Polytechnic University Digital and Wireless Innovation at The Walt Disney Company By Professor Nina Ziv Assisted by Dina Tate, ITE Research Associate Institute for Technology and Enterprise Polytechnic University The New York Information Technology Center 55 Broad Street, Suite 13B, New York, NY 10004 Tel: 212 547-7030 ext. 4012 / Fax: 212-547-7029 nziv@poly.edu www.ite.poly.edu April 2003 This case study was funded by the Othmer Institute for Interdisciplinary Studies of Polytechnic University, New York
I. Background In January 2001, the senior management of The Walt Disney Company made an important decision concerning its online venture, GO.com. After a lackluster performance in which the site failed to compete with other Web portals such as Yahoo!, AOL, and Lycos, the Disney Company decided to shut down the portal and revise its online strategy. Larry Shapiro, Executive Vice President of Business Development and Operations of The Walt Disney Internet Group (WDIG) summed up the problem: We saw there was no room at the portal table for us. Yahoo, Lycos and the others made it extremely competitive for us and we had to spend too much money to be as big and then to eventually be better than Yahoo. We decided it wasn t worth it. 1 As a successful $25 billion entertainment company with a universally known brand, Disney found itself in uncharted territory (Exhibit 1). Despite having an excellent track record in its various businesses including theme parks, films, publishing, and television, it was now competing in a media industry landscape that included companies such as Yahoo! and AOL which were providing a new type of media experience for their audiences on the World Wide Web. Because of the development of the Internet, which was a robust technology platform on which content could be developed, these companies were creating innovative multi-dimensional, non-linear content which could be accessed by a wide variety of users. Like other media companies in the late 1990s, Disney recognized the importance of having a presence in the digital world and in 1994 created an Internet Group, Disney Online, to focus on the Company s online efforts. The goal of the initial business plan was to launch a dial-up service, called the Daily Blast which would compete with AOL and Prodigy. The target audience was families and especially children who had always been a major part of the Disney customer base. In addition, a website, Disney.com, was developed which featured Disney products and content also aimed at children. 2 These initial forays into the online world had mixed results. The website attracted a fair number of visitors but the Daily Blast at first did not do well in developing a subscriber base. Nevertheless, Disney seemed satisfied with its moderately successful online strategy while it continued to focus much of its resources on redefining its vast media empire. Yet it was the failure of Go.com, Disney s attempt to establish a major web portal, which caused the Company to see its online presence as more than just a placeholder in the digital world but rather as an important aspect of its identity as a media company in the early 21 st century. Indeed, this failure was a major learning experience for the Walt Disney Company and created managerial challenges which needed to be addressed. One important challenge was to how to integrate the core strengths of the Company which included its brand and its intellectual assets, e.g., Disney characters, and the use of digital technology which would support and differentiate its media properties. Disney was first and foremost a great content company where technological innovations were seamlessly blended with content. For the first time, the means of distribution, namely the technology, was equally as important as the content itself. Thus, a digital portal such as Yahoo! offered its audience short stories on newsworthy events and surrounded these stories with hypertext links to other multi-dimensional content, e.g., audio, video, and graphics. Rather than focusing on the intrinsic value of the content, users had an online Copyright 2003, Nina Ziv 1
experience in which technology was a defining factor. 3 In addition to the World Wide Web, wireless devices were proliferating in the marketplace and media companies were beginning to use the wireless platform as another means of distributing their content. Clearly, delineating a convergence strategy which would blend the digital and physical properties as well as accommodate these new wireless platforms was becoming an important issue for the industry. Along with leveraging a brand and finding the right convergence strategy, it was important to build an internal organization which would reflect both the unique DNA of the company as well as the new innovative content being produced. Moreover, in the rapidly changing media industry environment, companies could no longer rely exclusively on their own homegrown talent. Instead, it was imperative for companies to access innovative capabilities outside the traditionally defined organizational boundaries. Thus, a significant challenge for a company such as Disney was learning how to reach out to the larger networked environment and form partnerships and alliances with technology companies as well as tap into the expertise of professionals who were outside of the Disney organization. In early 2003, Disney has begun to address these challenges. However, it remains to be seen whether the Company will continue to be a strong player in the media industry and in the digital/wireless environments. II. Disney s Internet Strategy: Go.Com From its inception in 1923, the Walt Disney Company was known as an innovator in the entertainment industry. Walt Disney, who founded the company along with his brother Roy, introduced the idea of feature length cartoons to Hollywood. He also pioneered the use of sound as well as Technicolor to enhance these cartoons. 4 Using these technological innovations, Disney created characters such as Mickey Mouse and animated features such as Snow White and the Seven Dwarfs, which delighted audiences and established Disney as one of the premier entertainment companies in the world. This unique combination of technology and artistry enabled the Company to develop a powerful brand. As the Disney Company evolved, it was able to use this powerful brand to expand into publishing, television, and cable programming. In addition, the development of Disney s theme parks in Orlando, Florida and Anaheim, California, echoed the company s propensity to take risks. Indeed, until the establishment of Disneyland in 1955, most amusement parks were actually carnivals which moved from place to place. Disneyland was a permanent site which exploited the Company s well known brand of entertainment. 5 Given Disney s leadership as an innovator in entertainment, it was not a great leap for the Company to create an offering in the online environment. Disney s first website, Disney.com, offered content, products and services, primarily aimed at children and their parents. The site included a Disney store, information on Disney theme parks, and access to the Daily Blast, which featured games and activities. The Company hoped to get revenues from advertising, the sale of products, the sale of vacation packages and other services related to Disney s theme parks. 6 Along with Disney.com, the Company had two other sites, ABCNEWS.com, which became part of its online holdings as a result of Disney s acquisition of ABC Network in 1995 7, and ESPN.com, which Disney acquired in 1998. 8 During the late 1990s, Disney further strengthened its online organization. In 1997, the Buena Vista Internet Group (BVIG) was created in order to consolidate the Company s Internet properties. Disney also acquired 43 percent of Infoseek Corporation, an Internet search company. Disney and Infoseek subsequently created a new Internet business called Go.com, which was then renamed the Walt Disney Internet Group (WDIG). Though WDIG Copyright 2003, Nina Ziv 2
had some brand names in its cadre of websites ABCNEWS.com, ESPN.com, and Disney.com-- the Company decided to compete head-on with other web portals and launched the Go Network in January 1999. Go.com was expected to become another web mega-portal that integrated e- commerce, search capabilities, entertainment, content and news. The portal was to focus on four specific categories: Children and their families, news, sports and entertainment. Within each of these categories, Disney was either a major player or had a strong presence. The goal was to enable families and children to enjoy the ultimate online experience while at the same offering e-commerce from other partnered websites. Disney believed that GO.com, like most of Disney s other websites, would derive the majority of its revenues from advertising and e-commerce sales of merchandise and travel services. Moreover, GO.com would drive traffic to Disney s other branded sites where additional advertising revenue would be generated. Other offline Disney properties would provide marketing and advertising thus driving customers to the website. Eventually GO.com would provide broadband access to Disney s archives of films and cartoons and other offline properties. Disney s synergistic approach seemed unbeatable. Said Larry Shapiro: GO.com was an attempt to capitalize on what was going on with the Web at that time. Our ideology was that if businesses like Yahoo!, Lycos and Excite could be started from scratch in this space, then we should be able to leverage our key brands to start a whole new business In the beginning, the Go Network was successful. For example, Disney1.com, a website that was designed to capitalize on the possible convergence between the Internet and television, attracted approximately 400,000 visitors a month during 1999. 9 As well, traffic to Go.com s e-commerce websites such as the GO Shopping service, Disneystore.com, and ESPNstore.com was very strong during the 1999 Christmas holiday season 10, and the number of visitors to the ABC.com website dramatically increased during 1999 in part because of the popularity of the online version of the television show Who Wants to be a Millionaire? 11 Indeed, according to Media Metrix, Go.com ranked fourth in the ratings for most popular websites in January 1999. Go.com had 19.9 million visitors which placed it not far behind Yahoo! which had 29.1 million visitors, AOL.com which had 29 million visitors and MSN.com which had 21.1 million visitors. 12 However, despite the initial surge in traffic, the Go Network could not compete with the other web portals and by mid 2000, it had fallen to sixth place and far behind the other portals in unique number of visitors. 13 Realizing that the Company s Internet strategy needed a new direction, Disney s management decided to redesign the website so that it focused on two of the Company s strengths: entertainment and leisure. Instead of being a portal, the website would provide activities and information that would complement television programs. Thus, for viewers of shows such as Monday Night Football, the website would provide additional information on an event which would enrich the user s experience. Steve Bornstein, GO.com chairman touted this television/internet experience, which was called Enhanced TV, as a new type of convergence: So given the unique programming possibilities for the Internet, together with the unique assets of The Walt Disney Company, we have embarked on a mission to develop online entertainment that is indeed active and interactive, bringing with it possibilities of real-time community and fused that directly with our onair programming. 14 Copyright 2003, Nina Ziv 3
Despite its new design, GO.com continued to fare poorly in the portal rankings. 15 In January 2001, WDIG shut down GO.com and laid off 400 employees. The Company also converted its Internet Group common stock, which it had created in November 1999, into shares of Disney common stock. 16 In all, Disney had lavished $150 million on GO.com. Industry analysts pointed to Disney s failure with the GO Network as another example of the inability of a traditional media company to understand the challenges it faced in the digital world. Disney did not have a consistent strategy, its website had gone through too many design changes, and it had not accurately assessed the views of national advertisers who were having second thoughts about Internet advertising. Most importantly, Disney had ignored its biggest asset, its brand name and instead attempted to create a new brand that its customers didn t recognize nor were willing to embrace. Many in the Company also breathed a sigh of relief when Disney shut GO.com down. It was a misuse of resources to go down that path. It was good that we recognized early on that we needed to significantly pare down our efforts on line, said Larry Shapiro. Reflecting on Go.com s demise, John Skipper, Senior Vice President and General Manager of ESPN s Internet Group, suggested that Disney s strategy had been flawed from the beginning: GO.com was a bad name, maybe Disney would have been a better name.don t create a new brand name when you already have a strong one. We were too late. Yahoo!, MSN were way ahead. Disney was too late because it wasn t different. If you come out late, you d better have something different and we didn t. 17 In January 2001, with the dot com boom over and many web-based content companies fighting for survival, the Walt Disney Company once again had to rethink its strategy vis a vis the World Wide Web. Should it continue to experiment with the convergence of digital and physical properties or abandon its efforts in this direction and concentrate on what it did best: providing great content and entertainment to its audience? III. Building a New Model of Convergence With the Go Network experience behind them, the management of the Walt Disney Company moved decisively away from a portal strategy and towards a strategy of developing its independent Internet properties which included Disney.com, ESPN.com, ABC.com, and ABCNews.com. Larry Shapiro explained Disney s thinking: We had to shut down GO.com and capitalize on our key brands: Disney, ABC and ESPN. We had to focus our energy on them and make them the leaders in family entertainment, sports and news. We could not be distracted with outside things that would not be a part of the core mission of the Company. Our efforts had to be around what makes sense for those brands. The new strategy was to concentrate on the key things that bring growth to the Company. Indeed, Disney now viewed the power of the World Wide Web in a different light. Rather than focusing its energies on competing with New Media companies such as Yahoo! and Excite, which were essentially content creators for the Web, it would once more rely on what had made it a great company in the first place a unique blending of technology and artistry. The Web along with other technologies, would be used by Disney to enhance the new products and services it created for its customers. In this context, convergence did not Copyright 2003, Nina Ziv 4
mean finding novel ways for the digital and physical properties to interact but rather using technology as an underlying support vehicle for the existing physical properties that defined the Company. Larry Shapiro pointed out that in the past, convergence meant that there was a deliberate attempt to promote interactivity across various media, e.g., interactive television. However, he said, another way of looking at convergence is for a company to be able to use the Internet as a means of distribution to support a business model whether its advertising or subscription based, which is what we are doing at Disney. In order to achieve this new vision, WDIG was reorganized so that more control was placed in the hands of the individual divisions such as ABC and ESPN. At the same time, many of WDIG s functions were centralized. This hybrid approach enabled Disney to provide the needed infrastructure and services for the websites as well as to engage in innovative ventures using new technologies which would ultimately benefit all of the individual website divisions (Exhibit 2). As part of the move to centralize particular functions and provide support to the individual websites, WDIG built its own robust technology infrastructure. Because of the high volume of traffic on the websites and the need to host major online sites such as the Superbowl.com, the development of such an infrastructure was viewed as a top priority. In addition, having one technical platform enabled the Company to streamline the processes of ad serving, production, publishing, user registration and authentication and billing. Thus, WDIG constructed two large data centers which house 2000 servers capable of handling two billion page views per month. 18 It also built an Internet authentication/registration system and an Internet infrastructure management system. 19 In addition to a centralized technology infrastructure, WDIG consolidated its advertising function in order to provide maximum revenue opportunities for all of its websites. WDIG depends on media advertising for much of its revenue. These revenues are primarily from the sale of banner advertisements, on-site promotional and marketing placements and promotional sponsorships on Disney s various websites. One method used by the Internet Group to increase advertising revenues was to offer advertisers the Big Impression Ad across several of its websites. This type of advertisement is 30 percent larger than standard Web banners and better positioned on the site. The Big Impression Ad was showcased on several of Disney s websites including ABC.com, ESPN.com, and ABCNEWS.com. 20 The Internet Group s mandate also includes Direct Marketing and here too, the e-commerce efforts were centralized. Thus, the Group s commerce sites sell a wide range of Disney-branded products and services which are related to the ABC, Disney and ESPN brands. For example, sports fans can purchase team memorabilia through ESPN.com and on the ABC.com website, fans of the soap opera General Hospital can purchase items related to a storyline on the show 21 (Exhibit 3). In keeping with the strategy of using technology to enhance its existing products and services, Disney also licensed its content for distribution on various technology platforms (Exhibit 4). An important part of this licensing strategy has been the distribution of Disney s Blast which has been syndicated for use around the world by such service providers as Telefonica in Latin America, NTL in the United Kingdom, and T-Online in France. In each case, the content is formatted for the local market. In another move to distribute its content on existing technology platforms, Disney and Microsoft formed a partnership to offer Disney content on MSN, Microsoft s Internet Service Provider. Michael Eisner, Chief Executive of Disney, viewed the relationship between Disney and Microsoft as an important one: One of Disney s undisputed competitive advantages is its strong brand, and the ability to adapt beloved characters and stories to new technologies is a cornerstone of our strategy we are pleased to expand our Internet offerings to Copyright 2003, Nina Ziv 5
a new generation through our relationship with MSN, which represents a wonderful combination. 22 WDIG also made an agreement with Bell South to license Disney content for viewing on Bell South s Internet portal. In this deal, a variety of Disney content including text, video and audio from ABC.com, Disney.com, and ABCNews.com as well as links to e-commerce sites such as Disney Store has been made available to Bell South s DSL and dial-up subscribers. The Bell South-Disney relationship reinforces our commitment to delivering Disney and ABC content across a variety of distribution media suggested Larry Shapiro. 23 IV. ESPN.com One of the sites which was affected by the reorganization of WDIG was ESPN.com. ESPN.com was built by Starwave Media, a New Media company and was originally called ESPNET Sportszone. The website was launched in 1995 and was moderately successful. In 1998, Disney acquired Starwave and with it ESPNET Sportszone, which was subsequently renamed ESPN.com. 24 ESPN.com was a key part of the GO Network and was renamed GO Sports. However, after the GO Network was shut down, the site reverted to the ESPN.com name. As a result of WDIG s move to decentralize its organization, the ESPN.com management immediately made some decisions which were designed to ensure that separation. For one thing, the management decided that it would have a traditional business model and generate revenues from advertising and from charging for games and specialized information rather than relying on giving away content and hoping users would come, a common practice for many Web businesses. Another key decision was to house ESPN.com in midtown Manhattan, away from the television station and other offices which are based in Bristol, Connecticut. John Skipper explained the rationale for the separate location: ESPN was a separate organization and continues to be. Our bottom line pays for all of its own things and we are making money. Business-wise we run separately from the television station We are here at 34 th Street by ourselves.when I started the magazine I made a deliberate decision to be in a separate location and to create a real entrepreneurial environment It s about us, not this great big company. Clearly we have the advantage of the brand name [Disney], the money, the promotions of a big company, but I wanted ESPN.com to be here and also wanted ad sell, circulation, and marketing people to be here. They are upstairs. There is also a benefit from being by yourselves because no one knows quite what you are doing. Skipper also noted that the ESPN.com culture is very different from the culture that permeates the Disney organization: The ESPN culture is by itself. The magazine and the dotcom have the youngest staff in the entire company. It s the most risk oriented part of the company and should be. We are starting a magazine. One of the hardest things to do at a big company is to stay risk oriented and be willing to have fun. Copyright 2003, Nina Ziv 6
Yet even as its culture and physical location enabled ESPN.com to thrive as a separate organization, the parent company clearly wanted the synergies between the various media to be exploited, stated Skipper: There is an insistence that everything we do editorially be coordinated. If a big story breaks, we get that story but there is an insistence that it be shared with TV and that we work together. But rather than view the parent company as a negative influence on their organization, Skipper and the senior management of ESPN.com recognized that there were advantages to being part of a large media company such as Disney. Though we do things differently, he said, we benefit from the brand and being part of the Walt Disney parent company. Moreover, the notion of synergy carried over to the ESPN organization and proved to be another way in which ESPN differentiated itself from its competitors. Said Skipper: Broadly defined, Sports Illustrated is just a sports information news service. ESPN is a company that integrates things very well There are synergies because it all comes from one place TV, the magazine, online, and wireless. At CNNSI [Sports Illustrated s website], if there is a breaking story, it would be held for the magazine. If we have a breaking story, we break it online and then customers buy the magazine to read the rest of the story. Thus from the beginning, the strategy at ESPN.com echoed Disney s emphasis on using technology to enhance its intellectual assets as well as its major goal as a Company which was to provide great entertainment for its customers. When he joined the Company in 2000, Skipper knew that even though ESPN.com had good content, he had to differentiate the ESPN website from its competitors in order to attract the primary audience which was overwhelmingly young males who were technologically savvy. His strategy included redesigning the website and abandoning the dial-up user in favor of those who used broadband to access the site: With the design of the website, we moved away from the white look of Yahoo and AOL and toward the user of bigger pictures, color, and graphics broadband We have been much more aggressive than people have been comfortable with in terms of creating the user experience. Our users are young and tech savvy. It s never going to be entertaining unless it looks better. In addition to using technology to differentiate the website, Skipper hired top notch journalists in order to ensure that the quality of the content on the site was superior to ESPN s competitors. After establishing itself on the Web, ESPN.com continued to be a technological innovator in the online sports arena. For example, the site offered its users various games including Fantasy Leagues which enabled fans to enhance their online experience. The site now provides access to the official sites of the NBA, NFL, WNBA, and Soccernet, the most popular soccer site on the Web. Recently, ESPN.com rolled out a new delivery system called ESPN Motion which is a free service that provides high quality video clips of sports highlights and interviews to users. 25 Despite the challenges which have faced ESPN.com, it has become one of the most profitable of Disney s web properties and has consistently outpaced its closest competitors. In 1999, the number of unique visitors to ESPN.com was 8.2 million, which was greater Copyright 2003, Nina Ziv 7
than its nearest competitors, SportsLine USA, CNNSI.com, and Fox Sports Online which combined only generated 8 million visitors. 26 The site continued to be a front runner in online sports sites in 2001 where it generated a record 10.9 million unique visitors 27 ; and in early 2003, its competitors still trail by large margins with ESPN generating 16.5 million visitors compared with Sportsline.com s 8.3 million visitors, and SI.com s (Sports Illustrated) 5.5 million visitors. 28 John Skipper believes ESPN.com will continue to maintain its place as the number one sports site on the Web and intends to build on what has made it a success: As far as the future is concerned, right now we are just trying to build a brand and make it scaleable, more fun and more provocative. We expect to be a very profitable business and make money in the next five years. Given the enormous advantage that we have in our brand name and our resources, we should never lose and have the best product. V. Disney s Wireless Initiative As WDIG continues to widen its use of technology to enhance its intellectual assets, it is constantly investigating the opportunities that are presented by emerging technologies in the marketplace. We need to understand emerging technologies. We need to experiment and be perceived as being forward looking, suggests John Skipper. One technology area in which Disney has made a significant investment is that of wireless. Disney has pursued a two-tiered strategy in approaching this new technology. One aspect of the strategy is to build on its model of convergence between digital and physical properties. Thus Disney has formed partnerships and alliances with major mobile carriers in order to distribute existing Disney content on wireless devices both domestically and globally. For example, Disney characters and ring tones are available on AT&T s wireless phones and Sprint PCS phones. 29 In another partnership deal, WDIG is providing free headlines and news from ESPN.com and ABCnews.com to AvantGo s 2.5 million subscribers. 30 Disney has also capitalized on its branded content to develop a global wireless content strategy. WDIG s first entrance into the global market took place in the summer of 2000 when it launched Disney-i on the NTT DoCoMo platform in Japan. DoCoMo subscribers were able to receive a wide range of Disney offerings on their cell phones. At the close of 2002, Disney had established itself in the Japanese market with more than three million subscribers. 31 Using the Japanese experience as a guide, the Company has entered into agreements with 22 global telecommunications companies in more than 20 countries including KG Telecom based in China; TCC based in Taiwan; KDDI Corporation, the second largest telecommunications Company in Japan; and Globe Telecom, which serves the Philippines market. All four companies distribute Disney content on their wireless platforms using a subscription based business model 32 (Exhibit 4). Disney s management also recognized that it in order to be a leader in the use of a technology such as wireless, the Company must acquire knowledge and innovative capabilities which can complement its own expertise as a great content company. Thus, for example, Disney has looked to the Japanese who have been pioneers in content innovation on the wireless platform. Larry Shapiro agrees with the need to look beyond the traditional organizational boundaries for ideas: We are now learning from Japan which is way out in front with regard to wireless technology. We are looking into how they are using different types of services Copyright 2003, Nina Ziv 8
and translating that knowledge into learning how to develop content for other markets. Another aspect of Disney s wireless strategy has been to form alliances with several technology companies to create new types of content which can be used on wireless devices. For example, Disney has partnered with TIM, a leading mobile operator in Italy, to jointly create multidimensional content for TIM s MMS (Multimedia Messaging Service). Instead of just ring tones and one-dimensional characters, a combination of moving characters, music, and personalized messages are available on these phones. 33 Disney has also developed new games based on its content for Sprint PCS s wireless devices. 34 While Disney has entered the wireless arena both domestically and internationally, it is clear that there are significant issues that must be addressed in using this emerging technology as a distribution platform. Larry Shapiro outlined a few of the challenges: We have several challenges as we expand into wireless. The first is the pace of development in the marketplace meaning that in the US in order for it to be successful the carriers have to have done certain things to their technology platform so that they are able to deliver content and report back to content companies about this and it s been slow going. Huge amounts of investments by the carriers must be made in order to get to that point. Marketing that content services to its customers is another challenge. It s not as easy as a PC. You have to teach people how to use the keypad to access the content. John Skipper, who manages ESPN.com, sounded an even more cautionary note on the use of wireless technology: There is not a lot of money yet in this arena so we are not looking on spending lots of money to drive the wireless market. Sports is a great application for wireless but wireless technology is very limited in this country We do sports scores and AT&T pays for the content. We are creating photos and such for wireless so we will be ready but we don t see reason to grow the market by spending on this stuff. VI. Emerging Issues Disney s innovative strategies and moves toward decentralizing the organization appeared to have paid off. At the end of 2002, a year after the demise of Go.com, Disney announced that its Internet properties were profitable, citing the gains made especially by ESPN and Disney s online store as contributing factors. 35 Moreover, WDIG s websites ranked in the top ten in terms of visitors according to Comscore Media Metrix. 36 Despite its achievements, the WDIG management realizes in order to keep its competitive edge, it has to continually scan the marketplace for new technologies which it can use to enhance its customers experiences. Larry Shapiro sees some major opportunities in the future: We see two big opportunities. One is the expansion of the wireless division on a worldwide basis. Second is broadband. We would like to increase the broadband penetration. It plays to our strengths in a big way particularly around video content whether it is a movie or other properties. There are all kinds of ways we can package and distribute our content across new business models. Copyright 2003, Nina Ziv 9
In an effort to capitalize on these technology opportunities, WDIG has been rolling out a series of applications designed for broadband users. For example, in Fall 2002, WDIG launched Toontown, an online game in which hundreds of players take on Disney character roles and collaborate online. Using a subscription-based business model, players are charged $9.95 for the first month and $5.95 for subsequent months. Another subscription service launched on broadband by WDIG is ABCNews on Demand. The service, which costs $4.95 a month offers users repackaged and expanded segments of ABC New s daily broadcasts. ESPN motion is another new initiative for broadband users. Steve Wadsworth, President of WDIG, believes that these applications will have a wide acceptance in the marketplace mainly because of the evolution of broadband adoption. We re getting to a critical mass in broadband, says Wadsworth. 37 While Wadsworth expresses optimism about the rollout of these new broadband applications, other Disney managers understand that today s broadband connection is still not fast enough to allow a media company such as Disney to get the maximum leverage out of its content creations online. Peter Murphy, Disney s Executive Vice President of strategic planning echoes this sentiment: We are 20% into the development of broadband. A lack of speed is still holding back some ideas. Executives at ESPN.com also believe that even though ESPN Motion may be attractive to their customer base, the next six months will be a learning experience in terms of using the technology; estimates are that somewhere between 3 and 25 percent of ESPN s users will download the software in that time period. 38 In 2003, the Walt Disney Company faces significant challenges. For one thing, it is unclear whether it will be able to retain its leadership in the marketplace in the area of animated features, where the Company has always had a competitive edge. Recently, Pixar Animation Studios has challenged Disney s leadership in this arena by using computer generated animation to create such hits as Toy Story. While Disney has had some recent successes in animated features, it has been slow to adapt new technologies to replace traditional animation. Indeed for Roy E. Disney, the Disney studio s Vice chairman for feature animation, these technologies level the playing field in animation and are cause for alarm. I hate the word brand, Disney said, but worry that it gets harder for us to distinguish ourselves. 39 Yet even as it falls behind in implementing new ways to produce animated features which will continue to distinguish its brand, the Company has also been willing to forgo its unique identity as an innovator in the digital world. Thus, late last year, Disney merged ESPN.com, its flagship website with the sports section of MSN, Microsoft s Internet Service Provider. 40 Though this may help to drive traffic to the ESPN website, combining the sites may have a negative impact on ESPN.com s identity as a unique destination on the Web. In addition to these mixed messages about its role as an innovator, Disney along with other media conglomerates, is still struggling to define the notion of convergence and what if any synergies exist among its vast holdings. Rather than pursuing an aggressive approach, Disney is slowly recalibrating its thinking about the convergence between digital and wireless technologies and its intellectual property assets. Peter Murphy suggests that this is the right way to proceed regarding convergence and the future implementation of other technologies: Some people tried to build their business models on aggressive projections. Those of us who had more modest expectations are feeling a little more comfortable now. Copyright 2003, Nina Ziv 10
As reported Results of Operations (in millions, except per share data) Exhibit 1 The Walt Disney Company Consolidated Financial Results 2002 41 2002 2001 2000 Revenues $ 25,329 $ 25,172 $ 25,325 Costs and expenses (22,924) (21,573) (21,567) Amortization of intangible assets (21) (767) (1,233) Gain on sale of businesses 34 22 489 Net interest expense and other (453) (417) (497) Equity in the income of investees 225 300 208 Restructuring and impairment charges (1,454) (92) Income before income taxes, minority interests and the cumulative effect of accounting changes 2,190 1,283 2,633 Income taxes (853) (1,059) (1,606) Minority interests (101) (104) (107) Income before the cumulative effect of accounting changes 1,236 120 920 Cumulative effect of accounting changes: Film accounting (228) Derivative accounting (50) Net income (loss) $ 1,236 $ (158) $ 920 Earnings (loss) attributed to Disney Common Stock (1) $ 1,236 $ (41) $ 1,196 Earnings per share before the cumulative effect of accounting changes attributed to Disney Common Stock: (1) Diluted $ 0.60 $ 0.11 $ 0.57 Basic $ 0.61 $ 0.11 $ 0.58 Cumulative effect of accounting changes per Disney share: Film accounting $ $ (0.11) $ Derivative accounting (0.02) $ $ (0.13) $ Earnings (loss) per share attributed to Disney Common Stock: Diluted $ 0.60 $ (0.02) $ 0.57 Basic $ 0.61 $ (0.02) $ 0.58 Earnings attributed to Disney common stock before the cumulative effect of accounting changes adjusted for the impact of SFAS 142 in fiscal 2001 and 2000 $ 1,236 $ 891 $ 2,157 Earnings per share attributed to Disney common stock before the cumulative effect of accounting changes adjusted for the impact of SFAS 142 in fiscal 2001 and 2000 Diluted $ 0.60 $ 0.42 $ 1.03 Basic $ 0.61 $ 0.43 $ 1.04 Average number of common and common equivalent shares outstanding for the Disney Common Stock: Diluted 2044 2100 2103 Basic 2040 2085 2074 Copyright 2003, Nina Ziv 11
Loss attributed to Internet Group Common Stock n/a $ (117) $ (276) Loss per share attributed to Internet Group Common Stock n/a $ (2.72) $ (6.18) Average number of common and common equivalent shares outstanding for the Internet Group Common Stock n/a 43 45 Copyright 2003, Nina Ziv 12
Exhibit 2 Walt Disney Internet Group Web Properties 42 ABC.com ABC.com is one of three business units of ABC Internet Group (AIG), which is part of the ABC Television Network and The Walt Disney Company. AIG develops and manages ABC.com, the leading broadcast network Web site; ABCNEWS.com, one of the leading news sites; Enhanced TV, which showcases the convergence of video and interactive programming; and Oscar.com, the official Web site for the Academy Awards, produced in conjunction with ABC.com and the Academy of Motion Picture Arts and Sciences. The ABC Internet Group has operations in Burbank, CA, and New York, NY. ABC.com is based in Burbank, CA. ABCNEWS.com ABCNEWS.com was established May15,1997. It is one of the fastest-growing news sites on the Internet. With editorial and technical resources from ABC News and The Walt Disney Internet Group, ABCNEWS.com consistently provides users with up-to-the-minute, engaging, informative and interactive coverage of a range of issues and events. ABCNEWS.com's staff is devoted to reporting around-the-clock, writing and editing the news and features, while bringing the best of ABC News television broadcasts -- Good Morning America, World News Tonight, Nightline, World News Now, 20/20, PrimeTime, 20/20 and This Week -- to the Web. DISNEY.com Since its launch in February 1996, Disney.com has set the standard for excellence and innovation in online entertainment. The single official place for "all things Disney" on the World Wide Web, the site today reigns as the most popular kids and family destination, hosting approximately 750,000 unique visitors each day. Disney.com integrates a full range of content under a single URL to offer Disney-on-Demand: a rich, extensive, and engaging experience for everyone in the family, every hour of every day. In June 2000, Disney.com premiered its latest home page, bringing online visitors a virtualtheme-park experience. Six exciting neighborhoods live within the gates of Disney's virtual park, housing a variety of wholesome, original content that consistently reflects the magic that's come to be expected of Disney. In March 1999, Disney.com joined forces with the No. 1 kids subscription site, Disney's Blast. Introduced in April 1997, the popular moderately priced online service provides exclusive family-trusted premium entertainment, such as state-of-the-art multiplayer games and one-of-a-kind contests. ESPN.com ESPN.com, a division of ESPN Inc., is the leading provider of sports on the Internet. ESPN.com, which is also home to Soccernet and ABCSports.com, also works in conjunction with the Walt Disney Internet Group. ESPN Inc., the Worldwide Leader in Sports, is a multinational, multimedia sports entertainment company comprised of six domestic and 19 international Copyright 2003, Nina Ziv 13
television networks, a recently launched interactive TV channel, the largest sports radio network, ESPN The Magazine, ESPN.com, sports-themed dining and entertainment establishments, event management, ESPN Enterprises, wireless and broadband services, and more. ESPN features the broadest portfolio of multimedia assets in sports marketing with more than 40 national and international business interests or entities. FAMILYFUN.com FamilyFun.com (www.familyfun.com) is the premier online family solutions center, combining award-winning content, integrated commerce, and easy navigation. The site provides moms with what they need most in their busy lives: quick answers, fun ideas, and sensible solutions for life's everyday challenges. MOVIES.com Movies.com is a leading site for movie fans offering movie reviews, trailers and local show times. Launched in March 2000, Movies.com provides a broad array of news, original content, and services for movie fans. Its content encompasses films from throughout the U.S. film industry and follows films from production through video/dvd release. Copyright 2003, Nina Ziv 14
Exhibit 3 Walt Disney Internet Group E-Commerce Properties 43 ABC Auctions ABC Auctions (www.abcauctions.com) is an online marketplace of the Walt Disney Internet Group. It is presented by ebay and features authentic, rare and one-of-a-kind entertainment collectibles and memorabilia from favorite ABC television shows, movies and celebrities. DisneyStore.com Launched in February 1999, DisneyStore.com, the leading online retailer exclusively focused on Disney products, combines detailed product information, helpful shopping services, and innovative merchandising strategies. The site's search tools make it easy for customers to locate multiple products by keyword or Disney character. DisneyStore.com offers a secure, convenient, easy way to purchase popular Disney products online 24 hours a day, seven days a week. With more than 2,000 items to choose from, consumers can find the latest in Disney merchandise, as well as seasonal, regular, and sale items. In addition to this merchandise, DisneyStore.com showcases Disney Grams, Clothing & Accessories, Homes & Gifts, Toys, Videos, Games, and more. Disney Auctions Disney Auctions (www.disneyauctions.com) is an online marketplace of the Walt Disney Internet Group and is presented by ebay. It features authentic, rare and one-of-a-kind Disney collectibles and memorabilia from every aspect of Disney's entertainment legacy. Copyright 2003, Nina Ziv 15
Exhibit 4 Partial List of WDIG Content Distribution 44 ABC.com ABCNEWS.com Disney.com ESPN.com FamilyFun.com Mr. Showbiz AT&T Wireless PocketNet X X X X X X Sprint PCS X X X Verizon Wireless Mobile X X Palm X X Nextel X X X NTT DoCoMo X X Omnisky X X Nokia/SBC X Qwest X X X PacketVideo X Indicast X Copyright 2003, Nina Ziv 16
Michael Eisner 45 Chairman, The Walt Disney Company Exhibit 6 Executive Biographies Michael Eisner began his career at ABC, where he rose to Senior Vice President of prime time production and development, taking the network from number three to number one with such landmark shows as Happy Days, Barney Miller, Rich Man, Poor Man, and Roots. In 1977, Eisner became president of Paramount Pictures, leading the studio to become number one in box office and profitability, with such films as Raiders of the Lost Ark, Saturday Night Fever, Grease, Ordinary People and Terms of Endearment. In 1984, Eisner assumed his current position as CEO and Chairman of The Walt Disney Company, and immediately implemented a number of successful growth strategies. At the theme parks, attendance and revenues climbed due to popular new attractions and the addition of new hotels and an entire new theme park, The Disney/MGM Studios. Thanks, in part, to the development of the Disney Stores, Disney Consumer Products rose to dominance in the field of entertainment merchandise. Eisner is the author of a book, Work in Progress, which he wrote with Tony Schwartz about his involvement in the entertainment industry. Born March 7, 1942 in New York, Eisner graduated from Lawrenceville School in 1960 and Denison University in 1964 with a B.A. in English literature and theater. He serves on the boards of California Institute of the Arts, Denison University, American Hospital of Paris Foundation, the UCLA Executive Board for Medical Sciences, the National Hockey League and is a member of the Business Steering Committee of the Global Business Dialogue on Electronic Commerce and The Business Council. He has established and funded The Eisner Foundation, a philanthropic organization headed by his wife, Jane. Steve Wadsworth 46 President The Walt Disney Internet Group Steve Wadsworth is president of the Walt Disney Internet Group and has operational responsibility for The Walt Disney Company's Internet portfolio, which includes the leading Internet brands Disney.com, the No. 1 Web site for kids and families; ESPN.com; and ABC branded sites, leaders in entertainment and news. Wadsworth has seven years of Internet experience - all at The Walt Disney Company. Named to president of Disney's Internet unit in 1999, he is well versed in Internet business and technology operations. He has played a critical role in leading the company's successful drive to profitability and growth as he led a restructuring of the business and current expansion into broadband and wireless. Wadsworth joined Disney Online, Disney's first Internet operation, at its inception in September 1995. Prior to being named president of Disney's Internet operations, he served as senior vice president and chief financial officer, responsible for all strategic planning, business development, technology operations, finance, accounting and administrative functions. He came to Disney Online from Disney Consumer Products, where he served as director of business planning. Before joining The Walt Disney Company in 1993, Wadsworth was a principal for the Windsor Park Group in Los Angeles. He was responsible for providing strategic, operational and financial management consulting services to companies primarily in the retail and consumer products industries. Copyright 2003, Nina Ziv 17
Wadsworth is a frequent spokesperson on Internet issues and guest speaker at Internet industry forums. He holds a B.S. in engineering from the University of Virginia and received his M.B.A. from the UCLA Graduate School of Management. Larry Shapiro 47 Executive Vice President, Business Development and Operations The Walt Disney Internet Group Larry Shapiro is Executive Vice President of Business Development and Operations for the Walt Disney Internet Group (WDIG). He leads all distribution and technology partnership activities for the company, and manages its U.S.-based wireless businesses, CRM business services and customer support services. Shapiro also serves as the WDIG general counsel and is responsible for its human resources and public affairs functions. A key player in the formation of the Walt Disney Internet Group, Shapiro previously served as executive vice president, business development and operations for Disney's online unit, Buena Vista Internet Group (BVIG). Prior to the November 1999 merger of Infoseek Corporation and BVIG, Shapiro was senior vice president, business and legal affairs for BVIG. He joined the company as Vice President-counsel within Disney's corporate legal department, where he led numerous transactions, including Disney's acquisition of Starwave Corporation and its 1998 investment in Infoseek. Before joining Disney, Shapiro was an associate at two Los Angeles-area law firms: Weil, Gotshal & Manges, and O'Melveny & Myers. Shapiro graduated from the University of Pennsylvania and holds a J.D. from the University of Michigan. John Skipper 48 Senior Vice President and General Manager ESPN Internet Group John Skipper is senior vice president and general manager of ESPN Internet Group, a part of the Walt Disney Internet Group. Skipper oversees content development, design, production and marketing for ESPN.com (the No. 1 sports site), NFL.com and Soccernet, overseeing staffs in New York, Los Angeles, London, Bristol, CT, and Seattle, WA. Skipper most recently was senior vice president and general manager of "ESPN The Magazine," where he oversaw the most successful magazine launch of the 1990s. During its inaugural year, the magazine earned more than 20 awards, including "Best New Magazine" honors from both "Advertising Age" and "AdWeek" magazines, as well as a 1999 National Magazine Award for design. Before joining "ESPN The Magazine", Skipper served two years as senior vice president of The Disney Publishing Group where he was in charge of all Disney's magazine, book and licensed publishing operations in the United States. Since 1990, Skipper was vice president of "Disney Magazine" publishing, overseeing "Disney Adventures," "Discover," "FamilyFun" and "Family PC." Prior to joining The Disney Publishing Group, Skipper held the position of president and publishing director at "Spin" magazine. Previously, he spent 10 years with Straight Arrow Publishing including eight years with "Rolling Stone." At Straight Arrow, he rose to publisher of "US" magazine. Skipper is a board member of the Magazine Publishers of America an in 1999, Skipper was elected to the Audit Bureau of Circulations Board of Directors, Magazines Division. Skipper holds a bachelor and a master s degree in English Literature from the University of North Carolina and Columbia University, respectively. Copyright 2003, Nina Ziv 18
End Notes 1 The remarks made by Larry Shapiro throughout the case study were taken from a taped interview with Mr. Shapiro in New York City in November 2002 conducted by Dina Tate, ITE Research Associate. 2 John Motavalli, Bamboozled at the Revolution: How Big Media Lost Billions in the Battle for the Internet, New York: Viking Penguin Books, 2002, pp. 199-201. 3 George Landow, Twenty Minutes into the Future, Or How We are Moving Beyond the Book, The Future of the Book, ed. G. Nunberg, Berkeley: University of California Press, 1997, pp. 209-237. 4 Bill Capodagli and Lynn Jackson, The Disney Way, New York: McGraw-Hill, 1999, p. 8. 5 Bob Thomas, Building a company: Roy O. Disney and the Creation of an Entertainment Empire, New York: Hyperion, 1998, p. 193. 6 http://freespace.virgin.net/daniel.jesudasen/film/int_group.htm 7 http://www.ketupa.net/disney2.htm 8 Sally Beatty, Score! Espn.Com has a strong lead over its rivals; but the race is far from over, The Wall Street Journal [Online], March 26, 2001. 9 Disney online announces record number of visitors at Disney1.com, its newest kids convergence site, Walt Disney Internet Group Website, December 8, 1999, http://psc.disney.go.com/corporate/press/wdig/wdig/1999/1999_1208_disney.html. 10 GO.com s electronic commerce sites experience record growth and provide excellent customer service this holiday season, December 27, 1999, Walt Disney Internet Group website http://psc.disney.go.com/corporate/press/wdig/wdig/1999/1999_1227_go.html. 11 GO.com s ABC.Com experiences 83% growth from October to November 1999, making it among the top gainers on the Web, December 22, 1999, Walt Disney Internet Group website, http://psc.disney.go.com/corporate/press/wdig/wdig/1999/1999_1222_abc.html. 12 Go.com Top of the Pops, Wired News, February 22, 1999, www.wired.com/news/business/0,1367,18057,00.html. 13 Media Metrix releases U.S. top 50 web and digital media properties for June 2000 and reveals number one websites within new categories, The Traffick Report, July 24, 2000, http://www.searchengineguide.com/traffick/story/07-2000-mm2.html. 14 Chairman of GO.com delivers keynote address at Jupiter Entertainment Forum in Los Angeles, December 9, 1999, Walt Disney Internet Group website, http://psc.disney.go.com/corporate/press/wdig/wdig/1999/1999_1209_go.html. 15 iwon ranks as stickiest portal on the Internet for 2000 ahead of Yahoo!, AOL, MSN, and Excite, iwon website, February 26, 2001, http://www.iwon.com/company/info/press/press_partner_article_overview/0,4926,607 16 Ronna Abramson, Disney puts a stop to Go.com, The Industry Standard, January 29, 2001, http://www.thestandard.com/article/display/0,1151,21763,00.html 17 The remarks made by John Skipper throughout the case study were taken from a videotaped Interview with Mr. Skipper in New York City, November 21, 2002 conducted by Professor Nina Ziv and Dina Tate, ITE Research Associate. 18 Our technology leadership, Walt Disney Internet Group website, http://disney.go.com/corporate/press/wdig/technology.html. 19 Our technology leadership, Walt Disney Internet Group website, http://disney.go.com/corporate/press/wdig/technology.html. 20 http://freespace.virgin.net/daniel.jesudasen/film/int_group.htm 21 http://freespace.virgin.net/daniel.jesudasen/film/int_group.htm 22 The Walt Disney Company and MSN launch Disney on MSN ISP, October 24, 2002, Walt Disney Internet Group website, http://psc.disney.go.com/corporate/press/wdig/wdig/2002/2002_1024_wdig.html. Copyright 2003, Nina Ziv 19