The Walt Disney Company: Its Diversification Strategy in 2018 John E. Gamble Texas A&M University-Corpus Christi sied media and entertainment company with a business lineup that included theme parks and resorts. motion picture production and distribu- tion, cable television networks, the ABC broadcast television network, eight local television stations, and a variety of other businesses that exploited the com- pany's intellectual property. The company's revenues had increased from $45 billion in scal year 2013 to $55 billion in fiscal 2017 and its share price had regu- larly outperformed the S&P 500. While struggling somewhat in the mid-19805, the company's perfor- mance had been commendable in almost every year since Walt Disney created Mickey Mouse in 1928. The company ended 2017 with a modest one percent increase in revenues and four percent increase in net income over the year prior. However. its announcement in December 2017 that it would acquire 21st Century Fox for $71.3 billion in cash and stock had the potential to radically improve its future nancial performance. The transaction was approved by the US. Department of Justice (DOJ) Antitrust Division in June 2018 and was expected to be finalized by year-end 2018. The acquisition of 21st Century Fox would extend Disney's impressive col- lection of media franchises to include Fox, FX, Fox News Channel, Fox Business Network, Fox Sports Network, National Geographic Channel, Star India, 28 local television stations in the United States and more than 350 international channels, Twentieth Century Fox Film, and Twentieth Century Fox tele- vision production studios. Twenty-First Century Fox also held a 39.1 percent stake in Sky, Europe's leading entertainment company that served nearly 23 million households in ve countries. The Walt Disney Company was a broadly diver- Disney CEO Robert Iger commented on the ability of the acquisition to further boost shareholder value during an investor's conference shortly after the DOJ consent decree announcement in June 2018. The acquisition of let Century Fox will bring signi- cant nancial value to Disney and the shareholders of both companies, and after six months of integration planning we're even more enthusiastic and condent in the strategic fit of these complementary assets and the talent at Fox. Just to remind you of the incredibly valuable assets that we're acquiringour deal includes such premier entertainment properties as Twentieth Century Fox Film and Twentieth Century Fox Television, FX and National Geographic, Fox's regional sports networks, Fox Networks Group International, and Star India, as well as Fox's interests in Hulu and Sky. Since we rst announced our deal in December, the intrinsic value of these assets has increasedthanks, in part, to the ben- efits of tax reform and certain operating improvements. As we've said before, the combination of Disney and 21st Century Fox is an extremely compelling proposi- tion for consumers. It will allow us to create even more appealing high-quality content, expand our direct-to- consumer offerings and international presence, and deliver more exciting and personalized entertainment experiences to meet the growing demands of consum- ers worldwide.l As the company entered the third quarter of 2018, it was coming off an impressive second quarter, but faced several strategic issues. The company's core Parks and Resorts business continued to grow and record healthy profit margins, but its larger Media Copyrigh! 2018 by John E. Gamble. All rights reserved. C-278 PART 2 Cases in Crafting and Executing Strategy 4 The Walt Disney Company: Its Diversification Strategy in 2018 C-279 Networks business had seen minimal revenue growth action motion picture photography. Disney brought should be a clean and safe park that had attractions and skirting board approval for many of his initia- in recent years and was experiencing declining oper- Ub Iwerks from Kansas City to Hollywood to work that both parents and children alike would find enter- tives and his involvement in a long-running deriva- ating profits as media consumers turned from cable with Disney Brothers Studio (later to be named Walt taining. Walt Disney spent years planning the park tives suit led to his removal as chairman in 2004 and to direct-to-consumer (DTC) programming. The Disney Productions) to produce the Alice Comedies and announced the construction of the new park to his resignation in 2005. company's Studio Entertainment business unit had series that would number 50-plus films by the series America on his Disneyland television show that was The Walt Disney Company's CEO in 2018, also struggled to develop stable revenue and earn- end in 1927. Disney followed the Alice Comedies launched to promote the new $17 million park. The Robert (Bob) Iger, became a Disney employee in ings growth and its Consumer Products & Interactive series with a new animated cartoon for Universal park was an instant success when it opened in 1955 1996 when the company acquired ABC. Iger was Media business unit had seen a decline in revenues Studios. After Disney's Oswald the Lucky Rabbit car- and recorded revenues of more than $10 million dur- president and CEO of ABC at the time of its acqui- and operating profits in the past year. Going into toons quickly became a hit, Universal terminated ing its first year of operation. After the success of sition by The Walt Disney Company and remained 2019, Iger and Disney's management team would Disney Brothers Studio and hired most of Disney's Disneyland, Walt Disney began looking for a site in in that position until made president of Walt Disney have to evaluate the corporation's strategy to bolster animators to continue producing the cartoon. the eastern United States for a second Disney park. International by Alan Eisner in 1999. Bob Iger was the performance of its existing business units and In 1928, Disney and Iwerks created Mickey He settled on an area near Orlando, Florida in 1963 promoted to president and chief operating officer of develop new media delivery capabilities while prepar- Mouse to replace Oswald as the feature character in and acquired more than 27,000 acres for the new The Walt Disney Company in 2000 and was named ing for the integration of the probable acquisition of Walt Disney Studios cartoons. Unlike with Oswald, park by 1965. as Eisner's replacement as CEO in 2005. Iger's first 21st Century Fox. Disney retained all rights over Mickey Mouse and all Walt Disney died of lung cancer in 1966, but strategic moves in 2006 included the $7.4 billion subsequent Disney characters. Mickey Mouse and upon his death, Roy O. Disney postponed retire- acquisition of Pixar animation studios and the pur- COMPANY HISTORY his girlfriend, Minnie Mouse, made their cartoon ment to become president and CEO of Walt Disney chase of the rights to Disney's first cartoon character, debuts later in 1928 in the cartoons, Plane Crazy, The Productions and oversee the development of Walt Oswald the Lucky Rabbit, from NBCUniversal. In Walt Disney's venture into animation began in 1919 Gallopin' Gaucho, and Steamboat Willie. Steamboat Disney World Resort. Walt Disney World Resort 2007, Robert Iger commissioned two new 340-meter when he returned to the United States from France, Willie was the first cartoon with synchronized sound opened in October 1971-only two months before ships for the Disney Cruise Lines that would double where he had volunteered to be an ambulance driver and became one of the most famous short films of Roy O. Disney's death in December 1971. The com- its fleet size from two ships to four. The new ships for the American Red Cross during World War I. all time. The animated film's historical importance pany was led by Donn Tatum from 1971 to 1976. ordered by Iger were 40 percent larger than Disney's Disney volunteered for the American Red Cross only was recognized in 1998 when it was added to the Tatum had been with Walt Disney Productions since two older vessels and entered service in 2011 and after being told he was too young to enlist for the National Film Registry by the United States Library 1956 and led the further development of Walt Disney 2012. Iger also engineered the acquisition of Marvel United States Army. Upon returning after the war, of Congress. Mickey Mouse's popularity exploded World Resort and began the planning of EPCOT in Entertainment in 2009 that would enable the Disney Disney settled in Kansas City, Missouri, and found over the next few decades with a Mickey Mouse Club Orlando and Tokyo Disneyland. Those two parks production motion pictures featuring Marvel comic work as an animator for Pesman Art Studio. Disney, being created in 1929, new accompanying characters were opened during the tenure of Esmond Cardon book characters such as Iron Man, Incredible Hulk, and fellow Pesman animator, Ub Iwerks, soon left the such as Pluto, Goofy, Donald Duck, and Daisy Duck Walker, who had been an executive at the company Thor, Spider-Man, and Captain America. In 2012, company to found Iwerks-Disney Commercial Artists being added to Mickey Mouse cartoon storylines, since 1956 and chief operating officer since Walt Walt Disney acquired Lucasfilm in a $4 billion cash n 1920. The company lasted only briefly, but Iwerks and Mickey Mouse appearing in Walt Disney's 1940 Disney's death in 1966. Walker also launched The and stock transaction. Lucasfilm was founded by and Disney were both able to find employment with a feature length film, Fantasia. Mickey Mouse's univer- Disney Channel before his retirement in 1983. Walt George Lucas and was best known for its Star Wars Kansas City company that produced short animated sal appeal reversed Walt Disney's series of failures in Disney Productions was briefly led by Ronald Miller, motion picture franchise. advertisements for local movie theaters. Disney the animated film industry and became known as the who was the son-in-law of Walt Disney. Miller was A financial summary for The Walt Disney left his job again in 1922 to found Laugh-O-Grams, mascot of Disney Studios, Walt Disney Productions, ineffective as Disney chief executive officer and was Company for 2013 through 2017 is provided in where he employed Iwerks and three other animators and The Walt Disney Company. replaced by Michael Eisner in 1984. Exhibit 1. Exhibit 2 tracks the performance of The to produce short animated cartoons. Laugh-O-Grams The success of The Walt Disney Company was Eisner formulated and oversaw the implementa- Walt Disney Company's common shares between was able to sell its short cartoons to local Kansas sparked by Mickey Mouse, but Disney Studios also tion of a bold strategy for Walt Disney Studios, which July 2013 and July 2018. City movie theaters, but its costs far exceeded its produced several other highly successful animated fea- included the acquisitions of ABC, ESPN, Miramax evenues-forcing Disney to declare bankruptcy in ture films including Snow White and the Seven Dwarfs Films, and the Anaheim Angels, and the Fox Family 1923. Having exhausted his savings, Disney had only in 1937, Pinocchio in 1940, Dumbo in 1941, Bambi in Channel; the development of Disneyland Paris, THE WALT DISNEY enough cash to purchase a one-way train ticket to 1942, Song of the South in 1946, Cinderella in 1950, Disney-MGM Studios in Orlando, Disney California Hollywood, California, where his brother, Roy, had Treasure Island in 1950, Peter Pan in 1953, Sleeping Adventure Park, Walt Disney Studios theme park in COMPANY'S CORPORATE offered a temporary room. Once in California, Roy Beauty in 1959, and One Hundred-One Dalmatians France, and Hong Kong Disneyland; and the launch STRATEGY AND BUSINESS began to look for buyers for a finished animated-live in 1961. What would prove to be Disney's greatest of the Disney Cruise Line, the Disney Interactive action film he retained from Laugh-O-Grams. The achievement began to emerge in 1954 when con- game division, and the Disney Store retail chain. OPERATIONS IN 2018 film was never distributed, but New York distributors struction began on his Disneyland Park in Anaheim, Eisner also restored the company's reputation for In 2018, The Walt Disney Company was broadly Margaret Winkler and Charles Mintz were impressed California. Walt Disney's Disneyland resulted from blockbuster animated feature films with the creation diversified into theme parks, hotels and resorts, enough with the short film that they granted Disney an idea that Disney had many years earlier while of The Little Mermaid in 1989, and Beauty and the cruise ships, cable networks, broadcast television a contract in October 1923 to produce a series of sitting on an amusement park bench watching his Beast and The Lion King in 1994. Despite Eisner's networks, television production, television station short films that blended cartoon animation with live young daughters play. Walt Disney thought that there successes, his tendencies toward micromanagement operations, live action and animated motion pictureC-280 PART 2 Cases in Crafting and Executing Strategy CASE 24 The Walt Disney Company: Its Diversification Strategy in 2018 C-281 EXHIBIT 1 Financial Summary for The Walt Disney Company, Fiscal Years EXHIBIT 2 Performance of The Walt Disney Company's Stock Price, July 2013 2013-2017 (in millions) to July 2018 2017 2016 2015 2014 2013 (a) Trend in The Walt Disney Company's Common Stock Price Revenues $55,137 $55,632 $52,465 $48,813 $45,04 Net income ,366 9,790 8,852 8,004 6,636 Net income attributable to Disney 8,980 9,391 8,382 7,501 6,136 Per common share Stock price ($ ) Earnings attributable to Disney Diluted $5.69 $5.73 $4.90 $4.26 $3.38 Basic $5.73 $5.76 $4.95 $4.31 $3.42 Dividends $1.56 $1.42 $1.81 $0.86 $0.75 year Balance sheets Total assets $95,789 $92,033 $88,182 $84,141 $81, 197 (b) Performance of The Walt Disney Company's Stock Price Versus the S&P . Index Long-term obligations 26,710 24,189 9,142 3,537 17,293 The Walt Disney Company's Stock Disney shareholders' equity 41,315 43,265 14,525 44,958 45,429 Price Statements of cash flows Percent change (July 2013 = 0) Cash provided by operations $12,343 $13,136 $11,385 $10,148 $9,495 Investing activities 4.111 5,758 4,245 3,345 4,676 S&P . . Financing activities 8,959 7,220 5,801 6,981 4,458 Source: The Walt Disney Company 2017 10-K. Year Source: The Walt Disney Company 2017 10-K. production and distribution, music publishing, live about the company's planned acquisition of 21st theatrical productions, children's book publishing, Century Fox and Walt Disney Company's strategic interactive media, and consumer products retail- priorities during a media, cable and telecommunica ing. The company's corporate strategy was centered Secondly, we've been talking a lot about using tech- over the last decade deepening that penetration in tions conference in February 2018, Bob Iger made nology to reach consumers in more modern, more effi- markets. You mentioned Shanghai Disneyland, which on (1) creating high-quality content, (2) exploiting the following comments: cient, and effective ways. That certainly has changed would be an example of how we've done that in China. technological innovations to make entertainment significantly. When I talk about a dynamic marketplace, This gives us the ability to have a far more global foot- experiences more memorable, and (3) international We've been a company that has emphasized the value I think it's most evident in how people access entertain- print and to diversify the company's interest from a geo- expansion. The company's 2006 acquisition of Pixar of high-quality, branded entertainment. And the acqui- ment, how they consume entertainment, and this acqui- graphic perspective. and 2009 acquisition of Marvel were executed to sitions of Pixar, Marvel, and Lucasfilm/Star Wars, sition gives us the ability not only to have essentially enhance the resources and capabilities of its core obviously were a reflection of that core strategy more product, more intellectual property, but to bring Disney's corporate strategy also called for suf- animation business with the addition of new ani- This gives us a larger portfolio of high-quality it to the consumer in more compelling ways and ways mation skills and characters. The company's 2011 branded content. When you think about FX, when you we think the consumer wants their entertainment more ficient capital to be allocated to its core theme think about National Geographic, when you think about and more. The Star and Sky assets and the Hulu assets parks and resorts business to sustain its advantage acquisition of UTV was engineered to facilitate its international expansion efforts. The acquisition of number of the franchises that Fox has created, include give us an opportunity to do that. in the industry. The company expanded the range ing their Marvel franchises and Avatar and other prod- And then lastly, we've talked a lot about wanting to of attractions at its theme parks with billion-dollar Lucasfilm's Star Wars franchise in 2012 not only uct, we believe that this fits beautifully into a strategy grow our company globally. The Walt Disney Company plus additions such as its new Toy Story Land attrac- allowed the company to produce new films in the to continue to invest in entertainment, particularly in a has been a global company for a long time, but in many tions opened in 2018 at Shanghai Disneyland and series, but integrate Star Wars into its other business world that seems to be growing in terms of its appetite of the markets that we operate in our penetration was Disney's Hollywood Studios and its Star Wars Land units, including theme park attractions. When asked to consume entertainment relatively superficial. We spent a fair amount of time scheduled to open in Disney's Hollywood StudiosC-282 PART 2 Cases in Crafting and Executing Strategy CASE 24 The Walt Disney Company: Its Diversification Strategy in 2018 C-283 and Anaheim's Disneyland in 2019. Expansions were broadcasting and television production operations. It's no secret that we have seen the development and mobile first, in many cases. The user interface is par- also underway in 2018 at Tokyo Disney Resort and The division also included Radio Disney, which aired he growth of an entirely new media marketplace, and ticularly critical; this is really true for millennials and Hong Kong Disneyland. family-oriented radio programming on 34 terrestrial so we start with the premise that we want to participate younger, where the user interface that exists in the sort The Walt Disney Company's corporate strategy radio stations (31 of which were owned by Disney) in this new marketplace or this new market. Right now, of traditional television platform is not as compelling also attempted to capture synergies existing between in the United States. Radio Disney was also available we're only doing so at the tip of the iceberg, so to speak, to them. It is essential for us to provide our content its business units. Two of the company's highest gross- on SiriusXM satellite radio, iTunes Radio Tuner and with Hulu-that would be an example of that, and we on platforms and with user interfaces that are serving ing films, Pirates of the Caribbean: On Stranger Tides Music Store, XM/DIRECTV, and on mobile phones have a relatively small stake in Hulu, about 30 percent today's consumer better." So our OTT interests are essentially designed to be part and Cars 2 were also featured at the company's Florida Radio Disney was also broadcasted throughout most of this new marketplace, first. And I talked about it ear- Operating results for Disney's media networks and California theme parks. The company had lever- of South America on Spanish language terrestrial lier, if you look at how the consumer today wants their division for fiscal 2015 through fiscal 2017 are pre- aged ESPN's reputation in sports by building 230-acre radio stations. The company's 2011 acquisition of media, first of all, they're far more interested in mobile, sented in Exhibit 4. ESPN Wide World of Sports Complex in Orlando that UTV would expand the division's television broad- could host amateur and professional events and boost casting and production capabilities to India. occupancy in its 18 resort hotels and vacation clubs Among the most significant challenges to Disney's media networks division was the competi- EXHIBIT 3 The Walt Disney Company's Media Network Subscribers, 2013 and located at the Walt Disney World resort. In 2018, the company's business units were orga- tion for viewers, which impacted advertising rates and 2017 (in millions) nized into four divisions: Media Networks, Parks revenues. Not only did the company compete against Estimated Subscribers (in millions)() Estimated Subscribers (in millions)( and Resorts, Studio Entertainment, and Consumer other broadcasters and cable networks for viewers, Products & Interactive Media. but it also competed against other types of entertain Cable Networks 2013 2017 ment and delivery platforms. For example, consumers Media Networks might prefer to watch videos, movies, or other con- ESPN(2 tent on the Internet or Internet streaming services The Walt Disney Company's media networks busi- rather than watch cable or broadcast television. The ESPN 99 88 ness unit included its domestic and international effect of the Internet on broadcast news had been sig ESPN-International n.a. 146 cable networks, the ABC television network, televi- nificant and the growth of streaming services had the ESPN2 99 87 sion production, and U.S. domestic television sta- potential to affect the advertising revenue potential of tions. The company's television production was all of Disney's media businesses. ESPNU 72 limited to television programming for ABC and its The combat competing streaming content pro- ESPNEWS 73 66 eight local television stations were all ABC affiliates. viders and capitalize on such opportunities, Disney Six of Disney's eight domestic television stations launched two direct-to-consumer (DTC) streaming SEC Network n.a . 60 were located in the 10 largest U.S. television markets. services and Over-the-Top (OTT) services that delive Disney Channels Worldwide In all, ABC had 244 affiliates in the United States. ered content without a distributor. Disney's ESPN- Disney Channel - Domestic 99 92 When asked about the decline in cable television branded multi-sports content was planned for DTC 41 viewership, Bob Iger suggested that content delive distribution in 2018 and a Disney-branded DTC ser- Disney Channels - International(3) NN ery method was less important than the quality and vice that featured the company's film and television Disney Junior - Domestic 58 appeal of content. content was planned for 2019. Bob Iger discussed the Well, for the most part, we've looked at channels less company's DTC and OTT strategy in a 2017 interview. Disney Junior - International n.a. as channels and more as brands. And it's less impor- Direct-to-consumer really is still a relatively nascent Disney XD - Domestic 78 tant to us how people get those channels-obviously, business, although obviously Netflix probably wouldn't 91 it's important in terms of how they are monetized in look at it that way. But what we were doing was cre- Disney XD - International(3) today's world-but what's more important to us is the ating really, two different OTT or DTC products. One Freeform n .a . quality of the brand and intellectual property that fits was sports, and the other one I'll call family, which was under that brand umbrella. And our intention is to-as going to include Disney, Marvel, Pixar, and Star Wars. A + E and Vice the world shifts in terms of distribution and consump- And what we saw doing was bringing them both out A&E/2 99 ion we talked about earlier-is to migrate those brands reasonably priced. We have not announced price but and those products in the more modern direction from I did suggest they would both be substantially below Lifetime 99 a distribution and consumption perspective.' what Netflix currently charges for a few reasons. HISTORY 99 Exhibit 3 provides the market ranking for Bob Iger discussed during an analysts' confer- Lifetime Movie Network 82 Disney's local stations and its number of subscribers ence how the development of ESPN + and its family- oriented DTC services would allow the company to Lifetime Real Women (3) pa. and ownership percentage of its cable networks. The exhibit also provides a brief description of its ABC catch up with emerging media trends that it had missed. (Continued)C-284 PART 2 Cases in Crafting and Executing Strategy CASE 24 The Walt Disney Company: Its Diversification Strategy in 2018 C-285 Parks and Resorts Estimated Subscribers (in millions)(1) Estimated Subscribers (in millions)(") California Adventure-along with three hotels and The Walt Disney Company's parks and resorts division its Downtown Disney retail, dining, and entertain- Cable Networks 2013 2017 included the Walt Disney World Resort in Orlando ment complex. Disney California Adventure was the Disneyland Resort in California, Disneyland opened in 2001 adjacent to the Disneyland property FYI n.a. 58 Paris, the Aulani Disney Resort and Spa in Hawaii, and included four lands-Golden State, Hollywood Viceland n.a. 70 the Disney Vacation Club, the Disney Cruise Line, Pictures Backlot, Paradise Pier, and Bug's Land. The and Adventures by Disney. The company also owned park was initially built to alleviate overcrowding at Broadcasting Disneyland and was expanded with the addition of ABC Television Network (244 local affiliates reaching nearly 100 percent of U .S. television households) a 47 percent interest in Hong Kong Disneyland Resort and a 43 percent interest in Shanghai Disney Resort. World of Color in 2010 and Cars Land in 2012 to Television Production Disney also licensed the operation of Tokyo Disney strengthen its appeal with guests. ABC Studios and ABC Media Productions (Daytime, primetime, late night and news television programming) Resort in Japan. Revenue for the division was primar Aulani was a 21-acre oceanfront family resort ily generated through park admission fees, hotel room located in Oahu, Hawaii. Disneyland Paris included Domestic Television Stations charges, merchandise sales, food and beverage sales, two theme parks, seven resort hotels, two conven- Market TV Station elevision Market Ranking(4 sales and rentals of vacation club properties, and fees tion centers, a 27-hole golf course, and a shopping, charged for cruise vacations. dining, and entertainment complex. The company's New York, NY WABC-TV Revenues from hotel lodgings and food and bever- Hong Kong Disneyland, Shanghai Disney Resort, Los Angeles, CA KABC-TV age sales were a sizeable portion of the division's rev- and Tokyo Disney Resort them parks were highly enues. For example, at the 25,000-acre Walt Disney popular with ambitious expansion plans. Chicago, IL WLS-TV w World Resort alone, the company operated 18 resort The company also offered timeshare sales and Philadelphia, PA WPVI-TV hotels with approximately 22,000 rooms. Walt Disney rentals in 14 resort facilities through its Disney San Francisco, CA KGO-TV World Resort also included the 127-acre Disney Vacation Club. The Disney Cruise Line operated four Springs retail, dining, and entertainment complex ships out of North America and Europe. Disney's Houston, TX KTRK-TV 8 where visitors could dine and shop during or after cruise activities were developed to appeal to the Raleigh-Durham, NC WTVD-TV 24 park hours. Walt Disney World Resort in Orlando interests of children and families. Its Port Canaveral Fresno, CA KFSN-TV also included four championship golf courses, full- cruises included a visit to Disney's Castaway Cay, a service spas, tennis, sailing, water skiing, two water 1,000-acre private island in the Bahamas. The popu- 1) Estimated U .S. subscriber counts according to Nielsen Media Research as of September 2017, ex cept as noted below. parks, and a 230-acre sports complex that was host to larity of Disney's cruise vacations allowed its fleet to (2) ESPN and A&E programming is distributed internationally through other networks discussed below. over 200 amateur and professional events each year be booked to full capacity year-round. 3) Subscriber counts are not rated by Nielsen and are based on internal management report. (4) Based on Nielsen Media Research, U.S. Television Household Estimates, January 1, 2017. Walt Disney's 486-acre resort in California The division's operating results for fiscal years included two theme parks-Disneyland and Disney 2015 through 2017 are presented in Exhibit 5. Source: The Walt Disney Company 2017 10-K. EXHIBIT 4 Operating Results for Walt Disney's Media Networks Business Unit, EXHIBIT 5 Operating Results for Walt Disney's Parks and Resorts Business Unit, Fiscal Years 2015-2017 (in millions) Fiscal Years 2015-2017 (in millions) Revenues 2017 2016 2015 Revenues 2017 2016 2015 Affiliate fees $12,659 $12,259 $12,029 Domestic $14,812 $14,242 $ 13,611 Advertising 8, 129 8,509 8,361 nternational 3,603 2,732 2,551 TV/SVOD distribution and other 2,722 2,921 2,874 Total revenues 18 ,415 16,974 16,162 Total revenues 23,510 23,689 23,264 Operating expenses 10,66 0,039 9,760 Operating expenses 14,068 13,571 13,150 Selling, general, administrative and other 1,950 1,913 1,884 Selling, general, administrative and other 2.647 2,705 2,869 Depreciation and amortization 1.999 1,721 1,517 Depreciation and amortization 237 255 266 Equity in the loss of investees 25 Equity in the income of investees (344) (597) (814) Operating Income $ 3,774 3,298 $ 3,031 Operating Income $ 6,902 $ 7,755 $ 7,793 Source: The Walt Disney Company 2017 10-K. Source: The Walt Disney Company 2017 10-K.C-286 PART 2 Cases in Crafting and Executing Strategy CASE 24 The Walt Disney Company: Its Diversification Strategy in 2018 C-287 Studio Entertainment video on demand (SVOD) services such as Netflix EXHIBIT 7 Operating Results for Walt Disney's Consumer Products & Interactive The Walt Disney Company's studio entertainment might acquire distribution rights to a film for a 12- to 19-month window. Telecast right fees decreased Media Business Unit, Fiscal Years 2015-2017 (in millions) division produced live-action and animated motion pictures, direct-to-video content, musical recordings, as the length of time from initial release increased. 2017 2016 2015 and Disney on Ice and Disney Live! live performances. Operating results for the Walt Disney Company's The division's motion pictures were produced and Studio Entertainment division for fiscal 2015 through Revenues distributed under the Walt Disney Pictures, Pixar, fiscal 2017 are produced in Exhibit 6 Licensing, publishing and games $3,256 $3,819 $3,850 Marvel, Lucasfilm, and Touchstone banners. The Consumer Products & Retail and other 1,577 1,709 1,823 division also distributed Dreamworks Studios motion pictures that were released from 2010 to 2016. Interactive Media Total revenues 4,833 5,528 5,673 Most motion pictures typically incurred losses The company's consumer products division included Operating expenses 1,904 2,263 2,434 during the theatrical distribution of the film because the company's Disney Store retail chain and businesses of production costs and the cost of extensive adver- specializing in merchandise licensing and children's Selling, general, administrative and other 1,007 1,125 1,172 ising campaigns accompanying the launch of the book and magazine publishing. In 2018, the com- Depreciation and amortization 179 175 183 film. Profits for many films did not occur until the pany owned and operated 221 Disney Stores in North Equity in the income of investees movie became available on DVD or Blu-Ray disks for America, 87 stores in Europe, 55 stores in Japan, and 2 home entertainment, which usually began three to six stores in China. Its publishing business included comic Operating Income $1,744 $1,965 $1,884 months after the film's theatrical release. Revenue was books, various children's book magazine titles available also generated when a movie moved to pay-per-view in print and eBook format, and smartphone and tab- Source: The Walt Disney Company 2017 10-K. (PPV)/video-on-demand (VOD) two months after let computer apps designed for children. The division's the release of the DVD and when the motion picture sales were primarily affected by seasonal shopping EXHIBIT 8 Consolidated Statements of Income for The Walt Disney Company, became available on subscription premium cable trends and changes in consumer disposable income. channels such as HBO about 16 months after PPV/ Operating results for Disney's Consumer Products Fiscal Years 2015-2017 (in millions, except per share data) VOD availability. Broadcast networks such as ABC & Interactive Media division for fiscal year 2015 2017 2016 2015 could purchase telecast rights to movies later as could through 2017 are presented in Exhibit 7. The compa- basic cable channels such as Lifetime or the Hallmark ny's consolidated statements of income for fiscal 2015 $55,137 $55,632 $52,465 Channel. Premium cable channels such as Showtime through fiscal 2017 are presented in Exhibit 8. The Revenues and Starz might also purchase telecast rights to movies Walt Disney Company's balance sheets for fiscal 2016 Costs and expenses 11,264 11,274 39,241 long after its theatrical release. Similarly, subscription and fiscal 2017 are presented in Exhibit 9. Restructuring and impairment charges 98 156 53 Add: Other income 78 EXHIBIT 6 Operating Results for Walt Disney's Studio Entertainment Business 385 260 117 Unit, Fiscal Years 2015-2017 (in millions) Net interest expense Add: Equity in the income of investees (320) (926) (814) 2017 2016 2015 Income before income taxes 13,788 14,868 3,868 Revenues Income taxes 4,422 5,078 5,016 Theatrical distribution $ 2,903 $ 3,672 $ 2,321 Net Income 9,366 9,790 8.852 Home entertainment 1,798 2,108 ,799 Less: Net Income attributable to noncontrolling interests 386 399 470 TV/SVOD distribution and other 3,678 3,66 3,246 Net Income attributable to The Walt Disney Company (Disney) $ 8,980 $ 9,391 $ 8,382 Total revenues 8,379 9,44 7,366 Earnings per share attributable to Disney: Operating expenses 3,667 3,991 3,050 Diluted $5.69 $5.73 $4.90 Selling, general, administrative and other 2,242 2,622 2,204 Basic $5.73 $5.76 $4.95 Depreciation and amortization 115 125 139 Weighted average number of common and co equivalent shares outstanding: Operating Income $ 2,355 $ 2,703 $ 1,973 Diluted 1,578 ,639 1,709 Source: The Walt Disney Company 2017 10-K. Basic 1,568 1,629 1,694 Source: The Walt Disney Company 2017 10-K.C-288 PART 2 Cases in Crafting and Executing Strategy CASE 24 The Walt Disney Company: Its Diversification Strategy in 2018 C-289 EXHIBIT 9 Consolidated Balance Sheets for The Walt Disney Company, september 30, 2017 October 1, 2016 Fiscal Years 2016 and 2017 (in millions, except per share data) 1, 2016 Equity September 30, 2017 Preferred stock, $0.01 par value CURRENT ASSETS Authorized - 100 million shares, Issued - none Cash and cash equivalents $ 4,017 $ 4,610 Authorized - 4.6 billion shares, Issued - 2.9 billion shares 36,248 35,859 Receivables 8,633 9,065 Retained earnings 72,606 66,088 Inventories 1,373 1,390 Accumulated other comprehensive loss (3,528) (3,979) Television costs and advances 1,278 1,208 05,326 97,968 Other current assets 58 693 Treasury stock, at cost, 937.8 million shares at October 1, 2011 (64,011) (54,703) Total current assets 15,889 16,966 and 803.1 million shares at October 2, 2010 Film and television costs 7,481 6,339 Total Disney Shareholder's equity 41,315 43,265 Investments 3,202 4,280 Noncontrolling interests 3,689 4,058 Parks, resorts and other property, at cost Total Equity 45,004 47,323 Attractions, buildings and equipment 54,043 50,270 Total liabilities and equity $95,789 $92,033 Accumulated depreciation 29,037 26,849 Source: The Walt Disney Company 2017 10-K. 25,006 3,421 Projects in progress 2,145 2,684 Land 1,255 1,244 THE WALT DISNEY Chairman Iger summarized Disney's strong sec- 22,380 21,512 COMPANY'S SECOND ond quarter performance and summarized the com- pany's position at mid-2018 Intangible assets, net 6,995 6,949 QUARTER 2018 We're very pleased with our results in Q2, especially in Goodwill 31,426 27,810 PERFORMANCE AND ITS our Parks and Resorts and Studio businesses. Other assets 2,390 2,340 FUTURE PROSPECTS Our parks continue to drive growth through opera- tional excellence and by effectively leveraging our Total assets $95,789 $92,033 extraordinary content. As an example, I just got back LIABILITIES AND EQUITY The Walt Disney Company reported revenues and earnings per share increases during its first six months from opening our new Toy Story Land in Shanghai Disneyland and I'm happy to report that our first major Current liabilities of fiscal 2018 of 6 percent and 59 percent, respec- addition to the park was met with strong reviews and Accounts payable and other accrued liabilities 8,855 9,130 tively, from the first six months of the year prior. great excitement. We're thrilled with the reaction and The company's strong financial performance during the enthusiasm generated by the new land bodes well for Current portion of borrowings 6,172 3,687 the first six months of 2018 was led by its Parks and future expansion. Deferred revenue and other 4,568 4,025 Resorts business unit, which saw year-over-year rev- Turning to our Studio. . .It's clear from the recent 16,842 nue and operating income increases of 13 percent results-as well as from the slate ahead-that our Studio Total current liabilities 19,595 and 24 percent, respectively; and its Studio business has and will continue to raise the bar in terms of both Borrowings 19, 119 16,483 unit, which recorded a year-over-year revenue increase creative and commercial success. The incredible performance of Marvel's Black Deferred income taxes 4,480 3,679 of 9 percent and a year-over-year operating income increase of 12 percent. Disney's Media Networks and Panther is just one of many examples. We're proud of Other long-term liabilities 6,443 7,706 this movie on so many levels-it speaks volumes about Consumer Products & Interactive Media divisions great, innovative storytelling, the power of new perspec- Commitments and contingencies suffered 9 percent and 4 percent operating income tives and unbridled creativity. Redeemable noncontrolling interests 1,148 decreases, respectively, with neither achieving mean- We followed the phenomenal success of Black Panther ingful revenue growth. with another Marvel masterpiece, Avengers: Infinity War