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By dduct
July 8, 2003

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I think one of the reasons that Nemo has been so consistent over the past six weeks is that it's a fresh alternative.

Agreed. The underwater color and other special features make for a lot of eye candy. The turtles were special too. For someone like me who grew up in So. Cal., it was fun to hear the surf-talking turtles. My wife could not believe people talked like that. I knew people who only talked like that! Nemo was fun for the kids, the parents, and the grandparents (like me). That is a winning combination.

Pixar seems to understand that a great story, and something that stands-out in animation, are a great combination. Toy Story had the great backgrounds and sharply drawn lines -- and a touch of realism. Monsters had flowing hair. Nemo had the water effects. Every time, Pixar takes great technology, wraps it around a great story, and does the whole animated class a favor.

What I find odd is that Pixar does not want to make franchises out of stories like Toy Story. Disney had it right. People wanted to see what is happening with these characters. If done like James Bond, with a well thought out feature every three years, the result could be great animation and a great financial performance. Unfortunately, Disney does not do that with Mickey... Maybe, as part of the next Pixar deal, they can get the long-term rights to the previous characters and form a Disney group to just harvest from that group.

Disney has a problem with its movie studio. In all divisions except Miramax they seem to have lost traction. I tried to find the link to the annual report statement, a few years back, where Disney was reworking their movie contracts. It was going to save lots of dollars. So far, it looks like it shaved a lot of profits. I do not think you go from being #1 or #2 for a decade and then fall flat on your face for no reason. Mr. Eisner talked about saving money. I wish someone would ask if, by saving money, they lost their best people and their annual position at the top.

As a consultant, I am always looking for "opportunities." When I read Disney's recent annual reports, it always struck me that they lacked a long-term focus.

Look at the 2002 annual report. No mention of Monk and its Emmy for Best Actor. Disney Family, our $5.3 billion purchase, got four paragraphs and no pictures? Two of those paragraphs were single sentences! You would think that adding so much debt to the company's balance sheet would have deserved a better explanation of what was going to happen.

My #1 concern for Disney, seeing the results that have been harvested by lowering the average movie budget and reworking contracts, is that the company-wide reduction in capital spending will cause similar negative results throughout Disney. Was Mr. Eisner really candid when he announced that the assets had been laid in and that is was time to harvest the investment? If so, why is the following true for the period from 1994 to 2002?

Capital Spending has decreased from $.65 to $.50 a share.

For Mr. Eisner's statement to be true, he would have to be getting more out of the assets by spending less. But, is that correct? It might be worth looking at Disney's results and asking, once again, why are returns falling?

Earnings can increase and that would be nice. But if the Return on Capital stays at 3.0%, instead of rising back to 14.4% (where it was in 1994), will Disney be a great investment. In a word, no. 3% is not what you expect when you invest billions. Note that the annual report does not state on Return on Capital goal -- or any other financial measures that should be tracked to see if the executives are performing. Disney expects pay-for-performance from the cast. It is time they expect it from the executives.

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