Disney on ice corpus christi 2017

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CASE 24

The Walt Disney Company: Its Diversification Strategy in 2018

John E. Gamble Texas A&M University-Corpus Christi

he Walt Disney Company was a broadly diversified media and entertainment company with a business lineup that included theme parks and resorts, motion picture production and distribution, cable

television networks, the ABC broadcast television network, eight local television stations, and a variety of other businesses that exploited the company’s intellectual property. The company’s revenues had increased from $45 billion in fiscal year 2013 to $55 billion in fiscal 2017 and its share price had regularly outperformed the S&P 500. While struggling somewhat in the mid-1980s, the company’s performance had been commendable in almost every year since Walt Disney created Mickey Mouse in 1928.

The company ended 2017 with a modest one percent increase in revenues and four percent increase in net income over the year prior. However, its announcement in December 2017 that it would acquire 21st Century Fox for $71.3 billion in cash and stock had the potential to radically improve its future financial performance. The transaction was approved by the U.S. Department of Justice (DOJ) Antitrust Division in June 2018 and was expected to be finalized by year-end 2018. The acquisition of 21st Century Fox would extend Disney’s impressive collection of media franchises to include Fox, FX, Fox News Channel, Fox Business Network, Fox Sports Network, National Geographic Channel, Star India, 28 local television stations in the United States and more than 350 international channels, Twentieth Century Fox Film, and Twentieth Century Fox television production studios. Twenty-First Century Fox also held a 39.1 percent stake in Sky, Europe’s leading entertainment company that served nearly 23 million households in five countries.

Disney CEO Robert Iger commented on the ability of the acquisition to further boost shareholder value during an investor’s conference shortly after the DOJ consent decree announcement in June 2018.

The acquisition of 21st Century Fox will bring significant financial value to Disney and the shareholders of both companies, and after six months of integration planning we’re even more enthusiastic and confident in the strategic fit of these complementary assets and the talent at Fox.

Just to remind you of the incredibly valuable assets that we’re acquiring—our deal includes such premier entertainment properties as Twentieth Century Fox Film and Twentieth Century Fox Television, FX and National Geographic, Fox’s regional sports networks, Fox Networks Group International, and Star India, as well as Fox’s interests in Hulu and Sky. Since we first announced our deal in December, the intrinsic value of these assets has increased—thanks, in part, to the benefits of tax reform and certain operating improvements.

As we’ve said before, the combination of Disney and 21st Century Fox is an extremely compelling proposition for consumers. It will allow us to create even more appealing high-quality content, expand our direct-toconsumer offerings and international presence, and deliver more exciting and personalized entertainment experiences to meet the growing demands of consumers worldwide.1

As the company entered the third quarter of 2018, it was coming off an

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impressive second quarter, but faced several strategic issues. The company’s core Parks and Resorts business continued to grow and record healthy profit margins, but its larger Media Networks business had seen minimal revenue growth in recent years and was experiencing declining operating profits as media consumers turned from cable to direct-to-consumer (DTC) programming. The company’s Studio Entertainment business unit had also struggled to develop stable revenue and earnings growth and its Consumer Products & Interactive Media business unit had seen a decline in revenues and operating profits in the past year. Going into 2019, Iger and Disney’s management team would have to evaluate the corporation’s strategy to bolster the performance of its existing business units and develop new media delivery capabilities while preparing for the integration of the probable acquisition of 21st Century Fox.

Copyright ©2018 by John E. Gamble. All rights reserved.

COMPANY HISTORY Walt Disney’s venture into animation began in 1919 when he returned to the United States from France, where he had volunteered to be an ambulance driver for the American Red Cross during World War I. Disney volunteered for the American Red Cross only after being told he was too young to enlist for the United States Army. Upon returning after the war, Disney settled in Kansas City, Missouri, and found work as an animator for Pesman Art Studio. Disney, and fellow Pesman animator, Ub Iwerks, soon left the company to found Iwerks-Disney Commercial Artists in 1920. The company lasted only briefly, but Iwerks and Disney were both able to find employment with a Kansas City company that produced short animated advertisements for local movie theaters. Disney left his job again in 1922 to found Laugh-O- Grams, where he employed Iwerks and three other animators to produce short animated cartoons. Laugh-O-Grams was able to sell its short cartoons to local Kansas City movie theaters, but its costs far exceeded its revenues—forcing

Disney to declare bankruptcy in 1923. Having exhausted his savings, Disney had only enough cash to purchase a one-way train ticket to Hollywood, California, where his brother, Roy, had offered a temporary room. Once in California, Roy began to look for buyers for a finished animated-live action film he retained from Laugh-O-Grams. The film was never distributed, but New York distributors Margaret Winkler and Charles Mintz were impressed enough with the short film that they granted Disney a contract in October 1923 to produce a series of short films that blended cartoon animation with live action motion picture photography. Disney brought Ub Iwerks from Kansas City to Hollywood to work with Disney Brothers Studio (later to be named Walt Disney Productions) to produce the Alice Comedies series that would number 50-plus films by the series end in 1927. Disney followed the Alice Comedies series with a new animated cartoon for Universal Studios. After Disney’s Oswald the Lucky Rabbit cartoons quickly became a hit, Universal terminated Disney Brothers Studio and hired most of Disney’s animators to continue producing the cartoon.

In 1928, Disney and Iwerks created Mickey Mouse to replace Oswald as the feature character in Walt Disney Studios cartoons. Unlike with Oswald, Disney retained all rights over Mickey Mouse and all subsequent Disney characters. Mickey Mouse and his girlfriend, Minnie Mouse, made their cartoon debuts later in 1928 in the cartoons, Plane Crazy, The Gallopin’ Gaucho, and Steamboat Willie. Steamboat Willie was the first cartoon with synchronized sound and became one of the most famous short films of all time. The animated film’s historical importance was recognized in 1998 when it was added to the National Film Registry by the United States Library of Congress. Mickey Mouse’s popularity exploded over the next few decades with a Mickey Mouse Club being created in 1929, new accompanying characters such as Pluto, Goofy, Donald Duck, and Daisy Duck being added to Mickey Mouse cartoon storylines, and Mickey Mouse appearing in Walt Disney’s 1940 feature length film, Fantasia. Mickey Mouse’s universal appeal reversed Walt Disney’s series of failures in the animated film industry and became known as the mascot of Disney Studios, Walt Disney Productions, and The Walt Disney Company.

The success of The Walt Disney Company was sparked by Mickey Mouse, but Disney Studios also produced several other highly successful

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animated feature films including Snow White and the Seven Dwarfs in 1937, Pinocchio in 1940, Dumbo in 1941, Bambi in 1942, Song of the South in 1946, Cinderella in 1950, Treasure Island in 1950, Peter Pan in 1953, Sleeping Beauty in 1959, and One Hundred-One Dalmatians in 1961. What would prove to be Disney’s greatest achievement began to emerge in 1954 when construction began on his Disneyland Park in Anaheim, California. Walt Disney’s Disneyland resulted from an idea that Disney had many years earlier while sitting on an amusement park bench watching his young daughters play. Walt Disney thought that there should be a clean and safe park that had attractions that both parents and children alike would find entertaining. Walt Disney spent years planning the park and announced the construction of the new park to America on his Disneyland television show that was launched to promote the new $17 million park. The park was an instant success when it opened in 1955 and recorded revenues of more than $10 million during its first year of operation. After the success of Disneyland, Walt Disney began looking for a site in the eastern United States for a second Disney park. He settled on an area near Orlando, Florida in 1963 and acquired more than 27,000 acres for the new park by 1965.

Walt Disney died of lung cancer in 1966, but upon his death, Roy O. Disney postponed retirement to become president and CEO of Walt Disney Productions and oversee the development of Walt Disney World Resort. Walt Disney World Resort opened in October 1971—only two months before Roy O. Disney’s death in December 1971. The company was led by Donn Tatum from 1971 to 1976. Tatum had been with Walt Disney Productions since 1956 and led the further development of Walt Disney World Resort and began the planning of EPCOT in Orlando and Tokyo Disneyland. Those two parks were opened during the tenure of Esmond Cardon Walker, who had been an executive at the company since 1956 and chief operating officer since Walt Disney’s death in 1966. Walker also launched The Disney Channel before his retirement in 1983. Walt Disney Productions was briefly led by Ronald Miller, who was the son-in-law of Walt Disney. Miller was ineffective as Disney chief executive officer and was replaced by Michael Eisner in 1984.

Eisner formulated and oversaw the implementation of a bold strategy for

Walt Disney Studios, which included the acquisitions of ABC, ESPN, Miramax Films, and the Anaheim Angels, and the Fox Family Channel; the development of Disneyland Paris, Disney-MGM Studios in Orlando, Disney California Adventure Park, Walt Disney Studios theme park in France, and Hong Kong Disneyland; and the launch of the Disney Cruise Line, the Disney Interactive game division, and the Disney Store retail chain. Eisner also restored the company’s reputation for blockbuster animated feature films with the creation of The Little Mermaid in 1989, and Beauty and the Beast and The Lion King in 1994. Despite Eisner’s successes, his tendencies toward micromanagement and skirting board approval for many of his initiatives and his involvement in a long-running derivatives suit led to his removal as chairman in 2004 and his resignation in 2005.

The Walt Disney Company’s CEO in 2018, Robert (Bob) Iger, became a Disney employee in 1996 when the company acquired ABC. Iger was president and CEO of ABC at the time of its acquisition by The Walt Disney Company and remained in that position until made president of Walt Disney International by Alan Eisner in 1999. Bob Iger was promoted to president and chief operating officer of The Walt Disney Company in 2000 and was named as Eisner’s replacement as CEO in 2005. Iger’s first strategic moves in 2006 included the $7.4 billion acquisition of Pixar animation studios and the purchase of the rights to Disney’s first cartoon character, Oswald the Lucky Rabbit, from NBCUniversal. In 2007, Robert Iger commissioned two new 340-meter ships for the Disney Cruise Lines that would double its fleet size from two ships to four. The new ships ordered by Iger were 40 percent larger than Disney’s two older vessels and entered service in 2011 and 2012. Iger also engineered the acquisition of Marvel Entertainment in 2009 that would enable the Disney production motion pictures featuring Marvel comic book characters such as Iron Man, Incredible Hulk, Thor, Spider-Man, and Captain America. In 2012, Walt Disney acquired Lucasfilm in a $4 billion cash and stock transaction. Lucasfilm was founded by George Lucas and was best known for its Star Wars motion picture franchise.

A financial summary for The Walt Disney Company for 2013 through 2017 is provided in Exhibit 1. Exhibit 2 tracks the performance of The Walt Disney Company’s common shares between July 2013 and July 2018.

EXHIBIT 1

EXHIBIT 2

Financial Summary for The Walt Disney Company, Fiscal Years 2013–2017 (in millions)

Source: The Walt Disney Company 2017 10-K.

Performance of The Walt Disney Company’s Stock Price, July 2013 to July 2018

Source: The Walt Disney Company 2017 10-K.

THE WALT DISNEY COMPANY’S CORPORATE STRATEGY AND BUSINESS OPERATIONS IN 2018 In 2018, The Walt Disney Company was broadly diversified into theme parks, hotels and resorts, cruise ships, cable networks, broadcast television networks, television production, television station operations, live action and

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animated motion picture production and distribution, music publishing, live theatrical productions, children’s book publishing, interactive media, and consumer products retailing. The company’s corporate strategy was centered on (1) creating high-quality content, (2) exploiting technological innovations to make entertainment experiences more memorable, and (3) international expansion. The company’s 2006 acquisition of Pixar and 2009 acquisition of Marvel were executed to enhance the resources and capabilities of its core animation business with the addition of new animation skills and characters. The company’s 2011 acquisition of UTV was engineered to facilitate its international expansion efforts. The acquisition of Lucasfilm’s Star Wars franchise in 2012 not only allowed the company to produce new films in the series, but integrate Star Wars into its other business units, including theme park attractions. When asked about the company’s planned acquisition of 21st Century Fox and Walt Disney Company’s strategic priorities during a media, cable and telecommunications conference in February 2018, Bob Iger made the following comments:

We’ve been a company that has emphasized the value of high-quality, branded entertainment. And the acquisitions of Pixar, Marvel, and Lucasfilm/Star Wars, obviously were a reflection of that core strategy.

This gives us a larger portfolio of high-quality branded content. When you think about FX, when you think about National Geographic, when you think about a number of the franchises that Fox has created, including their Marvel franchises and Avatar and other product, we believe that this fits beautifully into a strategy to continue to invest in entertainment, particularly in a world that seems to be growing in terms of its appetite to consume entertainment.

Secondly, we’ve been talking a lot about using technology to reach consumers in more modern, more efficient, and effective ways. That certainly has changed significantly. When I talk about a dynamic marketplace, I think it’s most evident in how people access entertainment, how they consume entertainment, and this acquisition gives us the ability not only to have essentially more product, more intellectual property, but to bring it to the consumer in more compelling ways and ways we think the consumer wants their entertainment more and more. The Star and Sky assets and the Hulu assets give us an opportunity to do that.

And then lastly, we’ve talked a lot about wanting to grow our company globally.

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The Walt Disney Company has been a global company for a long time, but in many of the markets that we operate in our penetration was relatively superficial. We spent a fair amount of time over the last decade deepening that penetration in markets. You mentioned Shanghai Disneyland, which would be an example of how we’ve done that in China. This gives us the ability to have a far more global footprint and to diversify the company’s interest from a geographic perspective.2

Disney’s corporate strategy also called for sufficient capital to be allocated to its core theme parks and resorts business to sustain its advantage in the industry. The company expanded the range of attractions at its theme parks with billion-dollar plus additions such as its new Toy Story Land attractions opened in 2018 at Shanghai Disneyland and Disney’s Hollywood Studios and its Star Wars Land scheduled to open in Disney’s Hollywood Studios and Anaheim’s Disneyland in 2019. Expansions were also underway in 2018 at Tokyo Disney Resort and Hong Kong Disneyland.

The Walt Disney Company’s corporate strategy also attempted to capture synergies existing between its business units. Two of the company’s highest grossing films, Pirates of the Caribbean: On Stranger Tides and Cars 2 were also featured at the company’s Florida and California theme parks. The company had leveraged ESPN’s reputation in sports by building 230-acre ESPN Wide World of Sports Complex in Orlando that could host amateur and professional events and boost occupancy in its 18 resort hotels and vacation clubs located at the Walt Disney World resort.

In 2018, the company’s business units were organized into four divisions: Media Networks, Parks and Resorts, Studio Entertainment, and Consumer Products & Interactive Media.

Media Networks The Walt Disney Company’s media networks business unit included its domestic and international cable networks, the ABC television network, television production, and U.S. domestic television stations. The company’s television production was limited to television programming for ABC and its eight local television stations were all ABC affiliates. Six of Disney’s eight domestic television stations were located in the 10 largest U.S. television

EXHIBIT 3

markets. In all, ABC had 244 affiliates in the United States. When asked about the decline in cable television viewership, Bob Iger

suggested that content delivery method was less important than the quality and appeal of content.

Well, for the most part, we’ve looked at channels less as channels and more as brands. And it’s less important to us how people get those channels—obviously, it’s important in terms of how they are monetized in today’s world—but what’s more important to us is the quality of the brand and intellectual property that fits under that brand umbrella. And our intention is to—as the world shifts in terms of distribution and consumption we talked about earlier—is to migrate those brands and those products in the more modern direction from a distribution and consumption perspective.3

Exhibit 3 provides the market ranking for Disney’s local stations and its number of subscribers and ownership percentage of its cable networks. The exhibit also provides a brief description of its ABC broadcasting and television production operations. The division also included Radio Disney, which aired family-oriented radio programming on 34 terrestrial radio stations (31 of which were owned by Disney) in the United States. Radio Disney was also available on SiriusXM satellite radio, iTunes Radio Tuner and Music Store, XM/DIRECTV, and on mobile phones. Radio Disney was also broadcasted throughout most of South America on Spanish language terrestrial radio stations. The company’s 2011 acquisition of UTV would expand the division’s television broadcasting and production capabilities to India.

The Walt Disney Company’s Media Network Subscribers, 2013 and 2017 (in millions)

Estimated Subscribers (in millions)(1)

Estimated Subscribers (in millions)(1)

Cable Networks 2013 2017

ESPN(2)

ESPN  99  88

ESPN– International

n.a. 146

ESPN2  99  87

ESPNU  72  67

ESPNEWS  73  66

SEC Network n.a.  60

Disney Channels Worldwide

Disney Channel – Domestic

 99  92

Disney Channels – International(3)

141 221

Disney Junior – Domestic

 58  72

Disney Junior – International(3

n.a. 151

Disney XD – Domestic

 78  74

Disney XD – International(3)

 91 127

Freeform n.a.  90

A + E and Vice

A&E(2)  99  91

Lifetime  99  91

HISTORY  99  92

Lifetime Movie Network

 82  73

Lifetime Real Women(3)

 18 n.a.

FYI n.a.  58

Viceland n.a.  70

Broadcasting ABC Television Network (244 local affiliates reaching nearly 100 percent of U.S. television households)

Television Production ABC Studios and ABC Media Productions (Daytime, primetime, late night and news television programming)

Domestic Television Stations

Market TV Station Television Market Ranking(4)

New York, NY WABC-TV 1

Los Angeles, CA KABC-TV 2

Chicago, IL WLS-TV 3

Philadelphia, PA WPVI-TV 4

San Francisco, CA KGO-TV 6

Houston, TX KTRK-TV 8

Raleigh-Durham, NC

WTVD-TV 24

Fresno, CA KFSN-TV 54

(1) Estimated U.S. subscriber counts according to Nielsen Media Research as of

September 2017, except as noted below. (2) ESPN and A&E programming is distributed internationally through other networks discussed below. (3) Subscriber counts are not rated by Nielsen and are based on internal management report. (4) Based on Nielsen Media Research, U.S. Television Household Estimates, January 1, 2017. Source: The Walt Disney Company 2017 10-K.

Among the most significant challenges to Disney’s media networks division was the competition for viewers, which impacted advertising rates and revenues. Not only did the company compete against other broadcasters and cable networks for viewers, but it also competed against other types of entertainment and delivery platforms. For example, consumers might prefer to watch videos, movies, or other content on the Internet or Internet streaming services rather than watch cable or broadcast television. The effect of the Internet on broadcast news had been significant and the growth of streaming services had the potential to affect the advertising revenue potential of all of Disney’s media businesses.

The combat competing streaming content providers and capitalize on such opportunities, Disney launched two direct-to-consumer (DTC) streaming services and Over-the-Top (OTT) services that delivered content without a distributor. Disney’s ESPN-branded multi-sports content was planned for DTC distribution in 2018 and a Disney-branded DTC service that featured the company’s film and television content was planned for 2019. Bob Iger discussed the company’s DTC and OTT strategy in a 2017 interview.

Direct-to-consumer really is still a relatively nascent business, although obviously Netflix probably wouldn’t look at it that way. But what we were doing was creating really, two different OTT or DTC products. One was sports, and the other one I’ll call family, which was going to include Disney, Marvel, Pixar, and Star Wars. And what we saw doing was bringing them both out reasonably priced. We have not announced price but I did suggest they would both be substantially below what Netflix currently charges for a few reasons.4

Bob Iger discussed during an analysts’ conference how the development

EXHIBIT 4

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of ESPN + and its family-oriented DTC services would allow the company to catch up with emerging media trends that it had missed.

It’s no secret that we have seen the development and the growth of an entirely new media marketplace, and so we start with the premise that we want to participate in this new marketplace or this new market. Right now, we’re only doing so at the tip of the iceberg, so to speak, with Hulu—that would be an example of that, and we have a relatively small stake in Hulu, about 30 percent. So our OTT interests are essentially designed to be part of this new marketplace, first. And I talked about it earlier, if you look at how the consumer today wants their media, first of all, they’re far more interested in mobile, mobile first, in many cases. The user interface is particularly critical; this is really true for millennials and younger, where the user interface that exists in the sort of traditional television platform is not as compelling to them. It is essential for us to provide our content on platforms and with user interfaces that are serving today’s consumer better.5

Operating results for Disney’s media networks division for fiscal 2015 through fiscal 2017 are presented in Exhibit 4.

Operating Results for Walt Disney’s Media Networks Business Unit, Fiscal Years 2015–2017 (in millions)

Revenues 2017 2016 2015

Affiliate fees $ 12,659 $ 12,259 $ 12,029

Advertising 8,129 8,509 8,361

TV/SVOD distribution and other

 2,722  2,921  2,874

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Total revenues 23,510 23,689 23,264

Operating expenses 14,068 13,571 13,150

Selling, general, administrative and other

2,647 2,705 2,869

Depreciation and amortization 237 255 266

Equity in the income of investees

  (344)   (597)   (814)

Operating Income $ 6,902 $ 7,755 $ 7,793

Source: The Walt Disney Company 2017 10-K.

Parks and Resorts The Walt Disney Company’s parks and resorts division included the Walt Disney World Resort in Orlando, the Disneyland Resort in California, Disneyland Paris, the Aulani Disney Resort and Spa in Hawaii, the Disney Vacation Club, the Disney Cruise Line, and Adventures by Disney. The company also owned a 47 percent interest in Hong Kong Disneyland Resort and a 43 percent interest in Shanghai Disney Resort. Disney also licensed the operation of Tokyo Disney Resort in Japan. Revenue for the division was primarily generated through park admission fees, hotel room charges, merchandise sales, food and beverage sales, sales and rentals of vacation club properties, and fees charged for cruise vacations.

Revenues from hotel lodgings and food and beverage sales were a sizeable portion of the division’s revenues. For example, at the 25,000-acre Walt Disney World Resort alone, the company operated 18 resort hotels with approximately 22,000 rooms. Walt Disney World Resort also included the 127-acre Disney Springs retail, dining, and entertainment complex where visitors could dine and shop during or after park hours. Walt Disney World Resort in Orlando also included four championship golf courses, full-service spas, tennis, sailing, water skiing, two water parks, and a 230-acre sports

EXHIBIT 5

complex that was host to over 200 amateur and professional events each year. Walt Disney’s 486-acre resort in California included two theme parks—

Disneyland and Disney California Adventure—along with three hotels and its Downtown Disney retail, dining, and entertainment complex. Disney California Adventure was opened in 2001 adjacent to the Disneyland property and included four lands—Golden State, Hollywood Pictures Backlot, Paradise Pier, and Bug’s Land. The park was initially built to alleviate overcrowding at Disneyland and was expanded with the addition of World of Color in 2010 and Cars Land in 2012 to strengthen its appeal with guests.

Aulani was a 21-acre oceanfront family resort located in Oahu, Hawaii. Disneyland Paris included two theme parks, seven resort hotels, two convention centers, a 27-hole golf course, and a shopping, dining, and entertainment complex. The company’s Hong Kong Disneyland, Shanghai Disney Resort, and Tokyo Disney Resort them parks were highly popular with ambitious expansion plans.

The company also offered timeshare sales and rentals in 14 resort facilities through its Disney Vacation Club. The Disney Cruise Line operated four ships out of North America and Europe. Disney’s cruise activities were developed to appeal to the interests of children and families. Its Port Canaveral cruises included a visit to Disney’s Castaway Cay, a 1,000-acre private island in the Bahamas. The popularity of Disney’s cruise vacations allowed its fleet to be booked to full capacity year-round.

The division’s operating results for fiscal years 2015 through 2017 are presented in Exhibit 5.

Operating Results for Walt Disney’s Parks and Resorts Business Unit, Fiscal Years 2015–2017 (in millions)

Revenues 2017 2016 2015

Domestic $ 14,812 $ 14,242 $ 13,611

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International   3,603   2,732   2,551

Total revenues 18,415 16,974 16,162

Operating expenses 10,667 10,039 9,760

Selling, general, administrative and other

1,950 1,913 1,884

Depreciation and amortization 1,999 1,721 1,517

Equity in the loss of investees    25    3    —

Operating Income $ 3,774 $ 3,298 $ 3,031

Source: The Walt Disney Company 2017 10-K.

Studio Entertainment The Walt Disney Company’s studio entertainment division produced live- action and animated motion pictures, direct-to-video content, musical recordings, and Disney on Ice and Disney Live! live performances. The division’s motion pictures were produced and distributed under the Walt Disney Pictures, Pixar, Marvel, Lucasfilm, and Touchstone banners. The division also distributed Dreamworks Studios motion pictures that were released from 2010 to 2016.

Most motion pictures typically incurred losses during the theatrical distribution of the film because of production costs and the cost of extensive advertising campaigns accompanying the launch of the film. Profits for many films did not occur until the movie became available on DVD or Blu-Ray disks for home entertainment, which usually began three to six months after the film’s theatrical release. Revenue was also generated when a movie moved to pay-per-view (PPV)/video-on-demand (VOD) two months after the release of the DVD and when the motion picture became available on subscription premium cable channels such as HBO about 16 months after PPV/VOD availability. Broadcast networks such as ABC could purchase

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telecast rights to movies later as could basic cable channels such as Lifetime or the Hallmark Channel. Premium cable channels such as Showtime and Starz might also purchase telecast rights to movies long after its theatrical release. Similarly, subscription video on demand (SVOD) services such as Netflix might acquire distribution rights to a film for a 12- to 19-month window. Telecast right fees decreased as the length of time from initial release increased. Operating results for the Walt Disney Company’s Studio Entertainment division for fiscal 2015 through fiscal 2017 are produced in Exhibit 6.

Operating Results for Walt Disney’s Studio entertainment Business Unit, Fiscal Years 2015–2017 (in millions)

2017 2016 2015

Revenues

Theatrical distribution $ 2,903 $ 3,672 $ 2,321

Home entertainment 1,798 2,108 1,799

TV/SVOD distribution and other

 3,678  3,661  3,246

Total revenues 8,379 9,441 7,366

Operating expenses 3,667 3,991 3,050

Selling, general, administrative and other

2,242 2,622 2,204

Depreciation and amortization 115 125 139

Operating Income $ 2,355 $ 2,703 $ 1,973

EXHIBIT 7

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Source: The Walt Disney Company 2017 10-K.

Consumer Products & Interactive Media The company’s consumer products division included the company’s Disney Store retail chain and businesses specializing in merchandise licensing and children’s book and magazine publishing. In 2018, the company owned and operated 221 Disney Stores in North America, 87 stores in Europe, 55 stores in Japan, and 2 stores in China. Its publishing business included comic books, various children’s book magazine titles available in print and eBook format, and smartphone and tablet computer apps designed for children. The division’s sales were primarily affected by seasonal shopping trends and changes in consumer disposable income.

Operating results for Disney’s Consumer Products & Interactive Media division for fiscal year 2015 through 2017 are presented in Exhibit 7. The company’s consolidated statements of income for fiscal 2015 through fiscal 2017 are presented in Exhibit 8. The Walt Disney Company’s balance sheets for fiscal 2016 and fiscal 2017 are presented in Exhibit 9.

Operating Results for Walt Disney’s Consumer Products & Interactive Media Business Unit, Fiscal Years 2015–2017 (in millions)

2017 2016 2015

Revenues

Licensing, publishing and games

$ 3,256 $ 3,819 $ 3,850

Retail and other  1,577  1,709  1,823

EXHIBIT 8

Total revenues 4,833 5,528 5,673

Operating expenses 1,904 2,263 2,434

Selling, general, administrative and other

1,007 1,125 1,172

Depreciation and amortization 179 175 183

Equity in the income of investees

   1    —    —

Operating Income $ 1,744 $ 1,965 $ 1,884

Source: The Walt Disney Company 2017 10-K.

Consolidated Statements of Income for The Walt Disney Company, Fiscal Years 2015–2017 (in millions, except per share data)

2017 2016 2015

Revenues $ 55,137 $ 55,632 $ 52,465

Costs and expenses 41,264 41,274 39,241

Restructuring and impairment charges

98 156 53

Add: Other income 78 — —

Net interest expense 385 260 117

Add: Equity in the income of investees

  (320)   (926)   (814)

Income before income taxes 13,788 14,868 13,868

Income taxes  4,422  5,078  5,016

EXHIBIT 9

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Net Income 9,366 9,790 8,852

Less: Net Income attributable to noncontrolling interests

  386   399   470

Net Income attributable to The Walt Disney Company (Disney)

$ 8,980 $ 9,391 $ 8,382

Earnings per share attributable to Disney:

Diluted $5.69 $5.73 $4.90

Basic $5.73 $5.76 $4.95

Weighted average number of common and common equivalent shares outstanding:

Diluted 1,578 1,639 1,709

Basic 1,568 1,629 1,694

Source: The Walt Disney Company 2017 10-K.

Consolidated Balance Sheets for The Walt Disney Company, Fiscal Years 2016 and 2017 (in millions, except per share data)

September 30, 2017

October 1, 2016

CURRENT ASSETS

Cash and cash equivalents $ 4,017 $ 4,610

Receivables 8,633 9,065

Inventories 1,373 1,390

Television costs and advances

1,278 1,208

Other current assets   588   693

Total current assets 15,889 16,966

Film and television costs 7,481 6,339

Investments 3,202 4,280

Parks, resorts and other property, at cost

Attractions, buildings and equipment

54,043 50,270

Accumulated depreciation  29,037  26,849

25,006 23,421

Projects in progress 2,145 2,684

Land  1,255  1,244

22,380 21,512

Intangible assets, net 6,995 6,949

Goodwill 31,426 27,810

Other assets  2,390  2,340

Total assets $95,789 $92,033

LIABILITIES AND EQUITY

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Current liabilities

Accounts payable and other accrued liabilities

8,855 9,130

Current portion of borrowings

6,172 3,687

Deferred revenue and other  4,568  4,025

Total current liabilities 19,595 16,842

Borrowings 19,119 16,483

Deferred income taxes 4,480 3,679

Other long-term liabilities 6,443 7,706

Commitments and contingencies

Redeemable noncontrolling interests

1,148 —

Equity

Preferred stock, $0.01 par value

Authorized — 100 million shares, Issued — none

— —

Authorized — 4.6 billion shares, Issued — 2.9 billion shares

36,248 35,859

Retained earnings 72,606 66,088

Accumulated other comprehensive loss

 (3,528)  (3,979)

105,326 97,968

Treasury stock, at cost, 937.8 million shares at October 1, 2011 and 803.1 million shares at October 2, 2010

(64,011) (54,703)

Total Disney Shareholder’s equity

41,315 43,265

Noncontrolling interests  3,689  4,058

 Total Equity  45,004  47,323

Total liabilities and equity $95,789 $92,033

Source: The Walt Disney Company 2017 10-K.

THE WALT DISNEY COMPANY’S SECOND QUARTER 2018 PERFORMANCE AND ITS FUTURE PROSPECTS The Walt Disney Company reported revenues and earnings per share increases during its first six months of fiscal 2018 of 6 percent and 59 percent, respectively, from the first six months of the year prior. The company’s strong financial performance during the first six months of 2018 was led by its Parks and Resorts business unit, which saw year-over-year revenue and operating income increases of 13 percent and 24 percent, respectively; and its Studio business unit, which recorded a year-over-year revenue increase of 9 percent and a year-over-year operating income increase of 12 percent. Disney’s Media Networks and Consumer Products & Interactive Media divisions suffered 9 percent and 4 percent operating income decreases, respectively, with neither achieving meaningful revenue growth.

Chairman Iger summarized Disney’s strong second quarter performance and summarized the company’s position at mid-2018.

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We’re very pleased with our results in Q2, especially in our Parks and Resorts and Studio businesses.

Our parks continue to drive growth through operational excellence and by effectively leveraging our extraordinary content. As an example, I just got back from opening our new Toy Story Land in Shanghai Disneyland and I’m happy to report that our first major addition to the park was met with strong reviews and great excitement. We’re thrilled with the reaction and the enthusiasm generated by the new land bodes well for future expansion.

Turning to our Studio. . . It’s clear from the recent results—as well as from the slate ahead—that our Studio has and will continue to raise the bar in terms of both creative and commercial success.

The incredible performance of Marvel’s Black Panther is just one of many examples. We’re proud of this movie on so many levels—it speaks volumes about great, innovative storytelling, the power of new perspectives and unbridled creativity.

We followed the phenomenal success of Black Panther with another Marvel masterpiece, Avengers: Infinity War, which broke domestic and global records to become the largest movie opening in history. With this latest success, our Studio has delivered nine of the top ten biggest domestic box office openings of all time—all of them released in the last six years.

On the sports front, we’re very encouraged by the reaction to our ESPN + service, which launched just about a month ago. The reviews have been strong, and the response from sports fans has been enthusiastic.

We’re also merging Consumer Products and Parks and Resorts together— combining strategy and resources to create extraordinary experiences and products that bring our stories and characters to life for consumers inside our parks, at home, and beyond.6

As the company move closer to the consummation of its acquisition of 21st Century Fox, it had several pressing strategy decisions related to its existing lineup of businesses. Failure to adequately resolve competitive disadvantages in its core and historical businesses would make the integration of one of the world’s largest media companies even more complex and difficult.

ENDNOTES 1 As quoted by Bob Iger, Chairman and Chief Executive Officer of The Walt Disney Company, during Investor Conference Call, June 20, 2018. 2 As quoted by Bob Iger, Chairman and Chief Executive Officer of The Walt Disney