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Dow 30 Profile: Disney (Walt)
In the summer of 1923, Kansas City, Missouri native Walt Disney created a short pilot film, “Alice’s Wonderland”, about a girl in an animated world. October 16, 1923, marked the formal beginning of the Walt Disney Company (DIS – Free Disney Stock Report) when the film was picked up by distributor Margaret J. Winkler, who contracted a series of Alice’s Comedies. Walt and his brother, Roy moved to Los Angeles and established the Disney Brother Cartoon Studio as equal partners (Roy handled most of the finances). At Roy’s suggestion, the brothers changed the name of the company to the Walt Disney Studio.
Disney and his animators embarked on an all-cartoon series in 1927, and created 26 Oswald the Lucky Rabbit shorts. But, after a contract dispute with Winkler, Walt Disney lost the rights to that franchise and most of his staff.
Walt Disney and his chief animator, Ub Iwerks, developed a new character, Mickey Mouse. The imagineer poured resources into making the first sound cartoon. “Steamboat Willie” starring Mickey Mouse opened in November of 1928, and the Walt Disney Studios developed a series with the world-famous mouse at the helm. In the following years, Mickey became the company mascot, and his iconic ears soon branded everything from figurines to toothbrushes to office supplies.
The studio continued to gain steam, even during the Great Depression. It produced Silly Symphonies a collection of animated shorts. In 1932, Walt Disney Studios partnered with Technicolor on the first full-color cartoon “Flowers and Trees,” paving the way for the 1937 release of the first full-length animated film, Snow White and the Seven Dwarfs. Disney’s first fairy tale became the world’s highest grossing film (it held this record until 1939), and the studio (which relocated to Burbank, California thanks to the film’s profits) began production on other feature films.
But, the company lost access to its global audiences with the advent of World War II, and wasn’t able to recoup production costs on its 1940 releases: Pinocchio and Fantasia. Even though the studio slowed their output during the war, it continued to innovate and released Dumbo and Bambi in the early 1940s.
By 1950, Disney released its first live-action film Treasure Island. And in the following decade the film studio ventured into television production, including the Davy Crockett mini-series, the long-running Disneyland anthology, and the Mickey Mouse Club. It also created Buena Vista Productions to control the distribution and marketing of its ventures.
As its motion pictures and televisions gained momentum, Walt Disney turned his attention to another entertainment venue. On July 17, 1955, the revolutionary amusement park, Disneyland, opened in Anaheim, California. The park has attracted millions of visitors from around the globe, and in the founder’s words, it would “never be completed…as long as there is imagination left in the world.”
On November 12, 1957, the family-owned company decided to go public, and opened on the New York Stock Exchange at $13.88.
In 1965, the company announced plans to open a much larger theme park and resort in Orlando, Florida. After Walt Disney died of lung cancer in 1966, his brother and co-founder Roy Disney renamed the project in his memory. Walt Disney World opened to the public in October, 1971, and Mr. Roy Disney passed away two months after he fulfilled his brother’s vision. Donn Tatum, Card Walker, and Ron Miller (Walt’s son-in-law), took over the leadership of the company.
Walt Disney Productions churned out animated classics and family-friendly films through the 1960s and 1970s. It also created a new brand Touchstone Pictures, which was geared for more mature audiences.
Prime-time show The Wonderful World of Disney helped the media conglomerate keep a foothold in television. And in 1980, Walt Disney Home Studio was created to focus on the new videocassette market.The Disney Channel was born in 1983, featuring its library of classic films, television series, and new original programming.
Inspired by Disney’s dream of a futuristic model city, EPCOT Center it opened its second Walt Disney World theme park, a so called “permanent World’s Fair, in 1982. The following year, the company partnered with the Oriental Land Company to build Tokyo Disneyland.
Even with the success of its theme parks, the Disney Channel, and its valuable film library, the production company had trouble keeping up with competing studios. In 1984, financier Saul Steinberg launched a hostile takeover, intending to sell Disney’s various assets. Friendly investors fought the assault, and the company brought in Frank Wells from Time Warner (TWX) Warner Bros. and Michael Eisner and Jeffrey Katzenberg from Viacom (VIAB) subsidiary Paramount Pictures to head the corporation.
The company had a renaissance under its new leadership. Through the 1980s and 1990s it strengthened its own productions, entered into television animation, and revitalized its portfolio with several strategic acquisitions. In 1991, DIS was added to the Dow Jones Industrial Average.
In 1993, Katzenberg purchased Miramax Films, helping Disney capture older audiences. Three years later, Disney merged with Capital Cities/ABC. The $19 billion purchase added ABC television network (10 TV stations, 21 radio stations, seven daily papers), and an ownership position in A&E, Lifetime, History Channel, and ESPN. Today, it’s estimated that the sports network, alone, is worth the acquisition price.
Under Eisner and his partners, the company expanded its parks (opening Disneyland Paris), strengthened its film division (Disney-MGM Studios became Hollywood Studios), and invested in new media. In the 1990s, the company also launched its first cruise line, and made its foray on the Great White Way, adapting its films to the Broadway stage. It expanded merchandising efforts and opened the first Disney Store.
But, not everyone saw eye to eye with Eisner. In the mid 1990s, after a disagreement, Katzenberg left to form Dreamworks SKG (DWA) with Steven Spielberg and David Geffen. In the early 2000s, following a series of box office flops, sentiment turned against the Chairman and CEO. Board members Roy Disney and Stanley Gold led 43% of DIS shareholders to withhold their proxies from re-electing Mr. Eisner to the board. Former U.S. Senator George Mitchell became chairman, and Eisner resigned as CEO in 2005. He was replaced by his longtime assistant Robert Iger.
Iger helped restructure the company and renew its focus on family-friendly films. Miramax co-founders (The Weinstein brothers) left the company, and DIS downsized its investment in Touchstone. Disney acquired Pixar Animation Studios in an all-stock transaction valued at $7.4 billion in 2006. And at the end of 2009, the company purchased Marvel Entertainment for $4.24 billion.
Today, the global entertainment conglomerate consists of five segments: Studio Entertainment, Consumer Products, Parks and Resorts, Media Networks, and Interactive Media.
Studio Entertainment, which made up 16% of fiscal 2011 revenues, includes Disney’s production companies (Walt Disney Animation Studios, Pixar Animation Studios, DisneyToon Studios, Touchstone Pictures, and Hollywood Pictures); its international distribution arm; Walt Disney Studios Home Entertainment, which distributes titles for sale and rental; Disney Theatrical Productions (including its Broadway shows and Disney on Ice); and the Disney Music Group (Walt Disney and Hollywood Records).
Consumer Products, including Disney Toys, Disney Apparel, Accessories & Footwear, Disney Food, Health & Beauty, Disney Home and Disney Stationery, contributed 7% to the top line in fiscal 2011. The company’s publishing segment and retail operations (The Disney store) are also included in this segment. Ongoing merchandising efforts help support the global Disney brand.
The lion’s share of Disney’s business last year, contributing 46% of revenues, was from its Media Networks segment – its vast array of broadcasting, cable, radio, publishing, and associated websites. The group includes Radio Disney, ABC Television Network, and cable channels ABC Family, SOAPnet, Disney Channel, and the ESPN networks.
Parks and Resorts continue to make up a healthy portion of its overall business, as well. Disneyland, Walt Disney World Resorts, and the Disney cruise lines contributed 29% to the top line in 2011. In addition, the company has overseas subsidiaries in Tokyo, Hong Kong, and Paris, owns eight Vacation Club resorts (with more than 100,000 members), and offers guided tours across the globe under Adventures by Disney.
Interactive Media Group is the company’s smallest and newest segment. The unit responsible for the creation and delivery of Disney’s branded interactive and multiplatform content only contributed a modest 2% to last year’s revenues, we imagine that this segment will play a more active role in the coming years, given the active video game consoles and mobile gaming market, as well as the dynamic opportunities for content development for online, smartphone, and tablet use.
Walt Disney claimed the he “never called my work an 'art' It's part of show business, the business of building entertainment.” Over the past 80 years, the company has continued to innovate, strengthen its brand equity, and bolster its global position, and we believe that Disney is poised to grow nicely over the coming years.
The revenue and cost synergies afforded from the entertainment conglomerate’s broad portfolio and cross-platform efforts, and good corporate partnerships augur well for top- and bottom-line advances. Further, we think that Disney will continue to eye accretive acquisitions to complement its asset roster.
Looking ahead, the studio will likely continue to invest in content creation. Disney has scaled back studio production over the past few years, to concentrate on releasing better quality films, rather than pursuing a heavier slate. This move has helped the company shave costs and bolster margins. Too, Disney has been leveraging its film library to derive more benefit from its former successes. It is remastering its classics for DVD and Blue Ray re-release, as well as redistributing its movies to theaters in 3D format. Likewise, its focus on younger audiences – and to that end, its 2009 Marvel acquisition – should be accretive in the near term and over the long haul.
As television viewership continues to evolve, Disney is taking measures to adapt its own media segment. It partnered with other media companies to create Hulu, to take advantage of the viewers who have migrated to the Internet. We believe that Disney will pursue other deals with cable distributors to help it carve out a space for its shows and programs on nontraditional platforms, such as mobile devices and handheld tablets. It recently formed an alliance with Comcast (CMCSA) to better distribute its shows and programming. In addition, it plans to widen its global footprint, and is acquiring India-based UTV Communications to strengthen its media assets overseas. Likewise, Disney’s Interactive Media segment will likely play a greater role in the coming years, as the company adapts to the changing marketplace.
Parks and Resorts have also been a key investment in the past couple of years. The company owns fourteen theme parks across the globe, and has used its overseas properties to help support brand equity. Its cruise lines and other travel services have also gained steam, and the company has used increment price increases to help improve the returns on its investments in its vacation services.
The Dow-30 component has healthy finances, which should support its capital program, share buybacks, and its dividend program. Even though the media company is somewhat susceptible to consumer whims, we think that its well-diversified portfolio and management’s strategic growth campaign will ensure healthy long-term gains. As such, these shares may appeal to a wide range of investors.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.