The Walt Disney Company: A Financial and Organizational Analysis Authors: Cliff Anderson, John Morris, Jacob Lawrentz, And Donna Munsey Financial Environments of Organizations, MOL 503, MMOL 1-11 Professor: Kari Day Warner Pacific College September 10th, 2009 The Walt Disney Company: A Financial and Organizational Analysis The Organizational History of Disney Before WWII In 1939, the Valley Progress newspaper (History, p. 3) announced that San Fernando Valley in southern California would become the home of a million dollar, 51-acre lot called Walt Disney Studios.
The then-current residence of Disney was established in 1925 in Los Angeles, and consisted of a single large room of 25 artists. Walt Disney (and his brother-manager Roy) had expanded Disney studios to 150 employees and 20,000 square feet of space by 1929; then, when “Snow White” came out in theatres in 1936, the studio employment had doubled to 300 employees. Operations continued to increase in the years 1937 and 1938, increasing from 300 to 600 to 900 respectively, and finally to 1,000 employees at the time of the above newspaper’s announcement.
During this burgeoning period for Disney studios, artists were not the only operational development for what would become Buena Vista Studios. Walt built a coffee shop, restaurant, gas station, sports playfields, and an 800-seat theatre…all for the employees. Four sound stages were produced (among other things, one was exclusive for monitoring dialogue, another for orchestration; two stalwarts when creating Disney cartoons) and, in 1940, just a year after the San Fernando studio cut its ribbon, “Fantasia” would be born and Walter Elias Disney would create a new standard in the industry of animation.
It wasn’t that many years prior that Mickey Mouse learned to talk (around 1932, when “talkies” were coming of age in film); a few years before that, Walt and his brother Roy had $290. 00 between them. Apparently, Walt had his health but Roy did not, according the Valley Progress (History, p. 5). It was 1923, World War I was past and the Great Depression was the near future. Post WWII A shock to the Disney system occurred on July 17, 1955, a day referred to as “Black Sunday” (Helmore, para. ) by Disney itself. Disneyland (“Fantasyland” as it was originally called) opened its gates and faced its worst logistical nightmare. Over 30,000 people arrived for Disneyland’s Day One, broadcasting the event live to ‘50s black-and-white television-watchers. The gates of the park were literally crushed as the throng entered; the walkways had not yet set so women’s heels would penetrate and stick into the asphalt as they walked. Not enough restrooms and a gas leak forced the operation to close early.
In spite of these difficulties, Disneyland serviced over a million patrons in the first 7 weeks. The world outside Disney had carnival ride operations that seldom exceeded $50,000. 00 per ride with staff picked – literally – right off the street. Disney, on the other hand, went well beyond the norm to create more expensive rides like Frontierland and the Dumbo ride; staffing was handled by seeking recruitment through local colleges to accommodate the “squeaky-clean” look of Disney’s youth group demographic. Disney’s Modern Affairs
Back in 1929, people went to the theatre to watch “Snow White” for the first time; by the late 1990s, over 350 million folks will have danced with Snow White on the walkways of Disneyland itself (Helmore, para. 5). Admission to Disneyland for one day cost $33. 00 with an annual ticket for $199. 00. But, in the middle and late 2000s, Disney is in the media for all the wrong reasons, apparently. Walter Disney’s personality and vision is a distant echo relegated to the past. Michael Eisner, its most recent CEO, sought to engage Disney enterprises in lucrative deals.
He was intent to reclaim Disney as an industry leader in business (and not necessarily animation) by promoting ventures via a variety of directions. From new avenues of production (Miramax and Dimension Films) to broadband solutions (Comcast), television (ABC) and cable (the Disney channel, among others), Disney’s modern financial discussions are relegated to hundreds of millions of dollars if not billions (McCarthy, para. 19). Since 2005, the CEO baton was passed along for the 6th time to the company’s COO since 2000, Robert Iger.
Iger has a long history within the larger framework of Disney’s enterprises, namely through ABC studio and cable network channels (Management 2009). Iger – as CEO of Disney – has focused on reconciling problematic dissension among the board of directors, especially the current Roy Disney, who, at one time, campaigned against Disney itself. Since then, the company has restructured certain key areas in management to regain investor confidence and internal affairs. Most recently, Disney announced its fiscal year and fourth quarter financial results via webcast (Corporate 2009). Segments and Subsidiaries
The Walt Disney Company and its subsidiaries is a diversified worldwide entertainment company with operations in four business segments: Media Networks, Studio Entertainment, Parks and Resorts, and Consumer Products. Media Networks The Walt Disney Company is the second largest media conglomerate in the world, behind Time Warner. Its cable, satellite and international broadcast operations are principally involved in the distribution of television programming, the licensing of programming to domestic and international markets, and investing in foreign television broadcasting, production, and distribution entities.
Disney’s subsidiary ESPN, Inc. owns or has equity interests in or distribution agreements with twenty nine international networks reaching households in more than 190 countries and territories. Marketing magazine writes that the Disney name and logo ranks seventh among the world’s most valuable brands. The Media Networks segment includes the ABC television network in addition to ten broadcast television stations and more than seventy radio stations. The Company has various other international investments in broadcast and cable properties such as ESPN, The History Channel, Lifetime Television, International Disney Channels, and Toon Disney.
The company also develops and produces television programming for distribution to global broadcasters and cable and satellite operators, including the major television networks, Disney Channel and other cable and satellite networks, under the Buena Vista Television, Buena Vista Productions, Touchstone Television and Walt Disney Television labels. Walt Disney Internet Group oversees the Web entities ABC. com, Disney Online, and ESPN. com. This segment has consistently been the most profitable segment for the Walt Disney Co. the past three years.
It generated more than half of the company’s total operating income in 2008. Its operating income increased 11% that year over 2007. Studio Entertainment The Studio Entertainment segment produces live-action and animated motion pictures, television animation programs, musical recordings and live-stage plays. Walt Disney Pictures and Television, a subsidiary of the Company, produces and acquires live-action motion pictures that are distributed primarily under the Walt Disney Pictures and Touchstone Pictures banners. Another subsidiary, Miramax Film Corp. acquires and produces motion pictures that are distributed under the Miramax banner. The Company distributes produced and acquired films to the theatrical, home entertainment, pay-per-view, video-on-demand, pay television and free-to-air television markets. This segment appeared to be the weakest financially in 2008. It produced 13% of the Company’s operating income in 2008, but its operating income declined 9% after an increase of 64% the previous year. Parks and Resorts Walt Disney Parks & Resorts owns some of the most popular resorts in North America.
The company owns and operates the Walt Disney World Resort and Disney Cruise Line in Florida, the Disneyland Resort in California and ESPN Zone facilities in several states. The company licenses the operations of the Tokyo Disney Resort in Japan. The company’s Walt Disney Imagineering unit designs and develops new theme park concepts and attractions as well as resort properties. The businesses in the Parks and Resorts segment generate revenues from the sale of admissions to the theme parks, room nights at the hotels and rentals at the resort properties.
Costs consist primarily of the fixed cost base for physical properties and base level staffing necessary to operate the theme park and resort properties. This segment generated 22% of the Company’s operating income in 2008, and gained a healthy 11% for that category over the previous year. Consumer Products The Consumer Products segment partners with licensees, manufacturers, publishers and retailers throughout the world to design, promote and sell a variety of products based on new and existing Disney characters and other intellectual property.
In addition to leveraging the Company’s film and television properties, Consumer Products develops new intellectual property within its publishing and interactive gaming divisions with the potential of being leveraged across the company. The Company also engages in retail, direct mail and online distribution of products based on the Company’s characters and films through The Disney Store, the Disney Catalog and DisneyDirect. com, respectively. The Disney Store is owned and operated internationally and is franchised in North America.
The Consumer Products segment contributes the least amount of revenue and income of the four segments: less than 10%. But its operating income is growing at a rate of 14%, more than the other segments. It also grew 26% in the revenue category in 2008. Below is a chart of each segment’s operating income for the past three years: Ratio Analysis When considering the financial stability of the Walt Disney Corporation we wanted to look at one ratio from each of the different categories of ratios: liquidity, leverage, market, activity, and profitability.
First we considered liquidity by means of Walt Disney’s current ratio. Liquidity 20082007 1. Current Ratio 1. 01x. 99x (Current assets/current liabilities) The current ratio is the most popular of the ratios, or at least it is the most commonly used. The current ratio measures a firm’s short-term liquidity and its ability to meet needs for cash as they arise. Disney saw an increase from 2007 to 2008 in realizing their ability to meet short term debts. Although it wasn’t a significant increase, taking in to consideration that Disney is an established, profitable company, it was a good sign for Disney in a slumping economy.
Leverage 20082007 2. Debt to equity 1. 14×1. 23x (Total liabilities/stockholders equity) The debt to equity ratio is one of leverage. It measures a firms overall debt relative to its equity base. This ratio saw a decline from 2007 for Disney. This indicates that total liabilities have gone up relative to stockholders equity. When we look at the balance sheet we see that liabilities went down and so did equity from the previous year. This may be a bad sign for Disney, as owners lost value. Market 200820072006 3. Dividend payout 9. 4%13. 2%16. 1% (Dividends per share/earnings per share)
The dividend payout is a market ratio and it shows percentages of earnings paid to shareholders. This ratio has shown a significant decline for the past two years from 16. 1% in 2006 down to 9. 4% in 2008. This shows that Disney is paying a lower portion to its shareholders in the form of dividends relative to earnings per share. We think that this shows a decline in cash over the last couple years but it isn’t that bad. It looks as though 2006 was a really good year, and 2007 and 2008 are leveling off. Activity 2008 2007 4. Total asset turnover. 61x. 58x (Net sales/total assets)
Total asset turnover is considered an activity ratio and it measures the efficiency of a firm in managing all assets. Disney saw an increase in sales relative to total assets. This is a good thing. Basically Disney had more sales relative to its total assets showing an efficient increase in this ratio for 2007 to 2008. Profitability 20082007 5. Return on total assets 7%7. 7% (Net earnings/total assets) Finally we looked at the return on total assets. This being a profitability ratio it takes the total net earnings of a company and divides it by their total assets.
This ratio shows a firm’s overall efficiency of managing its assets and generating profits. Many analysts, especially investors, may want to consider this as one of the most important ratios to look at when choosing whether to invest in a company like Disney. This ratio basically just shows whether a company can continue to produce a positive bottom line. Disney showed a decline of seven tenths of a percent from 2007 to 2008, but this is still a good number. We can definitely see that there is a decline in Disney’s profitability from 2007, but there is still a positive number showing on the financial statements for this ratio.
There would be a huge alarm if this number dropped below 3 percent. Large companies like General Electric or Microsoft as well as Disney can afford a couple of years of poor profitability. Usually because of the size of the company they can absorb softer years. Smaller companies need to maintain a high level of profitability to stay competitive. We had a hard time as a team trying to find comparative market ratios for Disney. Because of the way Disney is structured, and the fact that it is a large conglomerate, it was difficult to find an industry average.
We considered comparing them to a Fortune 500 standard, or other media giants, but were unable to come up with any comparative data. We have to look at Disney as an entity by itself to determine its success. Risk Analysis As we look at the Walt Disney Company we must look at its capital structure and what the associated risks are with a company of this nature. If we start with the numbers and look at the debt to equity ratio we get a . 21/1 ratio or 21%. Generally anything under 30% is considered good. So in this case the Disney Company looks in good shape; however there are other factors involved.
Because The Disney Company is a large and complex organization that is primarily involved in the entertainment sector of business in the United States and around the world, this makes the company susceptible to a number of factors which could affect future operations. These include: * Changes in economic conditions that could have an adverse affect on business * Unpredictable changes in consumer tastes and preferences * Unauthorized use of intellectual property rights * General environment for tourism and travel Turmoil in financial markets causing accessibility issues with financing * Changes in applicable regulations that may impair profitability Any one of these could produce negative results for the company, but we will look at each individually to see what the effects could be. Within the last year there have been recessionary conditions in the economies of the United States and other countries around the world. This has affected demand for some of Disney’s products and services and a continued downturn could further affect demand for any of their business and reduce revenue and earnings.
If this downturn continues, that could mean a reduction in attendance at Disney’s theme parks, a decline in purchases of or prices for advertising on their broadcast or cables networks, and a reduction of spending on company-branded consumer products. Disney’s business model creates entertainment and consumer products whose success depends on the tastes and preferences of consumers who are often unpredictable. The success of Disney depends on the company’s ability to create and distribute new and exciting programming and theme park attractions that meet the changing preferences of the consumer market.
Disney must invest substantial amounts of money into these productions and attractions before they can know the full extent of acceptance to the consumer. A wrong move in any of these directions could affect the profitability of the business. Pirating or the unauthorized use of intellectual property rights by copying Disney’s entertainment products is another area of risk for the company. With the advent of new technologies, this practice has become widely available and is growing steadily. These developments have caused the company to devote more resources to this problem and the trend looks to continue.
The risk in this area is that it could reduce revenues because of lost sales and the cost of protecting these rights may need to increase. The general environment for travel and tourism could highly impact the demand for products and services provided by the Disney Company. Health concerns with pandemics, international political developments, and terrorist attacks could directly affect the ability of the company to attract visitors to its theme parks and reduce revenues. Adverse weather patterns or natural disasters such as excessive heat or rain, hurricanes, or earthquakes could also potentially cause substantial losses for the company.
With the recent turmoil in the financial sector has come the disruption and increased difficulty in obtaining financing on acceptable terms. This could cause the increase in costs of borrowing and potentially affect the bottom line. This disruption also affects the company by making it difficult for third party companies to access funds to make purchases from the Disney Company. The possible change in regulations both in the United States and around the world could impact the company and its profitability.
The company’s broadcast and cable networks are highly regulated and additional regulations may impair these portions of the business. Regulation of the safety of consumer products and theme park attractions may require that the company spend additional amounts to comply with the regulations or restrict the ability to offer these choices to consumers. Other areas that could also affect operations would be environmental protection regulations, U. S. or foreign privacy and data protection laws and regulations, and domestic and international laws or currency controls.
In conclusion, The Walt Disney Company was enjoyable to research. It is a financially healthy and strong organization. We were impressed by how far-reaching its influence is on our society. Walt Disney was a man who had an incredible impact on our world. References Disney Corporate, 2009 News Releases (2009). Retrieved August 27, 2009 from http://corporate. disney. go. com/news/corporate/2009/2009_0814_q4_fy09_announcement. html. Helmore, Edward (1995, July 15). A Mickey Mouse kind of operation. The Independent. Retrieved August 27, 2009, from http://www. independent. co. uk/travel/a-mickey-mouse-kind-of-operation-1591540.