Disney sticks to what it does best As rivals vie for technology, studio stays with Mickey and movies


NEW YORK -- To get an idea of how differently Walt Disney Co. and its competitors see the future of entertainment, look back at last week's events.

Most attention was focused on the hot pursuit of Paramount Communications Inc., one of two remaining independent entertainment studios. Two rival suitors, Viacom Inc. and QVC Network Inc., lined up allies and made towering counterbids -- as they have over the past six weeks -- to try to win Paramount. Their goal: to plug the studio's movies and shows into planned "electronic highways," the interactive cable technology that will allow viewers to order movies, games and information on television or home computers.

Disney, however, remained aloof from the merger frenzy affecting Hollywood. Instead, it marched forward with plans to produce more movies, sell more Mickey Mouse ears and build more theme parks. The big announcement came Thursday, when the company unveiled plans for Disney's America, a 100-acre park based on American history, to be built in Northern Virginia.

The diverging trend -- Disney's expanding its traditional businesses while competitors race toward a digital future -- has caused some on Wall Street to shake their heads in dismay. Meanwhile, Disney suffers financial setbacks -- it lost $77.8 million in the most recent quarter.

Has Disney has lost its touch?

"Disney has made a bet that as long as you have programs and theme parks, you don't have to own electronic hardware," said Ken Auletta, an author who follows media and entertainment issues. "It makes sense but is a huge gamble. Everyone else is betting the other way."

Disney could find its popular programming denied access to the electronic highway. Rather than selling that programming on its own terms, it could be forced to go, hat in hand, to highway gatekeepers who give priority to shows created in their own studios. Meanwhile, competition could cut profits of Disney's cash cow, its theme parks.

Although Disney won't comment on its strategy, analysts close to the company say that Disney believes that technologies -- even today's sure thing -- eventually become obsolete. What's never gone out of style? Movies and cartoons that appeal to children.

"When you own Mickey Mouse, you don't run the risk of being shut out of new technologies," said Ira Mayer, publisher of Entertainment Marketing Letter. "You can do what you've always done and make a pile of money."

Revenue is up

So far, the strategy seems to have worked. Disney's revenue has grown by about 20 percent a year since its chairman and chief executive officer, Michael Eisner, took the helm nine years ago. Its stock has risen 1,000 percent over that period, and it is widely touted as a new blue chip.

Meanwhile, the company plans a stunning increase in the number of movies it produces. Not satisfied with a few hits -- like last year's "Aladdin" or this year's "Nightmare Before Christmas" -- it is raising its TV and movie budget from $606 million this year to $1 billion over the next two years.

By acquiring Miramax Films, a movie producer and distributor, ,, for $60 million this year, Disney can produce 60 movies next year -- compared with the 15 to 20 produced by Hollywood studios like Fox or TriStar, analysts say.

Movies have made Disney a marketing juggernaut. It uses its movies to spin off toys and other products, which the company then licenses out for production. For the fiscal year that ended Sept. 30, the consumer-products business was Disney's best performer, having grown 30 percent over the previous year, to $1.4 billion.

But that's where the good news ends for Disney. Although movies and marketing have been growing at a snappy pace, the theme parks, which account for 40 percent of revenue, have struggled. Once considered recession-proof because families with little money tended to stay home rather than fly overseas, the parks have seen revenue grow by just 4 percent in the last fiscal year.

The biggest problem came from Euro Disney, which lost $900 million in the last fiscal year. Disney has blamed the European recession for the French park's troubles, but un-Disney-like missteps contributed to the problem, said Craig Silvers, an analyst with Crowell Weedon & Co.

Euro Disney's missteps

Euro Disney does not serve wine or beer at most restaurants, even though many vacationing Europeans tend to like a glass or two with lunch. The company also botched park transportation by failing to make provisions for bus tours.

Analysts say that Euro Disney should be able to end those problems and stop draining money from the parent company -- Disney spent $350 million bailing out the park. But they note that even the U.S. theme parks have problems.

In California, for example, Disneyland is embroiled in a fight with Anaheim officials over responsibility for building a bus terminal. The park wants to expand on land now used for parking and wants the city to build a transportation hub nearby.

Overall, attendance at Disney's Florida park was up 8 percent last year -- compared with 12 percent for its largest competitor, MCA's Universal Studios -- and will probably fall 3.5 percent this year, according to Amusement Business magazine. Attendance at Disneyland in California declined slightly last year, the trade publication reported.

Tough competition

Part of the reason is cost and competition. For a family of four, a day at the Florida park costs $130 for admission alone, compared with $96 for Universal Studios, which opened three years ago and now draws 6.7 million visitors annually. And MCA is expanding its Florida park, which analysts say probably costs Disney World 1 million of its 30 million annual visitors.

"Right now, [Disney is] sucking air because people don't have the money to travel and are searching for more economical vacations," said Glen Stevens, an analyst for Kemper Securities Inc. "They offer good value but are pricey."

Competition has pushed Disney into a costly expansion of its parks. If approved, the expansion of the California parks will cost $3 billion; the Virginia park will cost between $500 million and $800 million.

The new park is also fraught with risks. Euro Disney drew few visitors during the cool French winters, an experience that could be repeated during January and February in Virginia. And the new park is Disney's first venture not to feature Cinderella, Snow White and other characters from the Magic Kingdom. Instead, it will showcase U.S. history.

While Disney struggles to reinvigorate its parks, analysts say the battle over interactive technologies could determine the company's fate. The reason: Movies and television programs are the linchpins for Disney's success. Popular movies cause children to tug at their parents' sleeves and ask for trips to Florida or California when vacation time comes around. And during the holidays, movies spark sales of "Aladdin" dolls, "Beauty and the Beast" board games and "Little Mermaid" videos.

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