I have a friend (DocEagle) who in my opinion has his finger on the pulse of Disney more so than just about anyone I know. He made a recent post on another board that I thought was worth sharing. With his permission, it follows. It is rather long but a very interesting assessment of our beloved company. ########################################"It now seems like the Disney board is stepping up and putting pressure on Eisner and his fellow executives. This is long overdue, and seems to be happening because Roy Disney is getting more than a little restless.It is clear that Disney has underperformed. I last purchased Disney stock in 1997, and it is worth less today than it was then. Now, much of the market has lost value over the last year or so and in comparison Disney has actually done pretty well holding value, but what about the preceding 4 years?So Disney has some challenges. Let's start with movies. It is a simple fact the movie marketplace is saturated. The market for theatrical distribution hasn't expanded in decades. Increases in movie box office have been almost entirely due to higher ticket prices. The market is not expanding, and there is no reason to think it will soon. In the 90s, Disney compensated for this by building a huge market in home video, but now this is no longer extra money but just another part of this finite revenue stream. The only way to improve profits here is to figure out how to make movies for less money while maintaining the quality. And the introduction of digital cinema is going to create a paradigm shift in the business, on par with the introduction of sound and the arrival of television. It will reduce both the “barrier to entry” for new players and the distribution advantage of the majors. Competition will get stiffer. It doesn't look to me like the movie business will generate any significant growth to the company. But it can't be abandoned because it generates most of the core stories that drive the rest of the company.Animation is a huge problem. It is just so d*** expensive. There has been a lot of discussion in the press this spring about traditional v. computer animation. Which is a stupid discussion. Hand-drawn (and here I mean literally hand-drawn) animation will soon be extinct. It will soon be entirely done on computers for the simple reason that that is the only way to moderate costs. What will happen is computer animation that looks hand-drawn. Personally, I still don't naturally warm to computer animation. To me, Tarzan is the most visually breathtaking animated movie of recent years. Disney has to get to the point where it can make an animated movie—whatever the style—for $50 million or so, significantly lower than it is now. Computer animation is the only way to get there.To me, the biggest issue is redefining the Disney brand in regard to movies. Right now the brand means “kids safe”, so anything Disney does to threaten that creates an uproar. The problem is that that “young” audience is getting smaller. A ten-year old wouldn't have had a problem attending a Disney movie 20 years ago. Today it would be rejected as “kid's stuff”. At some point Disney has to recognize that the “kids” audience isn't enough. I would like the company to say “no, we aren't going to restrict the Disney brand to films that are safe for kids.” They need to say “We are about magic, romance, and adventure. If some of that takes us into edgier territory, so be it.” “Treasure Island” was not a G-rated picture in its original form. It preceded the ratings system, but subsequent releases edited out violence to qualify it for a G rating. I think a Disney movie could be rated up to PG-13. But would Roy Disney allow this?In Broadcasting, the best assets Disney has is not ABC, or ESPN, or the Disney Channel. Its best assets are its owned and operated (O&O) stations. These operate with hugely profitable margins. And they are likely to become more valuable as digital television allows mutli-casting. But it can take $500 million to nearly $1 billion to buy a major station. ABC is problematic, because the network market is becoming so fragmented that the big networks are losing audience every year. That said, there is some danger in overstating that loss. There is some evidence that advertisers are still hanging in there because the networks are still the only way to get a mass of people at once (a good resource when launching an advertising campaign). But the networks are getting a smaller and smaller piece of the pie. It is possible to exaggerate the trend, however, if people compare advertising buys with 2000. That year saw a convergence of factors that are unlikely to be repeated for a long time: the dot-com fever, the Olympics, and a robust political season. The dot-coms were in a land-rush, and the winners were going to be the ones that put themselves first in the consumers mind, so they threw millions to the networks. There is a huge opportunity to improve ABC's schedule, but even returning it to the forefront of network television will only accomplish so much. The place to grow in broadcasting is cable. ESPN is a great success, but it is also having to pay high prices for sports rights. New broadcasting channels are expensive, as the $5 billion for the Family Channel shows. In essence, that was a real estate purchase; Disney has some big decisions to make about how to renovate (and complicated by The 700 Club, the tenant that refuses to move out). It seems to me cable broadcasting is a place where dealmakers need to be particularly savvy. Its possible to throw away billions of dollars on bad deals here.Perhaps the most critical component of Disney's health is its theme parks. Disney has spent the last five years opening a number of new theme parks. They have to start contributing significant revenue because the parks are the cash cows that have to generate enough cash flow to maintain themselves and fund expansion elsewhere in the company. At this point, I have to believe the prospects for further growth in the U.S. are limited. If DCA proves itself in Anaheim, you could put a third theme park in there. And I think Disney could eventually build the shelved Disney's America somewhere (I think it could be built somewhere like Baltimore or San Antonio). But I think it will be a long time before another park is built in WDW. So that means overseas. Land in Hong Kong is being prepped. But beyond that, where? The difficulty in overseas expansion is finding a place with a stable economy and a robust middle class. Long term, the worldwide growth of the middle class is going to be the great economic theme of the 21st Century. But in the near term, few countries are steady enough to support the $700 million in annual guest spending that a Disney park needs to thrive. Consumer products focuses on two prime activities: retailing and licensing. Alice seems to tell us that Disney Stores are turning a corner. That is good news. Licensing is suffering because Mickey's halo is fading. The real star of the moment is Winnie the Pooh. But here again, the “Disney is just for kids” approach is hurting the company. Yes, it is the path of least resistance, but I absolutely believe that you can market upscale, quality Disney clothing to adults. Sears just made a deal to sell Land's End stuff in their stores. Couldn't Disney sell adult Disney casual clothing through Land's End? Disney has a lot of thinking to do about its hockey and baseball teams. I like the idea that Disney is a sports owner. Some say Disney should not be in that business, but I'd point out that Turner and Anheiser-Busch, who compete with Disney in various ways, have long owned successful franchises. It can be done. Admittedly, these don't produce a lot of profit, but I think it helps Disney to keep the pulse of the American public. I'd like to see them acquire a basketball team as well. Why bother? To me, its a kind of hedge against ESPN. At various times either team owners or broadcasters will have the upper hand. Does Disney really want to commit itself totally to one side or the other? The real problem Disney faces here is getting other team owners to change their thinking. Some people think corporate ownership has ruined sports, but I think corporate ownership is what can save it. Billionaires who are private owners of the teams run them mostly as a hobby. There are willing to lose a little money every year in order to be associated with a team, and figure they will cash in when they sell. It's like buying a house and renting it out. They lose a little money along the way, but the increase in broadcasting rights has continually elevated the value of teams. Disney, Busch, and other corporate owners want to own the teams forever, so the market value isn't as important to them, they want the profits. But they are forced to compete against owners who are much more willing to lose money. But I think change is just around the corner. Broadcasting rates simply cannot continue to rise. When that does private owners will begin to realize that the value of their teams won't continue to rise. They won't accept losing money when they don't see a big payoff on the horizon. At that point, the teams can be operated more sensibly.Are there new opportunities for Disney? I think so. Just as they expanded into Broadway, there are some horizons left to explore. It seems to me Disney needs to become a much bigger player in publishing and music. I know Disney has publishing and music interests, but their market share is infinitesimal. Most market share reports don't even segregate them, they're just part of “other.” Disney needs to have a presence in these areas that is as big as its presence in movies and broadcasting. Music is especially important because, as the middle class expands around the world, the music is going to be the first entertainment technology they embrace. That is where entertainment growth is going to happen first. Music and publishing are also the areas that are going to be the easiest to penetrate new foreign markets. In this area, I believe Disney is going to have to look at making acquisitions.And overseas is still the company's greatest opportunity. As big as Disney is, I think something like 80% of its revenue is domestic. If Disney wants to provide growth that really rewards shareholders, it HAS TO make its presence felt internationally. Thankfully, Disney has organized itself to do so. I am optimistic that an organizational structure is in place to coordinate enterprises across all product categories in foreign regions to produce Disney's famously effective synergy. Hopefully, it is just a matter of time.So Michael Eisner has a bunch of big challenges in front of him.In the Sermon on the Mount, Jesus says “You are the salt of the earth. But it the salt loses its saltiness, how can it be made salty again? It is no longer good for anything, except to be thrown out and trampled by men.” If Disney loses its Disney-ness, what good is IT going to be? Does Disney simply pursue size? Does it just aspire to be the GE of entertainment? Or is its first priority to be uniquely Disney? Does the company pursue market power or the Disney brand as its biggest advantage? That will guide a lot of decisions. If size is the goal, then you are going to be ruthless about dumping divisions that are not performing spectacularly (like the athletic teams). But if being Disney is perceived as the marketplace advantage, you may hold onto some underperforming assets (like the athletic teams) because they engage the public. Hewlett-Packard has changed course to pursue big-ness at the expense of its HP-nesss; Anheuser-Busch has pursued the other strategy, holding onto its parks and baseball teams. When I was a kid—in a ten-year period from 1959 to 1969—Disney added the Matterhorn, Monorail, and Submarines to Disneyland; produced ceremonies for the 1960 Winter Olympics; invented audio-animatronics; placed 4 attractions at the New York World's Fair; released Mary Poppins and the Jungle Book; produced the Wonderful World of Color for NBC; kept Zorro and MMC in reruns; added Pirates and Haunted Mansion to Disneyland; and announced Walt Disney World and a new community called EPCOT. People kept asking “what is Disney going to do next?!” Its been a long time since the public has felt that way about Disney. I'd like it to be that way again.Mickey needs a major revival. As I noted, Pooh is the big star on the lot now. Here's a radical idea: use Mickey in movies. Original movies. Mickey keeps getting re-invented as something else depending on how the company reads the current trends and how to keep him “relevant”. I think the company has lost sight of who Mickey is. The basic character Walt created was a fellow who would identify some sort of goal and pursue it so impetuously, and with such heart, that he was largely oblivious to the obstacles coming his way. For inspiration, they need to look at old Harold Lloyd silent movies. Lloyd was the third silent film star behind Chaplin and Keaton. Walt used to compare Mickey with Chaplin, but I think the Mouse is much closer to Lloyd, right down to the buttoned gloves. Lloyd shows how that kind of a character can generate enough audience sympathy to sustain a feature film. And the time is short to revive Mickey. Although Congress extended copyrights again, they won't do so again. And I believe Mickey enters the public domain in about 15 years. You can expect Disney to argue that only the “vintage” Mickey will be public domain. If that argument holds (I'd say its 50-50), the Mickey we know today (debuting in Fantasia) will be public domain in 30 years. So brace yourselves for eventually seeing “peeing Mickey” in the back windows of pickup trucks. I've said previously that the company needs to look at redefining the Disney brand. Eisner needs to figure out how. My argument is that the brand will have far more vitality if audiences understands it to mean magic, romance, and adventure. There will be an ample amount of family entertainment that can be offered within that rubric. “Kids safe” movies are those the public wants to exist, but doesn't want to see. Disney's growth in broadcasting, publishing, and music is going to have to be opportunistic. They will need to strike when the iron is hot. We've all heard about the 500-channel cable universe, but for most cable systems there is still a finite number of channels available. Existing channels are rarely for sale. The same applies to broadcast stations, both TV and radio. That's why the prices are so high. Most large publishing houses and music companies are well-established and owned by larger conglomerates. So when something becomes available, Disney will need to move fast. And this may disrupt previously planned strategies. That's going to present Eisner with some real challenges. Would the chance to buy a major TV station group, for example, mean cancelling a theme park? Finally, there are two acquisitions I believe Disney should make. They shouldn't be made at ANY price. The deals have to be within reason. But they should be seriously pursued. If they aren't, to me, Eisner is just not doing his job.First, buy Pixar and make it wholly-owned, or at least largely owned, by Disney. The reason is that Disney has to invest major research dollars in figuring out how to produce traditional animation on computer. Disney could do it on its own, but success is likely to come faster if it is done in conjunction with Pixar. I understand it won't be easy to make a deal with Jobs and Lassiter, but Eisner needs to keep at it. It may require giving Pixar some lattitude to pursue projects with other studios. Disney's existing deal is coming to an end soon enough, and Eisner needs to start talking now.Second, Disney should look at acquiring Bertelsmann, either by buying it or merging with it. Bertelsmann—headquartered in Germany—has interests in music, publishing, European broadcasting, European movie studios, and printing. Its prize assests include Bertelsmann Music Group (BMG is one of the biggest players) and Random House, the largest publishing house in the world. Bertelsmann's magazine group includes Parents magazine and Family Circle. Bertelsmann would nicely fill in the largest gaps in the Disney entertainment empire. It would also give Disney a toe-hold in foreign-language filmmaking and television—a nice diversification. In fact, the advantage of such a union is that there would be very little overlap between the Bertelsmann and Disney operations. Bertelsmann is a privately-owned company, but is making moves leading toward an IPO in a few years. Bertelsmann is known to be looking to acquire a U.S. studio. It would probably want to maintain its independence, but I have to think that if Seagram could be convinced to sell to Vivendi and if ABC could be convinced to sell to Disney, that a Bertelsmann-Disney deal could happen. Disney would then discard Bertelsmann's printing and other industrial operations."
Best Of |
Favorites & Replies |
Start a New Board |
My Fool |
BATS data provided in real-time. NYSE, NASDAQ and NYSEMKT data delayed 15 minutes.
Real-Time prices provided by BATS. Market data provided by Interactive Data.
Company fundamental data provided by Morningstar. Earnings Estimates, Analyst Rat