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raidermatt
03-18-2003, 06:10 PM
From CBSmarketwatch.com:




Disney tries to get back the pixie dust
Lull raises concerns at core animation, parks businesses
By Russ Britt, CBS.MarketWatch.com
Last Update: 9:24 AM ET March 18, 2003

BURBANK, Calif. (CBS.MW) -- It's been a while since the renowned animators here on Walt Disney Co.'s main lot, where their legendary founder first sketched Mickey Mouse more than 75 years ago, have produced a hit.

The group's last three original films -- "Treasure Planet," "Atlantis: The Lost Empire" and "The Emperor's New Groove" -- all fizzled at the box office. The $140 million "Treasure Planet" forced Disney to take a charge against earnings last quarter, unprecedented for one of the company's animated features.

Down in Anaheim, the company's California Adventure theme park next to its flagship Disneyland struggles amid concerns there aren't enough attractions to keep the facility afloat.

These are tough times for the Mouse House's cornerstone divisions. For decades, Disney's animators have created characters on screen, while its "Imagineers" have taken those characters, invented others and built rides around them. This braintrust has spawned countless revenue streams through a massive array of consumer products and services.

But as Disney (DIS: news, chart, profile) prepares for its annual meeting Wednesday in Denver (see MarketWatch's special "Measuring Disney's Magic" report) after a year in which its stock has dropped more than 30 percent, shareholders are craving a bit of that patented pixie dust. The groups that once served as virtual golden geese now seem to be in a creative funk.

"I think it is a concern, that Disney may have lost some of its touch," said David Joyce, an analyst at Guzman & Co. who follows the entertainment companies. "For the past year or two, there's been some high-level talent drain."

Former Disney employee Arthur Levitt disagrees. Levitt, now the president of online ticket service Fandango, left Disney in 2000 and was once a personal assistant to Disney Chairman and CEO Michael Eisner.

"I don't think Disney has lost one drop of its creative juices," Levitt said. "My opinion is they don't compromise on creative product." He said heavy cost cutting might be having an effect on operations. "Any time you talk to anybody in the creative world and tell them it doesn't have to cost more, people get sensitive," Levitt said.

Disney executives and spokespersons declined to answer specific questions for this story. Disney spokesman John Spelich said this in an e-mail message: "The premise of your story is factually incorrect and we will not participate in a factually incorrect, biased story."

A tough decade to match

While Disney's net income has hopscotched between the red and the black due to one-time events since 2000, operating income has dropped from $4.1 billion in 2000 to $2.8 billion last fiscal year. Along with the slumping economy, fears of war and terrorism have kept theme-park attendance down and hurt advertising on ABC.

Overall Disney sales have been flat to down since 2000, but that stall comes after a decade of massive growth, when sales quadrupled.

Some of that growth came from the 1996 purchase of ABC. But in the five years before that, Disney's sales doubled from $6 billion to $12 billion. They now stand at $25 billion.

As films such as "Beauty And The Beast," "Aladdin" and Disney's biggest hit, "The Lion King," set box-office records, they also spawned countless products, direct-to-video sequels and even a couple of Broadway shows.

"It just became poetry in motion throughout the company," said Chuck Champlin, who at the time was public relations director for Disney's consumer products division. Champlin resigned in 1999 after 12 years with the company and now is public relations director for a nearby college.

The company has evolved since the 1996 ABC buy. That media unit, which includes ESPN and the ABC Family Channel, now accounts for 38.4 percent of the company's sales. Theme parks and studio entertainment make up roughly a quarter each, while consumer products comprise the remainder.

Consumer products operates Disney Stores and sells various souvenirs, many spawned from movies. The division has been a sore spot for several years, as sales have tumbled 36.8 percent from $3.8 billion in 1997 to $2.4 billion in 2002.

"I think there was such a relentless pursuit of growth, which was a good and noble try," Champlin said. "But it really began to exhaust the brand. There were some overexposure issues."

Product difficulties are showing up in such areas as the exclusive pact Disney now has with McDonald's (MCD: news, chart, profile) for movie-related promotions. On a recent conference call, new McDonald's CEO Jim Cantalupo told analysts he was disappointed in the deal and put it under review.

"Everything is on the table," Cantalupo said. The company later said in a statement that it "valued" its relationship with Disney, and Disney echoed the same sentiment in its own statement.

New animation focus

As the in-house animation efforts have slipped, partners such as Pixar (PIXR: news, chart, profile) have helped pick up the slack. Pixar has had nothing but hits with two "Toy Story" films, "A Bug's Life" and "Monsters Inc."

The Disney-Pixar pact runs out in 2005, and Pixar is shopping around for possible new suitors. If the deal is renewed, Disney may have to yield more to its successful partner the next time around.

Inside Disney, a group of in-house animators in Florida developed last year's hit "Lilo & Stitch," which helped prime the Disney product pump. The group's prior outing was 1998's "Mulan."

And the company points out that three of its animated features were nominated this year for Academy Awards.

Disney's core group of cartoonists in Burbank -- long considered the center of the animation universe -- is now churning out the kinds of sequels that used to go directly to video. Now those are starting out on the big screen, as evidenced by "Jungle Book 2" and "Return to Never Land."

That process is quite profitable. The company says its 13 recent sequels cost a total of $200 million to make and will generate more than $1 billion in profit.

But former animators say they shortchange Disney's reputation.

"They're beginning to try and come up with new stuff out of the old stuff," said David Pruiksma, a 20-year Disney animation veteran who left voluntarily in 2001. "A company that does that is being very shortsighted."

Bob Smithouser, who reviews movies for an online publication produced by psychologist Dr. James Dobson's Focus On The Family group, praises a number of Disney projects, including "Treasure Planet."

His latest review of "Jungle Book 2" takes issue, though, with Disney's decision to put animated sequels in theaters.

"You almost feel like you're watching the first one," he said. "It makes you think these were more inspired by marketing instead of creativity."

A look at Disney-Burbank animation releases since 1994's "Lion King" shows steadily declining returns in U.S. ticket sales in relation to budgets. U.S. ticket sales are not the final say on profitability, but they are the first indicator of how well a film will do.

"Pocahontas" returned $141 million in U.S. ticket sales in 1995 on a $55 million budget. In 1997, "Hercules" took in $99 million on a $70 million budget. Then 1999's "Tarzan" brought back $171 million on a budget of $150 million.

"Dinosaur" in 2000 was a $128 million undertaking, much of it an investment in a computer animation studio. It returned $138 million in U.S. receipts.

The tide turned negative later that year with "Emperor's New Groove." Made for $100 million, the film garnered $89.3 million in U.S. sales. "Atlantis," with a $90 million budget, had $84 million in U.S. sales.

Animation evolution

Former animators say a confluence of events has worked against their department since the mid-1990s: the departure of studio chief Jeffrey Katzenberg to DreamWorks in 1994, a huge influx of managers and, most importantly, increased competition that boosted artist salaries as high as $500,000.

"They just didn't want to lose anybody, and salaries went through the roof," said Doug Krohn, a 20-year Disney veteran who left last year after his contract ran out and wasn't renewed. He joined Klasky-Csupo, which makes animated films and television shows for Viacom. (VIA: news, chart, profile) (VIA.B: news, chart, profile) (Editor's note: Viacom is an investor in MarketWatch.com, publisher of this report.)

Krohn said one of the biggest changes came in oversight of animation. The tremendous success of "Lion King," which made $781 million worldwide, turned the spotlight on the division. Katzenberg's departure shortly after that made the department fair game, and managers seeking a piece of the action poured in.

Prior to "Lion King," the department would put three or four supervisors and 50 animators on one film. After "Lion King," there were 300 artists on one film, with several dozen supervisors.

Disney replaced animation chief Thomas Schumacher with David Stainton in January. It's also separating its television animation group from the features operation. Both moves are said to have pleased key shareholders.

Disney has said it wants to avoid $140 million films like "Treasure Planet" in coming years, and so it is cutting costs. The animation staff has been cut by nearly half in the last few years. It now stands at 1,200.

The group's next release is "Brother Bear," due in November. Disney plans to keep budget at a more moderate, $80 million level.

"I would say creative people are still there," said Pruiksma. "You can have the greatest athletes in the world, but if you don't let them run, what is the point?"

Theme park troubles

The same refrains are heard when the subject turns to Disney's Imagineering department.

"I don't think Disney's lost its creativity," said Jim Cora, a 43-year Disney veteran who retired as chairman of Disney's international theme park business in 2001. "I think the problem is having enough money to be as creative as we can be."

Cora said it's much more costly now to develop and build imaginative new rides at Disney's parks. Imagineers consider the popular "Pirates Of The Caribbean" a quintessential Disney ride. Not only does it thrill riders, it tells them a story of pillaging rapscallions.

"Pirates" was built in the 1970s for $32 million. It would cost up to $145 million now, Cora estimates. "It's amazing how much it costs to build a good attraction," he said.

Disney is constructing a ride called "Mission: Space" at Walt Disney World in Orlando, Fla., geared to simulate the weightlessness of space.

At California Adventure, Disney hopes a new "Tower Of Terror" ride -- a replica of one at Disney World -- will boost interest in what critics say is a park too heavily weighted with shops and restaurants instead of rides and attractions.

"I didn't think it measured up to guest expectations for a Disney theme park," Cora said.

Disney has said it takes time for a theme park to gain momentum and promises to continue to improve California Adventure. One way it's doing that without heavy costs is with an "Aladdin" stage show, which is winning good reviews.

Disney also has said it will keep a lid on capital spending at its parks for a while, which means a facility such as Disneyland may not get a significant new attraction for some time. Disneyland's last debut was the Indiana Jones ride that appeared in the early 1990s. An experiment with a "Rocket Rods" ride in 1998 failed.

And now is not the time to expand, analysts say. Disney just revealed that its current quarter theme park business is lower than expected due to war fears, prompting some on Wall Street to lower forecasted earnings.

Disney officials have said the theme parks already have undergone significant expansion with the addition of California Adventure, the building of additional facilities in Paris and the opening of Tokyo DisneySea, built by Imagineers and owned by Oriental Land Co., which pays Disney a license fee.

DisneySea is winning rave reviews, partly because Oriental Land spent $4 billion to build the park. By comparison, Disney shelled out $700 million for California Adventure, plus another $700 million for an adjacent hotel.

Cora's brother John, a former Disney vice president in charge of resort development, says the company's tight fiscal constraints have stifled creativity.

"Disney has lost the good storytellers of the past, like Walt, who could tell stories in a good, passionate way," he said.

Russ Britt is the Los Angeles Bureau Chief for CBS.MarketWatch.com.

hopemax
03-18-2003, 06:30 PM
Cora said it's much more costly now to develop and build imaginative new rides at Disney's parks. Imagineers consider the popular "Pirates Of The Caribbean" a quintessential Disney ride. Not only does it thrill riders, it tells them a story of pillaging rapscallions.

"Pirates" was built in the 1970s for $32 million. It would cost up to $145 million now, Cora estimates. "It's amazing how much it costs to build a good attraction," he said.

I'm confused, are they referencing WDW's pirates because DL's opened in 1967. $32 million 1970 dollars = $148.6 million 2001 dollars, BTW. Just in case they are talking about DL $32 million 1966 dollars = $172.8 million 2001 dollars. So it doesn't really seem like it was any cheaper to produce rides back in the 70's.

d-r
03-18-2003, 06:56 PM
It's been a while since the renowned animators here on Walt Disney Co.'s main lot, where their legendary founder first sketched Mickey Mouse more than 75 years ago, have produced a hit.

Walt first sketched Mickey on a train ride back from New York - we all know the story of Walt's trip over Oswald the Rabbit. Why can't reporters do the simplest of fact checking? It was years before that Burbank studio, which wasn't even the first Disney studio for that matter, was built.

DR

mjstaceyuofm
03-19-2003, 07:53 AM
Minor fact-checking aside, the article does a good job of portraying the dilemma that the company is in now and illustrates it's lack of willingness to do anything but cut costs. We all know there's so much more to the story than what's been said, but to the casual observer (not the poster, but the truly casual observer ;) ) the article does a good job of getting the issues across.

larworth
03-19-2003, 08:07 AM
"The premise of your story is factually incorrect and we will not participate in a factually incorrect, biased story." Maybe this quote was taken out of context, but the article seems like a reasonable summary of current issues. Wonder why they were not interested in giving their side of the story?

"I don't think Disney's lost its creativity," said Jim Cora, a 43-year Disney veteran who retired as chairman of Disney's international theme park business in 2001. "I think the problem is having enough money to be as creative as we can be ---- Cora's brother John, a former Disney vice president in charge of resort development, says the company's tight fiscal constraints have stifled creativity. "Disney has lost the good storytellers of the past, like Walt, who could tell stories in a good, passionate way," he said.Iíve seen a Cora quote in several different articles. Didnít realize there were two of them. I never got the sense they had an axe to grind. Anyone know if they left on good terms? They obviously had a good internal view of things.

Disney also has said it will keep a lid on capital spending at its parks for a while, which means a facility such as Disneyland may not get a significant new attraction for some time. Mattís buddy Marcie confirms 2006 is the earliest for the next major DL attraction.

Hopemax, it does make you wonder if he wasnít just doing the same inflationary (vs. grass roots) estimate of what it would take to build a Pirates today? Letís say $150 million is correct. Than are we saying that building a new major e ticket dark ride (like a Pirates or HM) is roughly the same cost as building a major e ticket thrill ride (MSpace, TDS Tot)?

CasualObserver
03-19-2003, 10:31 AM
Let me tell you a story about a company who had a good thing, an innovative thing and they were ahead of their time. Business was good and revenues were growing at an astounding rate. Then, because they were so good, they started rushing things and decided that people would still continue to buy their product even though it wasn't up to the same quality as the old. It was flashier but not up to snuff. In order to keep customers coming back they promised more glitz and new features while never fixing the quality problems. The new features and glitz had problems of their own. In a matter of two years this company had all of their people either promising new features, explaining why it was the customer's fault for the problem, or attempting to fix in some way the most critical problems. No one was available to be innovative or creative. Another company came along with a new, creative, and innovative product that did not suffer from the quality issues nor have a bad reputation among customers. The new company took the market from the old because the old company was still trying to make promises and blame the customer while the new company was busy delivering what the customer wanted.

This is a true story. It happened to a company I worked for about two years ago. I like to say I learned how to run a business by watching the worst run business I had ever seen make bad decision after bad decision.

Now, shift over to Disney.

They once were innovative and ahead of their time.
They began believing that they really didn't have to deliver the goods because their name would make up for the lack of innovation.
They started providing less product while charging more money and blaming the customers for their poor revenues.
Their focus is no longer on innovation, but on trying to band-aid their problems. Innovation is a novelty.
Unless they change course, they will become more and more irrelevant because a competitor will arise to take away even more of their customers.

I say that Disney will not change course because to change course means to be honest with themselves and admit that they made bad decisions. Eisner is not known for taking the blame, but he is to blame. Eisner's policy is to shift blame. A company that evolves into an organization of finger-pointers will fail. Leadership is not blame, leadership is having courage. Eisner does not have courage. He is a coward trying to save his sweet, stock-option deal.

The CEO of the company I used to work for did not take the blame, he blamed everyone around him. Eventually the CEO was fired by the board. He, too, was a coward who hid behind scapegoats and excuses. All he wanted was to find someone to buy him out before the truth came out.

What Disney is suffering from is a lack of leadership. They have increased the level of customer sacrifice to the point that the price just isn't worth what you are forced to accept. Remember, kiddies, Customer Sacrifice = What exactly meets your needs - What you are forced to accept in it's place.

For example:

Why visit more than one store at WDW when they all carry the same thing? (okay, you nit pickers will find a store or two that carries something different but they are the exception). If you are going to turn WDW into a big mall, wouldn't it have made sense to provide variety?

So I'm forced to accept browsing the same items in a store with a different paint job when I really want to be able to explore and find something unique. So, my level of sacrifice is very high on shopping at WDW.

What is Eisner's solution to me not shopping at WDW? Close attractions in order to provide me more time to shop. Implement FastPASS to give me more time to shop. While I like FastPASS because I can go sit down and relax rather than being on my feet constantly, the reason I don't shop isn't a lack of time. To address the real issue of why I don't shop would mean admitting to a bad decision to remove any uniqueness from the offerings of the shops.

Until Eisner and his way of thinking are removed, Disney will continue this downward spiral. Figures from other parks show that it isn't the economy that is the fault of Disney's performance. It's the product offered. The buck stops with Mikey-boy!


Casual Observer

Another Voice
03-19-2003, 12:56 PM
Where to start:

"Former Disney employee Arthur Levitt disagrees. Levitt, now the president of online ticket service Fandango, left Disney in 2000 and was once a personal assistant to Disney Chairman and CEO Michael Eisner. "I don't think Disney has lost one drop of its creative juices," Levitt said."

According to the "rumors" at the time, Mr. Levitt was designing the interiors for Eisner's vacation home when Eisner thought he was so good that Eisner promoted Mr. Levitt to run Pleasure Island at WDW. One wonders if Mr. Levitt is really a source able to accurately comment on Eisner's management skills.


"The company has evolved since the 1996 ABC buy. That media unit, which includes ESPN and the ABC Family Channel, now accounts for 38.4 percent of the company's sales. Theme parks and studio entertainment make up roughly a quarter each, while consumer products comprise the remainder."

The percentage of the profits however tell a much different story: Parks provide 41% of the total profit, Media was 35%, Consumer Products 14% and the Studio unit only a sad 10%. Quite simply, the parks have to haul to load for all other underperforming divisions.


"Pixar is shopping around for possible new suitors."

Rumors are saying the shopping is over and Disney is now trying to find another partner (but their phone calls aren't being returned).


"The company says its 13 recent sequels cost a total of $200 million to make and will generate more than $1 billion in profit."

Which kind of makes you wonder about the "cost benefit" of this. One movie, 'The Lion King' cost half the total of the sequels and made three times the profit (film, video and consumer products). Perhaps quality over quantity is the key to real success after all.


"Prior to "Lion King," the department would put three or four supervisors and 50 animators on one film. After "Lion King," there were 300 artists on one film, with several dozen supervisors."

Again Ė quality over quantity is a leason with so many applications.


"Disney has lost the good storytellers of the past, like Walt, who could tell stories in a good, passionate way."

Truth.


Lastly: " All he wanted was to find someone to buy him out before the truth came out."

History is repeating itself.

CasualObserver
03-19-2003, 03:09 PM
Just wanted to know how to dress..

All Aboard
03-19-2003, 03:59 PM
CO & AV the same person? Ya think?

KNWVIKING
03-19-2003, 04:26 PM
BINGO, sorta rolls off the tongue.

CasualObserver
03-19-2003, 06:23 PM
You know, as bad as I want to play here. For the sake of Mr. Voice, I cannot let you believe that he and I are the same person.

He is Another Voice in the wilderness, while I am just a Casual Observer of the situation.

He is not me.
I am not him.

Casual Observer

P.S. or am I?;)

Another Voice
03-19-2003, 06:59 PM
It's hard enough finding the time just to post once; forget about a second name.

Eyesnur
03-19-2003, 08:26 PM
Oh, it's not that hard...:rolleyes:

DVC-Landbaron
03-19-2003, 09:41 PM
Originally posted by Pet...(I mean) Pirat...(I mean) Capt...(I mean)... Eyesnur!!!
Oh, it's not that hard...:rolleyes:

Not so hard to post perhaps. But it must be very, very hard to make sense and think logically!! I mean look at all the trouble that Peter Pirate/Captain Crook had!! I don't think either of them... (I mean) I don't think HE ever made sense!!! :)

KNWVIKING
03-19-2003, 09:53 PM
Okay,what's the deal with Pirate and Captain ? Banned from the boards ??