A NI T A ELBER S E
The Walt Disney Studios
Amid cheers from thousands of fans, many of whom had camped out for weeks to be a part of the experience, Hollywoodâ€™s biggest stars and most powerful executives were arriving for what was billed as the entertainment event of the yearâ€”the world premiere of Star Wars: The Force Awakens. It was the early evening of December 14, 2015. Among those walking the red carpetâ€”stretching out over four blocks of Hollywood Boulevard, which had been closed off for the occasionâ€”was Alan Horn, chairman of The Walt Disney Studios (â€˜Disney Studiosâ€™), the studio behind Lucasfilmâ€™s new film. He greeted Bob Iger, chairman and chief executive officer of parent company The Walt Disney Company (see Exhibit 1), who had just posed for some impromptu photos with several â€˜stormtroopers,â€™ white-armored characters made famous by the Star Wars franchise, that were lined up alongside the red carpet.
The two men and their families would soon make their way to the Dolby Theatre, one of three neighboring theaters that served as the venues for the premiere. Once there, Iger would call Horn, Lucasfilm president and producer Kathleen Kennedy, director J.J. Abrams, and the main cast and crew members onto the stage to celebrate the filmâ€™s first screening. The movie, made for more than $200 million, would open for audiences across most of the world on December 16, 2015â€”and Iger and Horn would finally begin to find out whether their investment in the Star Wars franchise reboot was going to pay off.
Star Wars: The Force Awakens was only the latest in a string of big bets that Horn had overseen since arriving at the studio in 2012. In fact, Disney was primed to pursue what Horn called a â€œtentpole strategyâ€ that revolved around at least eight big movies each year. Some came from Disney Live Action (known for Pirates of the Caribbean) and Disney Animation (which had scored a mega hit in 2013 with Frozen). But just as many big productions came from three studios that after multi-billion-dollar acquisitions now also operated under the Disney umbrella: Pixar (known for hits such as Toy Story and Finding Nemo), Marvel Studios (with its many superhero properties), and Lucasfilm (which gave Disney the rights to future Star Wars movies). In 2016, Disney planned to release twelve films, including four that had production budgets of around $200 millionâ€”Alice Through the Looking Glass, Captain America: Civil War, Finding Dory, and Rogue One: A Star Wars Storyâ€”and another four with budgets of at least $150 million.
There were significant risks involved in Disneyâ€™s strategy. In a given year, Disney Studios produced nearly twice as many tentpole movies as any other major Hollywood film studio, but fewer movies overall than all but one of its rivals. Box-office failures could be extremely costly, especially because Disneyâ€”unlike its rivalsâ€”chose not to enlist the help of financing partners. â€œWhen they donâ€™t work, I have to wear that,â€ said Horn. Also, finding the right balance between pursuing existing franchises and new original concepts was difficult but critical to the studioâ€™s long-term health. â€œHollywood is littered with franchises that once seemed very promising but lost their appeal just as quickly,â€ remarked Horn, as he looked out over a red carpet that was buzzing with excitement. Would Disneyâ€™s tentpole strategy pay offâ€”in the short and long run?
Professor Anita Elberse prepared this case. Research associate Jennifer Schoppe provided valuable research assistance. The case was reviewed and approved before publication by a company designate. Funding for the development of this case was provided by Harvard Business School, and not by the company. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.
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The Film Industry
In 2015, the motion picture industry generated around $38 billion in theatrical revenues worldwide (see Exhibit 2 for film industry statistics).1 â€œIn the U.S., box office grosses are essentially flat,â€ said Horn. â€œDomestic revenues have been between $9 billion and $11 billion annually for a decade, and are projected to remain in that range.â€ Nearly 70% of Americans were moviegoers, and the average moviegoer attended five to six movies per year. â€œBut internationally, we are seeing strong growth,â€ Horn added. â€œChina alone now has an annual box office of nearly $7 billion, with annual growth projected to be 20%.â€
Films were produced and distributed by both â€˜majorâ€™ and â€˜independentâ€™ studios. The six major studios, each owned by large entertainment conglomerates, were 20th Century Fox (a subsidiary of 21st Century Fox), Paramount Pictures (owned by Viacom), Sony Pictures (a division within Sony), Universal Pictures (owned by NBCUniversal), Warner Bros. Entertainment (a subsidiary of Time Warner)â€”and Disney Studios. Hundreds of independent studios, lacking access to the vast production and distribution resources that characterized the majors, also produced films. A select few smaller studios, such as Lionsgate Films, had evolved to become â€˜mini-majorsâ€™ and made films that could rival the major studiosâ€™ output in their production values and audience appeal. Nevertheless, in 2015, the â€˜mini-majorsâ€™ and â€˜indiesâ€™ together accounted for 85% of the films produced, but only around 20% of the box office grosses (see Exhibit 3 for box-office data for selected films in 2014 and 2015).2 â€œIn any given calendar year, upwards of 600 films are being released in the U.S. and Canada,â€ said Horn. â€œBut youâ€™ve never heard of 400 of them because a release could mean it appears in one theater, one city, for one week.â€
Theatrical Exhibition and Other Forms of Distribution
Films were made available to consumers through a series of â€˜release windows,â€™ the first typically being the domestic theatrical window in which audiences could see the film in movie theaters across America. The three largest U.S. theater chains, Regal Entertainment Group, AMC Entertainment, and Cinemark USA, together accounted for nearly 40% of the 43,000 movie screens in the country.3 â€œThe studios negotiate with the exhibitors to determine when their films make their debut in theaters, how long they stay in, and how much each party takes from each box-office dollar that is generated,â€ said Dave Hollis, Disney Studiosâ€™ executive vice president of theatrical distribution.
Studios and exhibitors employed various models to determine how to split revenues, explained Hollis: â€œSometimes, we get higher percentages in the early weeks of a movieâ€™s run in the theater, and lower percentages in later weeks. In other instances, the share that we take and the share that the exhibitor takes changes each time box-office grosses exceed certain thresholds.â€ Hollis estimated that major studios typically kept more than half of box-office receipts in the domestic market. He added: â€œWe negotiate two-to-four-year deals with individual theater chains, staggering when those deals start and end. We make sure they know our movie slate and why we have the expectations that we have. Each film also has a separate licensing agreement that states the conditions under which they can show the movie.â€
Films were usually released theatrically in international markets around the same time. China, Brazil, and other Asian and Latin American countries had emerged strongly in recent years. â€œAs the middle classes in those countries expand, movie-going is becoming a part of the culture, but most of those markets are still under-screened,â€ noted Hollis. Horn agreed that there was significant room for more growth: â€œThey are building over 20 screens a day, but there are still only around 33,000 screens in China for 1.3 billion people.â€ He added: â€œIn China, the government will not allow the release of more than 34 films each year that are not produced in partnership with or fully owned by a Chinese company. So they donâ€™t care about a film like McFarland, USA â€”they want to see Marvelâ€™s Captain America.â€ In international markets, 3D technology was important. â€œIn a handful of markets, especially
The Walt Disney Studios 516-105
in Asia, a lot of our business is done in 3D,â€ said Hollis, â€œand from a story-telling perspective, it acts as a differentiator from what consumers can experience at home.â€
After playing in theaters, films were typically released on at-home-viewing platforms, including television, DVD and Blu-ray, video on demand, online streaming, and online downloads. In 2014, consumers spent $17.8 billion across these platforms. DVD and Blu-ray sales accounted for $6.9 billion in revenues, down from a peak of $21 billion in 2004. Electronic sell-through (which included downloads on platforms such as Apple iTunes) and subscription streaming (on sites such as Netflix) reached $1.5 billion and $4 billion in revenues, respectively, in 2014.4 Consumer products such as toys and games could be another source of ancillary revenuesâ€”characters made popular by films were a key category of licensed merchandise sold worldwide.5
The Walt Disney Company
Led by chief executive officer Bob Iger, The Walt Disney Company was the worldâ€™s largest entertainment conglomerate, headquartered in Burbank, California. It employed 185,000 people across four business segments (also see Exhibit 1):
Â· Media networks covered cable and broadcast television networks (such as ABC, one of Americaâ€™s major broadcast networks, and ESPN, the top-rated sports network), television production operations, radio networks, and radio and television stations.
Â· Parks and resorts included several theme parks that Disney owned and operated in the US,
such as the Walt Disney World Resort in Florida and the Disneyland Resort in California, and around the world in Hong Kong, Paris, Shanghai, and Tokyo, as well as Disney Cruise Line.
Â· Studio entertainment produced and acquired films and direct-to-video content (through
Disney Studios), musical recordings (through Disney Music Group), and live stage plays (through Disney Theatrical Group).
Â· Consumer products and interactive engaged with licensees, publishers and retailers to design,
develop, and market a variety of consumer products based on Disneyâ€™s characters and stories, and produced content for games, mobile devices, websites, and other interactive media platforms.
The Walt Disney Studios
Established as an animation studio in 1923 by Walt Disneyâ€”who created the iconic character Mickey Mouseâ€”and his brother Roy, Disney Studios released the first ever full-length animated feature film, Snow White and the Seven Dwarfs, in 1937. It became the highest-grossing film at the time, and earned Walt Disney an Academy Honorary Award for â€œa significant screen innovation,â€ which â€œpioneered a great new entertainment field,â€ as the Academy of Motion Picture Arts and Sciences put it.6 â€œEveryone at Disney is proud to be a part of the heritage of Walt Disney,â€ said John Lasseter, the chief creative officer of Pixar and Disney Animation. â€œA lot of us do what we do for a living because of the way he entertained us.â€ In 1950, Disney Studios first ventured into live-action films.
By 2015, Disney Studios employed about 6,500 employees, and spent close to $2 billion producing films annually and hundreds of millions of dollars more distributing and marketing them (see Exhibit 4 for its output in 2014). The studio was led by industry veteran Alan Horn, until 2011 the president and chief operating officer at rival studio Warner Bros., who joined Disney in June 2012.
Horn oversaw five studio â€˜labelsâ€™ that together made up Disney Studios. Two, The Walt Disney Studios Motion Pictures (â€˜Disney Live Actionâ€™) and Walt Disney Animation Studios (â€˜Disney Animationâ€™), draw lineage from Walt Disneyâ€™s original studio and produced live-action and animated feature films, respectively. Three others were acquisitions made during Bob Igerâ€™s tenure as chief executive officer of The Walt Disney Company: computer animation studio Pixar purchased for $7.4 billion in 2006; Marvel Entertainment, which had its roots in comic books, for $4 billion in 2009; and legendary filmmaker George Lucasâ€™ Lucasfilm for $4.05 billion in 2012 (see Exhibit 5 for each labelâ€™s
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film output). â€œBob Iger wasnâ€™t afraid to bet heavily on great stories, great characters and great content producers,â€ said Lasseter. â€œWhen his tenure is over, people will point to Marvel, Pixar, and Lucasfilm as great acquisitions. Those three assets have everything to do with the creative content that powers this company.â€ Horn agreed: â€œWhat Bob has done required both vision and courage. I am very fortunate I get to work with these brands and develop movies with them. Collectively, those assets enable us to realize our tentpole strategy.â€