The Walt Disney Company (Walt Disney or ‘the company’), together with its subsidiaries, is a diversified entertainment company. The breadth and depth of Walt Disney’s product and service portfolio provides it with considerable strength. The company’s offerings can be broadly classified into four segments: media networks, parks and resorts, studio entertainment, and consumer products. A broad and diversified revenue base insulates the company from economic cycles in one industry and diversifies the company’s business risks. However, intense competition threatens to erode the company’s market share in its different lines of business.
Diversified product and service portfolio
The breadth and depth of Walt Disney’s product and service portfolio provides it with considerable strength. The company’s offerings can be broadly classified into five segments: media networks, parks and resorts, studio entertainment, consumer products, and interactive media.
The media networks segment owns television, radio and cable properties in the US and other countries. Through the parks and resorts segment, the company owns and operates the Walt Disney World Resort and Disney Cruise Line in Florida, the Disneyland Resort in California and ESPN Zone facilities in several states. The studio entertainment segment produces and acquires live-action and animated motion pictures, animated direct-to-video programming, musical recordings and live stage plays. The consumer products segment partners with licensees, manufacturers, publishers and retailers to design, promote and sell products based on existing and new Disney characters and other intellectual property. The interactive media segment of the company creates and delivers Disney-branded entertainment and lifestyle content across interactive media platforms.
The company has balanced revenue mix in terms of revenue generated from these segments. In FY2010, the company generated 45.1% of the total revenue from the media network segment. This was followed by parks and resorts (28.3%); studio entertainment (17.6%), consumer products (7%), and interactive media accounted for the remaining 2.0% of the overall revenues. A broad and diversified revenue base insulates the company from economic cycles in one industry and diversifies the company’s business risks.
Portfolio of well know brands
The company has a portfolio of globally recognized brands. For instance, the company owns one of the most powerful brands, Disney, in the entertainment business. Disney brand has been consistently ranked high in several brand surveys. Apart from a strong corporate brand, the company has several other brands such as ESPN within its portfolio. ESPN, for instance, is one of the largest and popular sports channels in the world. Miramax, Touchstone, and Pixar are other brands of Walt Disney, which have strong brand equity. Strong brand image helps the company gain consumer acceptance of new products easily. The company also has the option to leverage its strong brand image to enter new businesses.
Significant customer penetration of the cable networks operations
The company has strong cable networks operations. The company’s cable networks and international broadcast operations are principally involved in the distribution of television programming, the licensing of programming to domestic and international markets, and investing in foreign television broadcasting, production, and distribution entities. The cable networks produce its own programs or acquire programming rights from other producers and rights holders for network programming. Some of the company’s most significantly penetrated cable properties as of FY2010 include ESPN with 100 million subscribers; ESPNU with 74 million subscribers; ESPNEWS with 74 million subscribers; Disney Channel with 100 million subscribers; Disney XD with 78 million subscribers; and ABC Family with 99 million subscribers.
The company also has made investments in international broadcast and cable properties. ESPN operates six television sports networks, including ESPN, ESPN2, ESPN Classic, ESPNEWS, ESPN Deportes (a Spanish language network) and ESPNU (a network devoted to college sports). ESPN also operates four high-definition television simulcast services, including ESPN HD, ESPN2 HD, ESPNEWS HD and ESPNU HD.
The strong market penetration in the cable networks lends greater stability to the company’s operations. The company leverages this platform to cross-sell its other businesses, leading to better revenue growth prospects.
Strong brand equity enjoyed by parks and resorts operations
Walt Disney has a strong presence in the parks and resorts business. About 28.3% of its revenue amounting to $10,761 million comes from parks and resorts segment. The company’s parks and resorts segment consist of the Walt Disney World Resort, the Disneyland Resort, the Disney Vacation Club, the Disney Cruise Line, Adventures by Disney, and ESPN Zone.
The Walt Disney World Resort is located in Florida, on approximately 25,000 acres of company’s owned land. The resort includes theme parks (the Magic Kingdom, Epcot, Disney’s Hollywood Studios and Disney’s Animal Kingdom), hotels, vacation club properties, retail, dining and entertainment complex, sports complex, water parks and other recreational facilities.
The Disneyland Resort owns 461 acres and has the rights under long-term lease for use of an additional 49 acres of land in Anaheim, California. It includes two theme parks (Disneyland and Disney’s California Adventure), three hotels and Downtown Disney, a retail, dining and entertainment district.
Further, the Disney Vacation Club (DVC) offers ownership interests in 11 resort facilities located at the Walt Disney World Resort; Vero Beach, Florida; Hilton Head Island, South Carolina; and Oahu, Hawaii.
The company’s Disney Cruise Line has two 85,000-ton ships, the Disney Magic and the Disney Wonder. The Adventures by Disney offers a series of all inclusive guided vacation tour packages at predominantly non-Disney sites around the world. Also, the company operates eight ESPN Zone restaurants.
Furthermore, the company also owns 47% ownership interest in Hong Kong Disneyland Resort. The company also licenses the operations of the Tokyo Disney Resort in Japan. An extensive parks and resorts operation enables the company to not only reach more customers but also reinforce its brand equity among its target group.
Overdependence on the North American markets
Walt Disney has its operations all across the world spanning North America, Europe, Asia Pacific and Latin America. But, the company derives a majority of its revenues from North American markets, which does not truly reflect its global presence. The company derived 74.3% of its revenues from the US and Canada in FY2010. The company has a little presence in emerging markets like Asia Pacific, Latin America and other, which accounted for only 8.5% of the company’s total revenue. Concentrating on maturing markets like the US and Canada, which are already witnessing economic slowdown, and not expanding in emerging markets limits the company’s overall revenue growth and also weaken its market position in the international market.
Acquisitions to strengthen the position in the entertainment industry
Walt Disney has acquired several companies in the recent past to expand its position in the kids and families media markets. In the year 2009, the company acquired Wideload Games, a Chicago-based producer and developer of original interactive entertainment; Marvel Entertainment, renowned character franchise company; and Playdom, one of the leading companies in the fast-growing business of online social gaming.
Wideload Games is well known for its Bungie Software label, the Marathon and Myth computer game series, and the extremely popular game franchise Halo. Wideload Games is slated to develop original video games for Disney. Another acquired company, Marvel, owns some of the strong global brand and world-renowned characters including Iron Man, Spider-Man, X-Men, Captain America, Fantastic Four, Hulk and other 5,000 characters. The acquisition has brought these popular characters under the Disney brand. Besides, the acquisition of Playdom strengthens the company’s position in the fast-growing online social gaming.
The company can capitalize on the synergies from each of these acquired companies to further enhance its business operations and revenues.
Distribution agreement with DreamWorks Studios
The Walt Disney Studios, a motion picture arm of Walt Disney, entered into a long-term distribution agreement with DreamWorks Studios, in 2009. Under the terms of this agreement, Walt Disney will distribute 30 DreamWorks films over five years. Disney will also handle DVD sales and distribution on Starz, the premium cable channel with which Disney has a long-term deal. The first DreamWorks motion picture is expected to be released under the Walt Disney’s Touchstone Pictures banner in 2010. Furthermore, DreamWorks, for instance, will pay Disney a fee of 10% of the revenues. The above agreement enables the company to further enhance its quality of motion picture offerings and expand its customer base.
New franchise releases are likely to grow sales in the next fiscal
Walt Disney has several franchise releases lined up during 2011. Pirates of the Caribbean: On Stranger Tides, the fourth film in Pirates franchise; Cars 2 from Cars franchise; Marvel’s Thor; Marvel’s Captain America; and The Avengers are to be released during 2011. Most of these franchises have huge fan following and is expected to draw audiences in large scale. Earlier, during 2010, the company’s Toy Story franchise released Toy Story 3, which became the highest grossing animated movies and subsequently won several prestigious awards. Alice in Wonderland was another successful movie of 2010. The success of these franchises contributed to the 5.3% revenue growth during FY2010. Similar success of 2011 releases would further add to the company’s revenue growth.
Intense competition keeps market share under check
There is strong competition in many of Disney’s key industries. Its broadcasting services compete for viewers with other television networks, cable television, satellite television, videocassettes, DVDs, and internet. This high level of competition is particularly important with respect to advertising revenues, where it also competes with other media such as newspapers, magazines, radio and billboards. Disney’s broadcasting division competes with organizations such as CBS and Fox, with strong market presence and technical expertise to challenge it in every aspect of business. The parks and resorts segment competes with other parks and resorts operators like Xanterra Parks & Resorts and smaller local US based amusement parks for visitors. Thus, intense competition threatens to erode the company’s market share in its different lines of business.
Proliferation of piracy in entertainment industry
The proliferation of piracy in the entertainment industry is a significant and rapidly growing phenomenon. New technologies such as the convergence of computing, communication, and entertainment devices, the falling prices of devices incorporating such technologies, and increased broadband internet speed and penetration have made the unauthorized digital copying and distribution of films, television productions and other creative works easier and faster and enforcement of intellectual property rights more challenging. This facilitates the creation, transmission and sharing of high quality unauthorized copies of Disney’s content. The proliferation of unauthorized copies and piracy of these products has an adverse effect on the company’s businesses and profitability as these products reduce the revenue that the company could potentially receive from legitimate sale and distribution of its products and services. Increasing piracy will have an adverse effect on the company’s businesses and profitability.
The company’s television and radio broadcasting are highly regulated, and each of its other businesses is subject to a variety of US and overseas regulations. These regulations include the US Federal Communications Commission (FCC) regulation of its television and radio networks and owned stations, including licensing of stations, ownership limits, prohibitions on ‘indecent’ programming and restrictions on commercial time in children’s programming. These regulations are also in the form of federal, state and foreign privacy and data protection laws and regulations and regulation of the safety of consumer products and theme park operations. Changes in any of these regulatory areas may require the company to spend additional amounts to comply with the regulations, which in turn could affect its profitability.