Disney Discussion Summary

Disney Discussion Summary                                        

An analysis of the “major studio industry” reveals it is a pretty rough space – there are generally about 5-6 players in this business.  A 5 forces analysis reveals:

• Powerful buyers (movie distribution is a concentrated and hard to enter business so distributors are in a position to extract much of the upside)
• Powerful suppliers – the “talent” can also expropriate much of the potential upside.
• Rivalry:   Competition for scripts and talent can be ferocious
• Substitutes:  Many viable alternatives to major studios films – indies, cable, TV, books, etc.
• Entry:  Difficult to become a major studio – so this threat is low

The average ROIC in this space is low and the variance is high each period – studios move in and out of first place – there is no question that in addition to challenging industry forces there is also a fact that each “try” is expensive (Disney’s movies cost $22 million on average) and the outcomes are very unpredictable.  Hits that are predictable tend to be very expensive – the gems for studios are the movies that are cheap relative to box office receipts – in strategy speak – “you want to keep the nut small”.  Meaning, when operating under uncertainty on viewer acceptance, your odds of recouping are much higher if you don’t let costs escalate out of control.  Furthermore, if the nut is small and the movie is a hit, return on investment is astronomical.  So a movie like “Pretty Woman” which cost very little to make is much more valuable to a studio head than a “Transformer” on a ROIC basis.  If the metric is notoriety and technical achievement awards, that is another thing.

 This discussion reveals a clear insight on the value of Disney’s historical investment in its OWN brand equity.  If the studio is the draw, buyer power and supplier power are both checked.  So stated at the crudest level, a well positioned studio is itself the attraction to viewers and in this way, secures distribution and can treat talent as more “fungible.”

The case suggests that Disney enjoyed two golden periods – one that began in 1937 with Snow White during which Walt created while Roy imposed some financial discipline.  This period ended just after Walt’s death in 1966.  The second golden period began in 1984 when a team of people (Eisner, Wells, Katzenberg, and 20 or so other execs) combined into alchemy reminiscent of the Disney under Walt.

Two key two points:

1. A studio needs to be positioned so as to soften the effect of the 5 forces – the studio needs to be the draw and it should skew its production to the sort of movies that sell based on attributes the studio can control (such as story) rather than on attributes the studio cannot control (such as particular actors).
2.  As a stand alone business, the major studio business is not a source of high expected returns or a place for reliable returns.  That said, it is possible to take popular content and generate a lot of ancillary revenues through merchandizing, creating a franchise, theme parks, etc.  So while there isn’t much good to say about the prospect of a studio, there is a lot of synergy between a studio and some businesses that are quite reliable.  Think of it this way – making movie is like buying an option.  If it’s a “hit” you get to exercise your option by monetizing the heck out of it – but only if you are built to do this.

If we had to boil down the job of Disney’s top management, it would come down to paying attention to the following:

1. Investing in Disney’s mystique:  Disney mostly conjures up good emotions – I find that at most 10% of the class has a negative reaction to the firm.  If you google “Disney wordle” – you are likely to find they mostly contain words like “magic”, “family”, “feel good” – with a small amount of discontent saying “unauthentic”, “corny”, etc.  Let’s label the reaction Disney conjures up on average as one of Disney’s key “strategic asset.”  Without a doubt, many of Disney’s projects, movies in particular, are successful even if the ROIC is low IF the project increases the amount of positive reactions to the word “Disney.”  So some Disney projects are done to keep Disney from being a tired brand.
2. Exploiting the Disney mystique:   The stronger our positive feelings are toward Disney, the more able Disney should be to exploit its investments in Disney.  Obvious ways to exploit Disney’s investment in our positive feelings about them are raising prices for admission to theme parks, shows and hotels, but building more hotels, theme parks,  and theaters are also forms of exploitation (meaning exploitation in a good way!).  Some investments are both – they exploit Disney’s mystique and they also serve as investments in the Disney mystique.   But to be clear – building mystique and not monetizing it is a mistake that Walt was a guilty of – he seemed to be maniacal about quality – but really insistent on keeping prices down as he saw raising price as mercenary and thought it would diminish the brand.  This was quite costly to Disney over the years – as we can see be the ease with which Eisner generated revenues by raising prices without any obvious effect on brand equity.
3. Wringing Out Inefficiency that is Easy to Accumulate in the Name of “Creativity”:  To invest in Disney and to exploit Disney requires a behemoth organization that spans many businesses.  Maintaining operational efficiency throughout the kingdom is a formidable job.  The danger of being financially disciplined is you “kill the golden goose” – that is, stifle creativity in the name of practicalities.  On the other hand, when creatives operate without restraint they tend to build “Euro Disney” – a $4.4 billion dollar investment that could not be recouped under the best of circumstances.

So as a high level, Disney is about investment in a creative core, exploiting the fruits of that investment (without seeming mercenary) and keeping operational inefficiency from eating substantially in the upside (without managing in a  tight fisted a way that  dampens creativity.)  

If this sounds difficult – it is.  This is likely among the most difficult companies to run in the world.  It is also fair to say that it is probably unlikely any management team of Disney is doing a good job at all 3 things at the same time.  In other words, Disney is usually either underinvesting in “Disney”, underexploiting “Disney” or accumulating expensive operating slack.  After 1966, it was committing all three sins, and during Eisner’s final years it was also committing all three sins.