Unit VI Project Implementation Plan: Part 2 WALT DISNEY

Walt Disney Company, 2013

www.disney.com , DIS

Headquartered in Burbank, California, Walt Disney Company (Disney) and its

subsidiaries compete in the entertainment and media broadcasting industry worldwide.

Serving customers for nearly 100 years, Disney is a diversified conglomerate, owning

ABC, ESPN, theme parks, cruise lines, and more. As a member of the DOW 30 and the

world’s largest media conglomerate, Disney owns ABC television and cable networks

such as ABC Family, Disney Channel, and ESPN (80 percent). Disney owns 8 television

stations and 35 radio stations as well as Walt Disney Studios that produces films

through Walt Disney Pictures, Disney Animation, and Pixar. Disney’s Marvel

Entertainment is a top comic book publisher and film producer. Disney owns and

operates huge cruise boats, as well as 14 popular theme parks around the world.

Disney’s earnings in Q3 of 2013 equaled the prior year’s number, while revenue

increased 4 percent, led by Disney’s theme parks, resorts, and cable networks such as

ESPN. For Q3 of 2013, Disney earned $1.85 billion, on revenue of $11.6 billion, up from

$11.1 billion. Revenue at Disney’s parks and resorts grew 7 percent to $3.7 billion. Cable

networks revenue grew 8 percent to $3.9 billion, led by ESPN, A&E and U.S. Disney

channels. A laggard, Disney’s broadcast revenue was unchanged at nearly $1.5 billion.

Overall, Disney’s media networks business grew 5 percent to $5.4 billion. For Q3 of

2013, Disney’s movie studio revenue fell 2 percent to $1.6 billion, due to poor results

from the movies “The Lone Ranger” and “Iron Man 3.”

Copyright by Fred David Books LLC. (Written by Forest R. David)

History

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

cartoon calledAlice’s Wonderland. A distributor named M. J. Winkler contracted to

distribute the Alice Comedieson 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 company name 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 the Disneyland anthology series.

In 1955, Disney’s most successful series, The Mickey Mouse Club, began, and the new

Disneyland Park opened in Anaheim, California.

Disney created a series of releases from 1950s through 1970s, including The Shaggy

Dog, Zorro, Mary Poppins, and The Love Bug. Walt Disney died in 1966. In 1969,

Disney started its educational films and materials. Another important time of Disney’s

history was opening Walt Disney World in Orlando, Florida, in 1971. In 1982, the Epcot

Center opened as part of Walt Disney World. The following year, Tokyo Disneyland

opened.

After leaving network television in 1983, Disney introduced 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.

Filmmaking soon hit new heights as Disney led Hollywood studios in box-office gross

for the first time. 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, Dick

Tracy, Pretty Woman, and Sister 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 reached new heights with The Little Mermaid, Beauty and

the Beast,and Aladdin. Also that year, Disneyland Paris opened. During the 1990s,

Disney introduced Broadway shows, opened 725 Disney Stores, acquired the California

Angels baseball team to add to its hockey team, opened Disney’s Wide World of Sports

in Walt Disney World, and acquired 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. Disney acquired

Pixar in 2006, Marvel in 2009, and launched Disney Dream, a new cruise liner in 2011.

Newer Disney initiatives include the April 2011 groundbreaking of Shanghai Disney

Resort at a price tag of $4.4 billion and expected opening day slated for sometime in

2015. In February 2012, Disney finalized acquisition of UTV Software Communications,

an Indian entertainment company. In October of 2012, Disney announced plans to

acquire Lucasfilm, producers of the popular Star Wars movies. The acquisition is

expected to cost $4.05 billion. Disney plans to release Star Wars Episode VII in 2015.

Internal Issues

Vision and Mission

Disney’s vision is “to make people happy.”

Organizational Structure

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

organizational structure that consists of five diverse, but all family entertainment

segments: (1) media networks, (2) parks and resorts, (3) studio entertainment, (4)

consumer products, and (5) interactive media. The president, chief executive officer,

and director of Walt Disney is Robert Iger. There is no chief operations officer (COO) in

the Disney hierarchy, but Andy Bird, Chairman of Walt Disney International, functions

like a COO.

Segments

Disney provides segment revenue and operating income for each of their five

SBUs. Exhibit 2displays the three most recent years of revenue and operating income

per Disney SBU, along with a percentage change for each of the last two years. Note that

total consolidated revenues and operating income increased in 2012 and 2011, albeit at a

decreasing rate during the most recent period. Note that the consumer products and the

interactive media segments are small compared to media networks and parks and

resorts.

Media Networks

Media networks is the largest Disney SBU in both revenues and operating income,

accounting for 45 percent of all revenues in 2012. Revenue growth in 2012 came from

increased affiliate fees, higher advertising rates, increased viewership of ESPN programs

and the shows Castle, Once Upon a Time, and Revenge. The positive growth was limited

by lower home entertainment revenues from programs such as Lost and lower Disney

Channel viewership. Production costs increased as college sports, as well as NFL, MLB,

NBA, and Wimbledon were able to negotiate more lucrative contracts. For example, the

Southeastern Conference (SEC) signed a deal with ESPN in 2008 for $2 billion for 15-

year rights to broadcast football and men’s and women’s basketball games. However,

with the 2012 additions of Texas A&M and Missouri to the SEC, the previous contract is

contractually renegotiable and a new, much more expensive, contract is expected in the

near future.

With media networks, Disney owns and operates the ABC Television Network that

reaches 99 percent of all U.S. households. This segment also includes ABC-owned

Television Stations Group, ABC Studios, Disney Channels Worldwide, ABC Family,

SOAPnet, Disney ABC Domestic Television, Disney Media Distribution, Hyperion, and

Radio Disney network. The ABC Television Network operates more than 220 affiliated

stations across the USA. Disney channels worldwide consists of 94 kids and family

entertainment channels available in 169 countries and 33 languages. ABC Family is a

mixture of series and movies. SOAPnet owns character-driven soapy drama, from

daytime and primetime soaps, to reality shows and movies. Disney ABC Domestic

Television provides motion pictures and TV programming to U.S.-based media

platforms. Disney Media Distribution is an international distributor of branded and

nonbranded content to all platforms. Hyperion publishes fiction and nonfiction titles for

adults. Radio Disney is available in more than 40 U.S. markets, and on satellite radio,

mobile apps, and the Web.

EXHIBIT 1 Disney’s Organizational Chart

EXHIBIT 2 A Breakdown of Disney Revenues by SBU

Change (%)

(in millions) 2012 2011 2010 2012 vs. 2011 2011 vs. 2010

Revenues:

Media Networks $19,436 $18,714 $17,162 4% 9%

Parks and Resorts 12,920 11,797 10,761 10% 10%

Studio Entertainment 5,825 6,351 6,701 (8)% (5)%

Consumer Products 3,252 3,049 2,678 7% 14%

Interactive Media 845 982 761 (14)% 29%

Total Consolidated Revenues $42,278 $40,893 $38,063 3% 7%

Segment operating income:

Media Networks $6,619 $6,146 $5,132 8% 20%

Parks and Resorts 1,902 1,553 1,318 22% 18%

Studio Entertainment 722 618 693 17% (11)%

Consumer Products 937 816 677 15% 21%

Interactive Media (216) (308) (234) 30% (32)%

Total segment operating income $9,964 $8,825 $7,586 13% 16%

Parks and Resorts

EXHIBIT 3 A Breakdown of Media Networks Revenues (in millions)

2012 2011 Change (%)

Revenues:

Cable Networks 13,621 12,877 6

Broadcasting 5,815 5,837 —

19,436 18,714 4

Operating Income:

Cable Networks 5,704 5,233 9

Broadcasting 915 913 —

6,619 6,146 8

Disney’s parks and resorts segment includes 10 divisions: (1) Disneyland Resorts in California,

(2) Tokyo Disney Resort, (3) Disneyland Resort Paris, (4) Hong Kong Disneyland, (5) Walt

Disney World Resort in Florida, (6) Disney Cruise Line, (7) Adventures by Disney, (8) Disney

Vacation Club, (9) Walt Disney Imagineering, and (10) Aluani, a Disney Resort and Spa in

Hawaii. Disney has a 51 percent ownership in Disneyland Resort Paris and a 47 percent

ownership in Hong Kong Disneyland. Disney’s newest theme park will be in the Pudong district

of Shanghai opening in 2015.Exhibit 2 revealed that Disney’s parks and resorts revenue for

2012 increased 10 percent to $12.9 billion, and operating income increased 22 percent to $1.9

billion. Results for 2012 reflected increases at nearly all theme parks, except a decrease at

Disneyland Paris.

EXHIBIT 4

Domestic International Total

2012 2011 2010 2012 2011 2010 2012 2011 2010

Parks

Increase in attendance 3% 1% (1)% 6% 6% 1% 4% 2% (1)%

Increase in Per Capital Guest Spending 7% 8% 3% 1% 2% 3% 5% 6% 3%

Hotels

Occupancy 81% 82% 82% 85% 88% 85% _____ 83% 82%

Available Room Nights (in thousands) 9,850 9,625 9,629 2,468 $2,466 2,466 12,318 12,091 12,095

Per Room Guest Spending $257 $241 $224 $317 $294 $273 $270 $251 $234

The new 4,000-passenger ship, Disney Dream, was christened at Port Canaveral in 2011

and was designed especially for families. Disney Dream joins Disney Magic and Disney

Wonder. Another new ship, Disney Fantasy, joined the Disney fleet in 2012. Disney

Dream will sail to Disney’s private island, Castaway Cay.

Revenue in this segment is generated primarily from the sale of admissions tickets to the

theme parks, as well as hotel room charges per night and sales from merchandise, food,

and beverages. Revenue also comes from rentals and sales from vacation club properties

and sales of cruise vacations.

Exhibits 4 and 5 reveal that Disney domestic revenues from its parks and resorts

division increased 11 percent in 2011, to $12.9 billion, resulting from customers

spending 6 percent more, mainly from higher ticket and hotel prices. Revenue growth

was 6 percent in international operations stemming from 4 percent in higher spending,

a 3-percent volume increase, and a 3-percent gain on foreign currency appreciation.

Studio Entertainment

EXHIBIT 5 Parks and Resorts: Revenue and Operating Income

(in millions) 2012 2011 2010 Change (%)

Revenues:

Domestic $10,339 $9,302 $8,404 11%

International $2,581 2,495 2,357 3%

$12,920 $11,797 $10,761 10%

Segment operating income:

$1,902 $1,553 $1,318 22%

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: Theatrical Market, Home Entertainment Market, Television Market, Disney Music

Group, andDisney Theatrical Productions. Disney has also licensed the rights to produce and

distribute features films such as Spider-man, The Fantastic Four, and X-Men to third-party

studios. Disney earns a licensing fee on these films, whereas the third-party studio incurs the

cost to produce and distribute the films. Currently Disney has a diverse business line in the

studio entertainment SBU consisting of: Marvel, Touchstone, Pixar, Disneynature, Disney

Studios Motion Pictures, and more Disney-branded services. Disney’s studio entertainment

revenues for 2012 decreased 8 percent to $5.8 billion and segment operating income increased

17 percent to $722 million. Exhibit 6 reveals a revenue breakdown for this segment.

EXHIBIT 6 Studio Entertainment: Revenue and Operating Income

(in millions) 2012 2011 2010 Change (%)

Revenues:

Theatrical Distribution $1,470 $1,733 $2,050 (15)%

Home Entertainment $2,221 2,435 2,666 (9)%

Television Distribution and Other $2,134 2,183 1,985 (2)%

Total Revenues $5,825 $6,351 $6,701 (8)%

Segment operating income:

$722 $618 $693 +17%

Consumer Products

Disney’s consumer products segment partners with licenses, manufacturers, publishers,

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

on new and existing Disney characters. Product offerings are: (a) character merchandise

and publications licensing, (b) books and magazines, and (c) The Disney Store. Disney

released in mid-2011 a new toy line that captured the fantasy, action, and adventure

of Pirates of the Caribbean: On Stranger Tides.Disney is perhaps the largest worldwide

licensor of character-based merchandise and producer and distributor of children’s

film-related products based on retail sales. Disney’s consumer products revenues for

2012 increased 7 percent to $3.25 billion; operating income increased 15 percent to

$937 million.

Interactive Media

Disney’s interactive media segment creates and delivers games and media for

smartphones and tablets. Interactive media revenues for 2012 decreased 14 percent to

$845 million and operating income incurred a loss of $216 million. As indicated

in Exhibit 8, games and subscription revenue increased 36 percent in 2011, but the

segment has incurred losses for several years, as revealed inExhibit 2.

EXHIBIT 7 Consumer Products: Revenue and operating income

(in millions) 2012 2011 2010 Change (%)

Revenues:

Licensing and Publishing $2,056 $1,933 $1,725 6%

Retail and Other 1,196 1,116 953 7%

Total Revenues $3,252 $3,049 $2,678 7%

Segment operating income:

$937 $816 $677 15%

EXHIBIT 8 Interactive: Revenue and Operating Income

(in millions) 2012 2011 2010 Change (%)

Revenues:

Games Sales and Subscriptions $613 $768 $563 (20)%

Advertising and Other 232 214 198 8%

Total Revenues 845 982 $761 (14%)

Segment operating income:

$(216) $(308) $(234) (30)%

Finance

Income Statement

Disney’s 2012 income statement is provided in Exhibit 9. Note the 17.4 percent

increase in net income.

Balance Sheets

Disney’s 2012 balance sheets are provided in Exhibit 10. Note that Disney has $2.45

billion of “projects in progress.” Also, note the $25 billion in goodwill, fully one-third of

total assets, which is not a good thing. Long-term debt is staying about the same at $10

billion, which is a lot of debt to service.

Competition

Disney competes directly with NBC Universal, Paramount Pictures, Time Warner, CBS

Corp., News Corp., Carnival Corp., and Royal Caribbean and indirectly with all family

entertainment oriented businesses globally. In essence, all hotels, restaurants, water

parks, and attractions anywhere near Disney’s 14 theme parks, are rival businesses, such

as Sea World, Marineland, and Silver Springs in Florida. There is a large, new (China

state run) theme park scheduled to open in 2014 right beside the Disney theme park

(also slated for opening in 2014) in Shanghai, China, so that will be a major competitor.

EXHIBIT 9 Disney’s Recent Income Statements (in millions of dollars, except EPS)

Income Statement 2012 2011

Revenues 42,278 40,893

Costs and expenses (33,415) (33,112)

Restructuring (100) (55)

Other revenue 239 75

Net interest expense (369) (343)

Equity in the income 627 585

Income before taxes 9,260 8,043

Income taxes (3,087) (2,785)

Net income 6,173 5,258

Noncontrolling interests (491) (451)

Net income $5,682 $4,807

EPS 3.13 2.52

Shares outstanding (in thousands) 1,818 1,909

EXHIBIT 10 Disney’s Unaudited Balance Sheets (in millions)

2012 2011

Assets

Current Assets

Cash and cash equivalents 3,387 3,185

Receivables 6,540 6,182

Inventories 1,537 1,595

Television costs 676 674

Deferred income taxes 765 1,487

Other current assets 804 634

Total current assets 13,709 13,757

Film and television costs 4,541 4,357

Investments 2,723 2,435

Parks, resorts and other property 38,582 35,515

Accumulated depreciation (20,687) (19,572)

17,895 15,943

Projects in progress 2,453 2,625

Land 1,164 1,127

21,512 19,695

Intangible assets 5,015 5,121

Goodwill 25,110 24,145

Other assets 2,288 2,614

Total Assets 74,898 72,124

Liabilities and Equity

Current Liabilities

Accounts payable 6,393 6,362

Current portion of borrowings 3,614 3,055

2012 2011

Unearned royalties 2,806 2,671

Total current liabilities 12,813 12,088

Borrowings 10,697 10,922

Deferred income taxes 2,251 2,866

Other long-term liabilities 7,179 6,795

Preferred Stock, $.01 par value, 100 million shares authorized but

none issued

Common Stock, 4.6 billion shares, 2.8 and 2.7 billion shares issues

respectively 31,731 30,296

Retained earnings 42,965 38,375

Accumulated other loss (3,266) (2,630)

71,430 66,041

Treasury Stock, 1.0 billion shares (31,671) (28,656)

Total Equity 39,759 37,385

Noncontrolling interests 2,199 2,068

Total Equity 41,958 39,453

Total Liabilities and Shareholders’ Equity 74,898 72,124

Source: Company documents.

CBS Corp.

Headquartered in New York City, CBS is a large media conglomerate with operations in

television, radio, online content, and publishing. CBS Broadcasting operates the

number-1 rated CBS television network, along with a group of local TV stations. CBS

also owns cable network Showtime and produces and distributes TV programming

through CBS Television Studios and CBS Television Distribution. Also competing with

Disney, other operations include CBS Radio, CBS Interactive, and book publisher Simon

& Schuster. In addition, CBS Outdoor is a leading operator of billboards and outdoor

advertising. Chairman Sumner Redstone controls CBS through National Amusements.

Time Warner, Inc.

Headquartered in New York City, Time Warner is the world’s third-largest media

conglomerate behind Walt Disney and News Corp., with operations spanning television,

film, and publishing. Time Warner owns Turner Broadcasting that runs a portfolio of

popular cable TV networks including CNN, TBS, and TNT. Time Warner also operates

pay-TV channels HBO and Cinemax, all of which compete with Disney. Time Warner

owns Warner Bros. Entertainment that includes films studios (Warner Bros. Pictures,

New Line Cinema), TV production units (Warner Bros. Television Group), and comic

book publisher DC Entertainment.

News Corp.

Headquartered in New York City, News Corp. is the second largest media conglomerate

in the world, trailing only Walt Disney. News Corp. owns film, TV, and publishing

businesses that make and distribute movies through Fox Filmed Entertainment. Owned

by News Corp., FOX Broadcasting has more than 200 affiliate stations in the USA and

owns and operates about 25 TV stations, as well as a portfolio of cable networks.

Publishing assets of News Corp. include newspaper publishers Dow Jones (The Wall

Street Journal) and News International (The Times, The Sun), and book publisher

HarperCollins. News Corp. has stakes in British Sky Broadcasting (BSkyB) and Sky

Deutschland. The company has recently split into two parts.

Carnival Corp.

Headquartered in Miami, Florida, Carnival is the world’s number-1 cruise operator,

owning and operating a dozen cruise lines and about 100 ships with a total passenger

capacity of more than 190,000. Carnival operates in North America primarily through

its Princess Cruise Line, Holland America, and Seabourn luxury cruise brand, as well as

its flagship Carnival Cruise Lines unit. Brands such as AIDA, P&O Cruises, and Costa

Cruises offer services to passengers in Europe, and the Cunard Line runs luxury trans-

Atlantic liners. Carnival’s cruise boats compete with the Disney cruise boats wherever

Disney sails. Another large cruise line company, Royal Caribbean, also competes with

Disney ships wherever they sail.

Paramount Pictures Corp.

Headquartered in Hollywood, California, and a subsidiary of Viacom, Paramount

produces and distributes films through Paramount Pictures (Tranformers: Dark of the

Moon) and Paramount Vantage (Capitalism: A Love Story). The Paramount Pictures

library consists of some 3,500 films, including classic hits from the Star Trek,

Godfather, and Indiana Jones series, and releases about a dozen new titles annually.

Competing with Disney, Paramount Pictures distributes movies on video and DVD

through Paramount Home Entertainment.

Lucasfilm

In October 2012, Disney acquired Lucasfilm for a whopping $4.05 billion, with Disney

paying approximately half of that money in cash and issuing approximately 40 million

shares at closing. Headquartered in San Francisco, California, and founded by George

Lucas in 1971, Lucasfilm is a large, privately held, entertainment company that has

motion-picture and television production operations. Lucasfilm’s global activities

include (a) Industrial Light & Magic and Skywalker Sound that serves the digital needs

of the entertainment industry for visual-effects and audio post-production, (b)

LucasArts, a leading developer and publisher of interactive entertainment software

worldwide, (c) Lucas Licensing that manages the global merchandising activities for

Lucasfilm’s entertainment properties, (d) Lucasfilm Animation, (e) Lucas Online that

creates Internet-based content for Lucasfilm’s entertainment properties and businesses,

and (f) Lucasfilm Singapore that produces digital animated content for film and

television, as well as visual effects for feature films and multi-platform games.

With the Lucasfilm acquisition, Disney obtains a substantial portfolio of cutting-edge

entertainment technologies that have kept audiences enthralled for many years.

Kathleen Kennedy, current co-chairman of Lucasfilm, will become President of

Lucasfilm, reporting to Walt Disney Studios Chairman Alan Horn. Additionally she will

serve as the brand manager for Star Wars, working directly with Disney’s global lines of

business to build, further integrate, and maximize the value of this global franchise.

Kennedy will serve as executive producer on new Star Wars feature films, with George

Lucas serving as creative consultant. Star Wars Episode 7 is targeted for release in 2015,

with more feature films expected to continue the Star Wars saga and grow the franchise

well into the future.

The Future

Disney is busy completing its Shanghai theme park while at the same time integrating

the Lucasfilm acquisition into its operations. Analysts ponder whether the Lucasfilm

acquisition added more goodwill to the Disney balance sheet that already is too laden

with that burden. As the world comes online, the opportunities, as well as the threats,

abound for Disney. Strategic decisions have to be made in terms of what segments to

bolster and what segments to focus on improving. The interactive media segment has

not turned a profit in a number of years.

Kevin Mayer is Disney’s Executive Vice-president for Corporate Strategy

and Business Development. Help Mr. Mayer by preparing a draft three-year

strategic plan for Disney.