Walt Disney (Walt Disney, December 5, 1901 - December 15, 1966), the founder of the Disney Company, loved trains most, and he created Mickey Mouse while riding a train. By October 2023, the Disney Company, this commercial train that seems to be equipped with a "perpetual motion machine" has been speeding for a full 100 years. The popular super IP and series of derivative stories are the biggest boosters for Disney to run for a century.
In October, Disney officially released the 100th anniversary special short film "Once Upona Studio." In the short film of less than 9 minutes, 543 characters from more than 85 cartoons all appear.
From Mickey Mouse to Iron Man, from Pirates of the Caribbean to Star Wars, from Snow White to Lina Belle... With IP as the center, Disney has outlined a huge business landscape including film and television entertainment, cable TV, streaming media, sports, offline theme parks and peripheral products. It has an annual revenue of more than 600 billion yuan and has more than 200,000 employees working under it.
From a small animation studio to today's global entertainment empire, what did Disney do right? Can it maintain its glory in the next hundred years?
Fighting Netflix
After identifying streaming media as Disney's most important strategy in the next few decades, Disney will inevitably have a narrow encounter with Netflix, the giant on the streaming media track, which has been deeply involved in the streaming media field for nearly 20 years.
As of the fourth fiscal quarter of September 30, 2023, Disney's streaming media Disney+ subscribers increased by 5% from the previous quarter to 150 million, reversing three consecutive quarters of decline. Together with the 48.5 million subscribers of the video website Hulu and the 26 million subscribers of the sports channel ESPN+, Disney has a total of 225 million streaming media subscribers, lower than Netflix's 247 million.
Disney has defeated Netflix several times in previous battles.
Netflix CEO Reed Hastings once predicted that Disney streaming media will have "up to 20 million users." But in the first year of its launch, Disney attracted 70 million streaming media users around the world, and surpassed Netflix for the first time in the third fiscal quarter of 2022 (Q2 2022). At that time, Disney had a total of 221.1 million streaming media subscribers, slightly higher than Netflix's 221 million.
It only took Disney less than three years from the official launch of its streaming media business to its first overtake of Netflix, the “old king” that had been cultivating it for 16 years. Since then, Disney’s streaming user base has surpassed Netflix’s for three consecutive quarters.
Stronger IP and more attractive prices are the bargaining chips for Disney to overtake Netflix.
At the beginning of 2019, Disney broke up with its old partner Netflix, terminated its film broadcast authorization, and officially entered the streaming media business. In November of that year, Disney+ was launched, and the former close business partners faced off head-on. At that time, 30% of the content in Netflix’s library came from Disney and its subsidiaries Pixar Animation, Marvel Studios, and Lucasfilm. Disney's independence means that Netflix has lost a number of world-class IPs.
Compared with Netflix, Disney, which has a century-old heritage, is obviously more wealthy. With contributions from multiple businesses such as film and television entertainment, theme parks and resorts, cable TV and streaming media, Disney's annual revenue is more than twice that of Netflix, and its book cash flow is US$14.2 billion, much higher than Netflix's US$5.2 billion.
This gives Disney the confidence to attract users with low prices. The monthly membership fee of Disney+ in North America is only US$11.99 even after the price increase, which is far lower than Netflix's US$19.99. The impact of price thresholds on user decisions cannot be underestimated. After raising prices last January, Netflix lost 600,000 paying subscribers in North America.
Disney is pursuing user scale while also focusing on quality. In the past few quarters, Disney has been involved in a money-burning war in streaming media, with losses exceeding US$1 billion. Under CEO Iger's "profit first" strategy, the streaming media business is rapidly narrowing losses. By the fourth fiscal quarter of 2023, compared with the loss of US$1.47 billion in the same period last year, the loss of the streaming media business narrowed to US$387 million. The reduction of losses by big cash-burners has also led to a surge in Disney's overall profits. The entire group's net profit for the quarter was US$264 million, a year-on-year increase of 63%.
This isn't the first time Disney has won a battle. This century-old giant, known for its novel creativity, has relied on the power of IP to stay at the forefront of the trend more than once.
Traveling through cycles
In 1928, the world's first sound cartoon "Steamboat Willie" came out, and the fledgling Disney established a firm foothold in Hollywood with Mickey Mouse.
Subsequently, Walt Disney used fairy tales as inspiration to produce popular classic animated films such as "Snow White" and "Pinocchio", which have had a global impact. This was also a golden period in Disney's development history. During World War II, Disney also began experimenting with films that combined live action and animation.
The world's first animated film "Snow White"
After World War II, Walt Disney began to explore bringing the Disney animation kingdom to reality in addition to the success of the theater. In 1955, the world's first Disney Park was built in California, attracting millions of tourists.
In 1966, Walt Disney passed away, and the Disney Company, which had lost its soul, was leaderless for a while. This once invincible chariot gradually stalled, and the stock price plummeted. Its popularity in Hollywood was also snatched away by Lucasfilm's science fiction film "Star Wars". Disney's competing film "The Black Hole", which cost US$20 million, ended dismally at the box office with a box office of US$3.6 million.
"Star Wars: The Force Awakens" poster
To make matters worse, in the mid-to-late 1970s, home video recorders became popular, which impacted traditional theater movies. Disney is struggling to stay afloat with revenue from old movies and parks. In 1984, Disney encountered a hostile takeover by the "barbarians at the door" and was once in a life-or-death dilemma.
Also in the same year, Disney invited Michael Eisner (Michael Dammann Eisner) as CEO, marking the beginning of an "outsider" helm.
Eisner launched a series of drastic new measures: licensing IP to manufacturers engaged in peripheral product development, which increased the business eightfold; renovating Disneyland to promote significant growth in attendance and profit margins; shifting the focus of development back to the animation industry, and producing animated films such as "The Lion King" and "Beauty and the Beast". Over the next ten years, Disney's film market share climbed from 4% to 19%.
Channel construction is another major focus of Eisner. During his tenure, Disney acquired American Broadcasting Company (ABC) and Los Angeles Television, moving animated films from the big screen to television screens. From 1984 to 1994, Disney's market value rose from 1.9 billion to 28 billion US dollars, an increase of nearly 14 times.
However, during Eisner’s tenure, Disney failed to keep up with the trend of technological animation, and its top animators jumped to Pixar Animation founded by Steve Jobs. Since the 1990s, Disney has rarely produced original classic IPs, instead relying heavily on its partner Pixar.
Eisner's successor, Robert Iger, has taken Disney's IP advantages to the extreme. Disney once said of this legendary CEO that he helped Disney "become one of the most successful and respected media and entertainment companies in the world."
When Iger took office in 2005, Disney was facing the impact of new and old giants such as Netflix, HBO, and Amazon, and the revenue of traditional theaters was declining. Iger used his "money power" to launch several huge acquisitions, spending a total of nearly 100 billion U.S. dollars to acquire Marvel, Pixar, Lucas, 21st Century Fox and other companies. Almost half of the world’s most valuable IP is owned by Disney.
Iger, who resigned at the end of 2021 and then made a light-speed comeback in less than a year, returned to his position as CEO and spent US$8.6 billion to acquire the remaining 33% of Hulu shares, completing full ownership of Hulu. This also gives Disney, the huge IP aircraft carrier, greater confidence to compete with Netflix after it sails into the ocean of streaming media.
IP Dynasty
Through the ups and downs of different media eras, the core that has allowed Disney to stand for a hundred years has always been IP.
From Mickey Mouse, Snow White, the Avengers to Cars, Disney has built its own IP empire step by step through independent development, exploration of classics and investment in acquisitions.
Mickey Mouse, Donald Duck, The Lion King, etc. are all super IP independently developed by Disney. Snow White, Mulan, Pinocchio, etc. are inspired by classic fairy tales and traditional stories. After the sixth CEO Iger came to power, he discovered that Disney had not created a popular new IP in 10 years, so he began to "buy, buy, buy" on a large scale, acquiring IPs such as Marvel, Star Wars, and Shrek.
Marvel classic movie "Avengers" poster
As times change, Disney's classic IP is also constantly iterated.
For example, the early image of Mickey Mouse was more like a real mouse, but in the subsequent changes in several versions, the image of Mickey Mouse became increasingly rounded, cute, and cartoony, making it more acceptable to the public.
Changes in Mickey’s image
The image of Disney princesses is also changing. In the early days, the princesses were all white beauties with blonde hair and blue eyes. Later, there were more images of different races and skin colors. The early Princess Snow White played the role of being saved by the prince, while the later Princesses Hua Mulan and Elsa were more independent and powerful, dared to love and hate, did not need the prince, and could even save the prince.
Group photo of different Disney princesses
Embracing technology and constantly subverting is another secret weapon for this IP empire to transcend time cycles.
At the beginning of its establishment, Disney led the animation industry and created many industry firsts: the first sound animation, color animation, and animated film in history were all produced by Disney.
After Iger took over, Disney reached a cooperation with then-rival Pixar to put five Disney TV series, including "Desperate Housewives," on iTunes. Iger wrote in his autobiography "The Journey of a Lifetime" that Jobs told him afterwards that it was the first time in the entertainment industry that he had seen anyone willing to try something that might subvert his company's business model.
As early as 60 years ago, Walt Disney invested US$2.5 million in a simulated deep-sea submarine. To this day, black technologies such as AR, AI, and 3D printing are still important ways for Disneyland to present IP.
Disney has not missed the latest wave of AI even when it is 100 years old. Previously, foreign media reported that the Disney Group recently established a special working group to study how AI can be applied to the entire group. During a conference call in May, Iger called AI a disruptive technology that would ultimately represent "interesting opportunities" and "substantial benefits."
Crazy money printing machine
In 1957, Walt Disney drew a sketch in Hollywood. The movie was in the C position, with theme parks, television, music, etc. surrounding it, all interlocking. This brush created many classic IPs such as Mickey Mouse, and also drew the intricate industrial chain.
Over the next 60 years, Walt Disney and his successors built Disney's huge business empire brick by brick. A strong IP library is both a moat and a money printing machine.
After Iger returned to Disney, he reorganized the business into three major parts: entertainment (film and television entertainment, cable TV and streaming media), sports (ESPN) and experience (offline theme parks and peripheral products, etc.).
Among them, in addition to the sports business that has been newly upgraded to an independent segment, the entertainment and experience segment, which accounts for more than 80% of total revenue, has been operating at Disney for many years and has formed a complete closed business loop, bringing a steady stream of multiple rounds of revenue to Disney.
First of all, Disney has launched many movies with IP as the core, generating box office revenue. Launching new sequels around top IP is Disney’s weapon to harvest box office. Despite the downturn in the global film market in the past two years, as of the first half of 2023, Disney still won the global box office championship with US$3.4 billion.
Immediately afterwards, the film was played on streaming media and TV networks, bringing in copyright revenue and paying user revenue. In the fourth fiscal quarter of 2023, streaming media revenue was US$5.036 billion, a year-on-year increase of 12%.
These IPs will also appear in physical form at Disneyland, attracting users to buy tickets and play. With the continuous launch of new IP and movie sequels, the theme park will also add new characters and elements accordingly.
Disneyland, which was born nearly 60 years ago, is Disney's main profit cow, which includes ticket revenue and sales of peripheral products (publications, consumer goods, games, music, stage plays, etc.).
In the fourth fiscal quarter, the experience segment contributed more than one-third of Disney’s revenue and US$1.76 billion in net profit, with the latter increasing 31% year-on-year. It is precisely because of the outstanding performance of Disney theme parks that the losses caused by streaming media are covered.
The "one fish, eat more" model of diversified development and combination of online and offline has created Disney's entertainment empire today.
According to Wikimili data, Disney owns 12 of the 50 most profitable avatars in the world in 2022. Among the top 10 most profitable IPs, Disney exclusively owns 5. Only 10 exclusive IPs brought Disney US$355.5 billion in revenue.
Old empire, new challenges
100 years have passed, and the commercial tank forged by Walt Disney has not stopped expanding, but a new war has begun.
The streaming media business, which Disney regards as a new growth curve, has been overtaken by Netflix in the past two quarters, and it is still a major loss maker that needs to be supplemented. From underlying innovation capabilities to specific business performance to the broader market structure, Disney faces many challenges. For this reason, Disney had to ask the 71-year-old Iger to return to the helm.
At the moment, the biggest problem it faces is that Disney, which started by creating super IP, has lost its own creativity.
Eighteen years have passed since Iger criticized Disney for "losing its ability to innovate IP" in 2005. Disney's only new IP with wide influence is 2013's "Frozen." In 2021, Shanghai Disney released the new IP Lina Belle, but this IP has no film and television content support and can only participate in the sale of theme parks and peripheral products. Its influence and ability to attract money are far from the classic IP.
The top IP that Disney spent a lot of money to acquire is not as good as the early classic IP. Currently, among Disney's top 12 most profitable IPs, self-developed IPs account for 74% of revenue, dwarfing new IPs bought back.
What makes Disney even more uneasy is that the monetization ability of old IP continues to weaken.
Since last year, many of Disney’s movies and cartoons have experienced a failure in terms of reputation and box office. This year, Disney's highlight, the live-action version of "The Little Mermaid," performed poorly, with a box office of nearly 580 million U.S. dollars. Faced with a production cost of up to 250 million U.S. dollars and a marketing expense of 130 million U.S. dollars, it may be difficult to recover the cost. The global box office of "Raiders of the Lost Ark" was only US$380 million, less than half of expectations. The cost of the film was as high as nearly US$300 million, and it was rated by the industry as the film with the largest loss in 2023.
Not only the box office, this year’s Oscar for Best Animated Film was also taken away by Netflix’s “Pinocchio”. Hollywood media GameRant commented, "Disney is not dead, but it is disturbingly far away from its peak."
After Iger, who is well aware of the importance of content, took office again, he merged the content and channel departments and handed all management powers to the person in charge of content.
Disney, whose innovation capabilities are in decline, has high hopes for its streaming media business, but the latter is exactly a gold-seller. This is another crisis Disney faces.
Disney’s rapid growth in streaming users comes at the cost of continuing to burn a lot of money. Although Iger began to carry out drastic cost reduction and efficiency improvement after taking office again, in the fourth fiscal quarter, Disney's streaming media business still lost nearly US$400 million. Iger said, "In a very competitive world, the cost of content will be more expensive." He expects that the streaming business will not reach breakeven until the fourth fiscal quarter of 2024.
In order to better manage its money bag, Disney also hired a new CFO, Hugh Johnston, who had served as CFO at PepsiCo for 13 years.
According to Iger’s expectations for streaming media’s profits and losses, streaming media’s money-spending strategy will still last for at least a year, but the user growth gained from spending money has begun to ebb, and the growth rate has turned from the initial three-digit growth rate to negative growth. Users lack loyalty to the platform and will easily switch careers once no new excellent works appear. It seems that Disney cannot escape the dilemma of increasing streaming media revenue without increasing profits, and user growth is stalling.
Faced with Netflix’s battle to defend itself and the new and old rivals such as Amazon, Apple, and HBO, Disney is facing huge challenges on the new track of streaming media.
Egger, a savior in times of crisis, once summed up his life's business philosophy in his autobiography with the words "desperate to innovate." The "Savior" was originally scheduled to return for only two years, but his term has been extended by Disney until 2026. He was already 75 years old at that time, and will serve Disney for nearly 50 years with a spirit of desperate innovation.
How far can the Disney train run without innovation fuel in the next century?