Disney is, far and away, the most successful film studio in the United States today. They have dominated the box office this year, making up half the highest grossing films of 2018 so far. And this is not an anomalous year for them. They are also responsible for half the highest grossing movies of all time. Of the 35 films to ever exceed $1 billion in worldwide gross, Disney made 17. With the pending acquisition of Fox’s movie studio by Disney, films released under Disney or one of its subsidiary studios will account for a projected 40% of the domestic box office in America. This is all the more amazing when you realize that movies aren’t Disney’s primary business. They aren’t even Disney’s secondary business. After combining their consumer products and parks and resorts divisions to form the consolidated “Parks, Experiences, and Consumer Products” division, according to adjusted quarterly earnings numbers, the film studios are actually the worst performing division at Disney. Here’s an even crazier idea: I propose that, as long as their films were beloved, Disney could lose money on every picture and it would not have a serious impact on their business model. This is possible because Disney doesn’t function like most people expect, as a movie studio. In reality, they operate in an entirely different way. That’s the secret of Disney. What most people think is their product is their R&D and what most people think is their secondary income stream is actually their product.
So what do I mean when I say that their films are their R&D? For starters, the entire movie industry, structurally, is unlike almost any other business in the world. Namely, every product they produce is a prototype. With lots of businesses, from technology to CPG foods, there is an R&D budget dedicated to improving existing products, and occasionally fostering new products, to sustain their business as their current offerings become threatened by the improvements being made by their competition. This keeps their products high quality and relevant to consumers. Movie studios don’t do this. Each film is a one-off product. There is no room to improve each individual product over many cycles of development based on years of feedback from loyal customers. Even with the current wave of franchise film making, each sequel is not the latest version of an existing product, but an entirely new product. There needs to be a new story; telling the exact same story again is boring. There is often a new director; talent is freelance and chases the best artistic opportunities and compensation packages. There needs to be all new production design; new stories require new settings, costumes, and props. Where upgrades turn TurboTax 2017 into TurboTax 2018, Thor: The Dark World shares only the titular character with Thor: Ragnarok.
Even in the other performing arts, like music or theater, things are still revisited in a way they aren’t with film. Once an album recording is finished, that version of those songs might seem definitive. Still, musicians do keep tweaking their songs and their live show experience as time goes on. You can see this most plainly when live albums are released where the songs from the live show sound different from those on the original album, or when an artist with a long career releases re-recordings of some of their biggest hits and the quality of the music, such as the complexity of the arrangements, has matured and improved despite the song being the “same.” Similarly, in theater, shows are often work-shopped before they are brought to a broad audience. In the golden age of Broadway, shows traveled a fairly fixed circuit of cities and towns on the East Coast, making changes and improving the show after each stop, until it was deemed ready to open in New York. While modern shows don’t necessarily work a set circuit, they still often get “tested” in various locations before moving to Broadway, a la Wicked’s limited run in San Francisco.
Film does not have this flexibility. Reshoots, remasters, and new special effects can sometimes alter the original film, as Lucas’ toying with Star Wars or the three different re-edits of Blade Runner demonstrate, but these are the rare exception rather than the rule and were only possible due to the cult status these films held in popular culture. For the typical movie, there are no second chances. It is either successful right out of the gate or dead on arrival. Also, because of the way films are financed, and how expensive they can be to produce, almost every prototype goes to market with the expectation that it must succeed. This sounds like madness when you consider how many prototypes are just failures on the way to eventual success in a typical product design environment. Edison is supposed to have failed a thousand times before he got the light bulb correct. This deviation from the normal, iterative development cycle found in other industries creates great volatility in the film business, where a single massive success offsets many smaller loses. This more closely resembles the model of risk diversification of a Venture Capital firm than a traditional business.
Except Disney breaks this mold. Since they aren’t really a movie studio they aren’t really tied to the same model as their competitors. The vast majority of Disney’s earnings come from sources outside their movie studio. Of the roughly $14B in revenue per quarter Disney takes in, based on their 2018 Q2 earnings report, only $2B-$2.5B comes directly from the studio division. That is a lot of money, but it is nowhere near what the rest of the business brings in. The biggest earner, their media network, including radio and television stations, makes around three times that much, and parks and merchandising, the second biggest earner, makes close to two and half times that much. Understanding this dynamic is what defined the Michael Eisner era and beyond, both good and bad. To get a complete picture, we have to jump back in time and look at Disney’s growth from the 1980s to the present.
Many people of my generation grew up during the second golden age of Disney animation and have only known Disney as a massively successful, money making machine. Even though, like most studios, Disney had its ups (Beauty and the Beast) and downs (Home on the Range) in film quality, it never seemed to put a hitch in the company’s stride. Granted, as the second golden age came to a close people pined for a return to the era of Trousdale & Wise and Menken & Ashman, but with those films still fresh in their memory and the amazing back catalogue of films from the Walt Disney years, like Pinocchio, Dumbo, and Snow White, the Disney brand image still represented a history of more than fifty years of unbelievably high quality film making. This image, however, was not based in reality. What people of my generation and younger are less aware of, unless they are serious Disney fans/historians, is that Disney in the early 1980s was floundering. After the death of Walt in ‘66 and his brother in ‘71, much of the creative vision and business acumen that had made early Disney so successful was gone. Without it, the company began to lose the ability to produce box office success. This culminated in two major flops, The Black Cauldron from the animation department and The Black Hole from the live action department. More than just commercial failures, these flops showed that Disney had completely lost its creative vision. The company was also hemorrhaging talent, many of whom went on to outperform Disney on their own. For example, Don Bluth left Disney to go independent, eventually producing animated cultural touchstones like The Land Before Time and An American Tail.
In 1984, after an attempted hostile takeover by Reliance Group Holdings, there were many changes to the company, most notably the hiring of Michael Eisner as CEO. Eisner had felt he was being groomed for the top spot at Paramount so when he was passed over for the position he left the company looking for greener pastures and wound up at Disney. Initially, Eisner was able to bring a lot of success to the Disney studio system, with big hits at Touchstone such as Pretty Woman and Good Morning, Vietnam, as well as starting the second golden age of the animation studio by leveraging the success of Who Framed Roger Rabbit into The Little Mermaid and beyond.
That being said, the real genius of Eisner, in my opinion, wasn’t his ability to turn around the film studio. By looking at his full tenure as CEO of Disney, one begins to see a pattern where every major success in his early years is matched by an equal or worse failure in his later years. For example, he had trouble keeping talent happy. He didn’t promote Jeffrey Katzenberg to president after Frank Wells’ untimely death, causing Katzenberg to leave. After departing Disney, Katzenberg became the K in Dreamworks SKG as head of their animation department, eventually building the studio up to be a serious competitor to Disney. Michael Ovitz, Eisner’s choice over Katzenberg, lasted only 14 months and was fired with a “no fault termination” severance package worth an estimated $138M in cash and stock options. Ironically, the way Katzenberg was treated was the same kind of “unfair passing over” that had caused Eisner to jump ship at Paramount. It also caused a rift to form between Eisner and the animation studio, eventually leading to a similar hemorrhaging of talent as had plagued Disney in the ‘70s. Former employees like Tim Burton and John Lasseter quit or were fired, only to go on and become hugely successful post-Disney. Many of Eisner’s failures at the company would have destroyed any other creative business and made Eisner look like one of the worst CEOs in Hollywood, and yet Eisner, without a doubt, not only saved Disney but positioned it to be one of the most powerful media companies on the planet. How?
Eisner understood that Disney’s earnings weren’t completely dependent on movies. Theatrical releases were just one part of a much larger corporate system, which included merchandising, home video, theme parks, and television. His strategy was to build up not just the film studio but every aspect of Disney’s diversified business. The Disney Decade, a term used internally by executives at the company for their ten year growth plan in the ‘90s, was emblematic of this approach. Recognizing the success of Disney’s pay cable station, the Disney Channel, Eisner orchestrated the acquisition of the ABC broadcast family, including ABC’s network TV station and affiliates, as well as cable channels such as A&E and ESPN. Recognizing the importance of the theme parks, Eisner aggressively pursued the expansion of their park offerings. They opened new traditional amusement parks: Disney-MGM Studios (renamed Disney Hollywood Studios), Disney’s Animal Kingdom, and Disney’s California Adventure. They opened new water parks: Disney’s Typhoon Lagoon and Disney’s Blizzard Beach. They opened new non-park attractions such as Downtown Disney, Pleasure Island, and the ESPN Wide World of Sports Complex. They opened Euro Disney (renamed Disneyland Paris). They expanded into cruise lines and signed a one hundred year lease on Castaway Cay, a resort island in the Bahamas. Recognizing the huge potential of home video, Disney started producing lower quality films that were cheaper and faster to produce targeted specifically for airing on their TV channels and for rental from stores such as Blockbuster and Hollywood Video. While all these moves were not universally successful, this expansion created the structure in which Disney operates today.
Returning to the present, what does this restructuring by Eisner have to do with my initial claim that Disney functions unlike any other movie studio? What does Disney’s most divisive CEO, who hasn’t been in charge in over a decade, have to do with the company’s current prosperity? Before taking over, the current CEO, Bob Iger, was President and COO of Disney under Eisner and, during his time as Eisner’s number two, he learned the power of thinking about Disney as something more than a movie studio.
The movie studios at Disney are not creating product. The movie studios at Disney are an R&D lab. Except, instead of creating new, more effective consumer products, they are creating new intellectual properties. Consider Colgate. Colgate sells toothpaste, it does not sell the development of toothpaste. R&D develops new toothpaste formulas, but then it is up to the other divisions to take those formulas and make them into a product, market that product, and then sell that product. Similarly, Disney sells intellectual property branded experiences. While the development of the intellectual property is as important to Disney as the development of new toothpaste formulas is to Colgate, it is ultimately the parks, interactive media, and television channels that make the real money on that intellectual property in the same way that product designers, marketers, and salesmen sell the toothpaste. Disney needs the IP engine that is the film studios to keep producing content with which to brand their experiences, and for that content to be of high enough quality and popularity for the branded experiences to be desirable, but those two functions are far more valuable than the box office returns each property provides.
Perhaps the most valuable thing to Disney is how this structure can change the way they think about failure. While no one involved wants to see a film do poorly, if a film does fail to resonate with audiences it is not as much of a catastrophe as it often is at another studio. Where a studio like Universal might be shepherding many different film productions like single prototype startups, hoping that they all make it, Disney can look at each of its movies as an experiment where failures are ignored and successes are incorporated into the company’s real business of selling intellectual property branded experiences. Have a big flop or two, like Mars Needs Moms or John Carter? What do you expect? You can’t make a Disney theme park omelette without breaking a few eggs. As long as the R&D lab is still producing films like Avengers: Infinity Wars, Star Wars: The Force Awakens, Coco, and Moana, that can sell toys and theme rides, the company is in good shape.
I would argue that this also lets them take more creative risks than they are typically given credit for. Guardians of the Galaxy was not a widely known or beloved comic book series prior to the film, certainly not at the level of Hulk or Captain America, and yet Disney took a risk developing the property. They took another risk on talent: greenlighting first time screenwriter Nicole Perlman’s script, hiring pudgy TV actor Chris Pratt for the lead (this would be the film to catapult him to stardom), and picking the former Troma Entertainment director and maker of P.G. Porn comedy shorts to helm the project. Disney is also willing to take risks by changing the direction of a franchise already in motion, like completely shifting the tone and aesthetic of the character and his world. The first two Thor films were both fairly serious films rooted in Norse fantasy. For Thor: Ragnarok, the third film, Disney hired a relatively unknown New Zealand indie director to make an ‘80s inspired sci fi gladiator film that takes more cues from The Adventures of Buckaroo Banzai Across the 8th Dimension than it does Scandinavian mythology. These risks were made possible because Disney movies are more of a test bed for the next lucrative piece of IP, where failure is just part of the process, than a traditional movie studio where to break even is to fail.
You can see how Iger took and refined what worked from the mixed successes of the Eisner years by comparing how they treated their studios. Eisner understood that there was great money to be found in parks and under his control their importance to Disney’s profits grew and grew. At the same time, he was firing imagineers, gutting the animation department, producing low quality direct-to-video features, and more. He likely didn’t see the studios and other creative staff as the R&D department whose developments were necessary to keep the company going, but as a division in the company that cost a lot and, comparatively, returned very little financially. So, like many shortsighted CEOs, he downsized the most important part of the company to pump up quarterly earnings, but at the cost of long term stability. The result was an eroding of the brand value of Disney that led to discord between the board, and owners/stockholders they represented, and himself. This then led to him losing his board seat and, with one year left on his contract and little chance of a renewal, his eventual retirement.
By contrast, Iger has put heavy emphasis on brand integrity. Rather than skimp on studio spending, it has been a major part of Iger’s expansion strategy, pouring massive sums of money into acquiring existing intellectual property producers, such as Pixar, Marvel Studios, LucasFilm, and, most recently, 21st Century Fox. This has meant that, under Iger, the movies, television, and park experiences have never felt like low quality attempts to bilk the public for money. Sure, from a film criticism standpoint, Disney’s reliance on what often seems like formulaic franchise film making and weaponized nostalgia can begin to make their films feel banal and uninspired, even when in a vacuum they might be quite good, but from a business standpoint they remain amazingly lucrative. This not only demonstrates that audiences have yet to tire of these films in the way snobs may have, but it also means that those properties are ripe for use within the larger Disney system. Guardians of the Galaxy makes $800M? Retheme the Tower of Terror into a Guardians ride. Frozen makes $1.3B? Change the Maelstrom in Epcot to have Elsa, Anna, and Olaf in it.
While most noticeable with the Disney parks, this pattern holds true with their TV networks as well. While some channels, such as A&E and ESPN, remain completely independent, others, such as the Disney Channel and ABC, benefit from the strong IP created by their movie studios. For example, ABC’s show Once Upon a Time relied heavily on ties to existing Disney films with characters like Snow White, Jiminy Cricket, Captain Hook, and Belle. On the Disney channel, current shows such as Tangled: The Series and Big Hero 6; past shows such as Frozen, Aladdin, and The Lion Guard; as well as made for TV movies such as the three Descendants films, make explicit use of recent or legacy properties. In the same vein, Disney’s success with the Marvel Cinematic Universe stoked interest in live action superhero television series, allowing shows such as Jessica Jones and Daredevil on Netflix, Agents of SHIELD on ABC, and Runaways on Hulu to flourish, all products of the Disney-ABC Television Group.
Of course, Disney is not the only film/media company involved with the amusement park business. NBCUniversal owns the Universal Theme Parks subsidiary. Paramount attempted it with Paramount Parks. Then there are the license deals. Big studios like Warner Brothers and Sony Entertainment, as well as smaller shops like Hanna Barbera and Nickelodeon, have licensed their properties to be used by existing parks such as those managed by Cedar Fair and Six Flags. Yet Disney is by far the most successful.
Disney parks aren’t a licensing afterthought, as they are in most of their competitors, they are an integral part of the company’s business. To paraphrase what Ed Catmull, president of Pixar and Walt Disney Animation studios, says in his book Creativity, Inc., creative businesses need to find a balance between many different internal constituents: the storytellers, the animators, the designers, the finance department, the merchandise and consumer product department, and so on. This includes the parks division. So while it is very unlikely that the park department’s demands drive explicit changes within the movie making process (Catmull also says in Creativity, Inc. that good storytelling trumps all else), there are senior people at Disney making sure that the movie people, the merchandising people, and the park people are working towards harmonious goals. Disney parks already had a better reputation for theming and immersive design than their competitors and this holistic and integrated approach only presses that advantage further.
Compare that to their competitors, especially the licensed rides and parks. The nearest amusement park to me, growing up, was California’s Great America. While under the management of Paramount Parks, they opened a Top Gun ride. It was an inverted steel roller coaster whose only connections with the movie were limited use of the film’s soundtrack, a stars and bars logo over the ride entrance, and the name. Similarly, the two identical Dark Knight wild mouse-style coasters, one at Six Flags Great America in Illinois and the other at Six Flags Great Adventure in New Jersey, were meant to tie in with the hype around Nolan’s groundbreaking films but, to quote one ride reviewer on tripsavvyy.com, “the park chain forgot two essential ingredients: the theme and the coasters.”
The only competitor that comes close to Disney is NBCUniversal, being the only one that owns and operates its parks. But even Universal Parks does not think of their parks the same way that Disney does. While there are more positive examples of theming and intelligent IP integration, such as the Jurassic Park and Jaws rides (both Universal properties) or the Wizarding World of Harry Potter (licensed from Warner Brothers), on the whole NBCUniversal does not think of their films as IP being produced to feed the branded experiences in their parks. They see their parks as just another revenue stream for their current films or an opportunity for cross promotion. They replaced the Ghostbusters Spooktacular, based on an enduring piece of pop culture, with Twister…Ride It Out, based on an admittedly fun movie, but one with a limited shelf life of cultural relevance. Twister is closed now, to be replaced with a Late Night with Jimmy Fallon themed ride, a move I can only describe as completely baffling. In the same vein, they replaced the beloved Kongfrontation, a ride whose popularity is often attributed to saving Universal Orlando from financial ruin, with a ride themed after 1999’s The Mummy. Years later, in part in preparation for the movie Kong: Skull Island and in part because of a realization of how strong King Kong was as cinematic character, Universal opened a new ride, Skull Island: The Reign of Kong. This new ride was very similar to Kongfrontation, only in a different part of the park and less engaging thanks to its heavy use of pre-rendered CGI scenes as opposed to the original’s exclusive use of realistic animatronics.
While Disney hasn’t been shy about removing, retheming, or replacing the old to make way for the new, the parks division puts the parks first, ensuring that Disney, as a brand, is first and foremost and that decisions made are best for the park, not best for the studio. If a legacy ride is a reminder of Disney’s years of quality and importance in pop culture, it stays. If the ride is a historic draw or fan favorite, it stays. Hell, if a ride is popular and doesn’t tie in with any existing movie franchise, rather than tear it out or reskin it, they’ll try to make a movie that matches, like the successful Pirates of the Caribbean: Curse of the Black Pearl and the not so successful Haunted Mansion. Disney does not see its park attendees as a captive audience on which to sell their film properties. Quite the opposite. Their properties are the draw and the park experience is paramount.
Similarly, since the draw at Disney parks is the IP, both legacy and contemporary, the company goes out of its way to make sure that its theming is on point. The rides are often designed from the bottom up with the movie in mind. Even reskins like the conversion of the Tower of Terror to Guardians of the Galaxy – Mission: Breakout! take great care to not just make a drop ride with some Groot and Rocket Raccoon thrown in, but rather something that feels like it belongs in Peter Quill’s world. The ride features scenes shot with the series’ actual actors, was developed with input from series director James Gunn, and makes use of the series’ distinctive soundtrack. In a Disney park, nothing about a film’s connection to a ride is an afterthought. The other amusement park companies just don’t seem to operate this way.
The magic of Disney may be creativity. The magic of Disney’s business, however, is their unique model for fitting their films within the larger corporate system, as fuel for the company’s most lucrative departments. The studios produce movies. These movies generate love for the Disney brand and interest in experiencing more of the movies’ stories, in the form of brand experiences. This drives interest in the parks and in some of their TV offerings. Through park tickets, merchandise, advertising and sponsorship deals, hotel fees, and more, Disney turns that initial brand loyalty, created by the films, into unbelievable amounts of money. But as the later Eisner years demonstrate, without the movies at the top, the rest suffers. It is because of the way this ecosystem is structured that I made my bold claim at the beginning. Disney films do not need to make money, they only need to make people love Disney. As long as that is accomplished, and people keep coming to the parks, buying the toys, playing the games, and watching the tie-in TV shows, Disney will remain the incredibly successful company that it is today.