To have a better look at a digital transformation, nothing better to have a look at what does the biggest corporation trying to make sure to survive and thrive in the digital era.
I thought that Disney case is quiet compelling, as a consumer myself of their product and remember few decades ago where Walt Disney’s genius was highlighted by its creativity where Disney use to produce by themselves.
Disney competitiveness is still impressive today, but their operating model and distribution method evolved. Disney had box office hit after hit. But surprisingly even with all the publicity from these record-breaking movies, the box office is not where Disney makes most of its money.
So how does Disney make its money? And how did Disney become one of the largest mainstream media powerhouses in the world in recent history? How much content has Disney for their new streaming service? Where is this company heading and what’s on the roadmap for the future?
- Arrival of Bob Iger at Disney
- Collaboration with Pixar
- From strategic partnership to acquisition
- Set up a platform means aggregation of the supply
- A new distribution method: Streaming
- Disney’s largest revenue portion
- Direct to Consumer strategy
- Transition to a Digital Platform
Arrival of Bob Iger at Disney
In 1996, the current CEO of Disney Bob Iger joined the company through its acquisition of ABC, and he would eventually transform Disney into the powerhouse of today. Iger started off working for ABC, the American Broadcasting Company in 1974 and 15 years later, he was named the head of ABC entertainment.
Disney then purchased ABC in 96. In 1999, it made Iger president of Walt Disney international and then Chief Operating Officer in 2000, working alongside then CEO Michael Eisner.
Collaboration with Pixar
At the time, however, Disney had a problem and most of it stemmed from how Eisner had been running the business. Disney had a movie deal with a small company you may have heard of called Pixar.
Pixar was originally spun out of George Lucas’s Lucasfilm, with funding from Steve Jobs in 1986. Jobs paid 5 million for the technology rights and invested about 5 million into the business.
Steve Jobs was back at Apple in 1997. But by this point in time, he was still the Chief Executive Officer at Pixar. However, Pixar had to deal with Disney, Pixar would create and produce three films and Disney would take care of the marketing and distribution of these films.
The profits and costs were supposed to be split evenly. However, Disney would have all the rights to all the characters into the sequels, and it also collected a 10 to 15% distribution fee. The first 3d animated movie that was ever released was Toy Story. It was produced by Pixar and distributed by Disney.
The movie did very well earning 29 million opening weekend in 1995 and 373 million overall at the box office. In 1998. A Bug’s Life did 362 million globally animated pictures were doing very well. However, in 1999 Toy Story two was set to be released direct video.
Because it was a sequel, it wasn’t going to be counted as one of the movies in Disney Pixar three movie deal. This upset Pixar and especially Steve Jobs who had a 50.1% stake in Pixar and was the CEO.
This was the company that he had funded, and he’s also listed as a co-founder of Pixar Toy Story two eventually was changed to be released to theaters and ended up doing 500 million worldwide.
However, the relationship between Pixar Steve Jobs and Disney’s Michael Eisner went downhill very quickly from that point in time, they began openly fighting in the press with Steve Jobs calling Disney movies embarrassing duds, and Eisner saying that he didn’t really need Pixar anymore.
Since they had all the rights to all the characters and sequels that Pixar had developed. Eisner refused to deviate from the original deal, despite all the success that Pixar was bringing to Disney.
His mismanagement of the company also led to a campaign to save Disney from Walt Disney’s nephew, Roy E. Disney to get rid of Eisenhower as CEO.
Although the campaign just created more friction. What Eisner didn’t in fact realize was how important Pixar was to Disney. Luckily, this was very clear for Bob Iger at one of the Disney parades.
From strategic partnership to acquisition
In a later interview recalled standing next to Michael Eisner watching all the parade characters go by and realizing how every character in the Disney parade was only about Pixar character.
Pixar clearly meant a lot to Disney and Iger was planning to do something about it.When Bob Iger returned to the Disney headquarters, he presented to the Board one of his findings, which was that Disney’s own Animation Studios had actually been losing money for the past 10 years.
He presented three choices to the board. Disney could choose to keep the current management, which wasn’t working out too well in the studio will continue to lose money, or they could find some new management of which he didn’t know who or where to even look.
Alternatively, they could buy Pixar, which he wasn’t sure was even up for sale. After consideration of these three items. The board agreed with Iger and gave him the authorization to explore a deal with Pixar.
Iger went and visited Pixar and the Pixar team ended up warming up to him as he was so interested and impressed with their work. Steve Jobs also liked how he was so straightforward and open with him.
Iger had made it very clear to Steve Jobs that Disney animation was basically in trouble without Pixar. In 2005, Disney bought Pixar for $7.4 billion and Michael Eisner resigned as CEO later that year giving up the position to Bob Iger. Steve Jobs was the largest shareholder of Pixar.
He had owned 50.1% of the company and had of course put a lot of his money into the company from Apple. When Disney bought Pixar, Steve Jobs became the largest individual shareholder of Disney.
Michael Eisner ended up becoming the number two largest shareholder and that also explains why during many Apple presentations, Disney and Pixar especially are always showcased in each of Apple’s keynotes.
What was important with this acquisition, however, is that Iger mended the relationships with Steve Jobs and with Pixar, even as the so-called math didn’t work out for the acquisition.
Bob Iger saw the long-term value of Pixar, Pixar would have had to make 70 blockbuster films in order to make up for the large acquisition price, given the amount of money that movies were making back then at the box office.
Set up a platform means aggregation of the supply
But Bob Iger didn’t stop there. He saw the value of brands which could stand the test of time, and that could be used to tell stories under Bob Iger. Disney also acquired Marvel for 4.2 4 billion in 2009.
The Star Wars franchise Lucasfilm was also acquired for $4.05 billion in 2012. Both deals giving Disney years and years of future content and blockbuster names for movie titles. This is why Bob Iger has been so important for Disney in recent history and getting Disney to where it is today.
All of his acquisitions now make up a huge portion of the company’s do releases, and revenue associated with that. He’s also an expert at finding companies that fit under the Disney umbrella.
Income from operations that Disney had been fairly flat for many years near the end of Michael Eisner. His tenure after putting Bob Iger at the helm in 2005, profit had begun to take off under his management, while Iger had originally planned to step down from Disney in 2019.
He has agreed to stay on until at least 2021 to help integrate the new 21st Century Fox assets, which Disney had acquired for $71 billion. He says he’s sticking to the plan this time, as the timing wasn’t right before, but it’ll be right in 2021 for him to retire.
A new distribution method: Streaming
Iger’s departure will add some uncertainty to the company. But Iger feels confident that he has steered the company in the right direction and that his successor will be in good hands.
Currently, he is also a board member of Apple, but due to conflicts of interest from both Disney and Apple moving into the streaming business. Iger sits out of the streaming service discussions for now.
You may remember Google’s Eric Schmidt was on the board of Apple. He left his apples and Google’s businesses had overlapped. This could happen to Iger, however, Iger is leaving Disney in 2021.
Also, Google and Apple had other bigger issues with each other with regards to the Android OS being similar to iOS, which Apple felt threatened by. Iger is a proven merger and acquisition experts so staying on until the fox integration is complete as a smart move, especially for Disney.
This is one of the largest acquisitions by a company in the last decade. It’ll require a seasoned vet to integrate some of these assets, including Fox family Searchlight Pictures in many parts of 21st Century Fox along with great talent and new technology.
One of the main reasons that Disney acquired Fox was that Disney is viewing the world through a direct to consumer lens. And if that’s going to be the future of the media business, then the combined company presents a huge opportunity for the future.
The Fox acquisition will likely affect all the main segments of Disney’s business, especially the studio entertainment business with regards to Marvel now that the fox acquisition included all of the X men and other popular Marvel characters for Disney to work with.
But surprisingly, although Disney has blockbuster movies year after year, the movie business alone only makes up about 17% of Disney’s overall revenue.
Disney’s largest revenue portion
Many people think that this comes from toys and action figures and other types of merchandise. However, that segment called consumer products and interactive media makes up even less coming in at 8% of Disney’s overall revenue.
But it is definitely bolstered by new characters and rides on the back of blockbuster movie titles for which Disney can sell on licensed merchandise. Consumer product and interactive media also includes retail stores, merchandise and video games.
A lot of Disney’s products are licensed out and they take a royalty, Disney parks are immensely popular and are driving huge profit for the company. Even more than the billions coming from the movie business alone.
Parks and Resorts make up 34% of Disney’s revenue. Disney is just in the midst of opening up new Star Wars galaxy edge theme parks that is multiple locations which is seeing large anticipation and demand so it can be seen how the popularity of the movie segment also affects Disney’s other three main operating segments.
Parks and Resorts still isn’t the largest segment the largest segment is in fact media networks, which includes cable networks and broadcasting. Cable networks include the Disney channels and ESPN for which Disney He makes money off ease through advertising revenue as well as affiliate revenue for each of its subscribers.
Broadcasting includes things like Disney’s Marvel shows like Cloak and Dagger and Agents of SHIELD as well as other shows. Again, Disney makes money through program sales and affiliate revenues through multiyear contracts.
Advertising revenue also depends on the number of impressions and the network ad rates. This is very similar to how YouTube would make money for example, also since consumers are cutting the cord on cable networks, part of Disney’s media network business, which is its largest is in decline, which is worrisome to some investors.
As a whole, the operating income from these segments are very similar to the same percentages from the revenue. Looking at where Disney makes its money. Just because the movie studio business isn’t the largest it certainly contributes to the other parts of Disney’s businesses by making certain content and characters extremely popular.
For example, the Marvel Cinematic Universe set of movies is allowing for spin off television shows for the media networks division, new action figures and merchandise to be sold for the Consumer Products Division and is opening doors for new attractions at Disney parks.
But that said media networks is Disney’s cash cow. Disney also spent an astounding $3.2 billion on Parks and Resorts in 2018, which will provide future benefit however, it is still a huge capital expenditure compared to its other businesses which have significantly less capex, given the income they’re generating.
Now going forward from 2019. Disney is making some changes; it will still have immediate network segment. However, parks and resorts are now called parks experiences and products and will include the merchandise that Disney sells.
Studio entertainment will remain the same even as Disney smashed the box office records making over $8 billion at the box office by July 2019, which is a new yearly record.
Direct to Consumer strategy
Disney now has seven out of the top 10 highest grossing movies of all time, including Avatar, which Disney acquired through Fox. The other change that Disney made is a new segment called direct to consumer and international and it will include Hulu and Disney’s online direct to consumer products.: ESPN plus and Disney plus.
Disney had acquired a company called BAMTech, which began to develop two subscription streaming services aligned with Disney properties. The sports-oriented service ESPN plus launched in April 2018 and the upcoming entertainment service Disney plus.
ESPN plus service offers 1000s of live events on demand content and original programming not available on ESPN other networks. It’s a complimentary product. Instead of trying to replace ESPN. Bob Iger has said that the two will be separate for now for that reason.
If they need to in the future, they can flip a switch and make ESPN into a streaming service. ESPN is part of Disney’s highest revenue media network segment, which is why Disney doesn’t want to give up his cash cow.
But it was really this company BAMTech that has allowed Disney to venture into a direct to consumer model, sort of like Netflix. BAMTech is also internally known as Disney streaming services.
Walt Disney owns 75% of the venture MLB advanced media owns 15% and the NHL owns 9%. Both the MLB and the NHL have the right to sell their shares to Disney in the future.
Disney is also working on consolidating the owners of Hulu. The shares were divided as follows 30% owned by Disney Fox and Comcast and 9.5% owned by AT&T.
After the Fox acquisition. Disney owns a controlling interest of 60% of Hulu. They will be buying the Comcast portfolio for about $5.8 billion over the next four years.
Disney has bought AT&T portion for $1.4 billion consolidating Hulu under one umbrella. Disney’s lineup of streaming services will contain Disney plus, ESPN plus and Hulu.
The company announced in late 2019 that it will bundle all three of these services together for USD 12,99 a month, which is very competitive with players like Netflix, Amazon and Apple.
Transition to a Digital Platform
Hulu already has 28 million users in the United States, and it’s only mainly operating in the United States. Netflix still has about twice as many US subscribers and a lot more internationally.
However, Hulu is doing quite well domestically, Disney removed their shows and movies from Netflix and bringing them to their own platform.
Disney plus will also receive new Marvel and Star Wars shows and many of the Fox assets that were acquired. There are about 7000 episodes starting in the Disney plus service making it highly competitive.
Disney also has quite the roadmap for its movie business, including new remakes of classic Disney movies, new Star Wars movies, and of course, the Marvel roadmap now that some of the best brands in the world are under the same umbrella as the Fox assets.
Disney has plenty of original content and stories to help drive the business for many decades to come. With the company aligning itself to be a direct to consumer online distributor.
This opens many new windows for the company and ways in which it can defend itself against cable cutting in the future, and protect its media networks business, which is its largest and most profitable segment.
It will take some time for Disney to integrate itself with the massive 21st Century Fox acquisition. Although there may be some bumps along the way, Disney continues to invest in its future a strategy that has been proven to pay off given the great track record the company has had under the management of Bob Iger.
With its latest investments Disney will be positioned as an even stronger household name as the company navigates the transition to its digital platform.