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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.
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"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."


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As I said on the other board, Aloha, DocEagle should be a member of the Board of Directors. If I had any clout, I'd nominate him in a heartbeat. He is more knowledgeable about Disney than any of the ones on there, and has infinitely more sense than any of them.

I'll never forget that wonderful trip last year when I met you and him, and we wandered around the Studio Lot. That still ranks as my #1 Disney moment of all time -- it was such an unexpected surprise.

...Sneaking into the Animation Building, and seeing the drawings of Stitch, and wondering... what the HELL is THAT???
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Yes, I agree with everything Doc says. But I would also included that Michael needs to look at talent that is now in College. He will find some wonderful computer anim. at different University right in Southern CA.
Ann
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Let's take a look at some things...

It is a simple fact the movie marketplace is saturated.

That could well be. I'm not knowledgeable enough about the specifics of that economy to know one way or another.

However, I do know enough to know that MARKET SATURATION IS NOT DISNEY'S PROBLEM. Their problem--at least right now--is a shortage of good movies. As we have seen and continue to see, good movies still make lots of money these days. From Harry Potter to Star Wars to Monsters, Inc. to Spiderman. The list goes on and on.

The only way to improve profits here is to figure out how to make movies for less money while maintaining the quality.

I disagree. As I said, our problem right now isn't market saturation. We may face that problem in the future, but not until we improve our content. Until Disney figures out how to maintain quality in movies for the SAME amount of money, I surely don't want to see them trying to produce them for LESS!

Plus, let's not forget that there's room for inexpensive, fun movies (like "The Princess Diaries") AS WELL AS the occassional big-budget flick.

Hand-drawn (and here I mean literally hand-drawn) animation will soon be extinct.

I disagree, but I guess we'll just have to wait and see on this one. I certainly see an increasing role in computer-animated features, but I'm not sure that there will ever be a time when there's no room at all for traditional hand-drawn animation. Unless...

What will happen is computer animation that looks hand-drawn.

If and when we get to this point, I'll be much more willing to kiss hand-drawn animation goodbye. Until then, I still think computer animation frequently has a "cold" look.

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.

Why? Because the problem in Feature Animation is high costs? I don't agree. The problem is CONTENT, not COST. What made Monsters, Inc. such a popular and profitable movie? Constant efforts to keep costs down? Or constant efforts to tell a great story?

At some point Disney has to recognize that the “kids” audience isn't enough.

The only problem is that it IS enough. Although rather than "kids", I would use the word "family." The reason the success of "The Princess Diaries" surprised so many is that they underestimated the market for family-friendly fare. Parents are looking for something they can take their kids to without worrying about the content. Why shouldn't Disney provide that for them, since no other company will? Isn't this a great way to make ourselves unique?

Remember... "Family-friendly" doesn't just mean "Barney" or "Blue's Clues." My wife & I went to see "Beauty and the Beast" on our first date. We were 18 or 19 at the time.


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.

We do need to keep an eye to the distant future and make plans accordingly, but RIGHT NOW our number one goal needs to be to work on ABC's ratings. I do agree, though, that long-term we've got to figure out a way to deal with fragmentation. I surely don't see that trend decreasing.

I absolutely believe that you can market upscale, quality Disney clothing to adults.

I agree 100% on this one.

Disney needs to become a much bigger player in publishing and music...

Definitely!

And overseas is still the company's greatest opportunity.

This is something I recall us discussing more than once here. I agree completely.

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.

Preach on, brother!

When Disney opened Disneyland and Walt Disney World, they were national (indeed, INTERNATIONAL) news events. When Disney's California Adventure opened, though... Well, it was with a whimper rather than a bang.

“Kids safe” movies are those the public wants to exist, but doesn't want to see.

Needless to say, I disagree--because I feel history has proven otherwise. We continue to see fabulously successful "kid-safe" movies at the boxoffice. There's a big market for them.

...buy Pixar and make it wholly-owned, or at least largely owned, by Disney.

While I do think this would be great, I'm not sure I see it happening. Disney would have to make Pixar an INCREDIBLE offer. Perhaps so incredible that it would be difficult to make the deal profitable for Disney.

The reason is that Disney has to invest major research dollars in figuring out how to produce traditional animation on computer.

Disney has ALREADY done this. Anyone remember the Secret Lab, or whatever they called the super-expensive studio that produced "Dinosaur"? That movie was very well-animated, and showed that Disney can do a great job with computer animation.

THE PROBLEM IS THE STORY.

I can't stress this enough. Dinosaur wasn't a blockbuster because the story and characters were just mediocre. Monsters, Inc. WAS a blockbuster because the story and characters were a lot of fun. Animation style had VERY LITTLE to do with the success (or lack of it) of either movie.

If Disney buys Pixar, it needs to be so that they can learn how to write great stories and create characters to which audiences bond--not so that they can learn how to animate with computers.


PHF
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I've tried to respond to this post three times, one of which a bunch of text and supporting links disappeared.

There's just too much there to respond to point for point.

DocEagle is right and wrong about some things imo.

The movie biz has grown tremendously in ten years. Income has risen by approximately 59% in the last decade while ticket prices only rose about 20%. (you can still buy tickets for a measley 5-8 bucks)

The movie business is expected to grow by about 29% in this decade while all other industries are expected to grow by only about 16%, according to a government website that provides occupational outlooks.

But like anything else, one can find conflicting data or data to support just about any point one wants. So take my info with a grain of salt. One thing is for certain though, and that is just a few years ago, $20,000,000 for a movie debut was amazing. Nowadays, a movie might hit two-and-a-half times that. Something is changing and it's not just the price of a ticket.

But the distribution industry is hurting and it's not because of a drop in movie goers. It's because theater's and chains have had to build new and revamp old theaters. The ones that dont go bankrupt and even the ones that do, also sometimes go bankrupt. The renovations are killing the industry and it's only going to get worse because of technology. Digital projection is poised to make celluloid film, obsolete. Many theaters cannot afford the changeover and will go out of business. Although the studios seem to be willing to work with them a little on this one.

Making cheaper movies isn't the only way to "revive" the industry. Many very expensive movies, continue to set all time highs at the box office. This is considered a banner year for the movie biz.

Making good movies is what counts. Not only that, but making movies that people want to see. If there is a much larger crowd that wants to see an action adventure than a western, than one might deduce that the way to make more money is to cater to the crowds. The same can be said for animation. If people flock to computer animation, and only trickle in for hand-drawn, then studios will go where the money is. Thereby proliferating the phenomenon for awhile. Never mind the finer points of whether one venue has more merit than the other, and never mind the debates over story verses medium. Where the buck stops is what counts and lately it's been stopping in the animation movies.

Spirit has raked in about $42 million in what...fourteen days? I think Shrek did that in it's first weekend, didn't it? Just as an example. I think it cost about $85 million to make but those guys might be sandbagging. It will need to make $100 million in order to be talked about at all insofar as being any kind of a glimmer of hope for cell animation's reputation. Which it might do since it is a family film and family films have a tendency to hang in there at the box office.

As for Disney being "Disney," they have dumped many businesses in the past few years from an internet portal to a chain of high-tech arcade/indoor theme parks, to Disney playlands, to magazines and more. Disney isn't the biggest but they could be if they wanted to be. But yes, they dump things that aren't making money. It's like this: If they could make 5.5% return on their money by keeping Disney Quest open, but they could make 6% on their money by putting it in CD's, which should they do?

Well if you have stockholders to please and you are only open for making money, you put your money into CD's. Or wherever the money is. It's a sad fact but a true fact.

As for pushing the envelope on Disney movies...well, that's what they bought into Miramax and Touchstone for. And that's why they revamped Disney brand movies. Use to be that Disney couldn't attract A talent, did you know that? Because their movies were too corny and too safe and too family oriented, that actors didn't want the image.

Princess Diaries and Snow Dogs would seem to point that there is still a strong family audience there and who better to fill it than Disney. If anything about the company is strong, it's the name and they shouldnt' mess with that by making risque' movies under the Disney title, in my opinion.

On the other hand, I think the best thing that could happen to Disney would be for them to be taken over and separated. What does hurt them is all the controversy caused by owning so much...ABC, Touchstone, Miramax...I mean, they make movies glamourizing heroin addiction (Pulp Fiction) for instance. And they own radio stations who are charged with racial bias (Black-Hoe promotion). And they make movies ridiculing Catholicism (Dogma). And it all points squarely back to Disney even though they seem to think it doesn't, because of being produced in a division other than on the Disney label.

But if someone bought the company and separated it, then it could not be said that Disney does this and that. Disney would and could be seen as the shining, familiar "family" star. Back to where it should be, since it would only be operating theme parks, retail, movies, Broadway, On-Ice, etc.

I'm not smart enough to comment on everything they do and know where they should be headed. But with enough reading, we can see where they've been and guess fairly accurately where it is they are trying to go. That's why some of us can make predictions and the company then fulfills them.

But that's not a skill, when compared to the skill compared to knowing exactly what they "should" be doing and knowing what knowing how to find those elusive balances between quality and value, quantity and quality.

We live in a day of conglomerates. We all know it. And by not being a conglomerate, you will simply be bought out by one. Without a conglomeration you cannot control all aspects such as manufacture, distribution, and ultimately, market share.

We probably wouldn't even be on this board today, if not for Disney being as big and successful as it is. And they wouldn't be this successful if they didn't do alot of things right.

It's past my bedtime, but this post is woefully short of providing any real explanations. Explanations for the company which frankly, I don't have. I only have personal insights.

Paul T.
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I am more for keeping it together however, let each section make it own money. Keep the money from the theme parks (at least a large majority) for the theme parks, for maint., salaries, New rides & attractions etc.
Interlink where it is neccsary like touchstone tv making pilot for ABC,
and ABC family. I think they do Disney channel stuff to.
Companies need to grow or they will be stuck, like Disney did in the late 1970, early 1980 before Michael Eisner. I think that DIsney REsort is a good idea here in CA. But, it needs to be built up more before adding a third park. Many of the rides are going to be redone at Disneyland the big ride like Pirates, Hunted House, and Small World.
I think this is a good idea. I wish they redo Country Bears and put it back at Disneyland. A few more shows with the talking, singing machines would be nice for both Disneyland, WDW, and CDA. The 3D shows are really good to. I'd like to see a Toy Story 3D, Monsters InC. 3D. There could even be a Disney Princess's show.
Kids and adults like the shows, like Country Bears and the 3D ones.
A lot of people can view it at one time, it entertains people of all ages.
Ann

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