Disney: Commercializing Creativity
For a long time, movie-making has been viewed as a very risky, unpredictable enterprise: you can have a blockbuster one day and a flop the next, with very little visibility to distinguish the two a priori. A number of companies in the industry have attempted to “smooth” this volatility through the use of franchises – derivative works (sequels, spin-offs, merchandise etc.) which attempt to ‘stretch’ the power of an initial hit. The approach was pioneered in part by George Lucas, director of Star Wars, who famously traded his directing fee in exchange for the licensing and merchandising rights, a deal which cost Fox Studios billions. No-one, however, has been able to harness the power of this franchise approach, coupled with marketing muscle and cross-channel leverage, with the same level of success and consistency as Disney.
A simple way to visualize Disney’s business model (excluding ESPN) is a core “IP Generation” engine supported by various monetization channels:
The central tenet of Disney’s operating model is the ability to develop unique intellectual property, and then monetize it across a variety of platforms. As described in a WSJ article (quoted below), Disney is very deliberate in its approach to producing and monetizing content: no production is thought of as a “one-off”; instead, every opportunity is carefully analyzed with an eye towards monetization across every Disney business unit.
To keep executives focused on the biggest hits, Mr. Iger [Disney CEO] has tied the majority of their compensation to the performance of Disney as a whole, rather than individual businesses.
A committee of 20 executives analyzes franchises, hunts for new opportunities and occasionally demotes fallen stars, as happened with “High School Musical.”
Mr. Iger decides what the company’s top franchise priorities are each year, sending a powerful signal to Disney’s 180,000 employees in offices, studios and theme parks around the world.
“Once that’s done, a switch is turned and off the organization goes,” he said in an interview.
— WSJ, 6.8.2015
Disney has worked hard and spent a lot of money to build out its underlying IP creation engine. As described in the book “Creativity, Inc.”, Disney Animation Studios, once an animation powerhouse, had lost its edge in the early 2000s. Pixar, with its unique technology and a superior creative process, dominated the new world of 3D animation. In 2006, seeing the writing on the wall, Disney acquired Pixar for ~$7 billion, setting off alarm bells on Wall Street. Disney then proceeded to cross-pollinate key technology, principles and people from Pixar across the organization. For example, John Lasseter, former head of content, was named Chief Creative Officer of both Walt Disney Animation Studios and Disney Imagineering, the group in charge of designing rides and attractions at Disney Parks.
The culmination of all this, and a great case study for the power of Disney’s franchise approach, was the launch of Frozen in 2013. The tried and tested Disney formula of “cute characters + catchy songs” created a box office hit, and Disney promptly kicked its cross-channel approach into high-gear to propel a successful movie into a cultural phenomenon:
Since buying Pixar, Disney has acquired Marvel Studios ($4 billion) and Lucasfilm ($4 billion) to further augment its IP engine. Marvel’s “Avengers” franchise, consisting of 12 movies released so far and a development pipeline of 10 more, has been accompanied by unfathomable amounts of merchandising and cross-channel revenue generation, including two TV shows (Agents of SHIELD, Jessica Jones). Now, with the release of the new Disney-backed Star Wars movie a few weeks away, we appear to have come full circle in the realization of this model.
Sources:
http://www.wsj.com/articles/how-disney-milks-its-hits-for-profits-ever-after-1433813239
http://www.forbes.com/2008/02/05/disney-iger-franchise-biz-media-cx_lh_0205bizdisney.html
http://articles.latimes.com/1997-02-06/business/fi-25849_1_star-wars
“Creativity, Inc.” – Edwin Catmull (2014)
Thanks for sharing! Systematically “producing” innovations seems a wrong thing to do but in practice many companies succeeded. Disney adds another example to the the list of those companies such as Wyeth, Threadless and of course IDEO.
I would like to know more about how Disney implemented its “innovation funnel”, as in how as an organization, Disney selects and evolves a large number of ideas into a smaller number of big hits. It also seems like Disney relies on acquisition for many of their creative hits. Is this a sustainable model going forward?
Great article about a company I really admire! Disney is obviously huge company but you were able to lay out their basic business model really well. I was also surprised to hear how integrated and dependent the different business units are for such a large company.
It would be interesting to hear your thoughts on the future of Disney’s organic vs. inorganic (acquisitions) content generation. I’ve always felt the inorganic model is quite a bit riskier. However given the size of Disney size and its incredible amount of diversified content, perhaps they’re able to make these annual bets on outside ideas without betting the farm yet still being able to realize homeruns.
Thanks
It was interesting to read about how Disney aligns its executive pay with overall company performance as opposed to business unit performance. One of the failings of Toshiba as a company were its myopic focus on individual P&L performance by business unit so it’s good to see a company align things with overall performance. One concern I have regarding Disney is its shift away from smaller mid-budget films to a “tentpole” strategy – what happens when the first Avenger film flops? Will Disney have the infrastructure necessary to just continue pumping out hits in the tough movie making business?