Disney’s fairydust continues to work magic at the box office; media giant constantly reanimates itself to survive

Disney’s fairydust continues to work magic at the box office

Katherine Rushton visits the media giant that constantly reanimates itself to survive .


Disney is investing in a theme park and resort in Shanghai, worth $4.4bn Photo: Disney

By Katherine Rushton

4:02PM BST 17 Aug 2013

“I always liked Tinkerbell,” says Bob Iger, Disney’s chairman and chief executive. “She had a real attitude. I kind of like that. And being able to spread fairydust around? That’s kind of what I do for a living.” He’s not wildly off. Few companies in the world can claim to have pervaded Western culture over the past century to quite the same degree as Disney. Coca-Cola, perhaps, or Ford or McDonald’s – but however recognisable those juggernauts have become, they have not played the same role in shaping popular culture. It would take an unusual existence for a child to grow up without clapping eyes on Mickey Mouse, for example, or watching one of Disney’s other animations. Snow White did for one generation of children what The Jungle BookAriel the Little Mermaid and Aladdin have done for successive others. In many cases, Disney’s renditions of these tales have eclipsed the originals in people’s minds. Their popularity has helped Disney to become a commercial machine, with a market capitalisation of $112.3bn (£72bn), annual revenues of $42.3bn and $5.7bn of profits. But it is also a machine that can go awry if it loses the creative spark at its heart.When Iger took the helm of the company in 2005, it was heavily dependent on nostalgia brands. The Walt Disney Animations Studio had been riding high in the early 1990s, with box-office hits such as Beauty and the Beast and The Lion King. But then came a series of more forgettable animations: MulanTarzan and Brother Bear have not benefited from the same longevity.

The wider Disney company was still raking in cash from its myriad theme parks and merchandise based on classic Disney characters, but analysts feared that the studio’s creative drive was waning. Disney appeared to have lost that fairydust it needed to deliver future hits, and fuel the rest of the empire.

The studio was growing increasingly reliant on its partnership with Pixar Animation Studio, a much smaller cartoon business co-founded by Steve Jobs and John Lasseter, which specialised in computer-generated animation. The pair struck a nine-film deal, delivering movies such asToy Story that were revolutionary at the time, and have since become the benchmark for contemporary animation.

Although the relationship was lucrative, it was at times fraught. Lasseter had been fired from Disney in the early 1980s for treading on the toes of his superiors, and Jobs – on a many-year hiatus from Apple – was hardly known for his humility.

But in 2006, Iger decided to spend $7.4bn on taking full ownership of Pixar. Many observers at Disney and in the wider industry were perplexed that he should shell out such a large sum, and it is easy to imagine a scenario where things could have gone very wrong. But, fittingly for Disney, they forged a happy marriage.

For Iger, he was buying a culture. Pixar had mastered the art of storytelling in a way that Walt Disney Animations appeared to have forgotten. The smaller company was allowed to continue as it always had, while Lasseter was named creative director of Walt Disney Studios, so that he could import some of Pixar’s lessons to its new parent.

Pixar’s 22-acre campus in Emeryville, just outside San Francisco, arguably has more in common with the technology companies of Silicon Valley than the studios of Hollywood. Its main building was named after Steve Jobs last November, but the Apple co-founder’s influence is evident even without his name above the door. For starters, the building was designed by Bohlin Cywinski Jackson, the architects who also laid the blueprint for Apple’s retail stores. It is all glass and symmetry, with the creative animators separated from coding staff in two opposing wings, supposed to mirror the right and left sides of the brain.

The cavernous hall in between is currently decked out to reflectMonsters University, Pixar’s latest feature film.

Inside the animation studio, designers occupy a series of sheds, each one decked out as its occupant sees fit. There are a couple of small, vent-like passageways which lead to secret rooms, rather like the hideouts most children would dream of. Outside, on the terrace, stands an enormous desk lamp which lights up at night – a nod to Pixar’s very first short film, Luxo Jr, in which a larger lamp watches a smaller model as it plays with a ball.

But the real powerhouse of Pixar is across the lawn, in the so-called “Story building”. It has the feel of an upmarket hotel, with a huge roaring fireplace at the centre of another echoing, double-height atrium.

Here, Pixar’s storyboarders spend years plotting and blocking every title. Each film takes four to five years to make, so the studio will have a few in the works at any one time, but painstaking care is taken to keep tweaking stories, often pulling them apart and starting again just when they seem assembled and ready. It is perhaps surprising that the company sees so many of its projects through to the very end, with few false starts.

Pixar also puts a very heavy emphasis on innovation, taking full advantage of advances in technology. It took the company 800,000 hours to render Toy Story. The same process would be faster using today’s machines, but the company is now pursuing such complex animation techniques that the rendering time has barely budged a fraction.

It is an approach that clearly works. Monsters University was Pixar’s 14th feature film and the 14th to open at number one at the box office. In that time, the studio has also clocked up 12 Academy Awards.

The rest of the Disney business has not put in quite such a spectacular performance. At its third-quarter results earlier this month, the company wrote down more than $160m on The Lone Ranger, a live-action film that flopped at the box office despite its promise of Jerry Bruckheimer as director and Johnny Depp in the role of Tonto. John Carter, released a year earlier, was even more of a catastrophic failure, chalking up an estimated $200m of operating losses.

Disney executives say critics set the films up for a fall, but Iger does not appear to feel the same way. “I happen to believe that in today’s world, there is no such thing as failure when you tell a great story,” he says pointedly. “Anybody who complains that something that has been made that has not worked commercially has actually been great is usually wrong. Usually, things that are great in today’s world also succeed commercially. It is rare that they don’t.”

He continues: “What I really believe above all else in terms of what we do as a company, and a learning to be taken into the future, is: you’ve got to make great things in order for them to be successful, in order for them to be loved and consumed.”

Certainly Pixar’s airy headquarters feel like an easier place to be creative than Disney’s relatively faded studios in Burbank, north-west Los Angeles. But while Pixar has justified Disney’s $7.4bn outlay, its metronome delivery of a film per year was not enough to fuel growth as fast as its parent company required. In 2009, Iger blessed the $4bn acquisition of Marvel, the comic-book creator of Captain America andSpider-Man. Then, last year, it spent around the same again on Lucasfilm, the home of George Lucas’s Star Wars franchise.

The deals secured Disney an enormous new universe to draw on for stories. There are more than 17,000 named characters in Star Wars and thousands more in the Marvel archive. “[With Marvel] we thought we were buying 5,000 characters. Actually, we were buying more than 7,000,” says Iger.

They have spawned their own multi-billion-dollar industry. A pack of Star Wars Lego has been sold every two seconds since they first joined forces in 1999.

It is unsurprising, then, that Disney has three Star Wars films in the works. It has not confirmed any plans for a Star Wars theme park, but it feels like an inevitable next step.

Meanwhile, Disney has started mixing characters from its different worlds. Earlier this year, the Disney Channel set Phineas and Ferb, the TV cartoon series, in Chalmun’s Cantina, the bar full of misfits in Star Wars, where Luke Skywalker first encounters Chewbacca.

The way Iger sees it, Disney is laying the ground for an explosion in the amount of content people will consume on different platforms. “You look today at YouTube as an example,” he says. “It was a collection of videos when it first launched. It is now hundreds of millions of them. We have to anticipate that kind of growth. Together, Disney and Pixar and Star Warsare examples of that – we have the ability to tell so many more stories. That’s vital.”

For Lucas groupies, Disney’s acquisition was a mixed blessing. They are hungry for as much Star Wars output as they can get their hands on, but are also wary of it trampling the culture he created.

The Lucasfilm studio, this time in San Francisco proper, has the feel of a gentlemen’s country club. The shelves are lined with Star Warsmemorabilia, often cast in bronze or mounted on the walls in the same way as someone might hang a hunting trophy.

The entire building is lined with old posters from Lucas’s personal collection. Many are Italian, or advertisements for art-house films far removed from the world of science fiction. Elsewhere, space is devoted to props used in the scores of movies Lucasfilm’s special effects arm, Industrial Light & Magic (ILM), has worked on. There is an original ET, with a translucent chest from the scene where his heart lights up. Here is a wall dotted with model cars, used to create a chase scene in Men in Black.

Inside one studio, ILM is working on technology that can automatically track actors and render them as animated characters, for example turning actor Mark Ruffalo into the green and grimacing Incredible Hulk. ILM has developed the technology over many years, and is steadily closing in on what is widely regarded as the holy grail of animation – real-time rendering of human faces.

Disney insists Lucasfilm and ILM will keep operating as usual, the latter company serving any Hollywood studio willing to pay for its services. But the company’s rivals are nervous that Disney will ultimately get first refusal on its time and technology, or that it will stop ILM from serving third parties altogether.

Analysts, on the other hand, have been almost unanimously positive about the Lucasfilm deal, which will become accretive in 2015.

Iger’s bold buys do not mark the first time that Disney has had to reinvent itself, of course. Founder Walt Disney started out making animated shorts to be shown ahead of feature films, achieving his first major hit in the late 1920s with a character called Oswald the Lucky Rabbit. When he lost the rights in a tussle with a distributor, he set about developing another animated animal character – Mickey Mouse, star of Steamboat Willie – who would go on to eclipse Oswald by far.

Disney later introduced Pluto the dog, Donald Duck and numerous other animals who featured in short cartoons that for years were Disney’s bread and butter. But when the Great Depression took hold of America the following decade, demand fell away. In order to convince the public they could offer value for money, picture houses began offering double bills of two feature films back-to-back. Disney’s shorts were dropped in favour of more substantial offerings.

The studio’s income began to dry up fast and Disney adopted an “if you can’t beat ’em, join ’em” stance. It put virtually all of its resources into a feature-length animation of its own.

The resulting film, Snow White and the Seven Dwarfs, turned out to be one of Disney’s biggest successes, but what seems like an obvious step in retrospect was an almighty gamble at the time. The production was so expensive, it would have brought down the company if it failed – something critics predicted it would. Its eventual success, in 1938, is remembered today in the architecture of the executive suite at Burbank, where the seven dwarfs are cast into the structure, so that they appear to hold up the building’s roof.

However, the 1938 success of Snow White did not make the following years much easier. PinocchioBambi and Fantasia all made substantial losses. It was nearly four more years until Disney would produce another profitable feature – Dumbo. In the interim, as the Second World War took its toll, Disney turned its hand to propaganda and public education films.

Even today, the propaganda machine does not feel like an altogether unnatural fit for Disney. Arguably, the company operates a propaganda regime of its own. In 1943, it became one of the first major corporations to introduce a detailed staff handbook, The Ropes At Disney, which included instructions about everything from grooming habits to the importance of a permanently cheerful demeanour.

Today, that guide has morphed into “the Disney way”, but it remains remarkably prescriptive. Men working at Disney’s theme parks are banned from growing their hair long, and were even banned from sporting facial hair until last year, when the company relaxed its rules.

Meanwhile, on screen, Disney promotes a simple, upbeat view of life, where beautiful girls meet their Prince Charmings, and good gets the better of evil.

“There is a lack of cynicism and an optimistic point of view about the world,” says Iger. Critics argue that it is too saccharine, and presents a homogeneous, US-centric view of the world. Ethnic minorities are thin on the ground. Disney may have introduced the almond-eyed Princess Jasmine in Aladdin nearly two decades ago, but it did not launch a television series with a black protagonist until last March – the eponymous doctor in Doc McStuffins.

Disney executives demur about it being done unconsciously. One suspects the prospect of tapping a new market helped to put it front of mind. Disney is likely to introduce many more Princess Jasmines and Doc McStuffins as it seeks to expand its footprint outside America.

There has been a major shift in the company’s international outlook over the past decade. Disney will always be intrinsically American, but it has devolved power to the emerging markets and is ploughing billions of dollars into tailoring content for these markets, whether on-screen or in the form of theme parks.

“The company looked at the world through two lenses – domestic and international,” says Andy Bird, the British-born chairman of all Disney’s non-US operations. “How do we go from being the Walt Disney Company, China, to being the Chinese Walt Disney Company, or from the Walt Disney Company, India, to being the Indian Walt Disney Company?

In India, it has bought a controlling stake in UTV Software Communications, one of the country’s largest production companies, to help it make Disney films that have more in common with Bollywood than anything emanating from Los Angeles. In China, where the government sanctions the release of only a few dozen foreign films a year, Disney is investing in a theme park and resort in Shanghai, worth $4.4bn and jointly owned with the Shanghai Shendi Group.

Disney has already experimented with theme parks overseas, in Tokyo, Hong Kong and Paris. But when the Shanghai operation opens its gates in 2015, many of its visitors will be unfamiliar with the company’s cast of characters. It is a considerable risk, but one which Iger – who said earlier this year he will stay on into 2016 – believes that Disney must take.

The Asia-Pacific region is still relatively small in the grand scheme of Disney’s global business, but it is one of the fastest growing, even before the Shanghai theme park whirrs into action. Revenues jumped by 19pc last year to $3bn, a growth rate outstripped only by the region Disney calls “Latin American and other”, which saw revenues climb 21pc to $1.3bn. Disney’s much more established business in the US edged up just shy of 3pc to $31.8bn, while the European business shrank by nearly 4pc to $6.2bn.

“I grew up in the United States in the 1950s, dreaming that one day I would be able to go into Disneyland,” Iger says. “I had no idea that I would be able to go and get to the front of the line. My hope for the children of China is for them to be able to do the same thing – for them to grow up dreaming of Shanghai Disney.”

Disney will celebrate its 90th anniversary this year. The Tinkerbell-loving chief executive is bent on laying the foundations for it to maintain its momentum for at least another 90. He will need some of that fairy dust to spur creativity and open up new markets, so that Disney can stamp its imprimatur on the developing world, just as it has done in the West.

Timeline of an entertainment giant

1923 Walt Disney establishes the company, which in 1928 releases Steamboat Willie, its first Mickey Mouse cartoon

1938 Snow White, Disney’s first feature film, is released. On the back of its success, the group issues its first shares in 1940

1940 Disneyland theme park opens in Anaheim, California. This is followed by Florida’s Walt Disney World in 1971

1991 Joins the Dow Jones Industrial Average, making it one of the 30 largest quoted companies in the US

2001 Buys Fox Family Channel, renames it ABC Family. Follows it up with another purchase in 2004 when it buys The Muppets

2006 Buys Pixar. Continues spending spree in 2009 when it acquires Marvel, and again in 2012, buying Lucasfilm

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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