When last we met, a fresh-faced and ambitious young Michael Eisner and his laconic sidekick Frank Wells had rocketed to stardom, taking control of Walt Disney Productions after the ouster of its previous management. 1985 would mark the duo’s first full year in control of the company – how would it go? Would the handover go smoothly? Would the company stay together, and would development continue at the theme parks and in feature animation? And how many films could Bette Midler make in a single year? Let’s find out…
To Our Owners and Fellow Disney Employees,
What a year it’s been! Enormous vitality and enthusiasm at every level of management together with solid accomplishments at the operating level have marked our first year as the senior managers of your company.
Only as we reflect on our first anniversary do we see in clear perspective how fortunate we were in three principal respects:
* The enormous potential of Disney assets developed under the stewardship of prior managements;
* The remarkable capabilities of the managers of the operating units; and
* How vitally important the renowned Disney culture is to the success of the Company.
All of these superb values contributed to the most gratifying accomplishment: the achievement of the highest revenues and net income in Disney’s history.
Revenues surpassed $2 billion for the first time, a 22 percent increase from a year ago, while net income increased 77 percent, earnings per share 89 percent and return on equity increased to nearly 15 percent.
For the fiscal year ended September 30, 1985, revenues climbed to $2 billion from $1.7 billion a year ago. Net income rose to $173 million or $5.15 per share, compared to $98 million, or $2.73 per share a year earlier.
To provide perspective on the company’s pace of growth, Disney first passed $100 million in revenues in 1965, $500 million in 1975, $1 billion in 1981 and $2 billion in 1985.
After our first full year, we are pleased to report that the strategies we set forth for Disney’s long-term growth are rapidly taking shape.
Our overall goals of accelerating Disney further into the mainstream of entertainment and creating greater financial balance between operating units have required a commitment to creativity and innovation, with fresh visions based on historical Disney traditions.
Since each of our major business segments will be discussed subsequently in some detail, we will simply highlight certain steps taken during 1985 toward implementing priorities.
The steps taken include:
* Bringing into the company an exceptionally creative and high-quality staff in motion picture and television production.
* Reducing motion picture risks for stockholders through Silver Screen Partners II, a public offering.
* Re-entering pay cable television distribution and entering for the first time the television syndication business.
* Re-establishing Disney as a major force in network television through creation of a diverse range of programming sold to all three networks.
* Boosting appeal and entertainment value of theme parks through successful, innovating marketing efforts.
* Developing unique and exciting attractions for the theme parks with the best creative talents in the industry.
* Expanding the objectives and potential earnings of the consumer products division.
* Successfully integrating Arvida’s and Disney’s community development resources.
* Assuring the continued success of The Disney Channel with enhanced management vitality.
It became quickly apparent to us that Disney is a complex and sophisticated company. Its success is dependent not on the strength of any one particular business unit, but on the interaction and support of diverse business units on one another.
The key to returning Disney into the entertainment mainstream and providing the initial link in the creative chain reaction among business units is our motion picture and television activity.
Among the corporation’s greatest accomplishments this past year was to attract a remarkable number of the industry’s premier executive talents, starting with Jeffrey Katzenberg, chairman of Motion Pictures and Television, and Rich Frank, its president. They, in turn, have installed a creative, high-quality staff and laid the groundwork critical to revitalization of motion pictures, positioning Disney as a long-term major force in the industry.
During the year, Disney entered into an agreement with Silver Screen Partners II, a public limited partnership, which was seeking to raise $100 million in a public offering for the financing of Disney film production costs. Due to extraordinary public interest, the offering was subsequently re-registered and expanded. When the offering closed, it had raised gross proceeds of $193 million from over 28,000 investors, becoming the largest film limited partnership ever assembled.
To maximize the value of our growing film and television library, pay television and domestic syndication departments were created and staffed during the year. Both achieved early results with the sale of seven pictures to pay cable services and major, headline-noted offerings to independent television stations.
In animation, we are moving quickly under Vice Chairman Roy E. Disney’s leadership to become the state-of-the-art leader in computer-assisted production. Our staff is delving into advanced technologies that will speed up the production cycle to 18 months from the current four to five years required for a feature-length picture, without impinging on the creativity of our animation artists or the quality of their work.
While it will take at least two more years for Disney to emerge with a major studio-size release schedule, we have been fortunate in making great strides toward returning Disney to network prominence in just 12 months.
Our television presence currently includes:
* A return of the Disney anthology series on February 2, 1986, with original one- and two-hour movies in a show called “The Disney Sunday Movie.”
* A prime-time situation comedy called “The Golden Girls,” hailed as the freshest, funniest hit of the season.
* Two regular animated series on Saturday morning children’s television: “The Adventures of the Gummi Bears” on NBC and “The Wuzzles” on CBS.
* A major commitment with NBC for a variety of prime-time specials, featuring new theme park attractions, original animated shows and musical variety programming from our parks.
The Disney Channel, now available in over 2,500 cable systems, ended the fiscal year with 2.3 million subscribers and anticipated growth to 2.5 million by year-end. During the year the number of subscribers increased 930,000, leading the cable industry in growth for the second consecutive year. The Channel turned profitable early in the fiscal second quarter, ahead of projections.
Walt Disney Home Video increased its market share while revenues passed $100 million for the first time, continuing the sustained success it has had since the start of operations five years ago. In the past Christmas season, the company shipped a record one million cassettes, including 21 titles, in the single most successful promotion to date for the company.
In a milestone year, our theme parks demonstrated their resilience with exceptionally strong financial performance. Disneyland greeted its 250 millionth guest during an event-filled, year-long celebration of its 30th anniversary and Walt Disney World passed the 200 million mark. The appeal and entertainment value of both parks benefited from aggressive, creative marketing programs while profitability improved through new operational efficiencies.
Walt Disney World conducted its first major television promotional campaign in more than 50 U.S. markets with excellent results. Promotional tours of Disney characters and entertainers in more than 120 cities reinforced media campaigns.
Disneyland’s 30th year festivities received sustained national television coverage and was beamed by satellite around the world. NBC aired, and repeated, a two-hour entertainment special
To ensure the continuing popularity of Disney theme parks, unique and exciting attractions are planned for 1986 and beyond.
The Living Seas pavilion, opening early in 1986, will be a spectacular addition to Epcot Center. Presented by United Technologies, it will offer exciting travel through an undersea corridor in the largest facility ever dedicated to man’s relationship with the underwater world.
George Lucas, Francis Ford Coppola, and superstar Michael Jackson, in collaboration with Disney’s own legendary WED Imagineers, have created a unique three-dimensional narrative film presentation that will be shown exclusively at the Journey into Imagination pavilion at Epcot Center and a newly-built theater at Disneyland. “Captain EO,” a musical space fantasy, with original songs written, produced and sung by Michael Jackson, will be presented by Kodak. It will premiere in the spring, supported by a network television special.
George Lucas is also working with Disney’s Imagineers on an innovative ride for Disneyland that will involved a journey to the world of “Star Wars,” employing the most advanced simulator technologies. It will open in the fall.
In addition, we announced plans to open the Disney-MGM Studio Tour as a third-gated attraction at Walt Disney World. It will provide an entertaining history of film in association with MGM. It will also include other rides, attractions, merchandising and restaurants.
Most importantly, there will also be a working film studio and animation facilities. Working film and television facilities will accommodate the dual purpose of giving the tour credibility while we meet the production needs of our greatly increased film schedule.
Our consumer products division continued to expand its role and earnings potential by taking the lead in developing new Disney characters, with its involvement in the creation of products tied to our Saturday morning television shows and through its licensing of characters for high-fashion sportswear lines for the whole family.
Mickey Mouse fashions, which began as a trend two years ago in Europe, has become a U.S. merchandising phenomenon.
The acquisition of Arvida Corporation in June 1984 continues to prove to have been a farsighted investment that will pay for itself in a relatively short period of time.
Now called Arvida Disney Corporation, we have successfully integrated Arvida’s excellent community development resources with Disney’s expertise with the result that exceptional planning and management skills are being concentrated on all Disney properties, with particular focus on Walt Disney World and Euro-Disneyland.
As we announced at our last annual meeting, the decision on the site of a Euro-Disneyland has been narrowed to France or Spain. The decision, which will be made soon, will be a difficult one because of the opportunities both countries present.
Because of our growing international interests, Disney became the 12th U.S. company to list its common stock on the Tokyo Stock Exchange. Tokyo Disneyland has become an integral part of the city’s landscape, surpassing 25 million admissions since its start in April 1983.
The depth of financial management of this company was considerably strengthened with the appointment of Gary L. Wilson as the company’s Executive Vice President and Chief Financial Officer. He comes to us from the Marriott Corporation. Under Gary’s stewardship, we are certain his strategic vision will guide our long-term success.
We are also fortunate to have Joe Shapiro as Senior Vice President- General Counsel. He joins us from Donovan Leisure Newton & Irvine, where he became thoroughly familiar with Disney legal affairs.
After a full year in the company we continue to view our role as instilling a sense of direction, motivating constructive change within the framework of continuing traditions and infusing the organization with renewed vitality. That is our pledge.
While taking new directions, it is clear that the single most valuable asset of this company is the name “Disney.” It is critical that the public understands who we are and what the name stands for.
A corporate identity study, conducted over the past two years, indicates the name “Walt Disney Productions” primarily connotes involvement in motion pictures and television. Since 1938, when the company was incorporated, numerous divisions and subsidiaries have become dynamic Disney business entities. Many of these represent activities and products separate from filmed entertainment.
We anticipate our shareholders will adopt a proposal to rename the corporation The Walt Disney Company at the annual meeting.
We believe this change, which maintains the legacy of Walt Disney, will provide an excellent umbrella under which each of our business entities will have a well-defined Disney identity and purpose.
While we are pleased with the company’s progress in our first year, we consider it a beginning. The credit for that progress, in any case, should go to the 30,000 talented and dedicated men and women who make up the cast. We are grateful to them and to our more than 58,000 stockholders for their continued support in our efforts to improve that value of their investment.
Michael D. Eisner – Chairman and Chief Executive Officer
Frank G. Wells – President and Chief Operating Officer
So that’s 1985, Michael Eisner’s first full year at the helm of the soon-to-be-named Walt Disney Company. The tone is still fairly dry, though enthusiastic, and statistic-heavy; we’ve yet to reach the era of Eisner family hockey games and school plays. It’s easy to see his priorities even at this early stage; of his list of stated goals, the theme parks aren’t even mentioned until #5 – and that just talks about how they’re marketed. Only on the sixth bullet point are new attractions mentioned. Feature animation doesn’t even make the list.
This emphasis on marketing is heavy throughout; from some of the first conventional marketing campaigns for the parks, to using their new Saturday morning programs to create merchandising opportunities. Note that the development of these new characters was driven by the consumer products division; this began the corporate shift from the old Disney model of the Studio’s creations driving the merchandise to the company’s output being determined by the marketing executives. This was the model that had been exploited so successfully in the early 1980s by Hasbro and others, in which programming was specifically created to promote new product lines. I’m amused by the idea of using these characters in “high-fashion sportswear lines for the whole family.”
Eisner’s most obvious goal, however, is a massive increase in film and television production. It’s clear that live-action film takes priority in his mind over theme parks or animation; remember that he got his start in television, and later headed film production at Paramount. He wanted to be a big-time media mogul and key to this, in his mind, was bringing in outside talent to make Disney “mainstream.” The Disney studio had long been an insular institution that was resistant to new entertainment trends and talent. This had started to change in Ron Miller’s brief tenure as CEO, which resulted in the creation of Touchstone Pictures and The Disney Channel, but Eisner threw everything into high gear with a complete overhaul of studio personnel.
He also continued the process of using the “Silver Screen” limited partnerships to help fund Disney’s film slate. These partnerships essentially sold off ownership stakes in the films themselves in order to raise production capital. The first of these issues occurred in 1983, and there would be three more Silver Screen ventures to follow. They would help fund many live-action and animated releases throughout the late 1980s and early 1990s.
Some of the moves Eisner made during this period were sorely needed and it’s often surprising that previous management had neglected these opportunities in the past. The fact that Disney had never before entered the syndicated television market is astounding, as was their lack of a presence on Saturday morning children’s programming. Syndicating the studio’s massive back-catalogue, and expanding Disney’s presence on home video, was like printing free money. Unless Disney was planning on re-releasing Toby Tyler into theaters again (and I doubt they were), why not let someone pay to show it on local television on Saturday afternoons?
It’s interesting to see the immediate change in the theme parks under Eisner. In previous years, the parks had been the news in these annual reports, but in 1985 they almost seem an afterthought. Most of the Phase II plans for EPCOT had already been abandoned; The Living Seas marked the last of the original pavilion concepts to see the light of day, although “Life & Health” would morph into “Wonders of Life” and open in 1989.
With the abandonment of the old expansion plans, which had been written off in our previous report, we see the shape of things to come. The George Lucas team-up seems to have happened almost immediately, with Captain EO and Star Tours already well on their way to reality. It’s also remarkable how quickly development began on the Disney-MGM Studios, but it’s possible that this was an early priority of Eisner’s in order to compete with the Universal park that he knew was soon coming to Orlando. Eisner’s optimism about using the Florida studios to help with the expanded Disney production slate is charming and, we would eventually find, ill-founded. Previous management had been well on their way to an agreement for the “Euro-Disneyland” project, and the report mentions the impending decision on the resort’s site; the contest would soon be thrown by Eisner, basing his choice on nostalgic reminisces of childhood trips to Paris.
So, 1985. It was still a time of transition for Disney, but by 1986 Eisner’s team would be fully in place and at work on his new agenda. To be continued…