Iger’s Arrowheads Pointing Right

The Walt Disney Company is a diversified entertainment company with a $70 Billion+ market cap and a stock that has been performing consistently well for amost 4 years. It operates in four major business segments – Studio Entertainment, Parks and Resorts, Consumer Products and Media Networks. The Studio Entertainment segment produces, acquires and distributes live-action, animated motion pictures, direct-to-video programming, musical recordings, and live-stage plays to the theatrical, home entertainment, pay-per-view, video-on-demand, pay television, and free-to-air television markets. The Company also owns and operates the ESPN sports channel. In this segment, we evaluate Disney’s growth strategies.

The Parks and Resorts segment owns and operates the Walt Disney World Resort. The Consumer Products segment licenses Walt Disney characters and visual and literary properties to manufacturers, retailers, show promoters, publishers of books and magazines for children and families, as well as computer software and video game vendors for the entertainment and educational markets. The Company distributes its products through Disney Stores, as well as through its Web site DisneyShopping.com.

The Media Networks segment includes domestic broadcast television network and television stations, cable / satellite networks and international broadcast operations, television production and distribution, domestic broadcast radio networks and stations, and Internet and mobile operations. It also produces, distributes, and licenses cable television programming, and invests in foreign television broadcasting, production, and distribution entities. In fact, International is a key piece of Disney’s strategy going forward, with massive consumer markets opening up in India and China. I wrote a few pieces on the International opportunities earlier: Disney and Globalization and Disneyland on the Ganges.

The Company’s strategy of creating high-quality branded content with enduring franchise has been the key driver of growth in the twentieth century. Today, however, Walt Disney is looking at consolidating its business by selling off non-core businesses, acquiring companies that are synergistic to its digital strategy, and investing heavily in gaming, online and digital businesses. The Company generated a good return when it sold of its 50% stake in US Weekly for $300 million, having invested $30 million six years back.

Disney has made its most important strategic acquisition – Pixar Animation Studios for $7.4 Billion, which has strengthened it both in terms of creativity and technology. The Pixar acquisition has bolstered Disney as the leader in high quality family entertainment, and added juice and technology to its outdated animation film unit. It has also brought Steve Jobs to the Disney Board, adding a level of vision and understanding of the Digital business that so far did not exist on the team. Pixar delivered yet another home run hit in Cars.

The Company has formed an Internet division – Walt Disney Internet Group (WDIG) to provide strategic guidance, leadership and aid in the execution of business strategies. WDIG also provides technology platform to all the Walt Disney Internet properties, which includes Disney.com, FamilyFun.com, Movies.com, Disney Mobile, ESPN, etc. The division also develops and delivers broadband entertainment content like Disney Connection, Playhouse Disney Preschool Time Online and Toontown Online. It also develops content for TV programming through Enhanced TV.

Disney’s efforts to supplement its traditional media channels with online media have been yielding positive results. In October 2005, Disney teamed up with Apple’s iTunes to offer downloads of its popular TV series “Lost” and “Desperate Housewives.” In March, CEO Bob Iger announced that Disney video content has surpassed 4 million downloads on iTunes. Movie downloads have also done well. Disney has had 1.5 million movie downloads through iTunes as of March.

The Company also sees gaming as a potential growth area and plans to invest $130 million in FY2007 and increase it to $350 million over the next five to seven years. I think the focus on gaming is strategic and makes a lot of sense, especially given that they have a library of blockbuster hit characters which can be licensed and leveraged to build games around them. Pixar’s Cars and Incredibles, for example, are excellent opportunities for video game franchises. For most gaming startups, a strategic investment from Disney brings with it a tremendous leverage, including channels and licensing options, creating a win:win that Disney should successfully capitalize upon.

It is also a long term opportunity for Disney to leverage Pixar’s superior graphics and animation technology to create virtual environments like Second Life, that take advantage of their characters from Cars, Incredibles, etc. This is an opportunity unique enough that pretty much no other entertainment company can even remotely match.

Disney has also been experimenting with Disney Mobile, which has been developed keeping in mind the needs of parents and their kids. It’s a cell phone with innovative features that allow parents to directly manage their family’s wireless experience. It is loaded with features like GPRS, Family Monitor, Call Control, etc., and allows the parents to track and control their children’s mobile usage. It’s a bit early to tell where this effort is going.

In summary, the arrowheads are pointed in the right direction: Digital, Online, Gaming, Mobile and International. The presence of Apple CEO Steve Jobs on the Board, is a rare and remarkable opportunity for the company to leapfrog all others in the realm of digital entertainment.