Case 1 - Walt Disney - 2009

1 Walt Disney Company — 2009 Mernoush Banton Adjunct Faculty/Consultant DIS www.disney.com High unemployment, lingering recession, slow economic growth, and reduced consumer spending all contributed to a 7 percent drop in revenue and a 46 percent drop in Walt Disney’s profitability for the first quarter of 2009. For eight decades, the Walt Disney Company has captured the attention of millions of people, offering family entertainment products and services such as theme parks, resorts, recreations, movies, TV shows, radio programming, and memorabilia. Walt Disney brought Mickey Mouse and Donald Duck to the world. Walt Disney offers a variety of family entertainment all around the world.

History Mr. Walt Disney and his brother Roy arrived in California in the summer of 1923 to sell his 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 name of the company 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 Disneyland anthology series. In 1955, Disney’s most successful series, The Mickey Mouse Club, began. Also in 1955, the new Disneyland Park in California was opened. Disney created a series of releases from 1950s through 1970s, including The Shaggy Dog, Zorro, Mary Poppins, and The Love Bug. Mr. Walt Disney died in 1966. In 1969, the Disney started its educational films and materials. Another important time of Disney’s history was opening the Walt Disney World project in Orlando, Florida, on October 1, 1971. In 1982, the Epcot Center was opened as part of Walt Disney World. And, on April 15, 1983, Tokyo Disneyland opened. After leaving the network television in 1983, the company was ready to get into 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. At the same time, filmmaking hit new heights as Disney for the first time led Hollywood studios in box-office gross. 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 began reaching even greater audiences with The Little Mermaid, The Beauty and the Beast, and Aladdin. Hollywood Records was formed to offer a wide selection of recordings ranging from rap to movie soundtracks. New television shows, such as Live with Regis and Kathy Lee, Empty Nest, Dinosaurs, and Home

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Improvement, expanded Disney’s television base. For the first time, Disney moved into publishing, forming Hyperion Books, Hyperion Books for Children, and Disney Press, which released books on Disney and non-Disney subjects. In 1991, Disney purchased Discover magazine, the leading consumer science monthly. As a totally new venture, Disney was awarded, in 1993, the franchise for a National Hockey League team, the Mighty Ducks of Anaheim. In 1992, Disneyland Paris opened in France. Disney successfully completed many projects throughout the 1990s by venturing into Broadway shows, opening up to 725 Disney Stores, acquiring the California Angels baseball team to add to its hockey team, opening Disney’s Wide World of Sports in Walt Disney World, and acquiring 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.

Internal Issues Organizational Structure and Mission As indicated in Exhibit 1, Disney operates using a strategic business unit (SBU) type organizational structure. Note that Disney’s four SBUs consist of (1) Disney Consumer Products, (2) Studio Entertainment, (3) Parks and Resorts, and (4) Media Networks and Broadcasting. Disney’s mission statement is “To be one of the world’s leading producers and providers of entertainment and information. Using our portfolio of brands to differentiate our content, services and consumer products, we seek to develop the most creative, innovative and profitable entertainment experiences and related products in the world.” Disney does not have a vision statement.

EXHIBIT 1

Disney’s Corporate Structure

Walt Disney Company

Disney Consumer Products 1. Disney Hard_Lines 2. Disney Soft_Lines 3. Disney Toys 4. Disney Publishing 5. Disney Press 6. Disney Editions

Studio Entertainment 1. Walt Disney Pictures 2. Touchstone Pictures 3. Miramax Films 4. Buena Vista Home Entertainment 5. Buena Vista Theatrical Productions 6. Walt Disney Records 7. Buena Vista Records 8. Hollywood Records 9. Lyric Street Records 10. Pixar Studio

Parks and Resorts 1. Walt Disney World 2. Disneyland 3. Tokyo Disney 4. Disneyland Paris 5. Hong Kong Disneyland 6. Disney Cruise Line 7. Disney Vacation Club

Media Networks Broadcasting 1. Disney-ABC Television 2. ESPN Inc. 3. Walt Disney Internet Group 4. ABC-Owned Television Stations 5. ABC Radio

CASE 1 • WALT DISNEY COMPANY — 2009

EXHIBIT 2

Consolidated Income Statement (in millions, except per share data) 2008

Revenues Costs and expenses Other (expense)/income

$

Net interest expense Equity in the income of investees Income from continuing operations before income taxes and minority interests Income taxes Minority interests Income from continuing operations Discontinued operations, net of tax

37,843 (30,439) (59)

2007

$

35,510 (28,681) 1,004

2006

$

33,747 (28,392) 88

(524) 581

(593) 485

(592) 473

7,402 (2,673) (302)

7,725 (2,874) (177)

5,324 (1,837) (183)

4,427 —

4,674 13

3,304 70

Net income

$

4,427

$

4,687

$

3,374

Diluted Earnings per share: Earnings per share, continuing operations Earnings per share, discontinued operations

$

2.28 —

$

2.24 0.01

$

1.60 0.03

$

2.28

$

2.25

$

1.64

$

2.34 —

$

2.33 0.01

$

1.65 0.03

$

2.34

$

2.34

$

1.68

Earnings per share Basic Earnings per share: Earnings per share, continuing operations Earnings per share, discontinued operations Earnings per share Weighted average number of common and common equivalent shares outstanding: Diluted Basic

1,948

2,092

2,076

1,890

2,004

2,005

Source: Walt Disney Company, Annual Report (2008).

Consolidated Financial Statements Disney’s recent income statements and balance sheets are provided in Exhibits 2 and 3, respectively. Note the increase in profit from 2006 to 2007, and the decline from 2007 to 2008. The most recent Disney’s Consolidated Balance Sheet, shown in Exhibit 3, reveals over $22 billion in Goodwill and nearly $11.1 billion in Long Term Debt.

Financials by Segment Exhibit 4 demonstrates the company’s revenue and operating income by each business segment. Note that Disney’s Media Networks brings in the most revenues and operating income for the company. This division, as well as the Parks and Resorts segment, is growing. However, the company’s Studio Entertainment business segment and their Consumer Products businesses have experienced declining revenues in the last three years. As shown in Exhibit 5, Disney derives 76 percent of its revenue and 77 percent of its operating income from businesses in the United States and Canada. The company’s revenues and income are growing in all regions of the world, with Europe being second behind the United States/Canada in both revenues and income.

Disney Business Segments In percentage terms, Disney revenues in 2008 were derived from Media Networks (43 percent), Parks and Resorts (31 percent), Studio Entertainment (20 percent), and

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EXHIBIT 3

Consolidated Balance Sheets (in millions, except per share data) September 27, 2008

ASSETS Current assets Cash and cash equivalents Receivables Inventories Television costs Deferred income taxes Other current assets

$

Total current assets Film and television costs Investments Parks, resorts and other property, at cost Attractions, buildings and equipment Accumulated depreciation Projects in progress Land Intangible assets, net Goodwill Other assets Total Assets LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable and other accrued liabilities Current portion of borrowings Unearned royalties and other advances

3,670 5,032 641 559 862 550

11,666 5,394 1,563

11,314 5,123 995

31,493 (16,310)

30,260 (15,145)

15,183 1,169 1,180

15,115 1,147 1,171

17,532 2,428 22,151 1,763

17,433 2,494 22,085 1,484

62,497

$

60,928

$

5,980 3,529 2,082

$

5,949 3,280 2,162

Treasury stock, at cost, 777.1 million shares at September 27, 2008, and 637.8 million shares at September 29, 2007


$

$

Total current liabilities Borrowings Deferred income taxes Other long-term liabilities Minority interests Commitments and contingencies Shareholder’s equity Preferred stock, $.01 par value Authorized–100 million shares, Issued–none Common stock, $.01 par value Authorized–3.6 billion shares, Issued–2.6 billion shares Retained earnings Accumulated other comprehensive loss

Total Liabilities and SE

3,001 5,373 1,124 541 1,024 603

September 29, 2007

$

11,591 11,110 2,350 3,779 1,344

11,391 11,892 2,573 3,024 1,295

—

—

26,546 28,413 (81)

24,207 24,805 (157)

54,878

48,855

(22,555)

(18,102)

32,323

30,753

62,497

$

60,928

5


EXHIBIT 4

Revenue and Operating Income by Segment (2008 vs. 2007) Percentage of change

2008

2007

2006

2008 vs. 2007

Revenues: Media Networks Parks and Resorts Studio Entertainment Consumer Products

$ 16,116 11,504 7,348 2,875

$ 15,104 10,626 7,491 2,289

$ 14,186 9,925 7,529 2,107

7 8 (2) 26

6 7 (1) 9

Total Consolidated Revenues

$ 37,843

$ 35,510

$ 33,747

7

5

Segment operating income Media Networks Parks and Resorts Studio Entertainment Consumer Products

$ 4,755 1,897 1,086 718

$ 4,275 1,710 1,195 631

$ 3,481 1,534 728 607

11 11 (9) 14

23 11 64 4

Total segment operating income

$ 8,456

7,811

$ 6,350

8

23

(in millions)


Consumer Products (8 percent). Operating income was derived from Media Networks (57 percent), Parks and Resorts (23 percent), Studio Entertainment (13 percent), and Consumer Products (9 percent). These percentages reveal a bit of a weakness in Studio Entertainment because this segment creates 20 percent of revenues but only 13 percent of operating income.

Media Networks/Broadcasting Disney owns ABC Television Network, which includes ABC Entertainment, ABC Daytime, ABC News, ABC Sports, ABC Kids, Touchstone Television, and ABC Radio. Also included in this segment, Disney owns ESPN, Disney Channel, ABC Family, Toon Disney, SOAPnet, and Buena Vista Television. Disney has equity interest in Lifetime EXHIBIT 5

Revenue and Operating Income by Region

(in millions)

Revenue United States and Canada Europe Asia Pacific Latin America and Other

Segment operating income United States and Canada Europe Asia Pacific Latin America and Other

2008

2007

$ 28,506 6,805 1,811 721

$ 27,286 5,898 1,732 594

$ 26,027 5,266 1,917 537

$ 37,843

$ 35,510

$ 33,747

$ 6,472 1,423 386 175

$ 6,026 1,192 437 156

$ 4,797 918 542 93

$ 8,456

$ 7,811

$ 6,350


2006

2007 vs. 2006

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Entertainment Services, A&E Television Networks, E! Entertainment, ESPN, History Channel, The Biography Channel, Hyperion Books, and Disney Mobile. The increase in revenue in this segment was primarily due to growth from cable and satellite operators, which are generally derived from fees charged on a per subscriber basis, contractual rate increases, and higher adverting rates at ESPN. The increase in broadcasting revenue was due to growth at the ABC Television Network and increased sales of Touchstone Television series as well as an increase in prime-time advertising revenues. Increase in sales from Touchstone Television series was as a result of higher international syndication and DVD sales of hit dramas such as Lost, Grey’s Anatomy, and Desperate Housewives, as well as higher third-party license fees led by Scrubs, which completed its fifth season of network television. Two major TV networks of Disney (ABC and ESPN) recently struck a deal with cable operator Cox Communication whereby these companies now offer hit shows and football games on demand. Although advertising in the network is a source of additional revenue for the broadcasters, it requires selectivity for charging for each episode. Videoon-demand is a major industry and is expected to grow to $3.9 billion by 2010. Disney recently unveiled Disney Xtreme Digital, a networking site aimed at children younger than 14 years of age. This service will be competing against MySpace (owned by News Corporation). Disney has reported an increase in fiscal 2009 second-quarter net income mostly as a result of strong gains at cable network ESPN. Higher advertising revenues are reflected due to NASCAR programming at ESPN, an increase at ABC Family primarily due to higher rates, higher other revenues by DVD sales primarily from High School Musical, and a favorable settlement of a claim with an international distributor. Exhibit 6 provides specific segment information for the Media Networks division. Disney’s domestic broadcast television stations are listed in Exhibit 7. Disney’s international media network operations are described in Exhibit 8. In prime time, higher advertising rates and sold inventory were partially offset by lower rating from some of the problems. Increased sales of ABC Studios productions reflected higher international and DVD sales of hit drams such as Desperate Housewives, Grey’s Anatomy, and Ugly Betty.

Parks and Resorts Disney owns and operates Walt Disney World Resort & Cruise Lines in Florida, Disneyland Resort in California, ESPN Zone facilities in many states, 17 hotels at the Walt Disney World Resort, Disney’s Fort Wilderness Camping and Recreation, Downtown Disney, Disney’s Wide World of Sports, Disney Cruise Line, 7 Disney Vacation Club Resorts, Adventures by Disney, and 5 resort locations with 11 theme parks on three continents. With theme parks, Disney has 51 percent ownership in Disneyland Resort Paris,

EXHIBIT 6

Media Network Segment: Revenue and Operating Income

(in millions)

Change 2008 2007 vs. vs. 2007 2006

Revenues: Cable Networks Broadcasting

Segment operating income: Cable Networks Broadcasting

2008

2007

$ 10,041 6,075

$

$ 16,116 $ $

8,159 6,027

10% 2%

12% (1)%

$ 15,104

$ 14,186

7%

6%

4,100 655

$

3,577 698

$

3,001 480

15% (6)%

19% 45%

4,755

$

4,275

$

3,481

11%

23%


9,167 5,937

2006

$


EXHIBIT 7

Disney’s Domestic Broadcast Television Stations

Market

TV Station

Analog Channel

New York, NY Los Angeles, CA Chicago, IL Philadelphia, PA San Francisco, CA Houston, TX Raleigh-Durham, NC Fresno, CA Flint, MI Toledo, OH

WABC-TV KABC-TV WLS-TV WPVI-TV KGO-TV KTRK-TV WTVD-TV KFSN-TV WJRT-TV WTVG-TV

7 7 7 6 7 13 11 30 12 13

Television Market Ranking

1 2 3 4 6 10 28 55 66 72

Source: Walt Disney Company, Form 10K (2008).

EXHIBIT 8

Disney’s International Cable Satellite Networks and Broadcast Operations

Property

Estimated Domestic Subscribers (in millions)(1)

Estimated International Subscribers (in millions)(2)

98 97 63 67 4 20

— — — — — —

97 — 71 — — — 97 70

78 32 19 52 20 7 — —

30 19 9 25 4 1 1 1

100.0 100.0 100.0 73.3 100.0 100.0 100.0 100.0

97 97 52 52

— — — —

1 1 1 1

37.5 37.5 37.5 37.5

97 66 11

— — —

1 1 1

50.0 50.0 50.0

ESPN ESPN(1) ESPN2 ESPN Classic ESPNEWS ESPN Deportes ESPNU Disney Channels Worldwide Disney Channel Playhouse Disney Toon Disney Jetix Europe Jetix Latin America Hungama ABC Family SOAPnet A&E A&E The History Channel The Biography Channel History International Lifetime Lifetime Television Lifetime Movie Network Lifetime Real Women(2)

(1) Estimated U.S. subscriber counts according to Nielsen Media Research as of September 2008. Source: Walt Disney Company, Form 10K (2008).

Number of Channels

Ownership %

80.0 80.0 80.0 80.0 80.0 80.0

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EXHIBIT 9

Disney’s Offerings Under Parks and Resorts

Walt Disney World Resorts

Disneyland Resort Paris

Disneyland Resort

Epcot

Disneyland

Disneyland Park

Disney-MGM Studios

Disneyland’s California Adventure

Walt Disney Studios Park

Magic Kingdom

Resort Facilities

Hong Kong Disneyland Resort

Tokyo Disney Resort

Hong Kong Disneyland Resort Facilities

Disney Cruise Line

ESPN Zone

Walt Disney Imagineering

Tokyo Disneyland Tokyo DisneySea

Disney’s Animal Kingdom Resort Facilities Source: Walt Disney Company, Form 10K (2008).

43 percent ownership in Hong Kong Disneyland, 100 percent ownership in Tokyo Disney Resort as well as Disneyland in both California and Florida. Exhibit 9 summarizes Disney’s key parks and resort holdings. Disney revenues at its Parks and Resorts division increased 7 percent in 2008, or $701 million, to $10.6 billion due to increases of $483 million and $218 million at its domestic and international resorts, respectively. Domestic Parks and Resorts revenues increased due to increased guest spending, theme park attendance, and hotel occupancy, as well as higher sales at Disney Vacation Club. Higher guest spending was due to a higher average daily hotel room rate, higher average ticket prices, and greater merchandise spending at both resorts. Disneyland Resort Paris experienced increased revenues, offset by a decrease at Hong Kong Disneyland Resort due to lower theme park attendance. Some of the increase in revenue was due to favorable impact of foreign currency translation (weakening of the U.S. dollar against the euro). Operating income from the Parks and Resorts segment increased 11 percent, or by $524 million, to $1.897 billion. Exhibit 10 presents Disney’s attendance, per capita theme park guest spending, and hotel statistics for its domestic properties: EXHIBIT 10

Disney Parks and Resorts Data (2008 vs. 2007) East Coast Resorts

Increase in Attendance Increase in Per Capita Guest Spending Occupancy Available Room Nights (in thousands) Per Room Guest Spending

FY 2008

FY 2007

6% 3%

5% 1%

89% 8,614 $217

West Coast Resorts FY 2007

FY 2008

FY 2007

(1)% 2%

6% 8%

3% 3%

5% 3%

86% 8,834

92% 810

93% 810

89% 9,424

87% 9,644

$211

$309

$287

$225

$218


FY 2008

Total Domestic Resorts


The company also has been hosting VIP tours (additional fees applies), offering added-value services such as number of attractions being covered along with personal guide tours, preferred seating, and front-of-line access to rides. The company also offers package deals for major corporations and schools. Disney has plans to change its concept of the theme parks from the masses to a more concentrated perspective. This move allows Disney to offer more stand-alone theme parks and resorts in cities and beach resorts, as well as Disney-branded retail and dining districts, and smaller and more sophisticated parks. This permits the company in using the Disney brand name to expand in other areas of the travel business. The company has built timeshare vacation homes in popular places in the United States. Some of the challenges in this marketing strategy have been tailoring the niche attractions to the local markets while keeping the Disney brand reputation. However, there is a challenge of avoiding cannibalization of existing parks and attractions. The goal would be entering into new markets without harming or cannibalizing Disney’s brand.

Studio Entertainment 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 Walt Disney Pictures and Television, Touchstone Pictures, Hollywood Pictures, Miramax Films, and Buena Vista Home Entertainment International, which includes Walt Disney Records, Buena Vista Records, Hollywood Records, Lyric Street Records, and Disney Music Publishing. Disney owns Pixar, a computer animation leader, and produces feature animation films under both the Disney and Pixar banners. The company also produces stage plays, musical recordings, and live entertainment events. As of September 2008, Disney had released 928 full-length movies, 80 full-length animated features, and 546 cartoon shorts. Product offerings include Pay-Per-View, Pay Television, Free Television, Pay Television 2, and International Television.

Consumer Products The Consumer Products segment includes 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. The product offerings are Character Merchandise and Publications Licensing, Books and Magazines, Buena Vista Games, DisneyShopping.com, and The Disney Store. Products include books, interactive games, food and beverages, fine art, apparel, toys, and even home decor. In 2008, the revenues from this segment increased 26 percent to $2.9 billion. Sales growth at the Disney Stores was due to the acquisition of the Disney Stores North America. Sales growth at Merchandise Licensing was driven by higher earned royalties across multiple product categories. Operating income of this segment increased 14 percent to $718 million, mostly due to growth at Merchandise Licensing partially offset by a decrease at the Disney Stores due to the acquisition of the Disney Stores North America. In April 2008, Disney acquired inventory, leasehold improvements, and certain fixed assets of the Disney Stores North America for approximately $64 million. The acquisition included the assumption of the leases of 229 stores.

Competition Disney’s competitors differ in each segment of business. Time Warner is a major competitor to Disney and is composed of five divisions: AOL, Cable, Filmed Entertainment, Networks, and Publishing. Time Warner owns Time Inc., AOL, Warner Brothers, and TBS Networks. Walt Disney generally is classified as Entertainment-Diversified, which directly competes with Time Warner, Inc. (as shown in Exhibit 11). CBS Corporation and News Corporation directly compete with the Walt Disney Company in the Media Network segment, but they are not rivals in the Consumer Products and Parks and Resorts segments. CBS Corporation was a part of Viacom, Inc., but now operates independently under CBS Corp. News Corporation is a diversified international media and entertainment company that operates in eight segments: Filmed Entertainment,

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EXHIBIT 11

Disney vs. the Industry: Comparative Data

Market Cap # of Employees Qtrly Rev Growth Revenue Gross Margin EBITDA Oper Margins Net Income EPS

DIS

CBS

TWX

Industry

39.00B 150,000 -8.20% $ 36.99B 17.81% $ 8.18B 17.81% $ 4.02B $ 2.100

4.31B 25,920 -6.20% 13.95B 37.99% 2.69B 15.48% -11.67B -17.428

26.28B 87,000 -2.70% 46.98B 41.92% 13.34B 18.62% -13.40B -11.224

499.59M 7.51K 5.10% 930.87M 41.92% 166.44M 10.39% N/A N/A

DIS = Walt Disney Company CBS = CBS Corporation TWX = Time Warner Inc. Source: Based on finance.yahoo.com (April 2009).

Television, Cable Network Programming, Direct Broadcast Satellite Television, Magazines and Inserts, Newspapers, Book Publishing, and Other. Due to recent corporate restructuring for both CBS Corporation and News Corp., there are no industry data available for comparison purposes. Next we discuss the competition for each segment of Walt Disney.

Competition: Media Networks/Broadcasting The global media industry is a $1 trillion business that includes advertising, cable firms, newspapers, radio, and television. This industry is dominated by conglomerates Walt Disney, Time Warner, Inc., New York Times, News Corp., and CBS Corporation. Typically, these companies prosper during election years due to heavy advertising revenue invested by the politicians. Special events such as the Olympics also generate additional advertising revenue for such companies. Disney competes for viewers primarily with other television networks, independent television stations, and other video media such as cable and satellite television programming services, DVD, video games, and the Internet. Radio networks likewise compete with other radio network stations and programming services. Disney also competes with other advertising media such as newspapers, magazines, billboards, and the Internet. Exhibit 12 reveals some major competitors to Disney in this segment of business, as well as percentages that indicate attractiveness of that venue to consumers ages 18 to 24. CBS Corp. is composed of five segments: Television, Radio, Outdoor, Interactive, and Publishing. CBS Television is composed of CBS Network and its own television stations, EXHIBIT 12

Disney Rival Firms in Media Networks/Broadcasting

Major Competitors

Discovery Networks Disney/ESPN Media Networks MTV Networks Turner Entertainment Networks Scripps Networks NBC Universal Cable Comcast Cable Networks Fox Cable Networks

% Attractiveness*

72% 68% 52% 48% 43% 39% 34% 31%

*To consumers ages 18 to 24. Source: Based on Multichannel News 28, no. 10 (2007): 30; ISSN: 0276-8593.


television production, and syndication, Showtime, and CSTV Networks. In 2008, the Television segment of CBS contributed 64 percent of company’s total revenue (approximately $8.99 billion). The Radio segment derives revenue primarily from advertising sales. In 2008, the Radio segment generated 11 percent of CBS’s total revenue (approximately $1.5 billion). News Corp., with $33 billion in revenue, operates in eight industry segments: Filmed Entertainment, Television, Cable Network Programming, Direct Broadcast Satellite Television, Magazines and Inserts, Newspapers, Book Publishing, and Other. For the fiscal year 2008, the Filmed Entertainment, Television, Cable Network Programming, and Direct Broadcast Satellite Television contributed approximately 65 percent or $21.2 billion to the company’s total revenue. The company has been moving aggressively toward digital technologies such as broadband, mobility, storage, and wireless. News Corp. owns MySpace.com, one of the Internet’s most popular social networking site, and IGN.com (a gaming and entertainment site). Fox TV, owned by News Corp., ranks as one of the most popular networks on television with an average audience of 7.6 million every night, followed by CBS with 6.7 million viewers during each prime time, Walt Disney Company’s ABC with 5.4 million viewers per night, and finally NBC (owned by General Electric Company) with 4.8 million viewers during each prime-time period. News Corp. recently acquired Dow Jones & Company and Liberty Media Corporation, which included approximately 41 percent interest in the DIRECTV Group, Inc. Time Warner’s media and entertainment segments include AOL, Cable, Filmed Entertainment, Networks, and Publishing. The Cable segment services primarily analog and digital video services, and advanced services such as VOD and HDTV with set-top boxed equipped with digital video recorders. The Filmed Entertainment segment produces and distributes theatrical motion pictures and television shows. The Network segment consists of HBO and Cinemax pay television programming services. The Publishing segment publishes magazines and Web sites in a variety of areas and has a strategic alliance with Google, Inc. Exhibit 13 demonstrates Time Warner’s revenue by segment.

Competition: Parks and Resorts Disney’s theme parks and resorts compete with all other forms of entertainment, lodging, tourism, and recreational activities. Many uncontrollable factors may influence the profitability of the leisure-time industry such as economic conditions, including business cycle and exchange rate fluctuations; travel industry trends; amount of available leisure time; oil and transportation prices; and weather patterns. Seasonality is another concern for this segment because all of the theme parks and the associated resort facilities are operated yearround. Peak attendance and resort occupancy generally occur during the summer months when school vacations take place and during early winter and spring holiday periods. According to a survey conducted by the International Association of Amusement Parks and Attractions (IAAPA), there are more than 400 amusement parks in the United States, generating approximately $11.5 billion in revenues. The Magic Kingdom at Walt Disney World in Florida was the most visited amusement park in the world. The amusement parks in the United States employ approximately 500,000 year-round and seasonal employees.

EXHIBIT 13

Time Warner, Inc., Revenue (in millions) by Segment (2007)

Segment

Revenue

Cable AOL Filmed Entertainment Networks Publishing Total

$ 17,200 4,165 11,398 11,154 4,608 48,525

Source: Time Warner Inc., Form 10K (2008).

Percentage of Total Sales

Operating Income

35.44 8.58 23.49 23.00 9.49

$ (11,782) (1,147) 823 3,118 (6,624)

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The second largest amusement park company after Disney is Six Flags, Inc., based in Oklahoma City, Oklahoma, with 20 parks across the United States, Mexico, and Canada and soon in Dubai and Qatar with more than $1 billion in revenue (2008). Six Flags recently acquired Dick Clark Productions, which owns television hits such as the American Music Awards, The Golden Globe Awards, the Academy of Country Music Awards, Dick Clark’s New Year’s Rockin’ Eve, and So You Think You Can Dance. Ocean Park in Hong Kong has been aggressively competing with Disney. Ocean Park is a theme park that covers over 870,000 square meters and receives more than 5 million tourists each year. In March 2009, Ocean Park launched two new sightseeing locations in Shanghai to attract tourists from regions such as the Yangtze River Delta. Ocean Park has the advantage of understanding the local market because they have been in business for more than 30 years. They offer a range of transportation facilities to link Hong Kong with major cities in the Pearl River Delta. In 2008, Ocean Park established an office in Shanghai. Ocean Park plans to complete construction of four new themed travel attractions between 2010 and 2013. It also seems that the residents in Hong Kong are not very impressed with the small version of Disney built there because many have visited Disneyland in Tokyo or Anaheim, California. Disney in mid-2009 reached an agreement with the Hong Kong government to enlarge Hong Kong Disneyland. That city government owns 57 percent of that Disney theme park.

Competition: Studio Entertainment The success of Studio Entertainment operations depends heavily on public taste and preferences. Operating results fluctuate due to the timing and performance of releases in the theatrical, home entertainment, and television markets. Release dates are determined by competition and the timing of vacation and holiday periods. Many companies produce and/or distribute theatrical and television films, exploit products in the home entertainment market, provide pay television programming services, and sponsor live theater. Disney also competes to obtain creative and performing talents, story properties, advertiser support, broadcast rights, and market share. Movies have historically been a reasonable priced entertainment for families, and comprise more than $150 billion in revenues annually. The most important regions contributing to this industry are the United States (49.8 percent), Europe (33 percent), and Asia and developing countries (14 percent). Consolidation has been very common in the movie and entertainment industry. As such, a few companies dominate the industry and control the production and distribution of most movies, including: Warner Brothers (17.10 percent), Walt Disney (11.70 percent), Twentieth Century Fox (10.3 percent), Viacom (6.3 percent), and other (54.6 percent).

Competition: Consumer Products Leading competitors to Disney in this segment are Warner Brothers, Fox, Sony, Marvel, and Nickelodeon. Disney competes in its character merchandising and other licensing, publishing, interactive, and retail activities with other licensors, publishers, and retailers of character, brand, and celebrity names. Disney is perhaps the largest worldwide licensor of character-based merchandise and producer/distributor of children’s film-related products based on retail sales. Operating results for the licensing and retail distribution business are influenced by seasonal consumer purchasing behavior and by the timing and performance of animated theatrical releases.

Risk A wide range of factors could materially affect the future and the performance of the Disney, such as: 1. A prolonged recession in the United States and other regions of the world could have an adverse affect on the company’s business. 2. The success of the business depends on the ability to consistently create and distribute programs/products (movies, films, programs, theme park attractions, resort services, and consumer products) that consumers want. As such, heavy


3. 4.

5.

6.

investment is required in such product/service offerings in order to earn consumer acceptance and attention. Changes in technology and in consumer consumption. Technologies such as peer-to-peer, high-speed digital transmission, illegal digital video recorders, and so on are vulnerable to piracy. Disney must devote substantial resources to protect its intellectual property. Changes in travel and tourism could impact the company’s business, such as adverse weather conditions, natural disasters, terrorist attacks, health concerns, international concerns, political or military developments, and war. High unemployment rates.

Source: The Walt Disney Company, Form 10K (2008).

Conclusion Walt Disney’s net income fell 26 percent for the third quarter (2009) with no division or segment of the company reporting an increase. The worst performing division for the quarter was Movie Studio, which reported an operating loss of $12 million on a revenue drop of 12 percent. Disney’s DVD sales slowed dramatically. As the economic recession lingers and consumers still spend money on what the need rather than what they want, Disney needs a clear strategic plan for the future. Shareholders do not want to see a repeat of the firm’s third-quarter type results. Let’s say Disney asks your assistance in developing a strategic plan. Help Disney reverse its slipping revenues.

References Datamonitor Industry Market Research finance.yahoo.com Investor’s Business Daily Multichannel News, available from www.multichannel.com News Corporation, available from www.newscorp.com The Wall Street Journal, available from www.wsj.com The Walt Disney Company, available from www.disney.com TheStreet.com, available from www.thestreet.com Time Warner, Inc., available from www.timewarner.com Standard & Poor’s, available from www.standardandpoors.com USAToday.com, available from www.usatoday.com

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Case 1 - Walt Disney - 2009

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