Disney DVD article from The Wall Street Journal (transcript)

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Disney DVD article from
The Wall Street Journal (transcript)

The following is a transcript of the Wall Street Journal article which first broke the Disney classic animated DVD story. The article appeared in the August 17th issue:

Disney Plans Strategic Shifts in Home Videos

By Bruce Orwall

Moving to shore up its faltering home video unit, Walt Disney Co. plans to begin releasing its animated films on digital video disk, after years of holding back its most valuable movie assets from the two-year old format.

Disney's embrace of DVD could help break open sales of DVD players, the way its videos boosted VCR sales in the 1980's as parents clamored for cartoon feature-films for their children. Individuals in the industry estimate about 2.4 million DVD players are now in homes, with the number expected to rise to about four million by the end of the year.

Disney also is weighing a strategic shift in its video operations that would make many of its animated movies available on video all the time. That would be a major departure from the company's longtime strategy of rotating its animated films in stores, keeping each title off the market for a period of seven to 10 years.

Both the DVD launch and the new video-release strategy come as Disney's earnings have been declining, prompting the company to put many of its operations under a microscope. Reviving the video unit as a cash cow would go a long way toward solving the company's current woes. A big unanswered question is whether the unit's woes can be fixed by marketing tactics or reflect a broader decline in the appeal of Disney movies.

"Right now there aren't a lot of earnings coming out of the film library," says Thomas O. Staggs, Disney's chief financial officer. "But that doesn't mean the library went away. The value of the library's still there, it's just not apparent in the earnings stream."

Under the new plan, Disney would continue to retire classics such as The Lion King for about a decade, in hopes that demand will build for future re-releases. But second-tier titles such as The Fox and the Hound and The Aristocats would be on shelves constantly, giving the company a more reliable stream of video sales.

Disney has long resisted putting its animated movies on DVD, because the digital format is relatively new and many of the early users have been adults. But now, "we're a hair breadth away from DVD exploding," says Michael Eisner, Disney's chairman and chief executive.

The changes could help Disney generate more profit from its most valuable movie assets. For more than a decade, Disney's home-video unit was a stellar performer. But some more recent releases such as Mulan, don't sell as many units as classics such as Beauty and the Beast, and sales of re-released titles have slowed.

So far, Disney's DVD releases have included only live-action titles and A Bug's Life, a computer-animated film it co-produced with the computer animation studio Pixar.

This fall, Disney will begin selling DVD versions of nine animated films, most of which are currently available on video. They include Mulan, Pinocchio, The Little Mermaid, Peter Pan, Lady and the Tramp, and The Jungle Book. In the future, Disney will release animated films on DVD at the same time it releases them on video.

Some of the DVD titles will be available for only a short time before they are retired to the Disney vault, while others will remain on shelves. Mr. Eisner said the DVD releases would be accompanied by a promotional "blitzkrieg" not unlike Disney's huge effort to launch its Go Network Internet portal earlier this year.

By moving aggressively to DVD now, Disney also is betting the viewing habits of today's kids aren't the same as their older siblings' or parents' and don't necessarily involve a television. In addition to DVD viewers who use players hooked into their TV sets, many young computer users don't seem to mind watching movies on a computer monitor, using a DVD-ROM drive.

DVD-ROM sales are rising fast, with about 20 million units sold so far and tens of millions more expected in the next few years. "People underestimate the installed base of DVD," Mr. Stags says.

"It's certainly our hope that we will help this marketplace expand," said Richard Cook, chairman of Walt Disney Motion Pictures Group, who recently was given oversight of Disney's video operations.

Disney's longtime video-release strategy was based on the idea that keeping each film out of circulation for a few years would create demand for a re-release every few years. Now, Mr. Eisner says: "My sense is that we have to keep 15, 16, 17 movies on a 10-year cycle, with the other movies maybe available more on demand." A final decision is expected soon.

Prompting the move, in part, is the fact that some re-releases have been disappointments. For example, the original 1992 video release of the animated version of 101 Dalmations sold 11.8 million units. A re-release earlier this year has sold another 5.7 million units, below Disney's projections. While the original reached 22% of households with VCRs, the current release has reached just 4% of VCR households.

Earlier this year, Disney decided one problem was that the films weren't "resting" long enough. The company said it would extend each film's stay in the vault from seven years to 10 years. The hope was that three extra years out of public view would result in greater sales potential when the re-release finally arrived.

The contemplated strategy change has created a big revenue gap in Disney's home video unit. In preparation for the shift, the company canceled a re-release of Beauty and the Beast that had been planned for this summer.

Now, some analysts believe Disney might not re-release The Lion King, Beauty and the Beast or another one of its classics until 2001. Meanwhile, sales of the second-tier videos will "continue feeding the growth of the company," says Mr. Cook.

"The focus is on what actions will maximize the value of these assets," Mr. Staggs says. "Not 'How do you fix this quarter's earnings, how do you fix next year's earnings.' "

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