was going to happen anyway.” Despite the prominent presence of Netflix and Amazon in streaming services, since the launch of Disney+, Disney added more than 60 million subscribers by August 2020 (Stoll, 2021a). In 2019, Disney predicted that it would have between 60–100 million subscribers of Disney+ by 2024 (Sherman, 2020a). The rapid subscriber accumulation of Disney+ made Loeb confident that investing capital in it, then paying a dividend, was a justified option. It could help Disney+ be valued more like Netflix (Sherman, 2020a). Loeb’s Third Point Capital was one of the largest shareholders in Disney (Whitten, 2020b). Loeb wrote to Chapak, “By reallocating a dividend of a few dollars per share, Disney could more than double its Disney+ original content budget” (Sherman, 2020a). He further added, “The ability to drive subscriber growth, reduce churn, and increase pricing present the opportunity to create tens of billions of dollars in incremental value for Disney shareholders in short order, and hundreds of billions once the platform reaches larger scale.” The subscription base of Disney+ was primarily due to its large catalog of movies, Star Wars, and Marvel content, though Disney had not invested much in original programming (Sherman, 2020a). By August 2020, Disney had 100 million paid subscribers across its streaming offerings, with the majority being subscribers to Disney+ (Whitten, 2020b). Other legacy media companies, such as Comcast’s NBCUniversal, AT&T’s Warner Media, and Viacom CBS, were also transitioning away from box office movies and cable TV and investing in subscription streaming services (Sherman, 2020a).

Issues With the Disney+ Platform

In 2019 Michael Paull, Disney’s streaming services president, commenting on the user interface of Disney+, said, “As a principle, we wanted a simple, elegant experience.” He further added, “We want to make this easy. We don’t want the product to get in the way of the content” (“The Disney+ Interface,” 2019). However, when Disney+ was launched, users encountered several problems while opening the app due to site overload (as 10 million subscribers signed on during the first few days). There were also design issues, such as the absence of “Recently watched” or “Continue watching” features on the platform, though Disney rectified these problems later (Waniata & Marshall, 2020). Still, movie searches on Disney’s platform remained a problem. For instance, searching 101 Dalmatians, as “101” in the search pane generated a list of live-action films or an animated sequel, but not the original movie, because Disney+ had designated the original movie as “One hundred and one” in the library (Waniata & Marshall, 2020). The Disney+ search system was not smart enough to list it under 101 (Waniata & Marshall, 2020).

Disney’s Restructuring

The following presents the restructuring efforts of Disney.

Separating Content Creation and Distribution

Chapek separated content creation units from content distribution (“The Walt Disney Company Announces,” 2020). According to the CEO, he expected the strategy to increase Disney’s effectiveness in creating new content and getting it delivered in the way consumers preferred to consume it. He said, “Managing content creation distinct from distribution will allow us to be more effective and nimble in making the content consumers want most, delivered in the way they prefer to consume it” (“The Walt Disney Company Announces,” 2020). He further added, “Our creative teams will concentrate on what they do best—making world-class, franchise-based content—while our newly centralized global distribution team will focus on delivering and monetizing that content in the most optimal way across all platforms, including Disney+, Hulu, ESPN+, and the coming Star international streaming service.”

At Disney, three distinct groups managed content creation—Studios, General Entertainment, and Sports—headed by Alan F. Horn and Alan Bergman, Peter Rice, and James Pitaro. Disney expected all leaders to report directly to Chapek. Disney’s parks, experiences, and consumer products businesses had no changes in structure (“The Walt Disney Company Announces,” 2020).

Content Creation Subdivisions
Studio

Horn and Bergman were designated to lead Disney’s Studio division. The studio content division was responsible for creating branded theatrical and episodic content for theaters and streaming services. This division included the Walt Disney Studios’ content engines, including Disney live-action, and Walt Disney Animation Studios, Pixar Animation Studios, Marvel Studios, Lucasfilm, 20th Century Studios, and Searchlight Pictures (“The Walt Disney Company Announces,” 2020).

General Entertainment

Rice led Disney’s General Entertainment content and was responsible for creating general entertainment episodic and original long-form content for its streaming platforms and cable and broadcast networks (“The Walt Disney Company Announces,” 2020). This division included 20th Television, ABC Signature, Touchstone Television, ABC News, Disney Channels, Freeform, FX, and National Geographic.

Sports

Disney appointed Pitaro chairman of the Sports division. He was responsible for the sports content, including ESPN’s live sports programming, sports news, and original and non-scripted sports-related content, for the cable channels, ESPN+, and ABC (“The Walt Disney Company Announces,” 2020).

Distribution

In the reorganization, Disney promoted Kareem Daniel, the former president of Disney’s consumer products, games, and publishing division, to oversee the media and entertainment distribution group (Whitten, 2020c). Daniel had profit and loss responsibility of Disney+, and his profile included content distribution, sales, and advertising (Whitten, 2020b). He intended to use analytics to discover the best ways of reaching Disney’s audience, that is, releasing content through traditional windows before it was made available through streaming (Muscaro, 2020). Generally, movies released on video streaming platforms were low-budget films. For example, The Love Birds, an R-rated comedy released by Netflix in 2020, had an estimated production budget of USD 16 million, whereas mainstream movies had a production budget of more than USD 100 million and usually recouped costs and profits through cinema halls (Whitten, 2020a).

Disney’s reorganization segregated the direct-to-consumer and international business operations, with Rebecca Campbell leading international operations (“The Walt Disney Company Announces,” 2020). Chapek said that the new structure “gives us maximum flexibility when on which platform content will be available,” including determining whether the movie would be released in theaters or on Disney+ (Muscaro, 2020). With the emphasis on streaming and refocusing the company’s orientation on content creation, industry analysts expressed their surprise at the lack of mention of distinguished creative executives in Disney that did not get any leadership roles. These included Dana Walden, ex-chair of Disney Television Studios and ABC Entertainment, and Ricky Strauss, ex-president of content and marketing for Disney+ (Donnelly & Lang, 2020). Similarly, in 2019, Disney poached Netflix’s director of original film, Matt Brodie, for Disney+. Disney expected Brodie to monitor Disney+’s international content development for the non-U.S. markets (Easton, 2019).

Chapek also mentioned that restructuring the media and entertainment division could result in layoffs. It was likely to be on a lesser scale than layoffs in theme parks, owing to the COVID-19 pandemic (Whitten, 2020b). In September 2020, Disney terminated the services of 28,000 people from its theme parks (Whitten, 2020b).

Consumer Behavior in the Video Streaming Industry

Cable TV subscription locked customers into their contracts for at least a year, while streaming services offered free trials and easy cancellation of the subscription. Dull content for one month was enough to trigger consumers to end a subscription and switch to a competing service (Hersko, 2019). In 2020, consumers were subscribing to multiple streaming platforms primarily due to new content (“Share of Subscription Video,” 2021; Westcott, 2020) (see Figure 1 and Table 2). Disney, ViacomCBS, and NBCUniversal all were charging less than USD 10 a month for streaming services; Disney+ was charging USD 6.99 per month, while Viacom CBS kept the price at USD 5.99 per month with ads. A limited version of NBCUniversal’s Peacock streaming service was free, and a more robust package was available for USD 4.99 (Sherman, 2020b). Analysts considered low prices as the reason for consumers’ continuation with multiple subscriptions (see Table 2). However, consumers were also frustrated with having to subscribe to multiple platforms. Commenting on consumer frustration, Kevin Westcott, vice chairman of Deloitte, said, “There are over 300 streaming services in the United States right now, and the average household only subscribes to three or four, so there could be too many choices” (Hersko, 2019). He further added, “Consumers are frustrated they have to subscribe to so many services to get what they want. I don’t think we’ll see the continuous launching of more streaming services in the years ahead.”

In the chart, the vertical axis lists the service providers. Data shown by the chart are tabulated as follows:

Subscribe to

Also subscribe to

Also subscribe to Netflix

Also subscribe to Peacock Premium

Also subscribe to HBO Max

Also subscribe to Amazon Prime Video

Also subscribe to Disney+

Also subscribe to Hulu

Also subscribe to Apple TV+

Apple TV+

92

17

46

91

81

79

0

Hulu

85

10

32

79

68

0

38

Disney+

87

10

31

82.48

0

70

39

Amazon Prime Video

84

8

27

0

61

62

34

HBO Max

90

22

0

89

79

83

56

Peacock Premium

90

0

80

94

86

88

72

Netflix

0

6

20

63

50

50

25

Figure 1. Share of Subscription Video on Demand Subscribers Who Also Subscribe to Other Services in the United States, December 2020 (%)

A horizontal stacked bar chart of video on demand subscribers who subscribe to more than one service.

Source: “Share of subscription video” (2021, January 27).

Table 2. Reasons for Subscribing and Cancelling Streaming Services in the United States, 2019–2020 (%)

Reasons for subscribing to a streaming service

%

Reasons for cancelling a streaming service

%

Broad range of shows and movies

51

Too expensive

36

New, original content not available elsewhere

45

Free trial or discount ended

35

Previously released content not available elsewhere

27

Finished watching the content that led me to subscribe

24

Free trial or discount rate

24

Content I liked disappeared from the platform

17

Ad-free viewing experience

17

Replaced with a new paid subscription service

17

Shows and movies appropriate for children

16

Access content via a free, ad-supported streaming service

14

Bundled with other services

15

No live sports to watch

13

Lack of new content I am interested in

11

Source: Adapted from Westcott et al. (2020).

Disney Versus Netflix

Founded in 1998 as an online DVD rental platform, Netflix has been a leader in streaming video service (Moskowitz, 2020). In the third quarter of 2020, Netflix generated USD 6.5 billion in revenue and had 195 million subscribers globally (Stoll, 2021e, 2021f). Between 2013 and 2019, Netflix’s original content titles increased from 16 to 371 (Stoll, 2021b). In 2019, the company had approximately 8,600 full-time employees (Stoll, 2021c).

Netflix was expected to spend more than USD 17 billion on content creation by December 2020 and surpass USD 28 billion by 2028 (Sherman, 2020a). In contrast, Disney had a budget to spend approximately USD 1 billion on Disney+ original content in its fiscal year 2020 and USD 2.5 billion by 2024, though the COVID-19 pandemic delayed Disney’s investment (Sherman, 2020a).

Disney+ also mainly offered content for children, unlike Netflix, which primarily catered to adult content (Britt, 2019). However, Netflix was actively investing in children’s content as well (Lee, 2021). Kids have the potential to watch the same movie or show tirelessly hundreds of times (Tom, 2017).

Disney’s original content streaming in the top 10 series list was less than Netflix’s, though it had some edge over Netflix in streaming movies (see Table 3). In 2019, Disney+ had 7,500 TV episodes and 500 movies compared to Netflix’s 47,000 TV episodes and 4,000 movies (Stoll, 2021d). Disney also had a licensing deal with Netflix. According to the agreement, every Disney film released between January 2016 and December 2018 would be added to the Netflix library in 2026. The list included Black Panther, Beauty and the Beast, Incredibles II, Coco, Avengers: Infinity War, Star Wars: The Last Jedi, and Solo: A Star Wars Story (Travers, 2019). Moreover, once added to Netflix, Disney could not stream these movies on its platform (Travers, 2019). Bloomberg reported that Netflix has some of Disney’s “most-popular shows locked up for years” (Bui, 2019).

Table 3. Top 10 Streaming Content of 2020: Original Series and Movies by Streaming Service (billion minutes)

Original series (streaming service)

Streaming Minutes (billion)

Movies (streaming service)

Streaming Minutes (billion)

Ozark (Netflix)

30

Frozen II (Disney+)

15

Lucifer (Netflix)

19

Moana (Disney+)

11

The Crown (Netflix)

16

Secret Life of Pets 2 (Netflix)

9

Tiger King (Netflix)

16

Onward (Disney+)

8

The Mandalorian (Disney+)

15

Dr. Seuss’ The Grinch (Netflix)

6

The Umbrella Academy (Netflix)

13

Hamilton (Disney+)

6

Great British Baking Show (Netflix)

13

Spenser Confidential (Netflix)

5

Boss Baby: Back in Business (Netflix)

13

Aladdin (2019) (Disney+)

5

Longmire (Netflix)

11

Toy Story 4 (Disney+)

4

You (Netflix)

11

Zootopia (Disney+)

4

Source: Adapted from “Tops of 2020” (2021).

Netflix’s focus was on volume, and it promised a “new movie every week” in 2021 and had a slate of 70 movies lined up for release in 2021 (Faughnder, 2021). For shows and series, while Netflix followed the binging model, that is, “to watch a large number of television programs (especially all the shows from one series) in succession” (“Binge-watch is Collins’,” 2015), Disney+ opted to release only one new episode of its shows per week. Typically, a series had eight episodes; this made subscribers pay for at least two months of service to watch all the episodes (Alexander, 2019) as they could not binge-watch. Ricky Strauss, head of content division prior to restructuring, said, “We’re just getting started so it made sense to build our fan base with episodic content coming out once a week in a more tradition model, because we felt that if we put everything out at once it would be harder for us to build the audience, rather than having people tuning in. To be honest, also some stuff won’t be ready to binge, it’s coming in as the months go by” (Rawden, 2019). In January 2021, Strauss, a key executive involved in the launch of Disney+, resigned from Disney (Andreeva, 2021).

Streaming Versus Cinema

During the COVID-19 pandemic, Disney decided to launch two of its movies, Mulan and Soul, which the company initially scheduled for release on movie screens on Disney+ (Pulver, 2020). Comcast’s NBCUniversal executives also reached an agreement with movie theater companies such as AMC, Cinemark, and Cineplex to shorten the time for which movies were exclusively featured in theaters, that is, from three months to 17 days (D’Alessandro, 2020). Disney-owned Marvel Studios produced Black Widow at a cost of USD 150–200 million, with the potential of USD 750 million to over USD 1 billion revenues at the global box office (Whitten, 2020a). Disney would then generate a second round of revenues once Black Widow was made available on home videos and on-demand. Pushing these big-budget movies straight to home video of Disney+ implied less money for Disney (Whitten, 2020a).

Loeb also stated that subscription-based streaming had more revenue potential than one-time ticket sales in cinemas (Donnelly & Lang, 2020). He said, “I don’t think they appreciate the tiger they have by the tail, which is to say the value they can drive by moving into a subscription model, which has been adopted by everyone from Microsoft to Amazon” (Donnelly & Lang, 2020). Despite Disney having control of brands like Marvel, Pixar, and Lucasfilm, in October 2020, Netflix surpassed Disney in terms of market capitalization with USD 244 billion, whereas Disney was valued at USD 233 billion (Donnelly & Lang, 2020). According to sources, this happened due to Netflix’s subscription-based business model (Donnelly & Lang, 2020). Subscription-based models, in general, experienced 100% growth between 2011 and 2016, to the extent that the term “subscription economy” was coined (Luna, 2018). Peter Csathy, chairman of CREATV Media, said, “The Street [referring to The Wall Street] loves subscription business models and recurring revenue models” (Donnelly & Lang, 2020). He further added, “Locking consumers into some kind of monthly payment plan is the holy grail for investors.”

According to experts, a focus on streaming could divert hundreds of millions of dollars in ticket sales to cinemas and other ancillary businesses, though COVID-19 enabled Disney to take these risks (Donnelly & Lang, 2020). Jason Squire, a professor at USC’s School of Cinematic Arts, said, “As far as a theatrical release being shifted to streaming—these are very tough decisions” (Donnelly & Lang, 2020). He further added, “They involve sacrificing grosses. But the reality is there are no domestic grosses during coronavirus.” Phil Clapp, chief executive of UK Cinema Association, cautioned that Hollywood’s decisions to launch movies directly on streaming videos could “risk causing irreparable damage to key markets” and that when the studios want to rerelease their blockbusters, “it may be too late for many European cinemas” (Pulver, 2020).

The Road Ahead

Disney’s focus on streaming services implied, similar to Netflix, that it wanted to be valued more for subscriber growth and less for traditionally used financial metrics of a conglomerate such as profit margin (Donnelly & Lang, 2020). Commenting on Disney+’s ability to grow and create shareholder value the way Disney wants, Chapek said, “Given the incredible success of Disney+ and our plans to accelerate our direct-to-consumer business, we are strategically positioning our company to more effectively support our growth strategy and increase shareholder value” (Sperling, 2021). Loeb also wrote to Chapek that “A more aggressive content roadmap will distinguish Disney as the only traditional U.S. media company able to thrive in a world beyond the box office and the cable TV ecosystem, alongside digital-first businesses like Netflix and Amazon” (Sherman, 2020a). However, concerns remained regarding the effectiveness of Disney’s restructuring and focusing more on streaming than movies. Can Chapek benefit shareholders from this restructuring? To what extent should he incorporate shareholder activists’ suggestions in his strategic decisions?

Discussion Questions

  • Critically analyze Loeb’s belief that a subscription model was vital to the higher valuation of Netflix—that is, critically analyze if shareholders value the video streaming industry’s subscription model or something else.
  • Critically analyze Disney’s media and entertainment division restructuring by Chapek.
  • Critically analyze if shareholder activists should have a say in a firm’s strategy formulation.
  • How can Disney compete against Netflix?
  • Explain whether or not Disney should completely shift to a subscription model for its media and entertainment division.

Further Reading

Girod, S. G. J. , & Karim, S. (2017, March–April). Restructure or reconfigure? Harvard Business Review. https://hbsp.harvard.edu/product/R1702K-PDF-ENG
Greenwood, R. , & Schor, M. (2008, January). When (not) to listen to activist investors. Harvard Business Review. https://hbr.org/2008/01/when-not-to-listen-to-activist-investors
Hill, L. A. (2007, January). Becoming the boss. Harvard Business Review. https://hbr.org/2007/01/becoming-the-boss
Hinkel, J. , Poppe, H. , Tonner, M. , & Witten, C. (2015, June 4). Agitators and reformers: How to respond to activist investors. BoardSpan. https://boardspan.com/users/0/library/agitators-and-reformers-how-to-respond-to-activist-investors
Leinwand, P. , & Gilcreast, A. (2016, November 30). Why top management should listen to activist investors. Harvard Business Review. https://hbr.org/2016/11/why-top-management-should-listen-to-activist-investors
Toma, A. , Roghé, F. , Noakes, B. , Strack, R. , Kilmann, J. , & Dicke, R. (2012, April 25). Flipping the odds for successful reorganization. BCG. https://image-src.bcg.com/Images/BCG_Flipping_the_Odds_for_Successful_Reorganization_Apr_12_tcm9-104839.pdf
Vadana, I. I. , Torkkeli, L. , Kuivalainen, O. , & Saarenketo, S. (2019). The internationalization of born-digital companies. In A. Chidlow , P. N. Ghauri , T. Buckley , E. C. Gardner , & A. Qamar (Eds.), The changing strategies of international business (pp. 199220. The Academy of International Business. Palgrave Macmillan. https://doi.org/10.1007/978-3-030-03931-8_10

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