How Did Michael Eisner Make Disney Profitable?

[raidermatt]

But this goes back to the old argument of how much money should Disney leave on the table. Is it fair for a company - any company - to accept considerably less for their product when the market says otherwise ?

That's an over-simplification of the argument. Its phrased that way to justify the hikes, but it fails to recognize that there were valid BUSINESS reasons for not charging "what the market would bear". Those who don't believe it was in the company's best interests to make the hikes (at least to the extent they were made) believe that that by providing a greater VALUE for the guests, the company would actually leave less money on the table in the long run.

The beauty is that the company was already past the early "bite the bullet" stage of that philosophy. Where they were falling short was not expanding the resort quickly enough to take advantage of the strategy.

Hence the under-utilized asset problem which brought the wolves to the door.

Once the new team was in place, the company could have grown the resort while maintaining the strategy, but instead grew while using the more common "market pricing" strategy. Ceratainly it was a valid strategy, and one could even argue that in most cases, its the optimal strategy. I just don't believe that in this case it was the optimal strategy.

 

[sotoalf]

Since we live(d) in Florida, we got the Florida Residents rate at the Polynesian for $99 a night in 1986, the first time we stayed onsite; we acted like we'd just won the lottery. No, $99 wasn't a lot of money even in 1986, but occupancy at the two resorts then was so high that we felt priviliged to even find a room.

In 1989, when we stayed at the CBR, it was $74 a night. But by then the standard rooms per night at the CR and Poly were in the $130-140 range, which was a lot then. That's a considerable difference. Plus, the CBR had 2,112 rooms, so it was no problem booking one.

 

[Plus4206]

but it fails to recognize that there were valid BUSINESS reasons for not charging "what the market would bear". Those who don't believe it was in the company's best interests to make the hikes (at least to the extent they were made) believe that that by providing a greater VALUE for the guests, the company would actually leave less money on the table in the long run.
.

Ummm.. yes and no.

I believe you agree that CR & Poly were charging too little at the time ME took over, ( if not, I apologize for the assumption ), but when raising rates, how does one determine what's too much or too little without using standard business practice ? Also, I don't see where undercharging for a hotel room will leave less money on the table in the long run. Overcharging- Yes. Not reinvesting back into the parks - Yes. But charging what the market will bear.... not to sure.

 

[raidermatt]

...how does one determine what's too much or too little without using standard business practice ?

Without seeming flip, you use a non-standard business practice. Lots of companies charge more or less than the true market price for their product for a variety of reasons, most having to do with the long term impact of appearing to "gouge" their customers when demand is higher than normal for some reason. Others do it to maintain a certain image, such as value, quality, etc.

Also, I don't see where undercharging for a hotel room will leave less money on the table in the long run.

Its a matter of opinion, of course, but when you charge less than market, you build up goodwill. That's not to say its necessarily done for benevolent reasons, but in the customer's view, you are doing them a favor.

It's been mentioned by more than one person on this board that the Budgets and Mods are viewed as a "gift" to them, because otherwise they couldn't have stayed on property. Yet, this was not a gift from Disney. They simply provided lesser accomodations at the corresponding market price. Still, it builds goodwill among some.

Now, imagine providing Poly/Comtemp level accomodations, but at a lesser price. Not giving it away, mind you, and not using it at a loss leader. But simply charging a price such that most guests feel like they are getting a real value. Not that they are getting what they paid for, but they are getting even MORE.

How much is that goodwill worth in the long term? How much more likely is that guest to visit more frequently in the future? How much more money will that guest spend on-property because they have an even more positive feeling about their trip? Will they stay longer, and consequently spend more in other areas? How much will that extra goodwill felt toward the Disney brand impact other purchase decisions they make?

Nobody can quantify that definitively, and certainly it varies depending on the company. For some companies, it just wouldn't be worth it. But if in Disney's case, the value of what they gained by not charging as much as they could outweighs the extra cash generated in the short run thorugh higher rates, then they would in fact be leaving money on the table in the long run by adopting the market price strategy.

And, yes, there is even room for Moderates and/or Budgets in that philosophy, but the execution would be very different from the "motel with decorations" we see today (no matter how great one may think those decorations are).

 

[raidermatt]

I believe you agree that CR & Poly were charging too little at the time ME took over, ( if not, I apologize for the assumption )...

Actually, I think the biggest issue was not increasing the supply quickly enough. (There's those nasty under-utilized assets again...).

I answered this separately because I think trying to figure out the exact price that should have been charged is near impossible, and detracts from the bigger discussion, which is one of overall strategy/philosophy.

 

[Plus4206]

And, yes, there is even room for Moderates and/or Budgets in that philosophy, but the execution would be very different from the "motel with decorations" we see today (no matter how great one may think those decorations are).

Please, let's save this one till next month ;-)

I understand the concept of "Goodwill" moreso then most because of the business I'm in, but I've also seen it backfire a very high percentage of time. People that even recognize the dollar value of the goodwill gesture will stab you in the back for no good reason other then they can. But at least in my business goodwill is measurable & quantifiable to some extent.

IMO, Disney trips - at least to WDW, DL is an entirely different playground - are more an "event" then a simple vacation. Because of all the advanced planning that goes into the trip I don't know that people would recognize a less-then-market value price. Are they perceiving any goodwill at al ? The way I went about planning my first trip started with X dollar budget.Y amount for room,Z amount for food, etc. I came away from my trip on budget and totally WOW'ed.I've since spent mega bucks in The World. I never once gave thought that I was or was not getting greater value then I was actually paying. I'm not saying I'm a typical WDW traveller but I can only speak from my experience.

 

[Plus4206]

Rethinking what I wrote, maybe it's possible that I did get hooked on Disney was because of the value I receive but didn't actually perceive. One thing for sure is that I'm certain I got my monies worth.

Now to really confuse things.... my first trip was in '95.

 

[crusader]

Ok enough of the resort pricing issue. You can solve this one very simply using the fundamentals of basic economics - it's called supply and demand.

Or more importantly:

Its phrased that way to justify the hikes, but it fails to recognize that there were valid BUSINESS reasons for not charging "what the market would bear". Those who don't believe it was in the company's best interests to make the hikes (at least to the extent they were made) believe that that by providing a greater VALUE for the guests, the company would actually leave less money on the table in the long run.

Who operates this way? Seriously. This is a theory without any proof. Sounds good but totally unfounded. Name me one hotel/resort in existence right now that proves this theory in the U.S.

But I'd like to answer this:

And Eisner still resists. How late was Disney to the DVD market?

1997. In fact they were one of the first to sign on.

take a look - http://www.usatoday.com/life/2002-10-17-dvd-timeline_x.htm

You do know WB holds the patent on these little gems and collects royalties from every studio. (although that will be changing very soon.)

BTW - It may surprise some to learn that DVD's are the true financiers of Hollywood these days - not the themeparks. Read on - http://sagwatchdog.com/cgi-bin/index.cgi/noframes/read/360

One more thing -

It is a subtle difference in design, and shows the difference between being a 'marketeer' (thank you Mr. Voice for the reference to that new word) and an 'imagineer.'

That's exactly how I felt when I saw the way the poly was built vs the original design. So whenever the master plan modifications are tossed out in support of the slope theory, my feeling is all bets were off the minute the Poly was built.

Take a look at the disparity vs. what was planned.

http://home.cfl.rr.com/omniluxe/poly.htm

 

[raidermatt]

Rethinking what I wrote, maybe it's possible that I did get hooked on Disney was because of the value I receive but didn't actually perceive. One thing for sure is that I'm certain I got my monies worth.

You're right that we can't make any kind of accurate generalization just based on one, or even a few, experiences.

But at least I think you get what I'm saying with your last post.

I don't mean that everyone sits around with spreadsheets, assigning numeric values to the benefit they get from each experience, and then figures in the cost to determine where they vacation (thought I bet there are a few...).

Its more of a general feeling. If you feel like you got a better than average value, it just sits with you in a more positive manner. You may not realize that's why you have a stronger urge to go back sooner, or why you want to go to WDW more than to some other destination, but it has an impact.

I do agree, however, that its a tricky business, and its not for everyone.

 

[YoHo]

A couple of comments for Crusader.
1: Who operated that way?

DISNEY OPERATED THAT WAY FROM 1955 till 1984 !@#$?

This isn't some mythical pie in the sky idea. Disney Really did operate in this manner. Prices remained low, because Walt flew off in a rage whenever somebody suggested they should be charging more. That's why Card Walker was so affraid to raise parking prices.

Disneyland never made much profit, but then, Walt spent every dime on enhancments and E.P.C.O.T. and so forth, so It's not so surprising.

WDW Was always sitting pretty. It was underutilization of assests, not leaving money on the table (well, and a disgruntled nephew) that swept Eisner in.

And it really doesn't matter What other Hotels and resorts charge, because there isn't a single other resort in WDW's category. Disney is their market and there is no other valid reference point.


As for DVDs, I have familial ties to Some of the electronics companies that were involved in the standardizations and I had a bit of an insiders ear to what was going on. DVD came on fast and Divx died a mercifully quick death. Disney was a latecomer to the party. They wanted to release on Divx. One USAToday (of all things) article does not make a very good representation of the events.

 

[crusader]

I see, you want to live in 1955.

I asked to name one in existence today that "operates" this way. Quit trying to take me back 50 friggin' years ago when milk was delivered to my front door and only dad had a car and the price of a home was a few grand and if you owned a color tv that was a luxury and the price of an airline ticket was way beyond any family budget.

If Walt was keeping the DL resort pricing down, I'm not the least bit surprised. He built a park in Anaheim.

You need to give it up. It's 2005. The answer is None.

And it wasn't 1955 to 1984. It probably only applies to DL during Walt's lifetime. We could NEVER afford the WDW resorts in the 70's. We were a family of 7 surrounded by families of 5,6,8,9,10 and 11. The only families I know of who stayed in the deluxe resorts back then had 1 or 2 kids.

One USAToday (of all things) article does not make a very good representation of the events.

Why not? Which part of that article is misrepresented? It gives us a good basis for this whole debate. Initially, you weren't even discussing the evolution of the dvd. There were no comments about the development or the standardization or the fued. You were simply criticizing Eisner/Disney for missing the market or coming in too late or whatever the phrase of the day is, and I'm saying it's not true. They jumped on the bandwagon right away in 1997. I see nothing backing up your statement.

Heck, I'll gladly concede this issue but you're gonna have to provide some real figures post WB and Japan which at the very least clearly demonstrates what constitutes "late to the dvd market".