Walt Disney Company, 2013

Headquartered in Burbank, California, Walt Disney Company (Disney) and its subsidiaries compete in the entertainment and media broadcasting industry worldwide. Serving customers for nearly 100 years, Disney is a diversified conglomerate, owning ABC, ESPN, theme parks, cruise lines, and more. As a member of the DOW 30 and the world’s largest media conglomerate, Disney owns ABC television and cable networks such as ABC Family, Disney Channel, and ESPN (80 percent). Disney owns 8 television stations and 35 radio stations as well as Walt Disney Studios that produces films through Walt Disney Pictures, Disney Animation, and Pixar. Disney’s Marvel Entertainment is a top comic book publisher and film producer. Disney owns and operates huge cruise boats, as well as 14 popular theme parks around the world.

Disney’s earnings in Q3 of 2013 equaled the prior year’s number, while revenue increased 4 percent, led by Disney’s theme parks, resorts, and cable networks such as ESPN. For Q3 of 2013, Disney earned $1.85 billion, on revenue of $11.6 billion, up from $11.1 billion. Revenue at Disney’s parks and resorts grew 7 percent to $3.7 billion. Cable networks revenue grew 8 percent to $3.9 billion, led by ESPN, A&E and U.S. Disney channels. A laggard, Disney’s broadcast revenue was unchanged at nearly $1.5 billion. Overall, Disney’s media networks business grew 5 percent to $5.4 billion. For Q3 of 2013, Disney’s movie studio revenue fell 2 percent to $1.6 billion, due to poor results from the movies “The Lone Ranger” and “Iron Man 3.”

Copyright by Fred David Books LLC. (Written by Forest R. David)

History

Walt Disney and his brother Roy arrived in California in the summer of 1923 to sell a cartoon called Alice’s Wonderland. A distributor named M. J. Winkler contracted to distribute the Alice Comedies on October 16, 1923, and the Disney Brothers Cartoon Studio was founded. Over the years, the company produced many cartoons, from Oswald the Lucky Rabbit (1927) to Silly Symphonies (1932), Snow White and the Seven Dwarfs (1937), and Pinocchio and Fantasia (1940). The company name was changed to Walt Disney Studio in 1925. Mickey Mouse emerged in 1928 with the first cartoon in sound. In 1950, Disney completed its first live action film, Treasure Island, and in 1954, the company began television with the Disneyland anthology series. In 1955, Disney’s most successful series, The Mickey Mouse Club, began, and the new Disneyland Park opened in Anaheim, California.

Disney created a series of releases from 1950s through 1970s, including The Shaggy Dog, Zorro, Mary Poppins, and The Love Bug. Walt Disney died in 1966. In 1969, Disney started its educational films and materials. Another important time of Disney’s history was opening Walt Disney World in Orlando, Florida, in 1971. In 1982, the Epcot Center opened as part of Walt Disney World. The following year, Tokyo Disneyland opened.

After leaving network television in 1983, Disney introduced its cable network, The Disney Channel. In 1985, Disney’s Touchstone division began the successful Golden Girls and Disney Sunday Movie. In 1988, Disney opened Grand Floridian Beach and Caribbean Beach Resorts at Walt Disney World along with three new gated attractions: the Disney/MGM Studios Theme Park, Pleasure Island, and Typhoon Lagoon. Filmmaking soon hit new heights as Disney led Hollywood studios in box-office gross for the first time. Some of the successful films were: Who Framed Roger Rabbit, Good Morning Vietnam, Three Men and a Baby, and later, Honey, I Shrunk the Kids, Dick Tracy, Pretty Woman, and Sister Act. Disney moved into new areas by starting Hollywood Pictures and acquiring the Wrather Corp. (owner of the Disneyland Hotel) and television station KHJ (Los Angeles), which was renamed KCAL. In merchandising, Disney purchased Childcraft and opened numerous highly successful and profitable Disney Stores.

By 1992, Disney’s animation reached new heights with The Little Mermaid, Beauty and the Beast, and Aladdin. Also that year, Disneyland Paris opened. During the 1990s, Disney introduced Broadway shows, opened 725 Disney Stores, acquired the California Angels baseball team to add to its hockey team, opened Disney’s Wide World of Sports in Walt Disney World, and acquired Capital Cities/ABC.

From 2000 to 2007, Disney created new attractions in its theme parks, produced many successful films, opened new hotels, and built Hong Kong Disneyland. Disney acquired Pixar in 2006, Marvel in 2009, and launched Disney Dream, a new cruise liner in 2011. Newer Disney initiatives include the April 2011 groundbreaking of Shanghai Disney Resort at a price tag of $4.4 billion and expected opening day slated for sometime in 2015. In February 2012, Disney finalized acquisition of UTV Software Communications, an Indian entertainment company. In October of 2012, Disney announced plans to acquire Lucasfilm, producers of the popular Star Wars movies. The acquisition is expected to cost $4.05 billion. Disney plans to release Star Wars Episode VII in 2015.

Internal Issues

Vision and Mission

Disney’s vision is “to make people happy.”

Organizational Structure

As indicated in Exhibit 1 , Disney operates using a strategic business unit (SBU) organizational structure that consists of five diverse, but all family entertainment segments: (1) media networks, (2) parks and resorts, (3) studio entertainment, (4) consumer products, and (5) interactive media. The president, chief executive officer, and director of Walt Disney is Robert Iger. There is no chief operations officer (COO) in the Disney hierarchy, but Andy Bird, Chairman of Walt Disney International, functions like a COO.

Segments

Disney provides segment revenue and operating income for each of their five SBUs. Exhibit 2 displays the three most recent years of revenue and operating income per Disney SBU, along with a percentage change for each of the last two years. Note that total consolidated revenues and operating income increased in 2012 and 2011, albeit at a decreasing rate during the most recent period. Note that the consumer products and the interactive media segments are small compared to media networks and parks and resorts.

Media Networks

Media networks is the largest Disney SBU in both revenues and operating income, accounting for 45 percent of all revenues in 2012. Revenue growth in 2012 came from increased affiliate fees, higher advertising rates, increased viewership of ESPN programs and the shows Castle, Once Upon a Time, and Revenge. The positive growth was limited by lower home entertainment revenues from programs such as Lost and lower Disney Channel viewership. Production costs increased as college sports, as well as NFL, MLB, NBA, and Wimbledon were able to negotiate more lucrative contracts. For example, the Southeastern Conference (SEC) signed a deal with ESPN in 2008 for $2 billion for 15-year rights to broadcast football and men’s and women’s basketball games. However, with the 2012 additions of Texas A&M and Missouri to the SEC, the previous contract is contractually renegotiable and a new, much more expensive, contract is expected in the near future.

With media networks, Disney owns and operates the ABC Television Network that reaches 99 percent of all U.S. households. This segment also includes ABC-owned Television Stations Group, ABC Studios, Disney Channels Worldwide, ABC Family, SOAPnet, Disney ABC Domestic Television, Disney Media Distribution, Hyperion, and Radio Disney network. The ABC Television Network operates more than 220 affiliated stations across the USA. Disney channels worldwide consists of 94 kids and family entertainment channels available in 169 countries and 33 languages. ABC Family is a mixture of series and movies. SOAPnet owns character-driven soapy drama, from daytime and primetime soaps, to reality shows and movies. Disney ABC Domestic Television provides motion pictures and TV programming to U.S.-based media platforms. Disney Media Distribution is an international distributor of branded and nonbranded content to all platforms. Hyperion publishes fiction and nonfiction titles for adults. Radio Disney is available in more than 40 U.S. markets, and on satellite radio, mobile apps, and the Web.

EXHIBIT 1 Disney’s Organizational Chart

Source: Based on information in company documents.

EXHIBIT 2 A Breakdown of Disney Revenues by SBU

Source: Company documents. 2012 Annual Report, p. 31.

Exhibit 3 reveals a further breakdown of Disney’s media networks’ revenues and operating profits. Note the recent gains.

Parks and Resorts

EXHIBIT 3 A Breakdown of Media Networks Revenues (in millions)

Source: 2012 Annual Report, p. 33.

Disney’s parks and resorts segment includes 10 divisions: (1) Disneyland Resorts in California, (2) Tokyo Disney Resort, (3) Disneyland Resort Paris, (4) Hong Kong Disneyland, (5) Walt Disney World Resort in Florida, (6) Disney Cruise Line, (7) Adventures by Disney, (8) Disney Vacation Club, (9) Walt Disney Imagineering, and (10) Aluani, a Disney Resort and Spa in Hawaii. Disney has a 51 percent ownership in Disneyland Resort Paris and a 47 percent ownership in Hong Kong Disneyland. Disney’s newest theme park will be in the Pudong district of Shanghai opening in 2015. Exhibit 2 revealed that Disney’s parks and resorts revenue for 2012 increased 10 percent to $12.9 billion, and operating income increased 22 percent to $1.9 billion. Results for 2012 reflected increases at nearly all theme parks, except a decrease at Disneyland Paris.

EXHIBIT 4

a

Per capita guest spending and per room guest spending include the impact of foreign currency translation. Guest spending statistics for Disneyland Paris were converted from euros into U.S. dollars at weighted average exchange rates of 1.36 and 1.35 for fiscal 2010 and 2009, respectively.

bPer room guest spending consists of the average daily hotel room rate as well as guest spending on food, beverages, and merchandise at the hotels. Hotel statistics include rentals of Disney Vacation Club units.

Source: Walt Disney Company, Annual Report, page 34 (2012).

The new 4,000-passenger ship, Disney Dream, was christened at Port Canaveral in 2011 and was designed especially for families. Disney Dream joins Disney Magic and Disney Wonder. Another new ship, Disney Fantasy, joined the Disney fleet in 2012. Disney Dream will sail to Disney’s private island, Castaway Cay.

Revenue in this segment is generated primarily from the sale of admissions tickets to the theme parks, as well as hotel room charges per night and sales from merchandise, food, and beverages. Revenue also comes from rentals and sales from vacation club properties and sales of cruise vacations.

Exhibits 4 and 5 reveal that Disney domestic revenues from its parks and resorts division increased 11 percent in 2011, to $12.9 billion, resulting from customers spending 6 percent more, mainly from higher ticket and hotel prices. Revenue growth was 6 percent in international operations stemming from 4 percent in higher spending, a 3-percent volume increase, and a 3-percent gain on foreign currency appreciation.

Studio Entertainment

EXHIBIT 5 Parks and Resorts: Revenue and Operating Income

Source: Walt Disney Company, Annual Report, page 33 (2012).

Disney produces live-action and animated motion pictures, direct-to-video programming, musical recordings, and live-stage plays. Disney motion pictures are distributed under the names: Theatrical Market, Home Entertainment Market, Television Market, Disney Music Group, and Disney Theatrical Productions. Disney has also licensed the rights to produce and distribute features films such as Spider-man, The Fantastic Four, and X-Men to third-party studios. Disney earns a licensing fee on these films, whereas the third-party studio incurs the cost to produce and distribute the films. Currently Disney has a diverse business line in the studio entertainment SBU consisting of: Marvel, Touchstone, Pixar, Disneynature, Disney Studios Motion Pictures, and more Disney-branded services. Disney’s studio entertainment revenues for 2012 decreased 8 percent to $5.8 billion and segment operating income increased 17 percent to $722 million. Exhibit 6 reveals a revenue breakdown for this segment.

EXHIBIT 6 Studio Entertainment: Revenue and Operating Income

Source: Walt Disney Company, Annual Report, page 34 (2012).

Consumer Products

Disney’s consumer products segment partners with licenses, manufacturers, publishers, and retailers worldwide who design, promote, and sell a wide variety of products based on new and existing Disney characters. Product offerings are: (a) character merchandise and publications licensing, (b) books and magazines, and (c) The Disney Store. Disney released in mid-2011 a new toy line that captured the fantasy, action, and adventure of Pirates of the Caribbean: On Stranger Tides. Disney is perhaps the largest worldwide licensor of character-based merchandise and producer and distributor of children’s film-related products based on retail sales. Disney’s consumer products revenues for 2012 increased 7 percent to $3.25 billion; operating income increased 15 percent to $937 million.

Interactive Media

Disney’s interactive media segment creates and delivers games and media for smartphones and tablets. Interactive media revenues for 2012 decreased 14 percent to $845 million and operating income incurred a loss of $216 million. As indicated in Exhibit 8 , games and subscription revenue increased 36 percent in 2011, but the segment has incurred losses for several years, as revealed in Exhibit 2 .

EXHIBIT 7 Consumer Products: Revenue and operating income

Source: Walt Disney Company, Annual Report, page 35.

EXHIBIT 8 Interactive: Revenue and Operating Income

Finance

Income Statement

Disney’s 2012 income statement is provided in Exhibit 9 . Note the 17.4 percent increase in net income.

Balance Sheets

Disney’s 2012 balance sheets are provided in Exhibit 10 . Note that Disney has $2.45 billion of “projects in progress.” Also, note the $25 billion in goodwill, fully one-third of total assets, which is not a good thing. Long-term debt is staying about the same at $10 billion, which is a lot of debt to service.

Competition

Disney competes directly with NBC Universal, Paramount Pictures, Time Warner, CBS Corp., News Corp., Carnival Corp., and Royal Caribbean and indirectly with all family entertainment oriented businesses globally. In essence, all hotels, restaurants, water parks, and attractions anywhere near Disney’s 14 theme parks, are rival businesses, such as Sea World, Marineland, and Silver Springs in Florida. There is a large, new (China state run) theme park scheduled to open in 2014 right beside the Disney theme park (also slated for opening in 2014) in Shanghai, China, so that will be a major competitor.

EXHIBIT 9 Disney’s Recent Income Statements (in millions of dollars, except EPS)

EPS, earnings per share. Source: Company documents.

EXHIBIT 10 Disney’s Unaudited Balance Sheets (in millions)

Source: Company documents.

CBS Corp.

Headquartered in New York City, CBS is a large media conglomerate with operations in television, radio, online content, and publishing. CBS Broadcasting operates the number-1 rated CBS television network, along with a group of local TV stations. CBS also owns cable network Showtime and produces and distributes TV programming through CBS Television Studios and CBS Television Distribution. Also competing with Disney, other operations include CBS Radio, CBS Interactive, and book publisher Simon & Schuster. In addition, CBS Outdoor is a leading operator of billboards and outdoor advertising. Chairman Sumner Redstone controls CBS through National Amusements.