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Professor David Collis and Research Associate Ashley Hartman prepared this case. It was reviewed and approved before publication by a company designate. Funding for the development of this case was provided by Harvard Business School and not by the company. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2017, 2018 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545- 7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

D A V I D C O L L I S

A S H L E Y H A R T M A N

Reawakening the Magic: Bob Iger and the Walt Disney Company

We’re the Walt Disney Company. It’s a brand that means a lot, not just to the people in the company, but to the world.

— Bob Iger, Chairman and CEO of the Walt Disney Company

I only hope that we never lose sight of one thing—that it was all started by a mouse. — Walt Disney

Mickey Mouse, Snow White, and Buzz Lightyear strolled down Main Street at the grand opening of Hong Kong Disneyland in 2005, pausing to snap selfies with enthusiastic children in their Mickey Mouse ears. Bob Iger, newly appointed CEO of the Walt Disney Company watched the parade go by, but concerned for the future, he turned to colleagues and asked, “How many characters in this parade were created by Disney in the last 10 years?” There was one. But the languishing Disney Animation department was not the company’s only problem. Disney was under pressure: the company had recently delivered poor financial results; ratings at the ABC network had fallen below competitors; Walt’s nephew, Roy E. Disney, had stepped down from the board after expressing his displeasure with the direction of the company under Iger’s predecessor, Michael Eisner; and Comcast had made a $54 billion hostile bid to take over Disney only one year before. The situation for Disney looked bleak.

Yet within a few years, the tide had turned (Exhibit 1). By December 2015, the much anticipated Star Wars: The Force Awakens became the highest-grossing film in the U.S., earning over $2 billion worldwide. Frozen surpassed $1.3 billion in box office to become Disney Animation’s biggest success ever. Disney franchises, like Pirates of the Caribbean and Iron Man, had produced multiple live-action blockbuster hits. ESPN, ABC, and other media properties were producing record profits. Attendance was up at Disney parks, while Shanghai Disney Resort, the company’s fourth and largest theme park in Asia, was opening in June 2016. Iger thought back to the Hong Kong Disneyland parade, reflecting on how far the company had come and what he had learned about reawakening the Disney magic.

History In 1923, a Missouri farm boy, Walter Elias Disney, who was determined to be an artist but whose

Kansas City cartoon business had failed after only one year, moved to Hollywood. There he founded the Disney Brothers Studio with his older brother Roy1 (Exhibit 2). Walt was the creative force, while

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Roy handled the money. Quickly concluding that he would never be a great animator, Walt focused on overseeing the story work.2

A series of shorts starring “Oswald, the Lucky Rabbit” became Disney Brothers’ first major hit, but Walt was outmaneuvered by his distributor, who hired away most of Disney’s animators.3 Desperate to create a new character, after discovering that the distributor owned the copyright to Oswald, Walt made some changes to the rabbit’s appearance and created Mickey Mouse on a train trip from New York. Failing to find a distributor for this character, Walt added synchronized sound—something that had never been attempted in a cartoon.4,5 His gamble paid off handsomely with the release of Steamboat Willie in 1928, and, overnight, Mickey Mouse became an international sensation, known by different names, such as “Topolino” (Italy) and “Musse Pigg” (Sweden), around the world.

Despite successfully introducing new characters such as Goofy and Donald Duck, Walt realized that cartoon shorts could not sustain the studio indefinitely.6 In 1937, Disney released Snow White and the Seven Dwarfs, the world’s first full-length, full-color animated feature.7 In a move that would later become standard Disney practice, Snow White products were stocked on the shelves of Sears and Woolworth’s the day of release. With the success of Snow White, the company scaled up, building a new studio in Burbank and going public in 1940 to finance the expansion and the making of Fantasia.

Snow White was rereleased for the first time in 1944, setting the precedent for the reissue of cartoon classics to new generations of children as an important source of profits. After World War II, Disney diversified into live-action movies, music, and TV specials; during the 1950s, One Hour in Wonderland reached 20 million viewers when there were only 10.5 million TV sets in the U.S.8 This was followed by regular television shows, such as the Mickey Mouse Club, featuring preteen “Mouseketeers” as hosts.

In 1953, Disney created Buena Vista Distribution, ending an agreement with RKO, in order to save distribution fees of one-third of a film’s gross revenues. By 1965, Disney was averaging three films per year, mostly live-action titles, such as Swiss Family Robinson and Mary Poppins, but including a few animated films like 101 Dalmatians. Disney avoided paying exorbitant salaries by developing the studio’s own pool of talent. Observed one writer: “Disney himself became the box office attraction—as a producer of a predictable family style and the father of a family of lovable animals.”

Disney also expanded by creating Disneyland, a giant outdoor entertainment park in Anaheim, California. The park was a huge risk for the company, as Disney took out millions of dollars in loans. But the bet paid off. The success of Disneyland, which opened in 1955, was a product of both technically advanced attractions and Walt’s commitment to excellence in all facets of park operation. His goal had been to build a park for the entire family, since he believed that traditional parks were “neither amusing nor clean, and offered nothing for Daddy.”9

Disneyland’s success finally put the company on solid financial footing,10 and although Walt dreamed of building another theme park—in 1965, he secretly purchased over 27,000 acres of land near Orlando, Florida, on which he planned to build Walt Disney World—he was never able to see his dream come to fruition; he died just before Christmas 1966.11

Walt Disney was a strong believer in the importance of family life, and the company always looked to foster experiences that families could enjoy together. As he said, “You’re dead if you aim only for kids. Adults are only kids grown up, anyway.” The huge number of “firsts” that the company could claim was a tribute to the success of this philosophy, but Disney recognized that they were not without risk: “We cannot hit a home run with the bases loaded every time we go to the plate. We also know the only way we can ever get to first base is by constantly going to bat and continuing to swing.”

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Walt Disney attempted to retain control over the complete entertainment experience. Cartoon characters could be perfectly controlled to avoid any negative imagery. Disneyland had been constructed so that once inside, visitors could never see anything but Disneyland. According to Walt, “The one thing I learned from Disneyland [is] to control the environment. Without that we get blamed for things that someone else does. I feel a responsibility to the public that we must control this so-called world and take blame for what goes on.”12

The Disney brothers ran their company as a nonhierarchical organization in which everyone, including Walt, used their first names and no one had titles. “You don’t have to have a title,” said Walt. “If you’re important to the company, you’ll know it.” Although a taskmaster driven to achieve creativity and quality, Walt emphasized teamwork, communication, and cooperation.

The realization of Walt Disney World consumed Roy O. Disney, who succeeded his brother as chairman and lived to open the park in 1971. It almost instantly became the top-grossing theme park in the world, with its two on-site resort hotels being the first hotels operated by Disney. To generate traffic in the park, Disney opened an in-house travel company to work with travel agencies, airlines, and tours. Disney also started bringing live shows, such as “Disney on Parade” and “Disney on Ice,” to major cities all over the world. The next major expansion was Tokyo Disneyland, announced in 1976. Although wholly owned by its Japanese partner, it was designed to look just like the U.S. parks. However, film output during these years declined substantially. Creativity in the film division seemed stifled, and rather than push new ideas, managers were heard asking, “What would Walt have done?”

Michael Eisner, 1984–2004

In 1984, Michael Eisner took over a Walt Disney Company that had fallen into a lull, eerily similar to the one Bob Iger faced in 2005. The company’s financial performance had recently deteriorated as Disney incurred heavy costs to finish EPCOT and started its first cable channel, the Disney Channel. Film performance remained erratic and production of animated cartoons languished, with a reliance on sequels and the release of only one new full-length feature about every four years.13 Disney had no shows under its own name on network TV. Corporate raider Saul Steinberg even launched a takeover bid in 1984,14 as Walt’s nephew, Roy E. Disney, left the board, upset at the company’s direction.

Into this breach came Michael Eisner as CEO, with the support of investors, including Roy E. Disney, who returned to the board. Eisner had been head of programming at ABC before becoming CEO of Paramount and was noted for being the producer of Happy Days. He brought with him a lawyer and ex-head of Warner Bros., Frank Wells, as President and Jeffrey Katzenberg to lead the movie studio. Together, the three rejuvenated Disney, delivering the 11th highest total return to shareholders of the Fortune 500 over the next 10 years (Exhibits 3a and 3b).

Initial moves that quintupled net income in three years included raising prices in the theme parks at rates well above inflation, as market research revealed that attendees believed they got good value for money from a day in the park; opening the parks seven days a week by moving maintenance, which had previously been performed when the park was closed on Mondays, to the nighttime; cutting the re-release cycle for classic Disney animated movies from every seven to every five years; extending the licensing of Disney brands to more categories; and committing whatever it took to produce a block- buster animated cartoon for release over the summer every year. Eisner supported Imagineering (the company’s research and development arm responsible for the creation, design, and construction of theme parks and attractions worldwide) as a way to reinvigorate the culture and promote creativity and innovation, and created a synergy committee to coordinate marketing activities across the portfolio and lead collaboration on major initiatives, like Mickey’s 60th birthday, while for the first time pursuing national television advertising.

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As Disney Studios released a series of successful animated cartoons, beginning with Roger Rabbit, and continuing with such classics as The Little Mermaid (1989), Beauty and the Beast (1991, the first animated cartoon ever to be nominated for an Oscar as best picture), Aladdin (1992), and The Lion King (1994, which generated over $1 billion in operating income over the years), Eisner expanded the scope of the company. Euro Disney opened outside Paris in 1992 with support from the French government, enabling Disney to earn 10% of revenues and a 50% share of the profits, having invested $200 million of the park’s $4.4 billion cost. Annual throughput of live-action movies increased to more than 14 in order to reach scale in distribution, including from its newly formed adult studios Touchstone and Hollywood Pictures, as well as from the acquisition of the independent art movie company Miramax. Disney reappeared on national television with the Sunday evening Wonderful World of Disney show and Disney cartoons on Saturday mornings. It founded the Anaheim Mighty Ducks ice hockey team, named after the Disney movie, Mighty Ducks, reflecting Eisner’s love of the sport. Output of syndicated television shows increased, and the company embraced new ideas, like waterparks and nightlife at Disney World, and opened a chain of Disney retail stores after 1987.

The major move Eisner made in 1995 came a year after Frank Wells was killed in a helicopter crash and Jeffrey Katzenberg had left to found his own studio, Dreamworks, with Stephen Spielberg. In a $19 billion deal, financed with $14 billion of debt, Disney acquired CapitalCitiesABC—the first major acquisition Disney had ever made. Assets included the ABC television network—then the third-ranked national network—television and radio stations, and the nascent ESPN cable sports channel (which was reputedly valued at less than ABC during the acquisition process). While Eisner had previously preached that content was king and that distribution and content did not belong in the same company, the merger made Disney “the world’s most powerful media and entertainment company.”15

Hiring Michael Ovitz from Creative Artists Agency to be President in late 1995 turned out to be a mistake; Ovitz was fired in 1997 after failing to find a clearly defined role. Disney continued to expand, planning Hong Kong Disney; embracing technology by introducing DVD versions of its movies; buying New Amsterdam Theatre on Broadway to host Disney shows, starting in 1997 with a successful theatrical version of The Lion King; investing in two cruise ships at a cost of $1 billion each to bring in- house the previously licensed Disney Cruises; and buying a cable network in 2001 and renaming it ABC Family to extend the array of cable channels offered to an older audience. Yet Eisner and the strategic planning group began to exercise more control over business units. Deals such as the price paid to sports leagues for broadcast rights or programming choices at ABC gradually came more under Eisner’s remit, while he became “famous for managing every aspect of Disney’ business from approving carpet patterns in hotels to commenting on TV and movie scripts.”16

In the new century, performance of Disney cartoons at the box office deteriorated, with summer releases such as Dinosaur (2000) and Lilo and Stitch (2003) failing to find big audiences. Only Pixar hits, Toy Story (1995), Toy Story 2 (1999), and Finding Nemo (2003), distributed by Disney through a contractual arrangement that generated over half of Disney Studios income, produced good results. Although Eisner remained skeptical of technologies that posed a threat to traditional distribution channels, attempts to capitalize on the emergence of new technologies like video games, personal computers, and the internet led to the creation of a discrete unit, Disney Interactive, in 1994 and an online unit in 1995. This launched Go.com as a destination media portal in 1999, but it was shut down in 2001, with $900 million in write-offs, including for the purchase of search engine Infoseek.17

Iger’s Succession After years of financial underperformance (Exhibit 3b), by 2004 investors were increasingly

disgruntled with Disney management, culminating in an unsuccessful hostile bid by Comcast. Eisner

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insisted the company would soon turn around, but others had lost faith, particularly since relations with Steve Jobs, the main owner of Pixar, had deteriorated to the extent that it was looking for a new distribution partner. Morale at Disney was at an all-time low, and employees were not excited to come to work. The company was floundering instead of thriving. It was as if Disney had become a “company that simply didn’t believe in itself anymore, or in its future,” Iger later observed.18

Discontent became clear at a shareholder meeting in 2004 when 43% of shareholders withheld their support for Eisner’s reelection. Dissident shareholder Roy E. Disney, who had abruptly quit the board a few months earlier, made his case for Eisner’s removal and was met with resounding applause. Shortly after, Eisner announced he would retire when his contract expired in September 2006.

Disney conducted a thorough search for a new CEO, retaining an executive search firm and interviewing numerous external candidates along with one internal candidate, Bob Iger, President and COO. Iger had originally aspired to become a newscaster and, after graduating with a degree in television and radio, had begun his career as a weatherman for a local TV station in Ithaca, New York. He joined ABC in 1974 as a studio supervisor and worked his way up through programming roles to become President of ABC Entertainment in 1988 and of Capital Cities/ABC in 1994. He remained in that position after the acquisition by Disney until 2000, when he was promoted to be President and COO of Disney under Eisner. Iger acknowledged the CEO interview process was brutal; he completed 17 interviews, including two full-board group interviews as well as individual meetings with each board member. In March 2005, Disney announced that Iger would become CEO in September 2005.

As CEO-in-waiting, Iger took steps to rekindle frayed relationships even before officially taking the helm. Roy E. Disney had sued Iger and the board, claiming that the CEO selection process was unfair, so Iger reached out and negotiated a settlement that welcomed him back to the company. The day before the board announced Iger’s new appointment, Iger also called Steve Jobs to personally tell him the news, as he wanted the opportunity to prove Disney would be a new company, one that was Pixar- friendly and open to negotiations. Although talks stalled over the summer, the two reached a breakthrough in fall 2005. Iger suggested adding TV shows to iPods so users could watch television, as well as listen to music, on the go. Jobs then revealed a video iPod, which was set to be released a few weeks later. Iger and Jobs hammered out a deal in five days, and at Apple’s announcement, Jobs revealed that the new video iPod would feature content from ABC. The agreement made hit shows, such as Desperate Housewives, available for download within 24 hours of their broadcast on network television—when most competitors were striving to protect shows from online distribution.19

Over the summer, Iger also reflected on what his new strategy should be and how to shift the culture at Disney. He felt that “[t]he Walt Disney Company can be and should be one of the most admired companies in the world. . . . [Yet] we wouldn’t be admired by customers and shareholders unless we were first admired by ourselves.”20 To identify a way forward, he asked a reconstituted strategy team to take a detailed look at the entertainment industry and formulate a new corporate strategy.

Disney’s corporate strategy became to “deliver the highest quality branded entertainment franchises on all relevant platforms, employing the most effective technology in service of our customers around the world.”21 Throughout his tenure, Iger consistently reiterated the strategy, honing in on areas where Disney added value and exiting noncore businesses, even if they were attractive.

The strategy focused on three strategic pillars: creativity, technology, and global expansion. Analysis showed that developments in technology were both creating new distribution avenues for people to consume media, and supporting the development of ever more content. In this environment, success would only come from having “great branded content [that] would never be commoditized.” To deliver this, Iger wanted to stimulate creativity and focus on creating content that consumers would

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actively seek out. Iger also emphasized the importance of leveraging technology and distributing content in a user-friendly way that appealed to consumers. Iger viewed technology as a friend, not a foe, that would increase demand for Disney content by making it available anywhere, at any time, on any device. The third pillar, global expansion, reflected a wish to develop underpenetrated markets, notably the BRIC countries, by expanding relationships with local customers.

At Disney’s first board meeting as CEO, Iger painted a stark picture of Disney’s animation performance over the past 10 years and proposed buying Pixar as one solution. Since the early 1990s, Disney had co-financed and distributed Pixar’s computer-animated films in a co-production agreement in which Disney received about 60% of a movie’s profits; it was Pixar’s hits, such as Toy Story and Finding Nemo, that had buoyed Disney’s recent profitability. That distribution agreement was set to end in 2005, largely due to personal rancor between Eisner and Jobs. As the board did not officially say no to the acquisition, Iger began personally courting Jobs, who was receptive to talks. By January 2006, the deal was announced, with Disney purchasing Pixar for $7.4 billion.22 Iger noted: “I want to return Disney to greatness in [animation], and this was the way to do it fastest.”

Two Pixar executives, John Lasseter and Ed Catmull, who became Chief Creative Officer and President, respectively, of both Pixar and Disney Animation Studios, were tasked with reinvigorating Disney Animation by injecting Pixar’s director-driven culture, its emphasis on exchanging ideas and feedback among directors, and extremely high standards. As former CFO Tom Staggs said, “[M]aking movies is not the same as an assembly line,” and the amount of sway the finance team had held over Disney Animation had hindered the creative process. Pixar, which had a “brutally honest, high-energy, collaborative [movie making] process,” remained separate from Disney.23 Post-acquisition, the two companies had “thoughtful interaction” between them to ensure the Pixar culture was preserved.

The value of Pixar was not immediately obvious; the price tag was hefty, but it was seen as “an antidote to creative issues in Disney Animation”24 where Pixar values were enthusiastically embraced. As one Disney executive said, “Frozen never would have happened without the Pixar acquisition. . . . [I]t had been languishing in Disney Animation under a title called Snow Queen for a long time, and John [Lasseter] and Ed Catmull kept at it, kept at it, and didn’t force it into production until it was ready.”25 As a result, Disney made a film that in 2013 became the fifth biggest in box office history, creating a new Princess character, Elsa, and the hit song, “Let It Go.”

One of Iger’s early actions ended the strategic planning group as run under Eisner that had grown to oversee many business decisions. Indeed, one of the first meetings Iger was asked to attend as newly appointed CEO was called by the strategic planning group to decide the price of theme park tickets at the launch of Hong Kong Disneyland. Iger canceled the meeting, noting, “If the [business unit head] can’t come up with the price point, he shouldn’t be in the job.”26 Iger asked the head of the group to resign and in June 2005 hired Kevin Mayer, lead partner in the media practice at consulting firm LEK, who had impressed Iger in earlier roles at Disney. Mayer redesigned the group to become a sounding board and a resource, instead of one that oversaw the business units. The group, cut from 45 to 15 people, focused on finding and exploiting growth opportunities and M&A, as it was rebuilt over time to a team of 27. Such actions shifted Disney from an authoritative, centralized culture to a collaborative, creative one, chipping away at the underlying dissatisfaction of Disney employees. Iger himself observed, “You can completely change a corporate culture in three months.”27

Franchises With Iger at the helm, attention shifted to acquiring, managing, and leveraging Disney’s key

franchises across its four segments and many individual businesses (Exhibits 4 and 5). By 2015, the

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company thought of itself as owning six brands—Disney, ABC, ESPN, Marvel, Lucasfilm, and Pixar— and many individual franchises, like Princesses, Winnie the Pooh, ESPN Sports Center, or Good Morning America. In turn, franchises were classified into evergreen, like Mickey Mouse, that sold steadily, and cyclical ones whose sales were more driven by new content. Cars, for example, was one of Disney’s top franchises, but it was only a priority for the entire company when a new Cars movie was released. By 2015, 11 franchises had revenues above $1 billion (Exhibit 6).

After Woody and Nemo joined the Disney stable in the Pixar acquisition, Captain America and Thor joined the ranks in 2009 when Disney acquired the comic book and action hero company Marvel Entertainment for $4 billion. Iger stated that the acquisition was “perfect from a strategic perspective,” noting that Disney could sell Marvel’s characters across media and consumer product platforms and in additional markets.28 Although it was not the primary motive, the Marvel acquisition was also attractive because it gave Disney exposure to content for teenage boys, a demographic Disney was eager to develop further. Disney had long had success with marketing blockbuster Princess merchandise that appealed to young girls, but franchises for boys were more challenging to find.29

In October 2012, Disney announced it would acquire Lucasfilm, the maker of Star Wars, for $4 billion. The deal continued Disney’s strategy of purchasing companies that had franchise-worthy characters that could drive revenues for Disney in many different areas. Star Wars, for example, was expected to generate $5 billion in retail revenue from consumer products during the first year, and Disney announced in 2016 that it would build a new land in its theme parks featuring the characters and locations.30 George Lucas was impressed with how Disney had handled past acquisitions, notably letting Pixar maintain its culture and significant control over filmmaking.31

All Disney’s acquisitions were carefully planned; the company had a list of enterprises to buy, and while the timing of the deals was opportunistic, the company was mindful of which brands would fit. Although most purchases were U.S.-based, Disney was open to cross-cultural franchises, either purchasing a foreign brand or developing new products, such as cylindrical plush toys known as Tsum Tsum, in other areas of the world and bringing them back to the U.S.32

Franchises could also be found anywhere within the Disney businesses, not just animated cartoons (Exhibit 7). The classic Disneyland ride “Pirates of the Caribbean” had been turned into a hit movie series. High School Musical, developed as an original movie for the Disney Channel, was turned into four movies, spinoff shows, musical shows that toured as well as being featured in theme parks, records, books, and video games, and also launched the careers of its stars, who then were featured in other Disney shows. Miley Cyrus, of Hannah Montana fame—a Disney Channel show—became a hugely successful pop artist.

The

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