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Get Four
|  | FEBRUARY 21, 2006
By Ronald Grover Disney Builds a Better MousetrapWalt Disney CEO Robert Iger eschews traditional business practices to embrace a digital strategy. Will it be enough to bring back the magic?For much of the last decade, it has been awfully easy to dismiss Walt Disney (DIS ) as a media giant full of world-class assets that performed at less than their zippity-do-dah best. Under former Chief Executive Michael Eisner, tons of money was poured into half-filled theme parks, ABC's fortunes rose and fell quicker than you can say Who Wants to be a Millionaire?, and a once-proud animation studio was eclipsed by a gang of computer jockeys from Silicon Valley. For Disney shareholders, it was all there in the numbers. When Eisner turned over the reins to Bob Iger last October, Disney stock was trading at less than $24 per share, or about where it was in 1998. But just as frogs turn into princes, Disney is trying to turn back into the Magic Kingdom. There's no doubt that Iger has been working overtime to achieve that transformation. First there was the Jan. 24 announcement that Disney was buying Pixar Animation Studios (PIXR ) for $7.4 billion (see BW Online, 02/06/06, "Steve Jobs's Magic Kingdom"). Two weeks later, Disney announced a deal that effectively gets it out of the slow-growing radio business. And just a week ago, a Disney-led group announced the launch of MovieBeam, a service that delivers newly released videos to consumers who can't be bothered to drive to their local Blockbuster (BBI ) store to rent DVDs. HAIL MARY PASS? Iger is ditching lower-growing assets, looking to beef up the company's ability to create world-class content, and trying to find new technologies that can squeeze every last buck out of that Disney content. "Our No. 1 strategic priority is creating great content," Iger told investors in a recent conference call. "And No. 2 is the application of technology to improve our production's distribution." This recent flurry of deals certainly attests to the seriousness of Disney's intent. But the real question is, can Iger pull off his ambitious digital strategy? Like a lot of folks out there, I'm not yet certain he -- or, for that matter, anyone in the media business besides Rupert Murdoch -- can. To be blunt, it wasn't as if Iger had much choice in embracing the digital strategy. Unlike Time Warner (TWX ), which owns cable systems, or News Corp. (NEWS ), which controls satellite provider DirecTV (DTV ), Disney doesn't own a pipeline into your home -- hence the MovieBeam deal. Of the larger media companies, Disney actually controls the fewest TV stations. If anyone needs a path to America's homes, it's Walt Disney. But MovieBeam may be something of a Hail Mary pass. Disney wrote down the investments of a prior version and is only now rolling it out with the help -- and money -- of high-tech companies Cisco Systems (CSCO ) and Intel (INTC ) (see BW Online, 4/6/05, "IPTV's Revolution May Be on Hold"). I may be terribly out of touch, but does anyone out there really think that consumers who already own a DVD player will plunk down $200 or so more for the MovieBeam box? And then pay the same amount to download a movie as they pay to rent one? BENDING THE RULES. Wall Street, however, seems heartened by Iger's moves. Disney's stock price is up by 17% since Iger first started making such deals in mid-October. The deal back then was to allow Apple's (AAPL ) iTunes to license TV shows from Disney's ABC network for the new video iPod (see BW Online, 10/18/05, "Movie Moguls Need to Face the Music"). That was a bold move -- and quickly mimicked by just about every mogul worth his Guccis. It was also downright revolutionary for an industry worried that distribution on gadgets like the iPod would ruin sales for TV shows on DVD and in the syndication market. Now Disney says it has sold more than 2 million shows and other content thanks to iTunes. Certainly, Iger deserves praise for devising a digital strategy and delving into areas that made other top execs leery. And just as they did with the iPod licensing deal, Iger and Co. have made it clear they're willing to bend the rules to implement that strategy. MovieBeam will offer Disney movies at the same time that they appear in video stores -- until now a no-no for studios that don't want to compete with their big DVD outlets, such as Wal-Mart Stores (WMT ). The upside? Disney stands to make 70% of the $3.99 for every movie beamed to a consumer's home -- or about $2.80 -- compared to the far skinnier share it gets from rentals at Blockbuster, which one studio chief tells me is about 90 cents. "COMMITTED TO INNOVATION." So the numbers make sense, even if Iger has to scramble a few eggs to make his digital omelet. ABC affiliates were none too thrilled by his decision to sell such ABC shows as Lost and Desperate Housewives on the iPod. And Blockbuster was probably burning up the phone wires to Disney's Burbank (Calif.) headquarters after the MovieBeam announcement. But Iger intends to stand by his decision. "We won't let traditional business practices stand in the way of delivering our content to consumers," Iger told analysts not long after the Pixar and radio deals. Disney, he said, has to be "committed to innovation and experimentation." Walt probably said something along those lines once upon a time. And it clearly suggests the company may be stirring after a long slumber. Sure, it may occasionally stumble, but Disney's willingness to venture into the new world of digital will likely pay off in the long run.  Grover is BusinessWeek's Los Angeles bureau chief Edited by Patricia O'Connell
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