FOOL ON THE HILL
You Can't Cheat Quality

Disney had the most-watched television network, the most-visited theme parks, and a summer theatrical slate that had "can't miss" written all over it... but the Mouse missed. With ABC tiring and attendance at Disney parks running sluggish, Disney's animated "Atlantis" and epic "Pearl Harbor" are failing to light up the box office. Investors may have felt they were buying into a diversified entertainment conglomerate, but sometimes a domino effect takes down all of the egg-carrying baskets in its path.

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By Rick Aristotle Munarriz (TMF Edible)
June 26, 2001

Storyboard me this:

You know that feeling when you trip over a gap in the sidewalk? You stop. You look back and shake your head. What an evil, bad, bad gap. It's not your fault. No way. Your visibility is stellar. Sure, everyone else seems to be navigating the sidewalk flawlessly. Still, how could you be blamed for the stumble? You're not the problem. There's no need for an internal solution.

That kind of brute arrogance swirling in denial? That's Disney (NYSE: DIS) to an M-I-C right now. The content titan that had it all -- network ratings, theme park throngs, and film buzz -- is falling apart at its plush toy seams and it doesn't even know it.

Disney probably isn't even aware that the weapon of its own recent self-destruction is the same one Wall Street was cheering on just a few quarters earlier. Its cost-chomping budget costs, which were supposed to be the company's horse-drawn carriage ride to billions in savings and margin-widening paradise, has turned into a pumpkin faster than analysts can say "bibbidi-bobbidi-boo." 

Apparently, you can't cheat quality. If you compromise park construction costs to the point of making the parks half-day destinations, consumers notice. If you fail to spend the greenbacks to provide a fortress of solid programming around a game show phenom, sponsors notice. No, you can't skimp on the good stuff and get away with it.

You also can't let hired talent click in and out of the turnstiles and expect brand ubiquity to whisk you off to Neverland. It just doesn't work that way, even if pride is the last to know.

Watching Pearl Harbor and Atlantis sink in the box office can't be easy for Disney when it was supposed to be a seaworthy one-two summer punch. The irony that Shrek is the one knocking both out of summer blockbuster contention is just more salty pixie dust in the wounds. You see, the computer-rendered ogre hit comes from the DreamWorks SKG camp. The "K" in the SKG stands for Katzenberg: Jeffrey Katzenberg. He led the revitalization of Disney's animation studio under Michael Eisner and figured he'd be a shoo-in for the president's job when Frank Wells died. But when Eisner pal Michael Ovitz was anointed instead, Katzenberg started what would become a long line of defections of longtime animators and "imagineers."

Having topped the $200 million mark, Shrek has done what Disney's animation studio has failed to do in Katzenberg's absence, save for Pixar's (Nasdaq: PIXR) handiwork with Toy Story 2. While Disney still has Scary Movie 2 and November's release of Pixar's Monsters Inc. on the slate, other studios are better positioned for the latter part of the calendar year. As our own Brian Lund pointed out in Monday's Rule Maker column, AOL Time Warner (NYSE: AOL) has both A.I. and the first of the Harry Potter movies on tap.

Disney might try to reason away its filmed and in-house animated woes, but footsteps speak louder than words. Last year Joe Roth left the helm of Disney's studio division. Last week Peter Schneider followed suit. In Hollywood, where everyone down to an aspiring waiter wants to direct, no one seems eager to direct Disney. Is this a problem? No sirree. Someone fetch me some wet cement so I can smooth out this here sidewalk.

On the tube front, ABC may have closed out the ratings season on top but it's clear the company flew too close to the sun when it pumped out Who Wants to Be a Millionaire four nights a week. Ratings are slipping, lifelines are waning, and the show will only air two nights a week come the fall season.

Short of The Practice, Disney failed to build out any kind of successful programming beyond its Regis-flavored quiz show. That's unfortunate, and now Disney will have to pay the price for easing back on the Barcalounger when opportunity came knocking. According to yesterday's Daily Variety, ABC has had to slash its fall ad rates by 5% to 7%. When you tack on projected lower numbers for Millionaire and the voids around it, that shortfall can translate into more than 20% off the network's ad revenue take.

While Disney will naturally point to a sluggish broadcast ad market, only GE's (NYSE: GE) NBC has had to follow Disney's lead and cut rates, though not as deeply. Fox was able to hold steady while Viacom's (NYSE: VIA) CBS was actually able to command slightly higher rates for the upcoming season. Problem? Not a chance. Just smooth over the cement and the sidewalk will be as good as new.

Disney's two newest theme parks are also in trouble. You won't hear this from Disney officially, but at least this time they are scrambling to treat the malady -- only from the wrong end. Walt Disney World's Animal Kingdom and Disney's California Adventure are failing as full-day destinations, and the company is responding by cutting prices. In Florida, seasonal passholders who have limited access to the theme parks during peak periods will be able to visit Animal Kingdom for free all summer long. Over in Anaheim, locals will be able to pay the child's admission rate while accompanied kids will be let into the park for free.

Does Disney see the correlation? Does it realize that budget cuts at the park level are now causing lower attendance and revenue-smacking discounts at the gate? The older parks are also being watered down with attraction closures, staff cuts, and shorter operating hours. It's hard watching Disney retreat reactively and settle for less rather than build out the new parks into viable moneymakers. You can't draw the A-list crowd sans new E-ticket attractions. Disney lays the blame at the feet of the sluggish economy -- but if that were the case, why are regional amusement park operators like Six Flags (NYSE: PKS) and Cedar Fair (NYSE: FUN) poised for record-breaking seasons?

Disney has diversified itself along many leisure lines, but what good is having your eggs in different baskets if the baskets themselves are constructed cheaply? There are only so many corners you can cut before you find yourself going in circles.

Disney will eventually realize there is no mountain of McDonald's (NYSE: MCD) Happy Meal toys high enough to diffuse the growing power of word of mouth. At a time when television channels number in the hundreds and Web users in the hundreds of millions, money spent on marketing is probably better utilized on honing the craft that is being marketed in the first place.

Pearl Harbor was supposed to be the next Titanic, not the Titanic itself. Atlantis was supposed to keep Disney on the hand-animated map, but it, too, has become a lost empire. Bad news and mixed reviews travels faster than ever these days.

So why are you looking back after the stumble? It's not the sidewalk. It's the shoes.  

Rick Aristotle Munarriz thinks Daisy Duck is too good for Donald. He also owns a couple, yes, just two, shares of Disney. Rick's other stock holdings can be viewed online, as can the Fool's disclosure policy.