How Disney Milks Its Hits for Profits Ever After

Ben Fritz, Wall Street Journal, 8 June 2015 (annotated article)

CEO Robert Igers love of franchises spawns years of sequels, park

rides, merchandise. Walt Disney Co. is piling up profits by focusing on
franchises like Frozen and Star Wars that create opportunities for
sequels, theme park attractions and merchandising.

Norway is about to get a Frozen makeover. At Walt Disney Co.s Epcot Center in
Orlando, Fla., a 27-year-old tour of Norwegian history and mythology
called Maelstrom is being rebuilt as Frozen Ever After, based on the
blockbuster animated musicals fictional world of Arendelle. Disney Imagineers
who designed the ride recently got a virtual-reality tour at a warehouse in
Glendale, Calif., wearing 3-D glasses while watching high-definition images of
Olaf and Sven horsing around, Grandpappy Troll telling a magical story and Elsa
belting out her song Let It Go. They will become animatronic characters that
Epcot visitors float by on a log after Frozen Ever After opens next year. The first
Frozen ride is the latest example of Disneys transformation under Chairman
and Chief Executive Robert Iger into a company that tries to turn each big hit into
its own successful business.

Its easy to see why Disney is giving Anna and Elsa a new home in Epcot. As of
early May, sales of Frozen merchandise so far this year are more than 10 times
higher than during the same period of 2014. A mobile game has been
downloaded more than 105 million times. The movie itself has grossed about
$1.3 billion since its release in November 2013, the most successful animated
motion picture ever. In March, Disney announced that work has begun on a
sequel. The new ride is just the start of a growing presence for Frozen in theme
parks around the world, executives say. When people love a Disney product this
much, they expect to be able to somehow experience it, said Kathy Mangum, a
senior creative executive in the Imagineering theme-park design group, as the
ride in Disneys warehouse ended and the world of Arendelle disappeared from
the white walls, ceiling and floor.

Igers big changes

For decades, Disney also churned out a hodgepodge of content with no particular
connection to any of its entertainment properties. Miramax was sold five years
ago. Other changes show that the traditional Hollywood model of producing a
large, diverse slate of risky movies in hopes that a few big hits outweigh a larger
number of flops is dead at Disney as part of its focus on consistency. Mr. Iger has
refocused Disney around what it calls franchisesor entertainment
juggernauts that live on for many years as theme-park rides, toys, videogames,
television shows, pajamas and just about anything else that keeps revenue
rolling in. The consistent performance of those franchises is helping Disney
outshine competitors by measurements ranging from stock-price growth to

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product licensing to ticket sales per movie. Ten years ago, we were more like
other media companies, more broad-based, Jay Rasulo, then Disneys chief
financial officer, told analysts last fall. Almost every aspect of the company is
now oriented around brands and franchises.

Mr. Iger began focusing on franchises early in his tenure as CEO. He said he was
pretty amazed at how low Disneys return was on capital invested in movies.
He was quickly willing to bet that kicking a then-nascent franchise strategy into
high gear would help Disney withstand the challenges of globalization and
falling DVD sales by letting movies, theme parks, product licensing and other
businesses feed off each others successes.
The case I laid out was that by creating and then supporting franchises, it could
impact the bottom line of the whole company in a very profound way and
everybody would benefit from that, he said.

Disney has primarily fostered franchises in its own animation divisions and at
companies it bought. The studio now produces about 10 movies a year, and its
annual line-up is dominated by family-friendly franchises: one Star Wars sequel
or spinoff, (the 2012 purchase of Lucasfilm Ltd. for another $4 billion gave
Disney the ability to release a Star Wars follow-up every year, starting with
Star Wars: The Force Awakens this December); two or three Marvel superhero
movies (the takeover of Marvel Entertainment Inc. for $4 billion in 2009 brought
Avengers and Guardians of the Galaxy.); one or two live-action versions of
animated classics like The Jungle Book and Beauty and the Beast, and two or
three animated films, either originals or sequels.

The strategy has swept through every part of Disney except for its television
business, which is dominated by ESPN. For example, employees in Disneys
consumer products group are assigned to Toy Story, Mickey Mouse, Marvel
and other cash cows. The group used to be divided by product categories such as
clothes, toys and furniture. Disneys videogame division now publishes just one
major console game a year, Infinity, which brings together the companys most
popular characters. It used to make as many as half a dozen games a year, with
original titles in genres like action and auto racing.

Disney paid $7.4 billion in 2006 for Pixar Animation Studios, which released
Cars and Toy Story and delivered a jolt of energy to Walt Disney Animation
Studios, the creator of Frozen and last years hit Big Hero 6. The Disney Junior
cable channel, which went on the air in 2012, is considered a franchise, too, with
sub-franchises such as the animated series Sofia the First and Doc
McStuffins. As the entertainment business grows increasingly digital and global,
Mr. Iger has argued that recognizable franchises give Disney an edge. For
example, the company is developing over-the-top digital channels to offer
entertainment programming from its well-known franchises directly to
consumers. That could one day result in something akin to a Star Wars-only
version of Netflix Inc. and other ways to hold on to viewers as the cable bundle
unravels.

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At theme parks, Disneys annual capital investments have roughly tripled in the
past decade. Franchises are becoming much more prominent, a shift from the
more abstract ideas that used to inspire rides and attractions, such as the future
and the Wild West. Thomas Staggs, Disneys Chief Operating Officer, said that a
pretty high percentage of the uptick in capital weve been deploying has to do
with our belief in the creative library. He ran the theme-parks unit until February.
California Adventure got the Cars-inspired Cars Land in 2012, and the Seven
Dwarfs Mine Train roller coaster opened at Walt Disney Worlds Magic Kingdom
last year. Next year, Disney will open Iron Man Experience, its first attraction
based on a Marvel character, at Hong Kong Disneyland. Star Wars attractions
also are in the works. Disneys new $5.5 billion theme park in Shanghai, set to
open in 2016, will include a large Pirates area based on the movies that were in
turn based on a ride. Other Shanghai attractions were picked partly based on
analyses of the most popular Disney franchises in China, Mr. Iger said.

The link between popular franchises and park attendance is strong.

After struggling for a decade, California Adventure in Anaheim, Calif., saw
attendance surge 40% between 2011 and 2014, a sign that Cars Land is a
powerful draw, according to the Themed Entertainment Association. Disney
executives are hoping that Frozen Ever After will help boost Epcot, where
attendance has grown just 4% in the last five years. Epcot could use a shot in
the arm, said Ms. Mangum, the Imagineer executive who oversees Disneys
theme parks in Orlando. Purists may scoff at putting sentient snowmen in a park
meant to entertain with a purpose, as Disneys chief executive described Epcot
when it opened in 1982.
But Disney executives point out that Frozen is tied to Scandinavian art and
culture, adding that millions more people will likely visit Norway and the rest of
the World Showcase just to experience the new four-minute ride. We have to be
careful not be too doctrinaire when we apply these principles, said Mr. Staggs.
With a sequel and Broadway show also in the works, he added: You will see
Frozen in the parks for as long as were around.

Financial results and executive compensation

The push is paying off in ways that are envied by rivals. The interactive media
unit that includes Infinity reported its first-ever annual profit in fiscal 2014. Last
year, 11 different Disney franchises each sold more than $1 billion of branded
products, up from seven in 2011. Disneys film studio, which gets a cut of
revenue from products based on its movies, had an operating profit margin of
21% in fiscal 2014 and 27% in the next six months. Profit margins averaged
about 10% in the previous decade, roughly in line with competitors such
as Viacom Inc.s Paramount Pictures and Comcast Corp.s Universal Pictures.
Overall, Disney earned profits of $7.5 billion in its latest fiscal year, up 22% from
$6.14 billion in fiscal 2013. Revenue rose 8% to $48.81 billion. Disney hasnt
disclosed its number of franchises or profit and revenue for each.

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Many outsiders believe Disney is defying the long-held maxim that
entertainment is an inherently topsy-turvy business plagued by unpredictable
hits and flops. Some on Wall Street no longer see Disney as a media company
and see it more as a global consumer-products company like Nike, said Michael
Nathanson, senior research analyst at MoffettNathanson LLC. Disneys collection
of successful intellectual property is so vast that a senior executive at one Disney
rival complained recently: Its almost unfair given the amalgamation of
resources they have.

Nevertheless, relying so much on a small number of money-makers is risky,

though. If interest in the Marvel or Star Wars franchises were to falter, it would
be a serious blow to the entire company, not just Disneys movie studio. And
because Disney makes fewer films now, especially original, live-action
productions, the company is less likely to develop new franchises like Universals
Fast and Furious or surprise hits like American Sniper from Time Warner Inc.s
Warner Bros. The latest Fast and Furious movie is in a virtual tie with
Avengers as the third-highest-grossing movie of all time.

Meanwhile, Disney competitors are doubling down on their franchises. Starting

next year, Warner Bros. will release two superhero films a year from its stable of
DC Comics characters like Batman and Wonder Woman. Universal is making a
series of movies based on classic monsters like The Mummy and The Thing.
Paramount plans to accelerate the pace of sequels and spinoffs based on
Transformers. Some analysts are worried. We think there is cause for
increasing concern that the major studios are all moving towards increasingly
indistinguishable strategies as they all put more eggs in the franchise picture
basket, media analyst Doug Creutz of Cowen and Co. wrote in a research note.
The shift also could make it harder for fresh ideas to surface in Hollywood,
sceptics claim, while filling theatre marquees, theme parks and store shelves
with even more of the same. In response to criticism that they arent doing
enough to foster originality, Disney executives point to offbeat, animated fare
like next weeks Inside Out, about the characters inside an 11-year-old girls
brain, and last years Guardians of the Galaxy, based on an obscure Marvel
comic book that was new to most moviegoers.

To keep executives focused on the biggest hits, Mr. Iger has tied the majority of
their compensation to the performance of Disney as a whole, rather than
individual businesses. A committee of 20 executives analyzes franchises, hunts
for new opportunities and occasionally demotes fallen stars, as happened
with High School Musical. Mr. Iger decides what the companys top franchise
priorities are each year, sending a powerful signal to Disneys 180,000
employees in offices, studios and theme parks around the world. Once thats
done, a switch is turned and off the organization goes, he said in an interview.

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Disneys Organisational Structure

by Nargiz Kassymbekova on 8 November 2015

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