Disney's design case study answers

Disney Case – Group 1

High unemployment, lingering recession, slow economic growth, and reduced consumer spending all

contributed to a 7 percent drop in revenue and a 46 percent drop in Walt Disney’s profitability for the

first quarter of 2009. For eight decades, the Walt Disney Company has captured the attention of

millions of people, offering family entertainmentproducts and services such as theme parks, resorts,

recreations, movies, TV shows, radio programming, and memorabilia. Walt Disney brought Mickey

Mouse and Donald Duck to the world. Walt Disney offers a variety of family entertainment all around

the world.

History

Mr. Walt Disney and his brother Roy arrived in California in the summer of 1923 to sell his

cartoon called Alice’s Wonderland. A distributor named M. J. Winkler contracted to distrib-ute the

Alice Comedies on October 16, 1923, and the Disney Brothers Cartoon Studio was founded. Over the

years, the company produced many cartoons, from Oswald the Lucky Rabbit(1927) to Silly

Symphonies(1932),Snow White and the Seven Dwarfs(1937), and Pinocchio and Fantasia(1940). The

name of the company was changed to Walt Disney Studio in 1925. Mickey Mouse emerged in 1928

with the first cartoon in sound.

In 1950, Disney completed its first live action film, Treasure Island,and in 1954, the company

began television with Disneyland anthology series. In 1955, Disney’s most suc-cessful series, The

Mickey Mouse Club,began. Also in 1955, the new Disneyland Park in California was opened. Disney

created a series of releases from 1950s through 1970s, including The Shaggy Dog, Zorro, Mary

Poppins,andThe Love Bug.Mr. Walt Disney died in 1966. In 1969, the Disney started its educational

films and materials. Another important time of Disney’s history was opening the Walt Disney World

project in Orlando, Florida, on October 1, 1971. In 1982, the Epcot Center was opened as part of Walt

Disney World. And, on April 15, 1983, Tokyo Disneyland opened.

After leaving the network television in 1983, the company was ready to get into its cable

network, The Disney Channel. In 1985, Disney’s Touchstone division began the successful Golden Girls

and Disney Sunday Movie. In 1988, Disney opened Grand Floridian Beach and Caribbean Beach

Resorts at Walt Disney World along with three new gated attractions: the Disney/MGM Studios

Theme Park, Pleasure Island, and Typhoon Lagoon. At the same time, filmmaking hit new heights as

Disney for the first time led Hollywood studios in box-office gross. Some of the successful films were:

Who Framed Roger Rabbit, Good Morning Vietnam, Three Men and a Baby,and later, Honey, I Shrunk

the Kids, DickTracy, Pretty Woman,andSister Act.Disney moved into new areas by starting Hollywood

Pictures and acquiring the Wrather Corp. (owner of the Disneyland Hotel) and television station KHJ

(Los Angeles), which was renamed KCAL. In merchandising, Disney purchased Childcraft and opened

numerous highly successful and profitable Disney Stores.

By 1992, Disney’s animation began reaching even greater audiences with The Little Mermaid,

The Beauty and the Beast, and Aladdin. Hollywood Records was formed to offer a wide selection of

recordings ranging from rap to movie soundtracks. New television shows, such as Live with Regis and

Kathy Lee, Empty Nest, Dinosaurs, and Home Improvement, expanded Disney’s television base. For

the first time, Disney moved into publishing, forming Hyperion Books, Hyperion Books for Children,

and Disney Press, which released books on Disney and non-Disney subjects. In 1991, Disney

purchased Discover magazine, the leading consumer science monthly. As a totally new venture,

Disney was awarded, in 1993, the franchise for a National Hockey League team, the Mighty Ducks of

Anaheim.

In 1992, Disneyland Paris opened in France. Disney successfully completed many projects

throughout the 1990s by venturing into Broadway shows, opening up to 725 Disney Stores, acquiring

the California Angels baseball team to add to its hockey team, opening Disney’s Wide World of Sports

in Walt Disney World, and acquiring Capital Cities/ABC. From 2000 to 2007, Disney created new

attractions in its theme parks, produced many successful films, opened new hotels, and built Hong

Kong Disneyland

Internal Issues

Organizational Structure and Mission

As indicated in Exhibit 1, Disney operates using a strategic business unit (SBU) type orga-nizational

structure. Note that Disney’s four SBUs consist of (1) Disney Consumer Products, (2) Studio

Entertainment, (3) Parks and Resorts, and (4) Media Networks and Broadcasting. Disney’s mission

statement is “To be one of the world’s leading producers and providers of entertainment and

information. Using our portfolio of brands to differentiate our content, services and consumer

products, we seek to develop the most creative, innovative and profitable entertainment experiences

and related products in the world.” Disney does not have a vision statement.

Consolidated Financial Statements

Disney’s recent income statements and balance sheets are provided in Exhibits 2 and 3, respectively.

Note the increase in profit from 2006 to 2007, and the decline from 2007 to 2008. The most recent

Disney’s Consolidated Balance Sheet, shown in Exhibit 3, reveals over $22 billion in Goodwill and

nearly $11.1 billion in Long Term Debt.

Financials by Segment

Exhibit 4 demonstrates the company’s revenue and operating income by each business segment.

Note that Disney’s Media Networks brings in the most revenues and operating income for the

company. This division, as well as the Parks and Resorts segment, is growing. However, the company’s

Studio Entertainment business segment and their Consumer Products businesses have experienced

declining revenues in the last three years.

As shown in Exhibit 5, Disney derives 76 percent of its revenue and 77 percent of its operating income

from businesses in the United States and Canada. The company’s revenues and income are growing in

all regions of the world, with Europe being second behind the United States/Canada in both revenues

and income.

Disney Business Segments

In percentage terms, Disney revenues in 2008 were derived from Media Networks (43 percent), Parks

and Resorts (31 percent), Studio Entertainment (20 percent), and Consumer Products (8 percent).

Operating income was derived from Media Networks (57 per-cent), Parks and Resorts (23 percent),

Studio Entertainment (13 percent), and Consumer Products (9 percent). These percentages reveal a

bit of a weakness in Studio Entertainment because this segment creates 20 percent of revenues but

only 13 percent of operating income.

Media Networks/Broadcasting

Disney owns ABC Television Network, which includes ABC Entertainment, ABC Daytime, ABC News,

ABC Sports, ABC Kids, Touchstone Television, and ABC Radio. Also included in this segment, Disney

owns ESPN, Disney Channel, ABC Family, Toon Disney, SOAPnet, and Buena Vista Television. Disney

has equity interest in Lifetime Entertainment Services, A&E Television Networks, E! Entertainment,

ESPN, History Channel, The Biography Channel, Hyperion Books, and Disney Mobile.

The increase in revenue in this segment was primarily due to growth from cable and satellite

operators, which are generally derived from fees charged on a per subscriber basis, contractual rate

increases, and higher adverting rates at ESPN. The increase in broadcasting revenue was due to

growth at the ABC Television Network and increased sales of Touchstone Television series as well as

an increase in prime-time advertising revenues. Increase in sales from Touchstone Television series

was as a result of higher international syndication and DVD sales of hit dramas such as Lost, Grey’s

Anatomy, and Desperate Housewives, as well as higher third-party license fees led by Scrubs, which

completed its fifth season of network television.

Two major TV networks of Disney (ABC and ESPN) recently struck a deal with cable operator

Cox Communication whereby these companies now offer hit shows and football games on demand.

Although advertising in the network is a source of additionalrevenue for the broadcasters, it requires

selectivity for charging for each episode. Video-on-demand is a major industry and is expected to

grow to $3.9 billion by 2010.

Disney recently unveiled Disney Xtreme Digital, a networking site aimed at children younger

than 14 years of age. This service will be competing against MySpace (owned by News Corporation).

Disney has reported an increase in fiscal 2009 second-quarter net income mostly as a result of strong

gains at cable network ESPN. Higher advertising rev-enues are reflected due to NASCAR programming

at ESPN, an increase at ABC Family primarily due to higher rates, higher other revenues by DVD sales

primarily from High School Musical, and a favorable settlement of a claim with an international

distributor.

Exhibit 6 provides specific segment information for the Media Networks division. Disney’s

domestic broadcast television stations are listed in Exhibit 7. Disney’s international media network

operations are described in Exhibit 8. In prime time, higher advertising rates and sold inventory were

partially offset by lower rating from some of the problems. Increased sales of ABC Studios productions

reflected higher international and DVD sales of hit drams such as Desperate Housewives, Grey’s

Anatomy, and Ugly Betty.

Parks and Resorts

Disney owns and operates Walt Disney World Resort & Cruise Lines in Florida, Disneyland Resort in

California, ESPN Zone facilities in many states, 17 hotels at the Walt Disney World Resort, Disney’s

Fort Wilderness Camping and Recreation, Downtown Disney, Disney’s Wide World of Sports, Disney

Cruise Line, 7 Disney Vacation Club Resorts, Adventures by Disney, and 5 resort locations with 11

theme parks on three conti-nents. With theme parks, Disney has 51 percent ownership in Disneyland

Resort Paris 43 percent ownership in Hong Kong Disneyland, 100 percent ownership in Tokyo Disney

Resort as well as Disneyland in both California and Florida. Exhibit 9 summarizes Disney’s key parks

and resort holdings.

Disney revenues at its Parks and Resorts division increased 7 percent in 2008, or $701 million,

to $10.6 billion due to increases of $483 million and $218 million at its domestic and international

resorts, respectively. Domestic Parks and Resorts revenues increased due to increased guest

spending, theme park attendance, and hotel occupancy, aswell as higher sales at Disney Vacation

Club. Higher guest spending was due to a higher average daily hotel room rate, higher average ticket

prices, and greater merchandise spending at both resorts.

Disneyland Resort Paris experienced increased revenues, offset by a decrease at Hong Kong

Disneyland Resort due to lower theme park attendance. Some of the increase in revenue was due to

favorable impact of foreign currency translation (weakening of the U.S. dollar against the euro).

Operating income from the Parks and Resorts segment increased 11 percent, or by $524 million, to

$1.897 billion. Exhibit 10 presents Disney’s attendance, per capita theme park guest spending, and

hotel statistics for its domestic properties:

The company also has been hosting VIP tours (additional fees applies), offering added-value

services such as number of attractions being covered along with personal guide tours, preferred

seating, and front-of-line access to rides. The company also offers package deals for major

corporations and schools

Disney has plans to change its concept of the theme parks from the masses to a more

concentrated perspective. This move allows Disney to offer more stand-alone theme parksand resorts

in cities and beach resorts, as well as Disney-branded retail and dining districts, and smaller and more

sophisticated parks. This permits the company in using the Disney brand name to expand in other

areas of the travel business. The company has built time-share vacation homes in popular places in

the United States. Some of the challenges in this marketing strategy have been tailoring the niche

attractions to the local markets while keeping the Disney brand reputation. However, there is a

challenge of avoiding cannibalization of existing parks and attractions. The goal would be entering

into new mar-kets without harming or cannibalizing Disney’s brand.

Studio Entertainment

Disney produces live-action and animated motion pictures, direct-to-video programming, musical

recordings, and live-stage plays. Disney motion pictures are distributed under the names Walt Disney

Pictures and Television, Touchstone Pictures, Hollywood Pictures, Miramax Films, and Buena Vista

Home Entertainment International, which includes Walt Disney Records, Buena Vista Records,

Hollywood Records, Lyric Street Records, and Disney Music Publishing. Disney owns Pixar, a computer

animation leader, and produces feature animation films under both the Disney and Pixar banners. The

company also pro-duces stage plays, musical recordings, and live entertainment events. As of

September 2008, Disney had released 928 full-length movies, 80 full-length animated features, and

546 cartoon shorts. Product offerings include Pay-Per-View, Pay Television, Free Television, Pay

Television 2, and International Television.

Consumer Products

The Consumer Products segment includes partners with licenses, manufacturers, publish-ers,

and retailers worldwide who design, promote, and sell a wide variety of products based on new and

existing Disney characters. The product offerings are Character Merchandise and Publications

Licensing, Books and Magazines, Buena Vista Games, DisneyShopping.com, and The Disney Store.

Products include books, interactive games, food and beverages, fine art, apparel, toys, and even

home decor.

In 2008, the revenues from this segment increased 26 percent to $2.9 billion. Sales growth at

the Disney Stores was due to the acquisition of the Disney Stores North America. Sales growth at

Merchandise Licensing was driven by higher earned royalties across multiple product categories.

Operating income of this segment increased 14 percent to $718 million, mostly due to growth

at Merchandise Licensing partially offset by a decrease at the Disney Stores due to the acquisition of

the Disney Stores North America. In April 2008, Disney acquired inventory, leasehold improvements,

and certain fixed assets of the Disney Stores North America for approximately $64 million. The

acquisition included the assumption of the leases of 229 stores

Competition

Disney’s competitors differ in each segment of business. Time Warner is a major competi-tor to

Disney and is composed of five divisions: AOL, Cable, Filmed Entertainment, Networks, and

Publishing. Time Warner owns Time Inc., AOL, Warner Brothers, and TBS Networks. Walt Disney

generally is classified as Entertainment-Diversified, which directly competes with Time Warner, Inc.

(as shown in Exhibit 11).

CBS Corporation and News Corporation directly compete with the Walt Disney Company in the

Media Network segment, but they are not rivals in the Consumer Products and Parks and Resorts

segments. CBS Corporation was a part of Viacom, Inc., but now operates independently under CBS

Corp. News Corporation is a diversified international media and entertainment company that

operates in eight segments: Filmed Entertainment, Television, Cable Network Programming, Direct

Broadcast Satellite Television, Magazines and Inserts, Newspapers, Book Publishing, and Other. Due

to recent corporate restructuring for both CBS Corporation and News Corp., there are no industry

data available for comparison purposes. Next we discuss the competition for each segment of Walt

Disney.

Competition: Media Networks/Broadcasting

The global media industry is a $1 trillion business that includes advertising, cable firms,

newspapers, radio, and television. This industry is dominated by conglomerates Walt Disney, Time

Warner, Inc., New York Times, News Corp., and CBS Corporation. Typically, these companies prosper

during election years due to heavy advertising revenue invested by the politicians. Special events such

as the Olympics also generate additional advertising revenue for such companies.

Disney competes for viewers primarily with other television networks, independent television

stations, and other video media such as cable and satellite television program-ming services, DVD,

video games, and the Internet. Radio networks likewise compete with other radio network stations

and programming services. Disney also competes with other advertising media such as newspapers,

magazines, billboards, and the Internet.

Exhibit 12 reveals some major competitors to Disney in this segment of business, as well as

percentages that indicate attractiveness of that venue to consumers ages 18 to 24. CBS Corp. is

composed of five segments: Television, Radio, Outdoor, Interactive, and Publishing. CBS Television is

composed of CBS Network and its own television stations, television production, and syndication,

Showtime, and CSTV Networks. In 2008, the Television segment of CBS contributed 64 percent of

company’s total revenue (approximately $8.99 billion). The Radio segment derives revenue primarily

from advertising sales. In 2008, the Radio segment generated 11 percent of CBS’s total revenue

(approximately $1.5 billion).

News Corp., with $33 billion in revenue, operates in eight industry segments: Filmed

Entertainment, Television, Cable Network Programming, Direct Broadcast Satellite Television,

Magazines and Inserts, Newspapers, Book Publishing, and Other. For the fiscal year 2008, the Filmed

Entertainment, Television, Cable Network Programming, and Direct Broadcast Satellite Television

contributed approximately 65 percent or $21.2 billion to the company’s total revenue. The company

has been moving aggressively toward digital technologies such as broadband, mobility, storage, and

wireless. News Corp. owns MySpace.com, one of the Internet’s most popular social networking site,

and IGN.com (a gaming and entertainment site). Fox TV, owned by News Corp., ranks as one of the

most popular networks on television with an average audience of 7.6 million every night, fol-lowed by

CBS with 6.7 million viewers during each prime time, Walt Disney Company’s ABC with 5.4 million

viewers per night, and finally NBC (owned by General Electric Company) with 4.8 million viewers

during each prime-time period. News Corp. recently acquired Dow Jones & Company and Liberty

Media Corporation, which included approximately 41 percent interest in the DIRECTV Group, Inc.

Time Warner’s media and entertainment segments include AOL, Cable, Filmed Entertainment,

Networks, and Publishing. The Cable segment services primarily analog and digital video services, and

advanced services such as VOD and HDTV with set-top boxed equipped with digital video recorders.

The Filmed Entertainment segment produces and distributes theatrical motion pictures and television

shows. The Network segment consists of HBO and Cinemax pay television programming services. The

Publishing segment publishes magazines and Web sites in a variety of areas and has a strategic

alliance with Google, Inc.