The Walt Disney Company: Renovating the House of Mouse
How a business at its peak financial performance is missing opportunities to realize its true value.
Only 11 days after the worldwide release of “John Carter,” Disney projected the film would lose $200 million and push its studio division into the red. The film, which Disney hoped would be the start of a new blockbuster franchise, is now the biggest box office bomb in history. Yet, Wall Street analyst’s didn’t flinch – and Disney’s own management seemed unconcerned. Why? Because unlike most movie studios, The Walt Disney Company does not live or die by the success of a single film, quarter or year. Today, films make up only 7% of Disney’s $8.8 billion in profit.
To many, Wall Street most of all, the conglomerate model is dangerous, dilutive, and dead. But at Disney, it’s in full force. The company’s diversified base of brands, franchises, and assets paint a promising picture for the company. This utopian perception is sadly contrasted with management’s inability to realize the full potential of its properties.
The Walt Disney Company
Disney’s current structure is a collection of largely independent and disjointed operating units. At its core, Disney sells stories through a multimedia experience. Management understands the purpose of its core business, but is mistaken in believing its “peripheral” businesses must act as slaves that monetize this content. This way of thinking is a legacy from Disney’s days as a pure-play film studio, which undermines the studio’s potential to seamlessly integrate its storytelling experience across all business platforms.
Disney’s high-level strategy of late is to produce a few, large budget films per year, especially ones that continue existing franchises and then distribute this content across its value sphere. Although Disney is arguably not using its business units to the fullest, analysts praise this strategy due to its low risk and utilization of the company’s core competencies. In reality, this strategy recently flopped. Huge budget films may no longer be a sustainable cash cow on their own, but Disney is in a unique position. The Walt Disney Company’s conglomerate of business units has the potential to augment a pipeline of potentially blockbuster content.
Disney needs to take five specific actions to help its stories reach its highest potential:
- Divest assets that generate content that cannot be monetized across all Disney media, most often the content that doesn’t tell a “story”
- Acquire assets that fill gaps in how the story can be told
- Set up all businesses as content-generating units
- Set up all businesses such that content from peripheral units can be easily shared; restructure the company as a “Disney Family”
- Protect all owned brands and ensure the “story” is told consistently
Focus and Finance: ESPN
It is a little-known fact that ESPN generates 40% of Disney’s cash flows and is its largest asset. Many would consider ESPN Disney’s crown jewel – live televised sports programming is some of the only content immune to piracy and PVRs. ESPN’s earnings power makes it a financial asset, but not a strategic one. It is fundamentally dissimilar from all of Disney’s other properties and its content cannot be properly monetized across the company’s other channels. By divesting some of its position in this giant, Disney could rid itself of a possible conglomerate discount and refocus resources on creating a “content ecosystem” that truly leverages its unique story-telling capacity. Selling 60% of its 80% ownership in ESPN could net up to $15 billion in capital that can be diverted to businesses that support the creation of this ecosystem.
The Missing Pieces of the Puzzle: Acquisitions and Growth
Disney’s conglomerate structure can realize tangible synergies by distributing content through multiple channels. The company can therefore maximize value by owning as many unique channels as possible. This structure will not only capture the cash flows from these channels, but provide a truly multi-media storytelling experience that is very hard to replicate. By providing multiple avenues to consume the same story, the costs associated with generating the story can achieve meaningful economies of scale.
It is important to note that Disney is not limited to generating content in one or two business units. The company has the resources to restructure each business into a content generator and deliverer. By labeling the film unit as primarily a content generator and other units purely as distributors, the company leaves many combinations of generation and distribution unexplored, and diminishes its capacity for reinventing what it means to tell a story.
Disney has made forays into video games but has yet to make a bold move into the space. So far, the company has captured value from the video game market by licensing its intellectual property to publishers rather than creating titles itself. Acquiring a major console-game producer and publishing its own titles would allow Disney to reach its potential in this space.
Not one of the top 10 grossing movie titles of 2011 spawned a top 100 selling video game. These games fail to gain traction for many reasons, but ultimately fail to succeed because they are treated like merchandise. Licensees generally take two hours of film content and attempt to spread it over a twenty-hour gameplay experience; it regularly feels like an afterthought.
This has two main implications for Disney. First, the mediocrity of film-based video games has the potential to hurt the movie’s brand and alienate fans of the franchise. Second and more importantly, Disney’s writing talent and competency for telling stories is underused in the context of video games. Leveraging these capabilities in the video game space can allow the company to tell a story via film and game, adding a completely new dimension to the narrative and providing an immersive experience unmatched by EA and Activision. If executed correctly, Disney could add hundreds of millions in revenues over the lifetime of a story franchise.
Disney currently owns Hyperion, the publisher that releases books based on Disney, ABC, and ESPN content. “Artemis Fowl,” a Hyperion-published novel, had eight-figure sales over several volumes but a film franchise was never developed. Hyperion needs to place greater focus on producing original novels that have franchise potential. Book series such as “Harry Potter, “The Hunger Games” and “Twilight” reflect consumers’ demand to experience content through multiple avenues. Launching a book is less risky than producing a movie and could allow Disney to test the waters of a risky story. A book’s success could prove an excellent way to kick-start a franchise.
“John Carter” is an excellent case study for the telling of a risky story. Disney spent over $350 million bringing the film to market despite a lack of consumer awareness for the source material, yet when it was first published in 1917, it was critically acclaimed. Disney could have easily used Hyperion to re-launch the series in print and grow awareness through that medium. It would have required far less investment (and less of a loss in the case of a flop) and could have slowly developed a new fan base, which could have been offered a film as a secondary way to experience the story.
Disney is currently developing its Keychest prototype: an online store for all of its content. Launching Keychest as a subscription-based service would be extremely valuable. Revenue from the service would be used to finance Internet movies and television shows generating a large volume of new content. Micro-financed productions would have the freedom to create risky and original content for little cost — stories that, if received well, could be scaled up. Joss Whedon saw success when his self-financed production “Dr. Horrible’s Sing-A-Long-Blog” not only won an Emmy, but through sales of DVDs and soundtracks generated positive returns and had fans clamoring for a sequel. For a low-capital investment, he was able to build the foundation of a potential franchise.
Disney should acquire AMC Networks and its associated channels. AMC’s stable of content includes “Mad Men,” “Breaking Bad,” and the “Walking Dead,” some of the most critically acclaimed series on television. This acquisition has already been identified as a good fit by numerous analysts who note that it would allow Disney to reach a new demographic. Further, Disney could capitalize on AMC’s strong international sales team to reach new markets.
The true benefit of AMC, however, is its ability to fill another gap in the content value sphere. Disney currently does not have a dark and dramatic outlet like AMC, which could be used for more experimental, medium-budget projects.
Piecing Together the Puzzle: Creating a Disney Family
Growing and acquiring these businesses alone will perpetuate Disney’s inefficient conglomerate structure. The proposed Disney model only works if there is new content to monetize, therefore volume of content as a key piece to the puzzle. Disney needs to fundamentally alter its culture to one that nurtures content creation. To do this, Disney must create loyalty amongst its talent, such as more job security to incentivize risk taking, and a lowered cost structure to allow more daring and original productions.
To execute on these three points, Disney needs to actually hire talent rather than following the traditional freelance model popular in Hollywood today. Instead of freelancing directors, writers, editors, actors, and producers, the company should sign them to three to five-year contracts. This job security would be a rarity in Hollywood, and the value of this certainty would allow Disney to secure talent at a lower cost per unit of time. By owning this talent, it could be leveraged across multiple platforms for a lower cost than any one production would allow.
This type of structure would give staff the security to take artistic risks, lower the cost structure of each project, and create talent-brand strength. The volume of available projects as a result of the new distribution channels would ensure that the talent always has a project to engage in. As a result, Disney could have one of its film stars appear on a struggling television show, or anchor the launch of a new Internet series when they aren’t filming. This type of production model is only possible to achieve at present by a well-aligned conglomerate that behaves as one close-knit family.
Protecting the New House of Mouse
Developing an idea into a viable franchise takes commitment and investment over a long period of time, which is why Disney’s stories are its most valuable asset; stories are timeless, they never die. But if improperly managed, whether through overexposure or neglect, a story’s value can be significantly damaged. It is essential that Disney take action to protect its franchises because, when properly managed, they become lucrative perpetuities.
To this end, Disney should form steering committees for all of its major franchises. These teams, comprised of both brand managers and creative personnel from Disney’s various business units, would report directly to the CEO. They would serve the dual function of ensuring that all extensions don’t dilute the brand and that stories are integrated across channels seamlessly. This steering committee structure will facilitate the sharing of ideas and talent across departments. Such integration would immerse fans in the brand to a degree that competitors cannot achieve.
The Next Act
Disney has suffered managerial incompetence before and managed to survive because its assets are resilient and its conglomerate structure insulates them from risk. But the current structure also prevents it from realizing the true value of its properties. Disney needs to focus its divisions around storytelling in a multimedia context. It needs to create structures that will ensure properties are seamlessly integrated across channels – creating maximum value. To structure itself as such will require immense resources, provided by the divestiture of the majority of its safety net, ESPN. It will take dedicated work at all levels to implement this strategy. But if it doesn’t, Disney runs the risk of becoming a real Mickey Mouse operation.