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The Walt Disney Company (NYSE: DIS) is a leading media and entertainment conglomerate. The company is divided into five major business segments: Media Networks (including the ABC network), Parks and Resorts, Studio Entertainment (including Pixar), Consumer Products and Interactive Media. Under the leadership of its new CEO, Bob Iger, Disney has renewed its emphasis on its core strategy of creating and distributing attractive content for children and syndicating this content through its various entertainment channels. For example, when Disney produces a new movie, it continues to capitalize on the characters in the movie long after it has left the box office. Before the movie leaves theaters, the company will have already released a line of complementary toys and action figures. This is followed by the release of the movie on DVD and - depending on its popularity - a presence in Disney's theme parks or its own television show.

In line with this strategy of maximizing the value of its content, Disney recently began distributing its content in new ways, such as video-on-demand online and television shows formatted for video iPod users. Although distribution through these new mediums comes with significant risks of piracy, the migration of younger audiences (Disney's core customer base) away from traditional television to new media makes finding new ways to reach out to this demographic critically important. Disney has also invested $350 million to develop its own in-house video game development capabilities.

In another major acquisition, Disney purchased comic book company Marvel for $4 billion in cash and stock in 2009. The purchase gives Disney the rights to 5000 Marvel characters, including Spider Man, X-Men, and Iron Man, and their associated royalty and licensing revenues from games, movies, clothing, toys, and theme park rides. [1]

Company Overview

The Walt Disney Company was founded in 1923 as a movie studio, and its iconic Mickey Mouse character appeared for the first time five years years later. In 1955, Disneyland Resort opened in Anaheim, California, and the company went public two years later. Over the following decades, Disney continued to expand, acquiring film distributors and perfecting its model for consumer product merchandising. In 1996, Disney acquired ABC, and in 2006, Disney finally purchased its long-time partner Pixar, though the two had a previous distribution agreement prior to the acquisition.

Major Sources of Revenue

  • Overall advertising spending is largely driven by the economy, as well as by the presence of large-scale TV events like the Olympics. Disney's success in attracting advertising money and affiliate fees is driven by the quality of programming and the size of the audience it attracts.
  • Affiliate fees are payments from cable and satellite companies for programming. These fees provide a stable source of revenue and are expected to grow in virtually any economic environment. Disney generates the highest affiliate fees in the industry, largely due to the popularity of its ESPN programming.
  • Film and DVD syndication and merchandising are both more volatile than Disney's other sources of revenue. Success in this segment is determined by Disney's ability to produce hit movies--a difficult task with unpredictable results. A blockbuster movie can significantly boost revenues for years to come, but a pricey flop can also lead to extended lower sales.
  • Domestic theme parks' revenues depend on the number of visitors, which is related to the strength of the dollar. A weaker dollar encourages more foreign travelers to visit the U.S. and more domestic travelers to stay within the country, but a stronger dollar makes products and services (including admissions to Disney's theme parks) relatively more expensive.

Business Segments

The Walt Disney Company divides its operations into five business segments: Media Networks, Parks and Resorts, Studio Entertainment, Consumer Products, "Disney Interactive".

  • Media Networks: Media Networks manages Disney's operations in the television, Internet, and radio media industries. The division is centered around its American Broadcasting Company (ABC) television network, though Disney also a number of other successful networks, including ESPN, Walt Disney Television, and SOAPnet. Additionally, Disney holds substantial ownership interests in Lifetime and A&E. The Walt Disney Internet Group runs websites for many of the company's media networks. Only Disney's radio presence has been decreasing, with the recent sale of its ABC Radio Network to Citadel Broadcasting (CDL). However, Disney does still own a number of radio stations across the country and world.
  • Parks and Resorts: This segment deals with the operation of Disney's theme parks and resorts, both in the U.S. and abroad. Also included in this segment is the Disney Cruise Line, which offers cruises from Florida to Disney's private island, Castaway Cay, in the Bahamas. Disney has been working to expand this segment in recent years. Efforts to this end include the completion of the Hong Kong Disneyland and the announcement of the construction of two new cruise ships 50% larger than previous ones. Parks and Resorts was a significant driver of growth prior to the 2008 Financial Crisis. However, as disposable income decreased as a result of the economic downturn, consumers have been less inclined to visit Disney theme parks.
  • Studio Entertainment: Often regarded as Disney's most visible business, Studio Entertainment is actually subject to a great deal of variability in terms of both revenue and profit generation, as its performance is driven largely by Disney's ability to produce hit movies to be released in theaters, on television, and on home video. A flop, like the 2002 movie Treasure Planet, can be quite detrimental to the company's profits. On the other hand, a blockbuster hit, like the Pirates of the Caribbean series, can boost sales and profits substantially. In September 2009, Disney Studios Chairman Dick Cook was forced to resign at the request of CEO Robert Iger, who had been unhappy with the studio's direction and performance. In July 2010, the company announced it would be selling its independent film Miramax unit for $650 million to a group of investors including Ron Tutor, Colony Capital, James Robinson, and an unidentified Middle Eastern investor group.[2]
  • Consumer Products: The Consumer Products segment licenses the Disney brand for a variety of merchandise. Products bearing the Disney brand range from toys and apparel to home décor and electronics. The Disney Store chain of retailers also falls under this segment's umbrella. Though revenues for the Consumer Products division have traditionally come from licensing the Disney brand to other manufacturers, current chairman Andy Mooney has been expanding the segment's reach from licensing to manufacturing its own products. Current initiatives in this division include the recent $350 million investment in developing Disney's video game business, aimed at increasing the company's presence in this rapidly growing market. In July 2009, Disney announced plans to launch eight mobile games for the iPhone, Android, Blackberry, and Java/Brew, aiming to compete in the mobile gaming market. [3]
  • Disney Online: Disney's online sites include Kaboose.com, BabyZone.com, and various other child and parent-oriented sites.[4] The company announced it would create a new division called Disney Online Mom and Family portfolio to oversee these new assets as well as the company's existing assets. The company said that mothers are an attractive segment because they make most household buying decisions. [4]

Trends and Forces

Volatility of advertising revenues

Overall advertising spending is largely driven by the economy, as well as by the presence of large-scale TV events like the Olympics. Disney's ABC has recently achieved success with shows like Lost, Grey's Anatomy, and Desperate Housewives. Advertisers are willing to pay more for airtime during shows like these because they attract large numbers of viewers. Similarly, ad prices spike during playoff sports coverage and Superbowl coverage. A very disappointing sports season or flagging TV show ratings can significantly hurt advertising revenues, as does a general economic downturn

Consistency in affiliate fees

Sensitivity to short-term fluctuations in advertising spending are somewhat offset by steady revenues from cable networks' affiliate fees, which tends to provide a more stable revenue stream.

However, a large portion of affiliate fees come from sports coverage channels in the ESPN network, where the cost of sports coverage is rising. Extended increases in sports coverage cost may materially affect operating income after 2013, when Disney's current contracts with broadcasters will expire.

Growing technology investments

With the decline of traditional media to favor of influential technologies like Youtube and Apple's iTunes/iPod, it becomes necessary for media conglomerates to learn how to tap into these channels to access the audience and the advertising revenue. Disney recently began to post both full videos and clips of its programming online at ABC.com, ESPN.com, and Disney.com. In addition, Disney has begun to sell ABC content for use on iTunes and video iPods. These are new initiatives, but they have been very popular and could be a considerable source of future growth.

Exposure to movie attendance

The Studio Entertainment division's revenues are subject to conditions in the larger movie industry, including the rate of movie attendance. In recent years, the advent of online video and a rising amount of piracy has led to slow or flat growth in movie attendance, causing studios such as Disney to reevaluate their film distribution methods. One way the company has addressed declining cinema viewership is through enhancing the consumer movie experience, such as filming shows in I-MAX and 3-D. In the future, film studios are expected to focus more on the higher-margin DVD and television broadcast segments as a result of this decline in cinema viewership.

Slowing DVD business

The DVD market has begun to mature over the last 2 years. Consumer spending on home videos dropped by about 2% in the past year. Fortunately, For Disney which derives a large portion of its revenues from syndication of its content the impact, however, as DVD sales growth has not slowed as much for Disney's target audience.

Video games investment

As children grow up, they tend to trade their toys for more sophisticated forms of entertainment such as video games. However, children are making switch earlier and earlier, a phenomenon termed as "age compression", so the market for video games is growing larger. Disney, however, does not currently have a large presence in this rapidly growing video game market, though the company is making large investments in this area. The vast majority of games released by Disney are geared to lower grade level children, whereas the vast majority of children would rather play games and not bother with educational games, no matter how cute the character is. Games such as Kingdom Hearts is a good example.

Competitors

Disney's major competitors are the other large media conglomerates, such as News Corporation (NWS), Time Warner (TWX), Dreamworks Animation SKG (DWA), and Viacom (VIA), who directly compete with Disney in various business lines.

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