MiniCase 15: Disney: Building Billion-Dollar Franchises Disney: Building Billion-Dollar Franchises This activity is important because, as a manager, you must be able to identify the growth and diversification goals your organization hopes to achieve and choose the most successful ways in which to meet them, whether through mergers, alliances, or acquisitions. The goal of this exercise is to demonstrate your understanding of different growth and diversification strategies by applying concepts to recent actions by Disney and evaluating the challenges it faces. Read the case below and answer the questions that follow. Case With $55 billion in annual revenues in 2017, Disney is the worlds largest media company and is renowned for its Walt Disney Studios and the popular Walt Disney Parks and Resorts. Over the past decade, Disney has grown through a number of high-profile acquisitions, including Pixar (2006), Marvel (2009), and Lucasfilm (2012), the creator of Star Wars. All this was done with the goal of building billion-dollar franchises based on movie sequels, park rides, and merchandise. But midsummer 2017 revealed even bigger ambitions. Disneys Corporate Strategy Going into 2017 As a diversified media company, Disney is active in a wide array of business activitiesmovies, amusement parks, cable and broadcast television networks (ABC, ESPN, and others), cruises, and retailing. It became the worlds leading media company to a large extent by pursuing a corporate strategy of related-linked diversification. That is, some, but not all, of Disneys business activities share common resources, capabilities, and competencies. Disney executes its corporate strategy by entering alliances and acquiring other media businesses to create theme-based franchises. The corporate strategy of creating billion-dollar franchises is Disneys main focus, and CEO Bob Iger leads a group of about 20 executives whose sole responsibility is to hunt for them. These senior leaders decide top-down which projects are a go and which are not. They also allocate resources to particular projects; Disney has even organized its employees in the consumer products group around franchises such as Frozen, Toy Story, Star Wars, and other cash cows. The corporate strategy around building billion-dollar franchises is certainly paying off: Disney has seen steady growth to its top line, and it earned some $10 billion in profits in 2016. Its stock rose more than 350 percent between 2010 and 2017, outperforming its rivals such as Time Warner, Sonys Columbia Pictures, and 21st Century Fox. Disney and Pixar: Try Before You Buy To understand Disneys corporate strategy of growing through acquisition, lets look at one of the most successful deals in recent history: Disney acquired Pixar and then built a number of billion-dollar franchises around it. It all started with a strategic alliance. Pixar began as a computer hardware company producing high-end graphic display systems. One of its customers was Disney. To demonstrate the graphic display systems capabilities, Pixar produced short, computer-animated movies. Despite being sophisticated, Pixars computer hardware was not selling well, and the new venture was hemorrhaging money. To the rescue rode not Buzz Lightyear, but Steve Jobs. Shortly after being ousted from Apple in 1986, Jobs bought the struggling hardware company for $5 million and founded Pixar Animation Studios, investing another $5 million into it. The Pixar team, led by Edwin Catmull and John Lasseter, then transformed the company into a computer-animation film studio. To finance and distribute its newly created computer-animated movies, Pixar entered a strategic alliance with Disney. Disneys distribution network and its stellar reputation in animated movies were critical complementary assets that Pixar needed to commercialize its new type of films. In turn, Disney was able to rejuvenate its floundering product lineup, retaining the rights to the newly created Pixar characters and to any sequels. Pixar became successful beyond imagination as it rolled out one blockbuster after another: Toy Story (1, 2, and 3), A Bugs Life, Monsters, Inc., Finding Nemo, The Incredibles, and Cars, grossing several billion dollars. Given Pixars huge success and Disneys abysmal performance with its own releases during this time, the bargaining power in the alliance shifted dramatically. Renegotiations of the PixarDisney alliance broke down in 2004, reportedly because of personality conflicts between Steve Jobs and then-Disney Chairman and CEO Michael Eisner. After Robert Iger was appointed CEO, Disney acquired Pixar for $7.4 billion in 2006. The success of the alliance demonstrated that the two entities complementary assets matched and gave Disney an inside perspective on the value of Pixars core competencies in the creation of computer-animated features. Integrating Pixar allowed Disney to transfer and apply some of its own unique competencies including marketing, brand building, and product extensions. Acquisitions Ever After In 2009, Disney turned to acquisitions again. The acquisition of Marvel Entertainment for $4 billion added Spider-Man, Iron Man, The Incredible Hulk, and Captain America to its lineup of characters. Marvels superheroes grossed a cumulative $15 billion at the box office, with The Avengers bringing in some $2 billion. In 2012, Mickey Mouses extended family was joined by Darth Vader, Obi-Wan Kenobi, Princess Leia, and Luke Skywalker when Disney acquired Lucasfilm for more than $4 billion. In 2014, Disney acquired Maker Studios, a(YouTube-based) multichannel network, for $675 million. Under Disney, Maker Studies is no longer focused on providing some 60,000 (YouTube) creators with support by promoting their channels and selling ads. Rather, Maker now has marching orders to focus on no more than the top 250 (YouTube) content creators with large followings. The goal is to build billion-dollar franchises in the new on-demand TV space. One of Maker Studios early success stories was (YouTube) megastar PewDiePie, who at one point had the most successful (YouTube) channel and for many years was one of the highest-profile stars on (YouTube). In 2017, however, Disney cut ties with PewDiePie following his posting of videos in which he made inflammatory remarks, not in line with Disneys values. Building Billion-Dollar Franchises After taking the reins, CEO Iger transformed a lackluster Disney following a decade or so of inferior performance by refocusing it around what he calls franchises, which generally begin with a big movie hit and are followed up with derivative TV shows, theme park rides, video games, toys, clothing such as T-shirts and PJs, among many other spin-offs. Rather than churning out some 30 movies per year as it did before Iger, Disney now produces about 10 movies per year, focusing on creating box-office hits. Its annual movie lineup is dominated by such franchises as Stars Wars and Marvel superhero movies and by live-action versions of animated classics such as Cinderella and Beauty and the Beast. The biggest Disney franchises that started with a movie hit include the Pirates of Caribbean (grossing more than $4 billion), Toy Story (over $2 billion), Monsters, Inc. (close to $2 billion), Cars (over $1 billion), and, of course, Frozen (over $1.5 billion). The 2013 animated movie Frozen (made by Walt Disney Animation Studios run by Pixar execs Catmull and Lasseter) has grossed over $1.5 billion, making it the most successful animated movie ever. To further build its Frozen franchise, Disney is working on a sequel of its animated movie hit for release in late 2019. It has spun off several shorter films and is now also a Broadway musical. It offers much merchandise and is a dreamlike ride through the fictional world of Arendelle at Disney Worlds Epcot Center, replacing a previous attraction that had grown stale. The Star Wars franchise, however, is clearly the crown jewel in Disneys lineup of billion-dollar franchises. The 2015 Star Wars sequel The Force Awakens grossed over $2 billion on the big screen, making it the third-highest grossing movie ever, after Avatar and Titanic. Intergalactic Finance: The Star Wars Franchise Is Worth $10 Billion The numbers generated by the Star Wars franchise do seem fantastic. First, consider just the movies. Although The Force Awakens grossed over $2 billion in box-office receipts on a budget of about $260 million, NYU finance professor Aswath Damodaran estimates the final gross receipts of the 2015 Star Wars sequel to be $10 billion. How One Movie Grosses $10 Billion. Professor Damodaran extrapolated add-on revenue by using historical data, so he could project anticipated revenues not just from The Force Awakens but also from other announced sequels in the pipeline. Here is how a simple version of his model plays out, based on reported box-office receipts for the 2015 sequel of roughly $10 million. Note that add-on revenue is computed using a multiplier (shown in parentheses) of box-office receipts.1 Box-office receipts: $2 billion Streaming revenue (1.2): $2.4 billion Toys and merchandise (1.8): $3.6 billion Books and eBooks (0.2): $0.4 billion Gaming (0.5): $1 billion TV shows and other (0.5): $1 billion Thus the total gross receipts for The Force Awakens are $10.4 billion. Valuation of a Franchise. By coincidence, Damodaran ultimately values the entire Star Wars franchise at the same amountaround $10 billion. He therefore concludes that Disneys $4 billion price tag for Lucasfilm was a good investment. Again, the astonishing valuation of the franchiseor the reveal of the likely true gross receipts of a new film in the franchiseis explained by Disneys ability to build revenue on top of billion-dollar franchises through product extensions and add-ons. The Star Wars empire has a far reach in many corners of commerce, let alone in the galaxy. Clouds on Disneys Horizon While things have been sunny in Southern California, where Disney is headquartered, there are clouds on the horizon, which is to say Disney has been facing a number of potential challenges. Risks of Relying on a Few Big Franchises. Disneys approach is risky. What if the pipeline dries up? That is, how sustainable is an acquisition-led growth strategy? Not many media companies remain of the same caliber as Pixar, Marvel, or Lucasfilm. Losing Originality. Critics worry that focusing on billion-dollar franchises hampers Disneys originality. Moviegoers could write off Disneys offerings as too predictable. Problems on the TV Side. Roughly half of Disneys profits come from its TV networks ESPN, ABC, and others. Yet that industry is in disruption. People spend more time and sometimes money watching content online via (YouTube), Netflix, Hulu, and other streaming services than ever, and they watch less TV. This means the numbers of TV viewers and of cable subscribers are in decline. Underperforming Acquisitions. Disneys acquisitions have not been uniformly successful. While it won big with franchise-based studios Pixar and Lucasfilm, the company has also lost money and focus with the acquisition of technology companies. Examples include online video producer Maker Studios (2014) and social gaming company Playdom Inc. (2010). Issues of Succession. Who will succeed Robert Iger as CEO? He was the architect of Disneys corporate strategy of building billion-dollar franchises and implemented it to reach new levels of growth. Appointed in 2005, he originally planned to step down in 2015. Most recently he extended his tenure until 2019. With no clear internal candidates to take over the mantle as CEO, Disney has no heir apparent. These challenges were suddenly cast in a new light when Iger announced a strategic shift. Iger Joins the Disruption In the second half of 2017 Iger announced that Disney would launch two streaming services similar to Netflix. One service would focus on ESPNs audience and start in 2018, the other on Disneys huge catalog of original content and start in 2019. An ESPN Streaming Service While the ESPN service will focus on ESPNs audience, it will not cannibalize the existing ESPN stations. The ESPN streaming service will carry new sports content that extends the ESPN cable contentif you already subscribe to ESPN on cable, you will be able to also watch the cable events over the streaming service. This decision may reflect the importance that cable companies place on the ESPN sports channels as their single biggest draw overall, their must-have component of the cable offering. But the cable companies were increasingly frustrated by rising costs, especially as the costs affected viewership. ESPN, often the most expensive part of the cable bundle, accounts for over $8 per month of cable charges even when distributed across all subscribers, by some estimates. Cable companies wanted Disney to rein in fees because subscribers were growing more restive and some had already jumped ship. ESPN at its peak had 100 million subscribers, but it has lost close to 12 million subscribers in the past five years. And cable companies feared such a loss was just the beginning of a subscriber revolt, with subscribers demanding ESPN become unbundled from cable packages. For 2019: A Franchise Streaming Service While the proposed ESPN streaming service may not adversely affect ESPN channels, the decision to create a streaming service for many of Disneys blue-chip franchises has much greater potential, with special impact on Netflix. Iger has announced that Disney will be pulling most of its movies from Netflix over the next two years. Some analysts see this move as reducing the value of Netflix to subscribers. However, others see the pulled content as relatively minor. First, Disney has not yet decided whether it will pull its Marvel or Star Wars movies from Netflix, and second, none of the Marvel series (think the Marvel Defenders, Jessica Jones, and Luke Cage) will go because they are co-productions with Netflix. Technology Is Key To make this streaming happen, Disney is making one highly focused technology acquisition. Last year it acquired a third of BamTechwhich supplies streaming services for HBO and many sports eventsand has an option to buy a controlling interest. Early Days It is too early yet to tell how this shift in strategy will play out. But what is clear now is that in the face of various issues noted above, Disney under Iger has decided to increase its independence in unsettled media markets. Instead of fighting the disruption, Disney is joining it.

1. Please calculate and show the following ratios for Disney for the years 2015-2018. Briefly explain your findings and what they mean for the company. Note: Do not just copy and paste the ratios or visuals from a website. It is important to show your numbers and calculations.
   1. Return on Assets
   2. Total Assets Turnover
   3. Financial Leverage Index
2. What are the sources of competitive advantage for Disney? Are they sustainable, why or why not?

Submissions should be around 1,000 words in length excluding tables.

thewaltdisneycompany(dot)com/investor-relations/ - use this website to help you find out the answer to #1