STRATEGIC MANAGEMENT AND GLOBAL COMPETITION
INDIVIDUAL PAPER
THE WALT DISNEY COMPANY AND ITS ACQUISITION STRATEGY:
PIXAR, MARVEL & LUCASFILM
Li Chi Ching Jane
Strategic Management and Global Competition, Fall 2016
December 1, 2016
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This document analyzes Disney's acquisitions of Pixar, Marvel, and Lucasfilm, discussing the rationale behind each acquisition, the goals, potential benefits and risks, and post-acquisition results. Disney aimed to revitalize its animation studio with Pixar, acquire intellectual property with Marvel, and gain technology and a rich database with Lucasfilm.
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STRATEGIC MANAGEMENT AND GLOBAL COMPETITION
INDIVIDUAL PAPER
THE WALT DISNEY COMPANY AND ITS ACQUISITION STRATEGY:
PIXAR, MARVEL & LUCASFILM
Li Chi Ching Jane Strategic Management and Global Competition, Fall 2016 December 1, 2016
Abstract In this paper, I will analyze the rationale behind Disney’s acquisitions of Pixar, Marvel and Lucasfilm and the subsequent impacts they have on Disney as a whole. Disney has always been relying on its strategic model “The Ripple Effect” for sustainable growth—through creation of a film asset, value can be infused into an array of its related entertainment assets. And a popular film acts like a wave maker in creating ripples that go down to all of Disney’s businesses—success of films are central to Disney’s overall performance. Yet, the absence of successful films from Disney starting from the late 1990s stopped the Disney model from working, resulting in a decline in profits in various business segments within Disney. In light of this problem, Disney chose the path of acquisitions— Pixar was acquired in 2006, while Marvel and Lucasfilm were acquired in 2009 and 2012 respectively. All three acquisitions have one central goal—to find Disney’s way back to the wave makers, and hence make the Disney model work again. The announcement by Disney that it would buy its partner Pixar at $7.4 billion in 2006 once shook the world—many were either having doubts on how such an acquisition would turn out or considering the valuation as too high. Most acquisitions, particularly in media, are value-destroying as opposed to value-creating. Either Disney’s trampling of Pixar’s esprit de corps or Pixar animators showing resistance in the integration of technology and expertise with Disney would destroy the acquisition. However, evidence today shows the three acquisitions have so far been highly beneficial to Disney and have pushed Disney back up to its position as an entertainment giant. Ten years since the first acquisition of the animation studio Pixar, Disney has throughout this period successfully revitalized its own animation studio by learning and integrating Pixar’s animation technology, evidenced in Disney’s highly-recognized productions of Tangled (2010), Frozen (2013) and Zootopia (2016) —wave makers are again created form within Disney’s animation studio. On the other hand, the huge intellectual property that accompanied the acquisitions of Marvel and Lucasfilm has allowed Disney immediate exploitation of thousands of characters in generating revenues from films, merchandize production, theme parks and more—wave makers are directly collected from purchase of the two companies. In one sentence, with the accumulation of a rich reservoir of wave makers today, the ripple effect has come back stronger than ever for Disney.
2. Problems Disney faced that led to the three acquisitions 2.1 The Disney Model—“The Ripple Effect” To understand the rationale behind the three acquisitions, it is necessary to first understand how the Disney model works. Unlike most movie companies which revolve around producing a number of movies every year and waiting for one or two that prove able to sell, every Disney movie is the first step in an entire package that has subsequent activities that will be realized in Disney’s other business segments if the movie turns out to be successful and gains popularity. As we can see from the strategic map of sustainable growth published in 1957 from Disney’s archives in figure 2, everything in Disney starts from the center—“theatrical films”, and from there value can be infused into an array of related entertainment assets like music, merchandize production, Disneyland, TV, publication… For example, Disney creates a Mickey Mouse movie, which gains popularity. From there, music CDs will be released; merchandizes will soon be found on the shelves in Toys R Us and Disney stores; story books and books on behind-the-scene production of the animation will be sold in bookstores; a new ride or even a new theme area will be built in Disneyland; there will be a new program in Disney Channel; new video games will be developed, and the list goes on. Despite being published half a century ago, the fundamental patterns and the underlying insight of the strategic map remains largely valid in reflecting the way Disney works. Figure 2. Disney's corporate theory of sustained growth published in 1957.
Therefore, the essence of the Disney model is that as long as there is a popular movie, there will be lots of other businesses that it can earn further revenue from. In other words, Disney’s strategy is related diversification—selling its customers the entire experience by having film-derived activities expand into its other business segments. Bob Iger, current CEO of Disney, once described the model as a “ripple effect”— “As animation goes, so goes our company. A hit animated film is a big wave, and the ripples go down to every part of our business—from characters in a parade, to music, to parks, to video games, TV, Internet, consumer products. If I don’t have wave makers, the company is not going to succeed.” 1 As Iger said, there is one big problem to this strategy—also a fundamental problem in pursuing related diversification: all the eggs are in the same basket. When there are no good movies, meaning no wave makers, Disney’s other business segments will suffer as well.
- 2 The loss of wave makers—no more ripples (mid-1990s to mid-2000s) The Disney empire was rooted in animation and its classic characters—Mickey Mouse and friends, and the Disney princesses. Yet they do not generate revenues for the company forever—breakthrough ideas and new animations are always needed. After a few successful productions in the early half of the 1990s, including Beauty and the Beast (1991), Aladdin (1992) , and The Lion King(1994) , Disney’s animation studio had not been doing as well since the latter half of the decade which lasted into the turn of the millennium. Disney was not producing blockbuster movies with attractive characters. At a low point, the 2002 film Treasure Planet turned out to be a fiasco that forced Disney to take a $98 million write-down. Quoting from Iger, “After ten years of The Lion King, Beauty and the Beast, and Aladdin, there were then ten years of nothing”.^2 As a consequence of the under-performing animation studio, there was nothing to take advantage of in the related diversifications that Disney has, leading to a marked decline in profits in various segments as shown in figure 3. There were no ripples found across the Disney strategic map. (^1) Isaacson, Walter. Steve Jobs. New York: Simon & Schuster, 2011. (^2) Ibid.
was made when Iger stepped up as Disney’s CEO at just the right time in 200 5 —a year before the partnership was due to end and before Jobs formally settled with another distributor. Figure 4. Worldwide box office for Pixar and Disney animated films from 1998 to 2005. http://www.wsj.com/articles/SB 2051651
3. The 3 Acquisitions of Pixar, Marvel and Lucasfilm The 3 acquisitions of Pixar, Marvel and Lucasfilm have one fundamental common goal—to find Disney’s way back to the wave makers, and thus make the Disney model work again. The way Disney achieved this will be explored in this section. 3. 1 Acquisition of Pixar (2006) àThe specific goal—to revitalize Disney’s animation studio. 3.1.1 Pixar as a computer graphic company Pixar was initially a computer graphics division owned by filmmaker George Lucas, known as Lucas Film Limited, later bought by Steve Jobs in 1986 who established it as an independent company named Pixar. Pixar has been successful in its computer animation production since the start—its first production was Toy Story in 1995, the highest grossing film of the year with $362 million. It is a major generator and publisher of research in computer graphics that has a history of winning multiple technical Academy Awards. 3.1.2 Pre-acquisition—the trigger Bob Iger, who succeeded Eisner as CEO of Disney in October 2005, had been the company’s President and Chief Operating Officer from 2000, making him the second highest-ranking executive under Eisner. Iger, although having worked under Eisner for a long period of time, has an entirely different mentality from Eisner in understanding and admitting that animation had truly gone stale in Disney since the mid-1990s. When Iger participated in the grand opening of Hong Kong Disneyland in September 2005, a month before he would officially become CEO of Disney, he saw in the opening parade that the only characters that had been created in the past decade was Pixar’s, such as the hugely popular Toy Story and Monsters, Inc. characters while there was nothing from Disney’s recent animations. In light of this, Iger realized that opportunities could perhaps be created through further alliances or acquisitions of other businesses instead of insisting on infusing the failing Disney animation from within. 3.1.2.1 The threat of losing Pixar The relationship between Disney and Pixar began in 1995 with an agreement to distribute five Pixar films in ten years such as Cars, Finding Nemo and The Incredibles. It
3.1. 2. 3 Analysis of the potential benefits and risks of the acquisition of Pixar Potential benefits Potential risks Access to Pixar’s technology
- Computer-generated and 3D technology
- Pixar’s application programming interface “Renderman” Cultural incompatibility - Disney has a hierarchical organizational structure whereas Pixar has an egalitarian culture that embraces freedom of communication - Disney is a “suit-and-tie” company whereas Pixar is a “Hawaiian shirt and scooter” company Full integration of Pixar’s characters into Disney’s various platforms
- Creating more ripple effects Risks in integration
- Clear skepticisms expressed from Pixar’s top executives Increase Disney’s overall brand strength and the base of high quality content Over-valuation
- 3.8% premium paid over Pixar’s closing price Reduce market competition 3 .1.3 The Acquisition 3.1.3. 1 Integration process Pinpointing at Disney’s weakness in the animation unit that had fallen into disrepair in the new world of computer-generated pictures, Iger installed John Lasseter, back then Executive Vice President and one of the original Pixar animators and director of Toy Story and more importantly, the man credited as the creative driving force in Pixar, as the creative leader of both Pixar and Disney Animation Studio. Catmull, president of Pixar, was given an extra position as President of Walt Disney Animation Studios on top of retaining his original position. Since Disney was acquiring expertise, the dispatch of the newly purchased experts into other parts of the company that allowed them to stretch their muscles enhanced integration and helped revitalize Disney’s animation unit. Moreover, Disney was careful in managing the acquisition by laying out additional conditions that ensured the separate identity of Pixar would not be taken away, understanding through due diligence that there were weariness and skepticisms expressed from top executives in Pixar despite encouragement from Jobs. Thus, over the years, despite integration in the technology component, many parts of the company were left standalone, e.g. the Pixar name persists, operation continues in its original headquarter, Pixar’s identity and culture were maintained, and branding of films was thereafter framed as “Disney•Pixar”.
3 .1.4 Post-acquisition results As the Disney studio began to absorb Pixar’s methods, Disney was proved able to finally produce more hits such as Tangled (2010) and Wreck-It-Ralph (2012). From Disney’s 2012 Annual Report, it was written that “Pixar also reinvigorated our animation, and we’re seeing a tremendous creative resurgence as a result,” showing that great synergy was realized. And the following year came the biggest hit with Frozen , which generated $1. billion at the box office—a record for an animation movie, earning Disney an Oscar for best animated feature. This year’s Zootopia also demonstrated impressive results with $1. billion box office. And so Disney brought back the ripple effect. From the success of Frozen, Disney’s Consumer Products division had record performance in 2014 that went up by 10 percent; theatrical distribution revenue increased by 30 percent due to performance of Frozen; one Elsa doll alone generated retail sales of $26 million in the U.S.^5 ; Frozen products have dominated Christmas sales for 2 years in a row 6 ; and the construction of a permanent Frozen themed area in Hong Kong Disneyland has been recently announced—the ripple effect from a successful Disney movie can last years. In Pixar’s perspective, it was able to focus on its core competency of producing high quality computer graphics while subsequent marketing, distribution and merchandize production are taken care of by the marketing giant Disney. As a result of synergy realization, Disney•Pixar has also produced its first two animation films that topped $1 billion at the box office— Toy Story 3 (2010) and Finding Dory (2016). According to Iger, he considered buying Pixar the single most important thing that had happened to him in the ten years he had been in the job. 7 Acquisition of Pixar in 2006 also opened the door to subsequent acquisitions of Marvel and Lucasfilm. (^5) "Fiscal Year 2014 Annual Financial Report And Shareholder Letter." The Walt Disney Company. https://ditm- twdc-us.storage.googleapis.com/2015/10/2014-Annual-Report.pdf. (^6) Ibid, “Disney: Let it Grow”. (^7) Miller, Daniel. "How Robert Iger's 'fearless' Deal-making Transformed Disney." Los Angeles Times. June 6, 20 15. http://www.latimes.com/entertainment/envelope/cotown/la-et-ct-disney-iger- 20150607 - story.html.
sequels and spin-offs, owning Marvel will drive Disney towards being a dominant force across all entertainment age in the young demographic, putting a higher entry barrier to potential entrants and owning a higher share of the competition in the market. Furthermore, Marvel had many licensing partners in the market prior acquisition, thus making it Disney’s direct and indirect competitor. Acquisition would help Disney remove competition in the market. Essentially, with both companies at the time of acquisition relatively robust, the acquisition is less on expertise, but solely on allowing Disney to grow its content base at a fast speed and at a great extent so that Marvel’s characters can be utilized as wave makers to bolster Disney’s other businesses.
- 2 .2. 1 Analysis of potential benefits and risks of the acquisition Potential benefits Potential risks Speed
- Quick expansion of Disney’s content base
- Marvel owns a library of over 5, characters and numerous developable storylines o Characters have a long estimated useful life of 40 years Content incompatibility - Just as the targeted audience is different for Disney and Marvel, integrating Marvel products into Disney’s various distribution channels and its theme park and stores present risks of incompatibility, i.e. will the co-presence of Avengers and Mickey Mouse in Disneyland fit together? Gain an entirely new segment of audience
- Marvel’s loyal fans and teenage boys àa new demographic that is unlikely to overlap with Disney’s original audience Disputes with Marvel’s existing licensing partners
- Some contracts Marvel had with other licensing partners have not expired yet, which may result in potential conflict of interests New source of long-term stable income
- Through release of superhero films and related diversifications into merchandize licensing, theme parks and more Competition for resources - Resources in the animation segment are distributed among Walt Disney Animation Studio, Pixar, Touchstone Pictures, Walt Disney Pictures, etc. Marvel with its rich content and characters will require substantial resources àPotential difficulty in allocation of resources Remove competition and increase market power Over-valuation
- The deal was valued at 29% premium
3.2.3 Acquisition Analysis: Synergy effects The Disney-Marvel acquisition allowed the two companies to experience a mutual share of benefits and increase in potential abilities. Disney has a mature system of marketing operation, especially in the international market. Since both Disney and Marvel target similar markets, Disney’s market resources can be shared and Marvel will be able to benefit from Disney’s experiences and expand its brand more extensively on a global basis. Marvel had previously licensed its movie production with various companies, such as Universal Studio, Lionsgate Films, Paramount Pictures and Columbia Pictures. Merging with Disney allows Marvel to reduce transaction costs involved by having a stable distribution channel and focus on their strengths in developing character contents. Instead of investing time and resources in the lengthy process of internally developing new characters and plots which may turn out to be successful or unsuccessful, Disney can now quickly exploit potentials of already established Marvel characters for monetization. 3 .2.4 Post-acquisition results From Disney’s Annual Report 2010, it was mentioned that it has managed to increase in selling, driven by the acquisition of Marvel in 2009. Segment operating income increased by 11 percent, i.e. $68 million, due to improved results at the retail businesses and an increase in publishing business driven by Marvel titles. Increase in television distribution and other revenues are also primarily due to the inclusion of Marvel. Since the acquisition, Disney has so far released nine Marvel films and four of them—nearly half of them, have generated impressive results by topping $1 billion at the box office, which include The Avengers (2012), Iron Man 3 (2013) and Avengers: Age of Ultron (2015) and Captain America: Civil War (2016) , while among eight of the movies from Disney’s own animation studio in this period, only two topped $1 billion. Six more Marvel movies are scheduled to release over the coming three years, hinting profitability and smooth operation. There is now a whole section of Avenger products in Disney stores while permanent Marvel superheroes rides are under construction in Hong Kong and California Disneyland. While various investment analysts had been skeptical about the acquisition deal between Disney and Marvel, Disney’s stock has risen from $26 prior acquisition to around $100 today. In 2013, Disney’s earnings climbed by more than 22 percent compared to the previous year, a very impressive improvement considering a company of Disney’s size.
3 .3.2 Analysis of potential benefits and risks Potential benefits Potential risks Speed in gaining an established profile of intellectual property Content and cultural incompatibility
- Difficulty in making the co-presence of Disney’s Mickey Mouse, Princesses and Lucasfilm’s Star Wars characters work Access to Lucasfilm’s special effects technology Uncertainty of the durability of Star Wars’ popularity
- There was a 7-year gap between the new Star Wars movie by Disney and the previous one, and there existed possibility of a change in audience taste
- Unlike Marvel, Lucasfilm has a narrower profile surrounding only one theme—Star Wars. If Star Wars loses popularity, the whole of Lucasfilm will lose its value Gaining a new group of audience
- Star Wars has loyal fans that support their favorite characters with purchase of comics, games, and merchandise Competition for resources
- Potential difficulty in allocation of resources among the increasing portfolio of Disney’s studios Risk reduction
- An enriched portfolio allows Disney to leverage its way if some studios are not performing as well 3.3.3 Post-acquisition results Four years after the acquisition, Disney released the first Lucasfilm production Star Wars: The Force Awakens last year, and it quickly became the most successful film in Disney’s entire history, grossing over $2 billion worldwide. It is also the third highest grossing film in box office history, only after Titanic and Avatar.^10 Toys and merchandize associated with the film has already brought in more than $700 million. Brand Finance now estimates the value of Star Wars to have risen to $10 billion—more than twice of the purchase price Disney paid. 11 There are six more Star Wars productions on the way to the big screen. Furthermore, Stars Wars ride has taken over the classic Space Mountain roller coaster in Hong Kong Disneyland, while Star Wars themed-land is currently under construction in Disneylands in the U.S. (^10) "All Time Worldwide Box Office Grosses." Box Office Mojo. Accessed December 08, 2016. http://www.boxofficemojo.com/alltime/world/. (^11) "Global 500 2016: The Annual Report on the World’s Most Valuable Brands." Global Finance. February
- http://brandfinance.com/images/upload/global_500_2016_for_print.pdf.
A longer time frame is needed to evaluate the long-term success of this acquisition, but the huge success of their first production and the revenue generated so far undoubtedly show good synergies between the two companies. Moreover, being an established brand, Lucasfilm is predicted to churn out its own string of reliable, predictable fare. With series like Star Wars, consumers know what they are going to get from the particular movie experience, making marketing easy and non-risky. From the similar nature between this and Marvel’s acquisition, it is projected that the purchase will give Disney further potential in utilizing already established popular content to continuously create wave makers over the years to come. 4. The evidence of Disney’s overall revitalization through the three acquisitions Disney was ranked as the world’s most power brand in 2016 by global consultancy Global Finance, “Disney’s strength is founded on its rich history and original creations, however its now dominant position is the result of its many acquisitions and the powerful brands it has brought under its control .”^12 From Disney’s 2014 Annual Report, it was also mentioned in the first page “The acquisitions of Pixar, Marvel, and Lucasfilm gave me more than an unprecedented portfolio of fantastic branded content. They also brought some incredibly innovative storytellers to Disney, who’ve served as catalysts to expand our creativity in new directions.” Despite various benefits and synergies that were brought into place through the three acquisitions, I would argue that the essential core of Iger’s acquisition strategy is fundamentally targeted at reviving “The Ripple Effect” in the Disney model shown in the beginning of this paper—the model that is critical to Disney’s survival. Pixar helped Disney revitalize its own animation studio in the sense that new wave makers can be created from within Disney’s own studio through development of new animation content, while Marvel and Lucasfilm helped by offering their already popular content base that can create immediate wave makers with almost guaranteed revenue. Although paying a combined total of about $15.5 billion in the purchases of Pixar, Marvel and Lucasfilm, which are high price tags, Disney’s market capitalization has since risen from $61 billion in 2006 to over $160 billion in 2016. From the following figure, Disney’s stock price has shown unprecedented rise since 2009 after the financial crisis (figure (^12) Ibid.
($1.024 billion), Pixar’s Finding Dory ($1.026 billion), Marvel’s Captain America: Civil War ($1.132 billion) and Lucasfilm’s Star Wars: The Force Awakens ($2.066 billion)(released in December 2015). Moreover, the top four grossing movies in the entire film industry in 2016 have all been Disney productions ( Captain American: Civil War, Finding Dory, Zootopia and the Jungle Book) , a highly impressive outcome in view of keen competition and existence of strong competitors. Figure 9 shows the vast amount of profit that Pixar and Marvel film productions have brought to Disney. Marvel has generated as high as an average of around $800 million and Pixar around $650 million per film in the global box office post-acquisition. While from figure 11 that dated until 2014, except Frozen, the rest of the four most profitable Disney movies produced in history are productions by either Pixar or Marvel, providing further evidence for the powerfulness of the companies that Disney has bought. In 2016, Star War: The Force Awakens by Lucasfilm has topped Frozen to become the history high. Figure 9. Profits generated from Marvel and Pixar post-‐acquisitions. http://www.fool.com/investing/general/2014/11/18/marvel-‐vs-‐pixar-‐can-‐you-‐guess-‐ which-‐acquisition-‐ha.aspx Figure 8. Films that grossed over $ billion worldwide from 1993 to 2015.
Figure 10. Most Profitable Disney Films up to 2014. http://www.fool.com/investing/general/2014/11/18/marvel-‐vs-‐pixar-‐can-‐you-‐guess-‐ which-‐acquisition-‐ha.aspx 5. So far still winning the competition While Disney owns its subsidiaries of Pixar, Marvel and Lucasfilm, its biggest competitors Time Warner’s Warner Bros. owns DC Comics, while Comcast’s Universal Pictures also has a strong animation arm. And the ongoing acquisitions of Disney may push pressure in the industry to compete by encouraging various acquisitions. Smaller firms with unique content may continue to be takeover targets. Earlier this year, Comcast completed the deal to acquire DreamWorks Animation studio, locking in the intellectual property that includes popular characters from Shrek and Kung Fu Panda —and they are likely to be exploited in Universal’s theme parks just as Disney does with Marvel and Lucasfilm’s characters. In terms of market share in the film industry, Disney is still occupying double that of Universal (25% vs. 12.2%) 15
. On the other hand, Warner Bros.’ revenue experienced a drop of 13 percent in the fourth quarter of 201516 and is losing out compared to Disney in terms of revenue and net income percentage change as shown in figure 11. Among the top 10 most grossed movies in 2016, Disney movies occupy exactly half of the list while there is only one Universal movie and two Warner Bros. movies on the list— making Disney a giant winner in movie production and thus giving it great revenue- generating opportunities into its other business segments compared to its competitors. (^15) "2016 Market Share and Box Office Results by Movie Studio." Box Office Mojo. Accessed December 08,
- http://www.boxofficemojo.com/studio/. (^16) "Time Warner Annual Report 2015." Time Warner. http://www.timewarner.com/sites/timewarner.com/files/related-articles/TWX_2015_Annual_Report.pdf.