The Evolution of The Walt Disney Company – its top 10 recent moves
The rationale for Disney’s proposed acquisition of 21st Century Fox is to bolster its content to feed a direct-to-consumer streaming service to rival the likes of Netflix, Amazon, Google and Apple.
My assessment of the acquisition and the future landscape of the Entertainment Industry is subject of a separate article, but it is worthwhile reflecting on the top 10 strategic decisions made by the last 2 Disney CEO’s that dramatically shaped Disney’s business.
Disney’s CEO Bob Iger and his predecessor Michael Eisner collectively presided over 33 years of transformation. When Eisner took charge in 1984, Disney produced one animation every 3 to 5 years, its entire library consisted of 158 features and its sole cable channel lost money. The business relied heavily on revenue from amusement parks and from Mickey Mouse licensing. The disastrous release of the 1985 animated feature Black Cauldron drove the Studio into losses and the company hit rock bottom.
In chronological order, these are the top 10 strategic decisions made that shaped Disney into today’s entertainment powerhouse:
1. Uncaging the animation catalogue for home entertainment (1985)
Eisner and his new executive team including Jeffrey Katzenburg and Bill Mechanic saw the potential of home video and in 1985 made the controversial decision to release Disney animated films to video. The titles were sacrosanct as Disney was reliant on re-releasing these theatrically and the move was potentially cannibalising.
The decision proved a master stroke. Revenues per unit exceeded the theatrical admission on far lower distribution costs and in the early years, titles were collector’s items and generated huge premiums. Home Entertainment generated $6 billion by 2004. Migration into new platforms like DVD extended the run and ultimately led to the industry’s introduction of windowing by pricing content based on its exclusivity relative to the theatrical release.
2. Entering the hotel business (1985)
A significant pillar of Disney’s diversified business today is its Parks and Resorts, but prior to 1985, it was just Parks.
Eisner recognised that deals struck with Marriot to own and operate hotels adjacent to the Parks benefited Marriot because the parks were popular all year round and were fully booked. In addition, hotels were an extension of the guest experience and Eisner felt Disney was in a better position to deliver the hotel design to match the Parks. As a result, Marriot’s contracts were not renewed and Disney entered the hotel business with great success.
3. Opening Disney Stores (1987)
In 1986, Disney’s business was heavily reliant on Parks and Mickey licensing and merchandise. But sales were constrained by purchases within the physical confines of the Parks. To grow earnings, Eisner rolled out Disney Stores and entered the retail business.
The Disney Stores delivered sales per square foot records for speciality retailers and would be an important channel to grow the Disney brand across the USA and abroad.
4. Early restructuring of the Animation Studio (from 1985-1987)
Animation has always been the heart and soul of Disney and on Eisner’s arrival, it was in tatters. A major restructure was undertaken including introducing third party collaborators. Disney also increased output. This resulted in important initial box office hits of Who Framed Roger Rabbit and The Little Mermaid in 1988 and 1990. More followed including Beauty and the Beast, Aladdin, The Lion King and the first computer animated feature, Toy Story.
Importantly, The Little Mermaid utilised a new ink and paint system (Computer Animation Production System) developed by Pixar for Disney that revolutionised the animation process.
5. Buying into Television (1995)
Disney bought Capital Cities/ABC for $19 billion in 1995, delivering it the ABC Network, TV Stations and 80% of the sports network, ESPN. ESPN was particularly valuable as it delivered leverage over cable channels and by 2004, it generated $2 billion in revenue from cable channels alone. This represented 3 times the entire movie production and distribution revenue.
6. Pixar (1995-2006)
The significance of Pixar comes in two parts.
Toy Story was a joint collaboration with Pixar and its success led to a subsequent five film deal where Disney shared in 50% of the films rights. With a 100% success rate and universal appeal, the films were commercial hits in the box office, home entertainment, merchandising and for Park theme based rides.
The Pixar-Disney cooperation was significant because Disney’s own animation titles had mixed success and all new intellectual property generated at the time were Pixar characters.
In 2004, negotiations to extend the distribution deal broke down over sequel rights. Eisner and Jobs relationship frayed. This was a major reason why Eisner resigned and appointed Iger as his successor.
Disney then acquired Pixar in a $7.4 billion all-stock deal in 2006. The price was considered high by the market. Disney acquired the remaining 50% rights share to 6 already released Pixar films, 50% rights to the yet-to be-released Cars and a development slate that included Ratatouille. However, it was a pivotal because animation is Disney’s creative engine to drive growth across all its businesses. The value was the acquisition of Pixar’s process and talent and this reanimated Disney as the world’s pre-eminent animation studio.
7. Diversifying away from non-branded franchise films
This represents both blessing and curse.
Disney commenced rationalising its film slate in 1999 to focus on Intellectual Property that could be leveraged across its business. In that year, its slate reduced from 36 to 18 films. It then introduced external co-financing of non-franchise slates in 2007 and sold Miramax and its library of over 700 titles for $700 million in 2010.
The sale of Miramax’s library to an investment group resulted in licensing deals being made with new digital premium services such as Netflix and Amazon that desperately needed content. Miramax’s catalogue could have provided the diversified content Disney now needs for its direct-to-consumer platform and perhaps may have changed the rationale (and price) of the Fox acquisition.
8. Marvel acquisition (2009)
The $4 billion acquisition of Marvel’s comic book empire and its initial forays into film based on Iron Man, Thor and Captain America had obvious benefits. Disney strengthened its offering in theatrical, merchandising and Park attractions from children into the lucrative adult male 18-35 segment, thereby extended the life cycle of its customer.
From 2012, a Marvel film has featured in the top 10 highest grossing films worldwide. These are:
· 2017 Thor: Ragnarok $841m (#7)
· 2016 Captain America: Civil War $1.1b (#1)
· 2015 Avengers: Age of Ultron $1.4b (#4)
· 2014 Captain America: The Winter Soldier $714m (#7)
· 2013 Iron Man 3 $1.2b (#2) and Thor: The Dark World $644m (#10)
· 2012 Marvel’s The Avengers $1.5b (#1)
Collectively, the acquisition generated over $11 billion of revenue across all Divisions excluding merchandising, making this one of the best acquisitions in recent history.
9. Lucasfilm acquisition (2012)
The $4 billion purchase of Lucasfilm’s ‘Star Wars’ and Indiana Jones franchises as well as the special effects company Industrial Light & Magic builds on Disney’s scale and strength in franchise properties. Interestingly, Disney did not acquire the original theatrical and home entertainment rights to the original films (Episode I through VI excluding Episode IV) because Lucasfilm licensed this to Fox until May 2020.
After the first two new Star Wars films released, Disney is reported as having generated $1 billion profit on its $4 billion investment.
10. 21st Century Fox asset acquisition (2017)
The rationale for Disney’s US$52.4 billion all-stock acquisition of the assets of 21st Century Fox is well documented in Variety and BBC, but in essence provides Disney with additional content production and infrastructure to feed its impending launch of a direct-to-consumer streaming service to rival the likes of Netflix, Amazon, Google and Apple.
My opinions on this and the future of the entertainment industry are covered in a separate article.
Summary
The modern evolution of the Mouse House under just 2 visionary CEO’s since 1985 has been significant. The key points evident from Disney’s recent journey is that:
· expanding outside the scope of existing core businesses makes sense when the value of intellectual property can be leveraged throughout an entire business;
· an acquisition price should be valued on the generated value from synergies within a business and not the underlying value of stand-alone assets acquired. In other words, it is what you do with it, not what is being sold;
· technology continues to disrupt and transform industry including entertainment and businesses must make bold decisions that refine traditional business models; and
· stable, long tenured and talented CEO’s are a good thing.
Ross Ioppolo
Ross Ioppolo spent the better part of a decade in Hollywood both studio side as the head of cashflow of Disney studios and as a film producer. A chartered accountant by trade and experienced CFO, Ross now lives in Sydney Australia were he runs Ormina Tours a luxury European travel operator and consults to businesses helping them scale sustainably.