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Teaching Note for Disney in a Digital World SM-29CTN and SM-29D TN

Teaching Note for
Disney in a Digital World: Disney in 2001 – Distributing the Mouse
and
Disney in a Digital World (D) A Digital Decade?: Disney in 2003 and Beyond

INTRODUCTION

Position in the Book

These cases are presented in the part of the book entitled “Convergence or Collision – Take II: Do Digits Defeat Pen and Plastic?” They help examine the strategic challenges that Disney faced in the early 2000s, as it confronted two strategic inflection points (SIP): (1) the question of how important it was for a content company to own distribution channels, and (2) the strategic consequences of digitization of content and digital distribution. Disney’s acquisition of Capital Cities/ABC for $19 billion in 1996 suggested that it viewed SIP (1) as the most important one. By the early 2000s, having acquired the traditional broadcasting network ABC TV in the mid-1990s, and having been less than successful on becoming an entertainment force on the Internet, the company continued to struggle with the question of how much and how broad its control over distribution should be. The company also had been less than successful in its efforts to develop videogames, and its traditional characters faced competition from new ones developed by videogame makers, such as Nintendo. In addition, it was still relying on traditional “pen-based” animation competencies for much of its traditional film making. The success of digital animation films and Disney’s dependence on Pixar, run by Apple co-founder Steve Jobs, for digital animation had taken on strategic importance. The fact that John Lasseter, co-founder of Pixar, was a Disney employee in the early 1980s and actually had tried to get Disney interested in digital animation adds a poignant note to the strategic situation faced by the company twenty years later. The widely publicized divergence of views of Disney CEO Michael Eisner and Pixar CEO Steve Jobs concerning what the US Government should do to protect intellectual property rights from technology-facilitated “piracy” added urgency to considering this strategic dependence. By 2003, however, Eisner began to give hints of new ways of thinking about using

digital-enabled interactivity to augment content consumers’ experience (and thereby further protect content).

In terms of the three key themes of the book, these cases offer the opportunity to examine how the confluence of environmental forces may lead a company with a well-established corporate strategy to feel a need to embark on major changes to maintain control of its destiny (Theme I). It also shows how these external forces may create various types of strategic inflection points that drive strategy and action apart, and it illustrates the difficulties of finding a new basis for realigning strategy and action (Theme II). The case also offers an example of P-independent change that might morph into runaway change and it raises the question of how to transform a company late in the game when it may potentially face more threats than opportunities (Theme III).

Overview of the Cases

The two cases complement each other and can effectively be used together. Taken together, the cases offer the opportunity for the instructor to examine with the students the challenges and opportunities that entertainment conglomerate Disney faces beyond 2003 as it tries to commit itself to embarking on a “Digital Decade.”

The first case, set in 2001, describes the continued struggle of Disney with the issues of distribution channel control, including the $900 million failure of its Internet portal and the $5.2 billion acquisition of cable network assets, and the implications of digitization of content and digital distribution. The unhappy incident with Time Warner in May 2000 had added to top management’s concerns about the monopoly power of the cable networks. The case moves on to describe Disney’s five-point strategy in 2001, which included owning more content, owning more cable channels, investing in new distribution technologies (e.g., broadband Internet), exploiting the theme park franchise, and building more direct-to-retail relationships (and relying less on its own costly stores). The case provides some detail on Disney’s cooperation/competition with Blockbuster and its efforts to deliver movies over the Internet and “data casting” to get around the incumbent distribution “gate keepers.” Finally, the case also discusses the digital revolution in animation and Disney’s turbulent relation with Pixar, and its renewed efforts to gain some position in the fast growing video game industry segment. As it continues to struggle with the strategic challenges posed by vertical integration in the industry and the rapid rise of digital content and digital distribution, the company fortunately still generates a tremendous amount of cash. This gives it some additional time to further adjust its strategy and structure as it pursues its new vision of a “Digital Decade for Disney.”

The second case, set in 2003, describes Disney’s new vision of a “Digital Decade,” to put the company in front of the digital transformation of the entertainment industry, while recognizing that the industry continued to be very conflicted about the role of digital distribution.

After discussing the state of affairs in 2003 for each of the company’s four major businesses (Media Networks, Parks and Resorts, Studio Entertainment, Consumer Products), the case briefly elaborates on CEO Eisner’s vision for the “Digital Decade,” which seems to involve

using digital technologies to enrich the emotional connection between its content and its audience with new experience dimensions.

Note: During the period covered by the cases, tensions were growing between CEO Michael Eisner and some board members, notable Roy Disney, who actively sought to replace Eisner with a new CEO. These tensions were, at least in part, the result of the significant loss in value of Disney’s stock, which, in turn, must have been the result of the capital market’s assessment of Disney’s prospects in the rapidly changing industry. The cases, and this teaching note, focus on the fundamental industry forces rather than the personality issues, but some instructors may want to spend some time bringing these issues into the discussion.

MAJOR THEMES

  1. The strategic implications of “verticalization” of the content industry
  2. The strategic implications of “digitization” on companies in the content industry
  3. Maintaining brand identity in the face of industry convergence/collision
  4. Changing distinctive competencies (and the role of autonomous strategic action), and attendant critical dependencies
  5. Leading (or just joining?) the “digital content age:” managing corporate transformation

ANALYSIS

Preparation Questions

  1. What was Disney’s traditional corporate strategy before the acquisition of Capital Cities/ABC in 1996?
  2. What were the major environmental changes that led Disney to feel the need to acquire Capital Cities/ABC in 1996? How did this acquisition fit with their traditional corporate strategy? What did it imply about Eisner’s view of Disney’s traditional corporate strategy?
  3. What was the interplay of forces that made digitization of content and digital distribution of content possible and reinforced its adoption and use? What are the strategic implications for Disney?
  4. During 2001-2003, what has Disney done - strategically and organizationally - to deal with the new situation created by digitization of content and digital distribution?
  5. What tensions do you expect digitization of content and digital distribution to have created within Disney? For instance, how should Disney manage digital animation film opportunities in the future? Looking forward, what should Disney do differently?

Discussion

1. What was Disney’s traditional corporate strategy before the acquisition of Capital Cities/ABC in 1996?

Some key aspects of Disney’s traditional strategy are:

- Disney had long been an industry leader with a “pure play” strategy of content creation.

The company had a long and uniquely successful history of creating “characters” and telling “stories” that resonated strongly with traditional family values and are “wholesome” in light of those values. It had been able to attract highly talented creative people and developed an extraordinary competence base in traditional pen-based drawing and animation. Over many years, the company had created both animated and live action films, many of which have become classics. It has also expanded the application of its distinctive competencies into television programming. Its creative talent pool was able to consistently produce “hits.”

- Disney had relied on a “horizontal” strategy to position itself in the content industry.

Until the mid-1990s, Disney relied on the quality and appeal of its content creations to occupy, defend, and leverage a virtually unassailable product-market position in the content industry. Various distribution channels were eager to bring Disney’s content to the consumer, and Disney felt it had developed such strong emotional bonds with its core audience that it did not worry about reaching it. Disney relied on a very strong consumer “pull” to get into the distribution channels and hence, felt no need to directly “control” distribution through owning it.

- Disney used a strategy of “re-purposing” its content to expand its revenue base and keep its content fresh and alive.

Over the years, and especially under Eisner’s leadership, Disney had become a master of “re-purposing” its content, thereby creating various new and large sources of revenue. Perhaps most importantly, through its world-famous “theme parks” it had been able to keep its characters fresh and alive and to attract large masses of domestic and foreign paying customers. Even though it initially faced some difficulties, it was able to bring its theme park concept to foreign markets as well (e.g., France). Disney retail stores sold various types of merchandise based on its characters and stories. Disney cruises targeted family vacationers.

2. What were the major environmental changes that led Disney to feel the need to acquire Capital Cities/ABC in 1996? How did this acquisition fit with their traditional corporate strategy? What did it imply about Eisner’s view of Disney’s traditional corporate strategy?

This segment of the discussion can effectively make use of the Extended Industry Analysis Framework and the concept of a Strategic Inflection Point (SIP).

- Consolidation and vertical integration in the content industry.

During the early 1990s, Disney’s major competitors (Time Warner, News Corp, Viacom) had been buying major distribution assets to ensure their content would have a channel to consumers. Through 1996, Disney had taken the position that compelling content will find distribution, and

had avoided large investments in distribution. By 1996, however, the company seemed to have lost confidence in its pure play, horizontal strategy, and when ABC became the last remaining broadcast network available, Disney decided to invest $19 billion in its acquisition.

- Losing confidence in Disney’s traditional strategy?

While Disney presumably faced two strategic inflection points (SIP) by 1996: (1) the importance of distribution, and (2) digitization and the Internet, Disney’s acquisition of ABC clearly indicates which of the two SIPs top management considered most salient and urgent. The unsettling incident in May 2000 involving a cable company, owned by Time Warner, dropping ABC programming from its lineup during a critical ratings period called “sweeps week” exacerbated the concern about the monopoly power of the distribution “gate keepers.”

Nevertheless, the ABC acquisition seems to have been a defensive strategic action motivated by what other players were doing, rather than deriving directly from Disney’s own corporate strategy. The instructor can start a potentially stimulating discussion by questioning whether it was indeed a strategic imperative for Disney to spend $19 billion on acquiring ABC. With or without such a discussion, this point needs naturally to the next question.

Note: Some students may suggest that it was simply hubris on the part of Eisner that led to Disney acquiring ABC. While there may be an element of truth in that, the instructor can point out that such explanations are, in general, not very satisfactory. Deeper insight is usually obtained by trying to find out first what the underlying forces are that shape top management’s strategic actions before falling back on “personality” factors. One interesting conclusion of this segment of the discussion is that companies sometimes take strategic actions because they feel they have to because others have already taken certain strategic actions, rather than because they really wanted to take those actions.

3. What was the interplay of forces that made digitization of content and digital distribution of content possible and reinforced its adoption and use? What are the strategic implications for Disney?

This segment of the discussion can effectively use the Extended Industry Analysis Framework, the framework of Dynamic Forces driving Company Evolution, as well as the Framework of the Strategy-Making Process in established Firms.

- Technology: the emergence of digital content and the Internet.

Digital technology - hardware and software – has invaded the entertainment industry since the emergence of the microprocessor. From Atari’s electronic games, through the early PC video games of Electronic Arts and Nintendo’s introduction of console-based videogames, to today’s X-box and Playstation entertainment systems, electronic entertainment content has grown dramatically. Video games have created new characters and stories. Digital animation has begun to replace traditional pen-based animation and has also created new characters and stories.

Digital technology facilitates various forms of interactivity with digital content available to consumers that traditional technologies and content cannot match. This creates new usage patterns (and expectations).

Video arcades have become new ways for delivering and experiencing video games. The Internet has become a new distribution channel for digital content and has also created new usage patterns and behaviors. So have wireless communication devices.

Digital distribution channels have stimulated the emergence of complementary technologies (e.g., peer-to-peer computing and communication) that make possible the illegal - or at least unauthorized – proliferation of proprietary content “for free.”

- Culture: the changing family.

While the case does not touch on it, the instructor can ask the class to relate the technological changes to cultural changes that are affecting the concept of “family” in the so-called post-modern society. More and more children grow up in one-parent households and in other forms of family that are non-traditional. In two-parent households, both parents often work, leaving kids to spend more time entertaining themselves. The tolerance for violence, sexually explicit language and imagery has significantly increased and kids confront topics traditionally associated with “growing up” at earlier ages, and so on.

- Digitization poses a strategic inflection point (and an identity crisis) for Disney.

As pointed out under question 1, before the mid 1990s Disney had a clear vision of its identity and a clear strategy. It positioned itself as a “traditional family entertainment” company with a distinctive competence in traditional animation. Disney’s distinctive competencies served to support the company’s product market position extremely well. Disney’s strategic actions were very well aligned with its vision and strategy. Disney’s strategy diamond looked beautiful.

The technological and cultural changes discussed above posed a strategic inflection point for Disney and a potentially big identity crisis. First, there is a greater supply of content than before, with new characters and stories. Second, the new characters (e.g., Nintendo’s Mario) can do things that Disney’s characters (e,g., Mickey) cannot do without losing their traditional “wholesomeness.” Hence, Disney faces some potential problems with how it has positioned itself in the industry.

Note: An interesting question to ask here is “Who owns Mickey?” The superficial answer is of course Disney. A deeper answer is that the public owns Mickey, which constrains what Disney can allow Mickey to do. A good parallel here is Coca Cola. The instructor can ask what happened when Coca Cola endeavored to announce a change in the taste of Coke. A disapproving uproar of the consumers forced Coca Cola to back off and to introduce “Classic Coke.” (And it was not even clear whether consumers could really discriminate between the new and the traditional Coke taste.)

-Digital technologies (especially related to animation) are not a distinctive competence of Disney.

The company missed the boat on digital animation for many years. Instead, Disney formed a joint venture with Pixar where it would invest in, distribute and retain copyrights to digitally animated features created by Pixar. In some respects, it was as if Disney was outsourcing digital animation. The company would regret not better developing its assets in this newly important area as its home-grown digital animation features fared poorly at the box office. At the time of the case, Disney was left without a substantial digital animation capability and the joint venture with Pixar was nearing its end.