Disney Speaker: Bob Igercdn.media.ir.thewaltdisneycompany.com/2008/events/080528_trans… · where there's a significant amount of competition, breaking through the clutter to let

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Sanford C. Bernstein Strategic Decisions Conference

MAY 28, 2008

Disney Speaker:

Bob Iger President and Chief Executive Officer,

The Walt Disney Company P R E S E N T A T I O N Michael Nathanson – Analyst, Sanford C. Bernstein

I'm Michael Nathanson. I'm the Media Analyst at Sanford Bernstein. And I am so pleased today to have our guest with us, Bob Iger, the President and CEO of The Walt Disney Company. Bob is joined today by Tom Staggs, Senior Executive Vice President and CFO of Disney; and Lowell Singer, Senior Vice President of Investor Relations. And on behalf of Sanford Bernstein, I really want to thank Bob and the Disney team for coming in today to participate in this conference for us. Bob, thank you.

Sanford C. Bernstein & Co. Strategic Decisions Conference

May 28, 2008

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Bob Iger –President and Chief Executive Officer, The Walt Disney Company

Good morning. Michael Nathanson – Analyst, Sanford C. Bernstein

Good morning to you. Over the past few years, as Disney has exceeded analyst estimates, improved return on capital, continued to innovate; you've often used the phase the “Disney Difference." Can you explain to our audience how that difference has affected your performance? Bob Iger –President and Chief Executive Officer, The Walt Disney Company

Well, we've been using the term to -- or as a means of -- describing why and how we think our company is different than most or all of our competitors in the media and entertainment space. And it starts -- and this has a direct impact on the results -- it starts with the fact that we have the only global brand in the media and entertainment space that has real value, from a consumer point of view, in terms of what I'll call platforms and distributors -- that's everything, by the way, from technology platforms like FIOS to platforms like mass retail platforms -- we have access; the brand has meaning there. And it also has meaning in terms of access to territories, meaning geographic territories. So brand value, particularly when it is fueled with great creativity, has a direct impact on our superior results. Secondly, we now have a company that owns a number of platforms that are Disney branded, that give us the ability when we have success in one business to leverage that success across company-owned businesses much more effectively than our competitors, and much more effectively than we could in the past. And there are numerous examples of that. One of the best and most recent is High School Musical, which began as a relatively inexpensive Disney Channel movie, whose success is now being leveraged in just about every Disney branded business in the company, from Consumer Products, video games and publishing, to music; to parks and resorts, where High School Musical shows can be seen; to our studio, which is releasing a feature film, High School Musical, et cetera, et cetera. But that ability to leverage success without having to license to third parties, but essentially to take it in ourselves, is quite significant.


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And then in addition to the brand value and the ability to leverage success, we also have a collection of platforms that provide marketing support. And in a day and age where there's a significant amount of competition, breaking through the clutter to let people know product exists is a real challenge, and can also get extremely expensive. And so not only do these platforms give us the ability to break through the clutter, but they provide efficiencies as well. But more than anything, I'd say that it's the brand value that we really are talking about the most when we're talking about this difference. Michael Nathanson – Analyst, Sanford C. Bernstein

Okay. If you look over the next three to five years, let's say, what are your targets -- areas that you think that you need to develop, let's say – the next two or three areas that really will matter in the next three or five years, that you're focusing right now on, on expanding into? Bob Iger –President and Chief Executive Officer, The Walt Disney Company

Well, this company starts with great creativity. And in terms of expansion, meaning growth, most of it will emanate from creativity. And we're fortunate now that we have more than one creative engine at the company which was, for years, the studio. This is the case, by the way, with many media and entertainment companies. The motion picture studio is their primary creative engine. And that was true for Disney for decades. Now we have creative engines in many parts of the company -- the Disney Channel a great example, the studio, of course; parks and resorts, video games, publishing, et cetera. And we believe that we can leverage the breadth of that creativity now in more ways, and basically grow the bottom line, to create growth. We're also really focused on growing internationally. And there are a number of initiatives underway there. But one that's getting, I think, quite interesting is -- we really believe that while we can effectively distribute Disney product globally -- meaning product made in the U.S. -- the notion that there's a one-world culture, we think, is not necessarily the case. And while our culture works well in many parts of the world, we


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believe that it's also wise for us to create locally generated content, and we're investing significantly -- Disney branded in that regard. And so, growing internationally, but also basically building creative excellence -- becoming a creativity company rather than just a distribution company in these markets-- is really important. And of course using technology -- as an example, we're launching Disney.com, a new version in France this week. We're putting the new version of Disney.com out in multiple markets around the country -- taking something like Club Penguin, or the new virtual worlds that we're creating -- online social networking for kids -- and moving that not only in the United States effectively but to markets around the world -- also really important. Michael Nathanson – Analyst, Sanford C. Bernstein

Okay. Let me turn to ESPN. In the ESPN cable model, it's straightforward. The leagues have accepted long-term commitments from you in return for giving you the ability to exploit those rights on television. But as new markets develop, like the Web and mobile, is there a risk that the league will either hold back those rights or make the entry price so high that it's uneconomical to get into the business? How do you look at those new opportunities? Bob Iger –President and Chief Executive Officer, The Walt Disney Company

Well, in most cases, ESPN, when it buys -- when it licenses sports rights -- from leagues, in most cases, licenses all rights -- NBA is a good example, as is NASCAR. In the NBA's case, they license rights to put the NBA on 17 different platforms, as an example. So ESPN has plenty of opportunity to exploit rights in new media. In two cases -- and they're significant -- ESPN's rights are limited. One is the NFL, and the other is Major League Baseball, where, in both cases, those leagues have opted to go their own way in that regard. We believe over time that ESPN's ability to access more digital rights will grow, in part because these leagues realize that being part of ESPN in an integrated basis is good for their business. The exposure that ESPN creates for these leagues -- keeping them


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relevant -- is really valuable. And there are examples of this, of leagues that have opted not to be on ESPN. And what's happened in leagues that have, particularly those that have opted to be omnipresent in terms of ESPN platforms -- there's real value. And I think that -- now it may cost ESPN a little bit more money going forward; I'm not suggesting they'll be given to ESPN for free -- but I think that we will be able to strike deals that expand our rights. And in doing so, there'll be mutual benefit. Where we believe it gets too costly, as we've done in the past, then we'll walk away from it, because we believe ESPN has enough rights to put their brand and their product on new platforms anyway. And while it would be great to have everything, the cost and the returns on that investment will have to be weighed. Michael Nathanson – Analyst, Sanford C. Bernstein

Right. One of the things [I'll] say to you -- I remember a couple years ago, there could be this thesis where ESPN could be outflanked by a FOX Sports or a Versus. But clearly, the past four or five years, you've only gotten stronger. So how have you changed your own kind of internal marketing or programming of ESPN to meet those challenges? Bob Iger –President and Chief Executive Officer, The Walt Disney Company

Well, first of all, while I think the last four or five years have been great for ESPN, and while I don't think anyone has truly threatened their position in sports, we do not take that for granted. That's true across the company. The creative success that we've been experiencing, or other forms of success -- we've been around when that hasn't been the case. And we try really hard -- I try really hard, in my position as CEO, to exhort all of our businesses that are doing well or have dominant positions, to act like they're the underdog, or act like insurgents rather than incumbents. I think there's real value there. And so in ESPN's case, we continue to behave as though there are competitors basically nipping at our feet, or whatever the expression is. Michael Nathanson – Analyst, Sanford C. Bernstein

Right.


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They have an unbelievable brand; they have unbelievable presence. They provide leagues, as I just mentioned, with positioning in the world, and relevance that's obviously very important. Their ability to essentially take advantage of not just one sport but all sports, and to take that collection of rights that they have, as well as their own production capability, and create this huge brand, has obviously given them a tremendous competitive advantage, a leg up. And to some extent they've distanced themselves from the field, to the point where I think it would be very difficult for someone to come in without spending billions of dollars and truly challenge them. But we're going to continue to buy more sports rights, where we feel they create value; expand rights on digital platforms, continue to monitor the strength of the brand, the quality of the programming, investment in technology. And you could argue that ESPN's ratings are strong enough, so why go high-definition? Why invest in the technology to put a digital plant in and do that? We believe that that's the best thing ESPN should be doing, is to continue to raise the bar and challenge themselves to be better and, in doing so, essentially maintain that competitive advantage. Michael Nathanson – Analyst, Sanford C. Bernstein

Let's talk a bit about the ESPN international opportunity. How do you see the strategy unfolding in going about developing internationally -- a buy-versus-build opportunity? Bob Iger –President and Chief Executive Officer, The Walt Disney Company

Yes. ESPN international opportunity exists. But it's -- and I've said this a number of times -- it's not easy. They've made some nice inroads with a partner, News Corp., in Asia, India and other parts of Asia, for instance. And their brand is nicely present in Latin America. Europe, I'd say, would be the -- call it a big opportunity, because their presence there is limited. But that's where it starts to really get tough, because you're competing -- there aren't multiple primary sports in these countries. For instance, in -- take the UK, for instance, there's their version of football, or soccer as we call it. And we've struggled to come up with what's number two -- I guess maybe cricket, and we have some rights there. But whereas in the United States, you could name certainly four, maybe five major sports, and if you have three or four of them, you can really get inroads.


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In a lot of these other markets outside the U.S., particularly in Europe, it’s one sport. And if you don't have it, it's tough to penetrate. And to compete for rights to those sports, you're facing really tough battles with platform owners -- Sky a good example -- who can buy rights as a loss leader to penetrate the market for their platform. The other thing that's happened is you can't buy long-term rights; they're short-term deals, in part because of regulation. So I think the premier league in the UK only has the ability to sell rights for three years. So you can go out and negotiate hundreds of millions -- billions of dollars of rights, and try to build a platform, but in three years, you’ve got to step up again; it's a blind bid. And if you lose it, you lose a lot more than just those rights. So it's tough. We are going to continue to chip away. We're looking for opportunities, we're buying rights where we can. Another thing that's happened which is helpful is a lot of these packages have sliced-and-diced their rights to maximize revenue. And we've been opportunistic there, and will continue to be. But I'd say that of all the things that are possible in terms of ESPN's future, while growth internationally is definitely a priority of theirs, I don't think you're going to see numbers over the next five years that are so compelling that it changes the growth profile of ESPN significantly. Michael Nathanson – Analyst, Sanford C. Bernstein

Okay. Let me switch to another great cable network, which is the Disney Channel, and it's been on fire. And the question we have is -- is Disney Channel's success driven by its business model, which is no advertising, high-subscription revenue? Or is there a creative cycle there that you're tapping into, or maybe a shift in strategy? So talk a little bit about what's happening with Disney Channel? Bob Iger –President and Chief Executive Officer, The Walt Disney Company

Well, first of all, interesting you mentioned no advertising. We don't take advertising in the traditional sense on the Disney Channel. And it's a fully penetrated network that gets decent sub-fees. But what we really do, aside from the fact that we have great


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programming -- which is a blessing these days -- we use it as a marketing vehicle or platform for the company. So in essence, the Walt Disney Company is the exclusive advertiser on the Disney Channel. And why that's interesting is if you watch television today, most television that has advertising, the clutter is extraordinary. I realize I'm probably speaking against myself and some of our other businesses. But there are a lot of ads. And it's -- they're all great; they're all effective. And they're cheap, and you can't reach that many people without buying network TV, for instance. But when you're the exclusive sponsor, not in a program but in a whole channel, that's fantastic. And when that channel is doing well, even better. It starts with people. Over the last decade, we've been lucky to have hired great people that are in charge of creativity for the Disney Channel. And they have been on a tear. And again, something we don't take for granted either -- we're not only seeding them with enough resources to continue to develop -- it's easy to say, Well, we got five hits and another one in the pipeline, and let's spend a lot less in development. We've actually decided to continue to fuel what we believe will be growth with programming, creativity support, and an environment that enables that, meaning they have a fair amount of leeway, and they're not nitpicked to death. And it's a -- I mean, it's a very healthy and nourishing creative environment. On top of that, success can be a real friend because we become a magnet for the creative community, particularly when the creative community -- to go back to the Disney difference that we talked about -- realizes that success on that platform can be leveraged in so many ways. So as a for-instance -- if you have a young talent -- there's a 15-year-old woman who's in a Disney Channel movie at the end of June called Camp Rock, named Demi Lovato, who's from Texas, and she happens to have a great singing voice, and she can also act and dance. And so, the people representing her realize that she's on the Disney Channel in a good show. She's going to have access to a lot more -- many more platforms, a really strong music business, global distribution, a brand, --it's a great place for talent to be. She's opening up for the Jonas Brothers concert tour this summer. She's in the movie Camp Rock, and there'll be a half-hour series starring her coming next year, as an example.


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And the Jonas Brothers are another great example. Look at the success that was leveraged by Disney that's starting with the channel and our music business. And the kids from High School Musical and Miley Cyrus -- another great example. So if you've got a choice to make in terms of what direction you're going to bring your talent, you can go to Brand X and pray that you're going to end up not only succeeding in your show, but that it's going to be leveraged somewhere else in their company; or you can come to us and realize you can have an environment where it's sort of one-stop shopping. Everyone sits around a table; there's real strategy to get behind -- how you're going to leverage the talent and the success. And that even speaks for how we're managing franchises these days -- how to best maximize success and improve returns. Michael Nathanson – Analyst, Sanford C. Bernstein

Okay. Obviously, ESPN -- brand driver; Disney -- brand and a huge driver. Is there any interest expanding into other cable networks, other genres? I know you have ABC Family. But to me, it's not as simple as ESPN or Disney -- Bob Iger –President and Chief Executive Officer, The Walt Disney Company

No, it's not. ABC Family's doing extremely well, but no, definitely not as simple. We look, obviously with the strength of our balance sheet and our track record in managing cable networks. You'd expect that we look pretty carefully at everything that either is available or that might become available, or that we might make available. And we're fairly rigorous in our analysis. One, we look really hard at brand value, because I think in a cluttered environment, particularly in cable television, that matters. What's the program strategy, when you hear the name, what does it tell you, immediately? SciFi Channel -- I'll mention someone from a competitor -- that's a really compelling brand, in my opinion; whereas a general entertainment network, I think, is much less compelling than a well-branded channel, so we look at that.


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We look very hard at the ability to grow. You've got a very penetrated market right now, not just in terms of number of channels but number of subs. So growing subs -- difficult but there's still modest growth. And it's helping us -- ESPN is an example -- but not dramatic. And then growing sub fees, we all know, is difficult as well, particularly when you have so many channels. And then there's always the elusive prospect of taking something internationally. Easily said for the Disney Channel -- again, that brand value, and the access it creates. But a general entertainment channel -- little more difficult. So I think you'd expect that we'll look at everything; we'll be extremely selective, extremely. If we were to step up, we would do so with great caution. Michael Nathanson – Analyst, Sanford C. Bernstein

Okay. Bob Iger –President and Chief Executive Officer, The Walt Disney Company

By the way, there are great channels out there, and decent brands, and one that's for sale right now, that can be leveraged across other company businesses. But we ask ourselves the tough question -- okay, that's a great business, it's kind of pricey; how are we going to grow it? What can we do to grow it? Do we have the talent, do we have the wherewithal? And if the answer is we're not 100% sure, we shouldn't be stepping up. Michael Nathanson – Analyst, Sanford C. Bernstein

Great. Let me segue to broadcasting. You've been in broadcasting a long time. Bob Iger –President and Chief Executive Officer, The Walt Disney Company

Thirty-five years. Michael Nathanson – Analyst, Sanford C. Bernstein

Exactly. And are you worried about the current trend of steepening audience erosion?


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Sure. We worry all the time about a single-revenue stream business in a competitive world that costs a fair amount to program and manage. And with that in mind, we've been conservative in terms of our acquisition philosophy in that business. We haven't bought a TV station since 1993 or 1994, as a for instance. We love our TV stations, and they're incredible in terms of their success, both bottom-line and from a ratings and brand perspective. But we've been cautious. On the television network side, more and more, we've been looking at it as a studio versus a network, meaning when we look at that business today, we look at it as an integrated business with a studio that creates intellectual property that is driving real value today and should continue to, if we continue to succeed creatively -- and that that value is not just domestic in nature; it's growing nicely internationally and on new platforms. If we were not in the studio business, and we did not have success there, I think in this day and age, it would be pretty challenging to justify being in the network business unto itself, and with all the incumbent risk associated with that, whichincludes the cost structure and the competition. Michael Nathanson – Analyst, Sanford C. Bernstein

And what percentage -- [I don't know if you know] -- of your shows now on ABC are produced by ABC? It's a pretty high percentage, then? Bob Iger –President and Chief Executive Officer, The Walt Disney Company

Yes. We own -- I mean, it's over 50% in prime time -- we own the most successful ones -- Brothers and Sisters and Grey's Anatomy, and Desperate Housewives. I guess we have domestic, not global, rights on Dancing with the Stars. And that's been great, and it's driven a lot of returns -- phenomenal returns. And that's something that we're mindful of as well. Because, to your question earlier about Disney Channel, that difference that we describe, and that competitive advantage, is less so in the network business. And you have to really work hard at putting the right -- not only putting the right people in place creatively, but attracting the best talent.


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Michael Nathanson – Analyst, Sanford C. Bernstein

You mentioned you have long avoided buying stations. That's true from your Cap City days and post-Cap City days. Is there any point at which the decline in station values prompt you to reconsider the station footprint? Bob Iger –President and Chief Executive Officer, The Walt Disney Company

Probably not. I think our hand is solid. And those prices would have to be so great. And I think that, even in today's world, it's probably unlikely. But our position in the market is fantastic. And we've spent a lot of time, as you know, making decisions about how we're going to allocate company capital, and obviously we're looking to improve return on invested capital and grow the business. And I think we'd be hard-pressed to buy in businesses that we didn't think had the ability to deliver compelling growth. In fact, we wouldn't buy a business that -- and it would have to be such an unbelievable strategic fit, which obviously, at some point, would create that growth. I don't see it in that business. Michael Nathanson – Analyst, Sanford C. Bernstein

Okay. Let me ask you an industry theoretical question. I know post-strike, the ratings for scripted shows have been down. And the question is, will it recover in the new fall season? If it doesn't recover, let's say -- scripted shows -- what does the industry do, in terms of a management strategy, to maybe realign the business model? So if you're running -- if you could run all four networks at the same time, what would happen? Bob Iger –President and Chief Executive Officer, The Walt Disney Company

That would be a headache. Michael Nathanson – Analyst, Sanford C. Bernstein

Yes. That would also be illegal, but what the hell.


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I think we're looking at a number of things structurally in that business. One is addressing costs. Another is trying to look for new ways to generate revenue, moving programming onto new platforms, which we have done so successfully. But in reality, the revenue that's been generated, even though consumption is fairly compelling -- the revenue is still small compared with the revenue generated by advertising on the main network. It's a tough model. It's really tough. Turning to cash for retransmission consent -- that's not going to save that business. It's not -- it may be a near-term -- for some, anyway -- may be a near-term solution, because you could generate some revenue. But long term, you're still dealing with a general entertainment channel. And think about -- we talked earlier, a few times, about brands. Pure program play, meaning everything that sort of fits neatly into one description, is much -- I think, much more attractive today – and is hard to do with a network that has news and soap operas and game shows, and you name it. I just think it's difficult. It's a challenged business. And again, we like the way -- we like how we're positioned in it. We've had three or four years of real success, combined -- by the way, again -- the network and the studio. We feel good about the schedule that's been put together, albeit cobbled together a bit because of the writer's strike. There are a number of things on the table in terms of restructuring that Anne Sweeney, who runs that business, is working hard on. And we exhort and encourage her to do so. But it's still challenged. Michael Nathanson – Analyst, Sanford C. Bernstein

You've been very aggressive early on, moving into alternate platforms -- the iTunes, ABC Player. Where is VOD in the mix? I know my cable analyst, Craig Moffitt, would want to ask that question. Why hasn't VOD been embraced more by the industry, or even your company, as an alternative to Internet distribution? Bob Iger –President and Chief Executive Officer, The Walt Disney Company

Well, I think there's a future in VOD -- both VOD delivered by multi-channel providers -- cable operators, for instance -- but also Internet VOD. And I think that the industry in general has been conservative because the proposition out there today is not as compelling. And they're loath to put some of their traditional businesses at risk. I think


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there's a little too much conservatism at play here, by the way. But they're loath to do so until the opportunity is really obvious. And I think everybody will get there; I can't tell you when. I actually believe that consumers, particularly young consumers, are going to be much less tolerant of basically accessing or getting programming in a linear form on a traditional network, and much more demanding of the product that they get in video on demand form, meaning individually -- much more. And if you're not in that space, you get marginalized; you have to be there. And the Internet's going to force some of that. And hopefully, better technology through multichannel providers will also enable us to get there. There's still navigational issues. We also have to make sure the product that we give them is compelling. I think it has to be day-and-date with the DVD business, the home video business, as a for instance. And we've done that in some markets as a test. I think you have to have a rich library. You have to have not only the newest stuff, but you have to have a lot of older stuff. Again, I think we'll get there. But there's a little more conservatism at play right now. Michael Nathanson – Analyst, Sanford C. Bernstein

And one of the points people worry about is the library value of the current show, either in VOD form or download form. Are you seeing anything in terms of long-term value of libraries being affected by the easy availability of content now? Does Housewives or Lost lose value because it's so easily accessible right now? Bob Iger –President and Chief Executive Officer, The Walt Disney Company

Does it lose value -- Michael Nathanson – Analyst, Sanford C. Bernstein

Lose value longer term, in terms of your next window?


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Oh. No, I don't think so. I don't think so. I think a lot of the consumption that we've seen on new platforms, we believe, is either incremental, or it's incremental and it stimulates more consumption on the traditional platforms. So I think now we're not seeing any negative impact. If anything, I think so far it's been positive. It also provides a program with a little more relevance than it would if it didn't exist on that platform. Michael Nathanson – Analyst, Sanford C. Bernstein

Okay. Let me turn to parks for a bit. Some investors believe that U.S. consumer confidence is a good leading indicator of future park attendance. With the recent fall in confidence, why are the parks not seeing any demand drop-off, and what are you doing differently today than maybe in previous -- Bob Iger –President and Chief Executive Officer, The Walt Disney Company

Yes, there are new consumer confidence figures which came out yesterday that are awful. But it's been trending down now for months. And we're not updating the street with any information, so what I can say is as of our last earnings announcement. But as of that time, we had not seen impact negatively from falling consumer confidence. And I think there are a lot of reasons why. One, I think our brand has had a positive impact on parks. The creative success that we've had these last few years, and the feeling that the Disney brand is back, so to speak, I think has really helped. And in fairness, a lot of what is most popular and most relevant today can now be accessed in our parks. The old stuff is great. But Pirates, for instance -- this is an attraction that was built in the mid-'60s -- becomes much more relevant when you've got three successful films out there, as a for instance. High School Musical, which I mentioned earlier, is another example of something that's very popular today that can now be accessed there. So there's this feeling that if you go to the parks, it's not about what Walt designed or what was created in the '60s, or was built even in the '80s; it's about what's really the most popular today. And that, I think, is helping.


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We also -- as we went into some detail during our earnings call -- we've also made some wise capital investments, not just in my tenure but over the last five years in particular. And that enabled us to be more accessible, meaning we built more moderately priced and value-priced hotels -- big impact there, we believe. We've also put into place some really smart revenue-management or yield-management systems to manage hotel pricing, which I think has helped. We've also innovated, in terms of our pricing strategy, making it more affordable for people to come. We've also taken a lot of share out of the market hotel-wise by moving more people from off-property hotels to on. And then this selective, and I think very successful, investment in attractions, including a number of new Pixar attractions -- one that's going in in Orlando and Anaheim in the next month, which is Toy Story Mania! -- just great technology, great storytelling, great franchises. And it's all working. Clearly we've been helped by the weakness of the dollar. Our international business through the quarter that we announced has been up steadily and nicely, although I believe there's still room, by the way, for it to grow; particularly if you look at it at its peak, there's still room. And I don't think people are traveling outside the United States as much, because it's so expensive. And the family vacation, while clearly -- I think the families who are struggling economically have to consider what they're spending on vacations -- tends to be one of the last things to go. Michael Nathanson – Analyst, Sanford C. Bernstein

Right. Okay, let's talk a little -- let's continue on the expansion theme in the parks. You’re going to be increasing your footprint -- renovating California Adventure, investing in Hawaii, adding some ships. Will these expansion plans dampen your recent improvement in ROIC? And what type of hurdle rates do you have to meet in order to put more money at work in the parks?


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Well, we don't disclose hurdle rates. But when we make these decisions, we have hurdle rates in mind. And we've spent -- Tom Staggs basically has a whip, ROIC whip, and he's used it a lot on me and on our businesses. We've spent a lot of time these last number of years trying to improve returns on invested capital, and we've done so. And these decisions that we've made -- particularly, the biggest one with the cruise ships -- have been made because we believe we can deliver significant and attractive returns on that invested capital. And that criteria's in every decision that we make, in terms of allocating capital. Near term, there'll be some negative impact on ROIC. But these aren't near-term decisions. You build a ship or a park, and they're there for a long time. And so when we analyze ROIC, it's not about the next couple of years; it's about, obviously, the long term. And we feel good about that. The ships have been significant in terms of delivering return on invested capital already. We believe that there's enough room in the business -- particularly where we are in the business, which is very differentiated -- to continue to deliver those strong returns. The other decision on California Adventure was a business that was not earning great returns on invested capital. And it was a difficult decision, because the last thing we wanted to do was to throw good money after bad. And basically in an attempt to fix it, which we felt we had to do, end up with more poor returns. Michael Nathanson – Analyst, Sanford C. Bernstein

Right. Bob Iger –President and Chief Executive Officer, The Walt Disney Company

And so we worked really hard on it, which meant driving the investment down to a level that we really believed was right, and focusing on the creativity, and then really looking at the resort as a whole. Disneyland, through all its popularity -- and as Yogi Berra said -- it's so crowded there, no one wants to go. At peak, that experience can be a little rough, because it does get crowded. And our ability to grow Disneyland was limited, because we were running out of space. And so this decision was made to grow the whole business in Anaheim, and also to fix California Adventure.


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Okay. Let's shift to Consumer Products, and then I will move these questions being handed to me, and to you very soon. Some believe that Consumer Products is underrated by the street. Why do you feel this division has such strong growth potential in the future? And what's the undiscovered opportunity within Consumer Products? Bob Iger –President and Chief Executive Officer, The Walt Disney Company

Well, underrated -- I think Consumer Products should be appreciated. Over the last six or seven years, they have completely restructured their licensing business globally. And the results are extraordinary and continue to be, meaning they have grown their licensing business significantly and fixed it in the process, meaning licensees that are higher-quality in nature, the product that's being put on the shelves, also higher-quality in nature -- a better proposition for both parties. And in managing our franchises much better, we have a much better handle on our global licensing issues -- both the prospects for growth and the challenges that we have in certain markets. And I think that we're going to be able to continue to grow our licensing business nicely over the next certainly five years, helped of course by creativity. When you have Cars, as a for instance, which is one of the most successful franchises, movie franchises we've ever seen -- maybe next to Star Wars -- it's probably the second-most successful ever -- that helps a lot. And Consumer Products is much better positioned to take advantage of it -- strong relationships with mass retail globally. They're also starting to create new franchises on their own, which we've enabled, not just through video games but in certain other areas, and that's helped as well. Michael Nathanson – Analyst, Sanford C. Bernstein

Okay. How about the recent decision to get back into the store business? How is that going to be run differently this time around?


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The recent decision to get back into the store business -- I mean, first of all, not a huge decision, although that doesn’t mean that we took it -- we made it casually. The footprint that we brought back is substantially smaller than what we had in its heyday, so to speak. At one point, we had over 500 stores in the U.S. This is just over 200, and with better locations; we'll work to improve those locations as well. The immediate step that's taken is to improve the quality of the merchandise, and make sure it represents Disney's strong franchises. And so you go in, you should be able to find the most popular -- including Hannah Montana and the Jonas Brothers and High School Musical, et cetera and so on. And it shouldn't just be an emporium, where if you want to buy a 1940 replica of a Pinocchio coffee mug -- I'm not sure that's a good use of that space. So we've got some merchandising work that we have to do, as well as improving the locations. The decision that we made was made in part because those stores are a touch point for many customers to the brand. And we thought that not only would it not be good for the brand to see them go into receivership or to ultimately get shut down, but that we might have an opportunity without investing much capital to basically improve the experience in the touch point. And we'll see. We are confident in the management of Consumer Products and their ability to do this. They have a good concept in mind that will not require much capital. I don't want to disclose it here, but I feel good about it. And again, not much at risk, although clearly some lease obligations that we inherit back. But we thought it was the right decision. Michael Nathanson – Analyst, Sanford C. Bernstein

Okay. Well, let me turn to some of these questions.


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Q & A Michael Nathanson – Analyst, Sanford C. Bernstein

With cable networks now over 50% of profitability, of your EBIT, do you [have] concern about not owning 100% of ESPN? And then a follow-up would be -- you have some JVs, like Lifetime. Is there any interest in unwinding some of your cable network joint ventures? Bob Iger –President and Chief Executive Officer, The Walt Disney Company

We don't have any concerns about not owning 20% of ESPN because we've had a great relationship with Hearst over these many, many years. And we communicate well with them, we see eye-to-eye with them in terms of how ESPN should be managed, although as an 80% owner, those decisions are obviously made by us. But we don't treat them like a 20% partner in that regard; we treat them as though they're our equal partner. Would we love to own 100% of ESPN? Of course. 100% of a great thing is better than 80%, but they wouldn't sell it cheaply. And I don't think they -- in fact, I don't think they'd sell it at all. Michael Nathanson – Analyst, Sanford C. Bernstein

Okay. I would not sell it. Bob Iger –President and Chief Executive Officer, The Walt Disney Company

On the other businesses, Lifetime and A&E -- again, we've had decent relationships. I think we leave some money on the table by not managing them as a whole, meaning one company. But unwinding decades-old partnerships gets kind of complicated. It takes two -- or in A&E's case, there are three partners to tango. There are some tax-liability issues, not that they can't be dealt with. We've talked about it over time -- seeing whether there's a way to restructure in some fashion. And we'll continue to explore those discussions.


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Okay. Let's talk about park pricing on the admission side. Is there any untapped pricing power in parks admissions? And what's been the recent trend on pricing? Bob Iger –President and Chief Executive Officer, The Walt Disney Company

We look at our pricing very holistically. It's not a single-day ticket; it's usually a multi-day ticket. And because of our investment in hotels and our desire to move more people off-property on, the pricing that we look at is more packaged pricing. It's everything from average daily rate to ticket pricing to per-capita spending. And we've increased our pricing, I think, virtually annually, at least since I've been CEO. And we probably will continue to increase, but at a pace that we think is reasonable, that considers all the other pricing issues that we contend with. Also, when people talk about pricing, they're usually talking about a single-day ticket -- relatively small in terms of percentage of tickets that are purchased. I mean, it's not insignificant, but it's not a majority of our tickets. So do I think there's room? Yes, there's probably room, but you're not talking about a huge opportunity -- particularly in this market -- to simply increase pricing. There are other ways that we manage to grow revenue, beyond just the ticket price. And we'll continue to look at those. Michael Nathanson – Analyst, Sanford C. Bernstein

Okay. One of the questions is -- your ABC strategy -- your ESPN strategy--is a go-alone strategy, where you use the brand to build the online video experience. There are some other models where there's a shared cooperative, let's say a Hulu model. How do you look at a more, let's say, shared aggregate online video model versus the strategies that you guys have employed? Bob Iger –President and Chief Executive Officer, The Walt Disney Company

Well, on the Disney branded product, we're looking for an experience online that's basically -- when I say "walled," I mean within the walls of a Disney branded experience. And we think we can take advantage of our brand strength and build


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Disney.com into a real entertainment destination, which is what we're working on right now, and not let the product out all over the place. ESPN's doing basically the same thing -- not that they won't syndicate in some form at some point, but mostly they're building the online experience for their customers in one place. On the ABC side -- that's a debate that's ongoing, whether it's Hulu or somewhere else -- I think ABC, if they really want to drive traffic or consumption -- they'll be hard -pressed to keep their programming just on their own site. They've done some deals, one with AOL -- I think there was another, but I just don't recall what it was. I think they'll continue to do that. They looked at Hulu. Maybe they're still looking at it; I'm not sure. And I don't know whether there's a Hulu in our future or not. But I think it's likely that ABC will syndicate its programming in more platforms over time. I don't think they're losing anything today by not doing it, because you're still talking about revenue that's relatively modest. But I think at some point, if they're going to reach as many people as they feel they need to and really grow revenue, they're going to have to be more expansive in terms of where they put their product. Michael Nathanson – Analyst, Sanford C. Bernstein

Okay. So I waited about 45 minutes to ask you a game question. I have one written down for you from someone. The growth strategy in video games -- is it organic, or acquisition-driven growth? How do you look at games as an opportunity? And you talked a little bit about what Disney's been doing. I know it's an area of investment for you. Bob Iger –President and Chief Executive Officer, The Walt Disney Company

Well, I think it's both -- it's organic, and it's acquisition. But the acquisition is different than maybe that person meant, meaning our acquisition has been buying video game developers and growing our creative capacity, so that we can create a thriving, self-published video game business and not license to third parties. We realize there's investment required, and we're doing so somewhere in the range of $200 million this year, in what I'll call self-produced, published video games. But in success, you take a much bigger piece of the action. And that's our intention.


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Most of the games that we're making and developing areDisney branded. Most of those derive from other Disney IP. We'll continue to do that. We'll look at opportunities in the space to grow through acquisition, but applying the same rigorous criteria that we use for any acquisition -- growth profile, strategic fit, return on invested capital, et cetera. Michael Nathanson – Analyst, Sanford C. Bernstein

Okay. There's a film question about the direct-to-video strategy for certain titles. The question is, why not take all your family-focused movies to the theater first, given that parents are willing to really see -- take their kids to anything? So how did the direct-to-video model develop versus your own in-theater release? Bob Iger –President and Chief Executive Officer, The Walt Disney Company

Well, the direct-to-video model was developed many years ago by Michael and Disney back then, and it was quite successful. They made the decision that it was a new market, and that they couldn't necessarily tap into the movie market, being the theatrical movie market, for more revenue. And so they sliced-and-diced, I guess, in a way and went after a different market. My philosophy is that on the motion picture side, we should be making fewer rather than more films, and concentrating on higher quality, scheduling them in the right time slots and marketing them right. And I think that expanding in that space would be a mistake for us. And that's exactly what our studio is doing. We do believe there are opportunities to make direct-to-video films at a lower cost, and not derivative of the primary films as we used to do, but basically create franchises from whole cloth, which is what's going on right now with this Tinkerbell Fairies franchise. And there are a few others that we're starting to talk about in terms of putting into development, but haven't decided that yet. The theatrical business today, like so many of our businesses, is very competitive and challenged, and it's not forgiving. It's not enough just to put a film out there and market it well; it has to be a good film. And sometimes it's not enough for it to be a good film; it has to be marketed well. And those opportunities are not limitless in nature.


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And I like the discipline of only making, say, 10 films, maybe 12 films, a year And the yes that the movie executives at Disney have to make is a much more serious yes, when they say yes to something. And if they had too many opportunities to say yes, my guess is the quality of the films that they make would come down. Or the returns on those films would come down. And we're trying to go the other direction. Michael Nathanson – Analyst, Sanford C. Bernstein

Does it surprise you, though -- because I've been writing about this a lot lately -- that that's the path you've chosen, and other studios have not figured this out? Is it a surprise that the number of films that are released per studio has not really changed at other places -- given what you see the economic -- Bob Iger –President and Chief Executive Officer, The Walt Disney Company

I'm focused on what we're doing; I'm going to be really polite. Michael Nathanson – Analyst, Sanford C. Bernstein

Okay. Bob Iger –President and Chief Executive Officer, The Walt Disney Company

I think there are too many movies being released into the marketplace, and it shouldn't surprise anybody in the business why there is so much failure, and why the returns on investment in that business are so modest. There's just too much out there. And they all can't possibly be good enough, or marketed well enough, to succeed or to drive good returns. And I don't care what the others do, but I care what we do. And it's also the reason why we're so focused on the Disney brand, because it makes a difference in that space. Now, you still have to have a good movie. It has to be marketed well and timed well. We have an interesting situation right now with Caspian, which is the second installment of Narnia, -- which is Disney branded -- and I believe creatively is actually better than its predecessor. And it's not doing as well as its predecessor did, or actually as well as we had hoped.


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I think it was well-marketed, but to give you an idea -- you all know how competitive it is. It follows Iron Man, which is not only a fine film but really well-marketed and very successful. And it precedes Indiana Jones, which I've not seen yet, but I'm told is good enough, and very well-marketed. And just because it's Disney, and just because it's a good film, doesn't guarantee that it's successful. That is very telling, in my opinion, and sobering. And it really -- it's a good lesson. And it just informs us that much more of what we need to do as a company in that space, is to really focus, and not rest on the laurels of a marketing platform, or even the quality of a film. It has to be put into the marketplace right. And it's a very, very delicate, very fragile marketplace. Michael Nathanson – Analyst, Sanford C. Bernstein

It's funny you say that, because I have two children, your childrens’ age. And I can tell you, in the first quarter, there was nothing in the theaters for kids. There was just this huge vacuum, and all of a sudden, December comes, and there's a huge roadblock, right? It's -- Bob Iger –President and Chief Executive Officer, The Walt Disney Company

Yes. Michael Nathanson – Analyst, Sanford C. Bernstein

The timing is really -- Bob Iger –President and Chief Executive Officer, The Walt Disney Company

But it's interesting, Michael -- it's very tempting, when you see those vacuums, to say, Well, why didn't we have films there? And it could be -- it'd be pretty easy. We certainly have the capital to just go out and make more films and fill those slots. But the returns on investment in the film business are really, really not impressive if you're an investor. The returns on investment in the Disney film business have been impressive. But I think one of the reasons they've been impressive is that we just have not made that many of them. Just look at the size of the Disney library over time.


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So we're going to increase the number of Disney films that we were making slightly, but we're reducing significantly the number of films that we're making. And that gives us the ability to concentrate on quality of production, quality of marketing, and really try to place them right. We're not going to bat a thousand in the business. But we're going to try to come as close as we possibly can. Michael Nathanson – Analyst, Sanford C. Bernstein

Okay. And with that, I want to thank Bob Iger for coming today. I really, really appreciate it. Bob Iger –President and Chief Executive Officer, The Walt Disney Company

Thank you. Michael Nathanson – Analyst, Sanford C. Bernstein

Thanks for your attendance.

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Management believes certain statements in this webcast may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are made on the basis of management’s views and assumptions regarding future events and business performance as of the time the statements are made. Management does not undertake any obligation to update these statements. Actual results may differ materially from those expressed or implied. Such differences may result from actions taken by the Company, including restructuring or strategic initiatives (including capital investments or asset acquisitions or dispositions), as well as from developments beyond the Company’s control, including:

- adverse weather conditions or natural disasters; - health concerns; - international, political, or military developments; - technological developments; and - changes in domestic and global economic conditions, competitive conditions and consumer preferences.

Such developments may affect travel and leisure businesses generally and may, among other things, affect: - the performance of the Company’s theatrical and home entertainment releases; - the advertising market for broadcast and cable television programming;

- expenses of providing medical and pension benefits; - demand for our products; and - performance of some or all company businesses either directly or through their impact on those who distribute our products.

Additional factors are set forth in the Company’s Annual Report on Form 10-K for the year ended September 29, 2007 and in subsequent reports on Form 10-Q under Item 1A, “Risk Factors”. Reconciliations of non-GAAP measures to closest equivalent GAAP measures can be found at www.disney.com/investors.

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Disney Speaker: Bob Igercdn.media.ir.thewaltdisneycompany.com/2008/events/080528_trans… · where there's a significant amount of competition, breaking through the clutter to let