TEACHINGNOTE:SM29CANDSM29DTN

DATE: 07/11/05

TEACHING NOTE FOR

DISNEY IN A DIGITAL WORLD: DISNEY IN 2001
DISTRIBUTING THE MOUSE
AND
DISNEY IN A DIGITAL WORLD (D) A DIGITAL
DISNEY IN 2003 AND BEYOND

DECADE?:

INTRODUCTION
Position in the Book
These cases are presented in the part of the book entitled Convergence or Collision Take II:
Do Digits Defeat Pen and Plastic? They help examine the strategic challenges that Disney faced
in the early 2000s, as it confronted two strategic inflection points (SIP): (1) the question of how
important it was for a content company to own distribution channels, and (2) the strategic
consequences of digitization of content and digital distribution. Disneys acquisition of Capital
Cities/ABC for $19 billion in 1996 suggested that it viewed SIP (1) as the most important one.
By the early 2000s, having acquired the traditional broadcasting network ABC TV in the mid1990s, and having been less than successful on becoming an entertainment force on the Internet,
the company continued to struggle with the question of how much and how broad its control over
distribution should be. The company also had been less than successful in its efforts to develop
videogames, and its traditional characters faced competition from new ones developed by
videogame makers, such as Nintendo. In addition, it was still relying on traditional pen-based
animation competencies for much of its traditional film making. The success of digital animation
films and Disneys dependence on Pixar, run by Apple co-founder Steve Jobs, for digital
animation had taken on strategic importance. The fact that John Lasseter, co-founder of Pixar,
was a Disney employee in the early 1980s and actually had tried to get Disney interested in
digital animation adds a poignant note to the strategic situation faced by the company twenty
years later. The widely publicized divergence of views of Disney CEO Michael Eisner and Pixar
CEO Steve Jobs concerning what the US Government should do to protect intellectual property
rights from technology-facilitated piracy added urgency to considering this strategic
dependence. By 2003, however, Eisner began to give hints of new ways of thinking about using
This note was prepared by Professor Robert A. Burgelman for the sole purpose of aiding classroom instructors in the use of
Disney in a Digital Decade (two cases), GSB No.SM-29C and SM-29D. It provides analysis and questions that are intended to
present alternative approaches to deepening students comprehension of the business issues presented in the case and to energize
classroom discussion.

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digital-enabled interactivity to augment content consumers experience (and thereby further

protect content).
In terms of the three key themes of the book, these cases offer the opportunity to examine how
the confluence of environmental forces may lead a company with a well-established corporate
strategy to feel a need to embark on major changes to maintain control of its destiny (Theme I).
It also shows how these external forces may create various types of strategic inflection points
that drive strategy and action apart, and it illustrates the difficulties of finding a new basis for
realigning strategy and action (Theme II). The case also offers an example of P-independent
change that might morph into runaway change and it raises the question of how to transform a
company late in the game when it may potentially face more threats than opportunities (Theme
III).
Overview of the Cases
The two cases complement each other and can effectively be used together. Taken together, the
cases offer the opportunity for the instructor to examine with the students the challenges and
opportunities that entertainment conglomerate Disney faces beyond 2003 as it tries to commit
itself to embarking on a Digital Decade.
The first case, set in 2001, describes the continued struggle of Disney with the issues of
distribution channel control, including the $900 million failure of its Internet portal and the $5.2
billion acquisition of cable network assets, and the implications of digitization of content and
digital distribution. The unhappy incident with Time Warner in May 2000 had added to top
managements concerns about the monopoly power of the cable networks. The case moves on to
describe Disneys five-point strategy in 2001, which included owning more content, owning
more cable channels, investing in new distribution technologies (e.g., broadband Internet),
exploiting the theme park franchise, and building more direct-to-retail relationships (and relying
less on its own costly stores). The case provides some detail on Disneys
cooperation/competition with Blockbuster and its efforts to deliver movies over the Internet and
data casting to get around the incumbent distribution gate keepers. Finally, the case also
discusses the digital revolution in animation and Disneys turbulent relation with Pixar, and its
renewed efforts to gain some position in the fast growing video game industry segment. As it
continues to struggle with the strategic challenges posed by vertical integration in the industry
and the rapid rise of digital content and digital distribution, the company fortunately still
generates a tremendous amount of cash. This gives it some additional time to further adjust its
strategy and structure as it pursues its new vision of a Digital Decade for Disney.
The second case, set in 2003, describes Disneys new vision of a Digital Decade, to put the
company in front of the digital transformation of the entertainment industry, while recognizing
that the industry continued to be very conflicted about the role of digital distribution.
After discussing the state of affairs in 2003 for each of the companys four major businesses
(Media Networks, Parks and Resorts, Studio Entertainment, Consumer Products), the case
briefly elaborates on CEO Eisners vision for the Digital Decade, which seems to involve

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using digital technologies to enrich the emotional connection between its content and its
audience with new experience dimensions.
Note: During the period covered by the cases, tensions were growing between CEO Michael
Eisner and some board members, notable Roy Disney, who actively sought to replace Eisner with
a new CEO. These tensions were, at least in part, the result of the significant loss in value of
Disneys stock, which, in turn, must have been the result of the capital markets assessment of
Disneys prospects in the rapidly changing industry. The cases, and this teaching note, focus on
the fundamental industry forces rather than the personality issues, but some instructors may want
to spend some time bringing these issues into the discussion.

MAJOR THEMES
1.
2.
3.
4.

The strategic implications of verticalization of the content industry

The strategic implications of digitization on companies in the content industry
Maintaining brand identity in the face of industry convergence/collision
Changing distinctive competencies (and the role of autonomous strategic action), and
attendant critical dependencies
5. Leading (or just joining?) the digital content age: managing corporate transformation

ANALYSIS
Preparation Questions
1. What was Disneys traditional corporate strategy before the acquisition of Capital
Cities/ABC in 1996?
2. What were the major environmental changes that led Disney to feel the need to acquire
Capital Cities/ABC in 1996? How did this acquisition fit with their traditional corporate
strategy? What did it imply about Eisners view of Disneys traditional corporate strategy?
3. What was the interplay of forces that made digitization of content and digital distribution of
content possible and reinforced its adoption and use? What are the strategic implications for
Disney?
4. During 2001-2003, what has Disney done - strategically and organizationally - to deal with
the new situation created by digitization of content and digital distribution?
5. What tensions do you expect digitization of content and digital distribution to have created
within Disney? For instance, how should Disney manage digital animation film
opportunities in the future? Looking forward, what should Disney do differently?

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Discussion
1. What was Disneys traditional corporate strategy before the acquisition of Capital
Cities/ABC in 1996?
Some key aspects of Disneys traditional strategy are:
- Disney had long been an industry leader with a pure play strategy of content creation.
The company had a long and uniquely successful history of creating characters and telling
stories that resonated strongly with traditional family values and are wholesome in light of
those values. It had been able to attract highly talented creative people and developed an
extraordinary competence base in traditional pen-based drawing and animation. Over many
years, the company had created both animated and live action films, many of which have become
classics. It has also expanded the application of its distinctive competencies into television
programming. Its creative talent pool was able to consistently produce hits.
- Disney had relied on a horizontal strategy to position itself in the content industry.
Until the mid-1990s, Disney relied on the quality and appeal of its content creations to occupy,
defend, and leverage a virtually unassailable product-market position in the content industry.
Various distribution channels were eager to bring Disneys content to the consumer, and Disney
felt it had developed such strong emotional bonds with its core audience that it did not worry
about reaching it. Disney relied on a very strong consumer pull to get into the distribution
channels and hence, felt no need to directly control distribution through owning it.
- Disney used a strategy of re-purposing its content to expand its revenue base and keep its
content fresh and alive.
Over the years, and especially under Eisners leadership, Disney had become a master of repurposing its content, thereby creating various new and large sources of revenue. Perhaps most
importantly, through its world-famous theme parks it had been able to keep its characters fresh
and alive and to attract large masses of domestic and foreign paying customers. Even though it
initially faced some difficulties, it was able to bring its theme park concept to foreign markets as
well (e.g., France). Disney retail stores sold various types of merchandise based on its characters
and stories. Disney cruises targeted family vacationers.
2. What were the major environmental changes that led Disney to feel the need to acquire
Capital Cities/ABC in 1996? How did this acquisition fit with their traditional corporate
strategy? What did it imply about Eisners view of Disneys traditional corporate strategy?
This segment of the discussion can effectively make use of the Extended Industry Analysis
Framework and the concept of a Strategic Inflection Point (SIP).
- Consolidation and vertical integration in the content industry.
During the early 1990s, Disneys major competitors (Time Warner, News Corp, Viacom) had
been buying major distribution assets to ensure their content would have a channel to consumers.
Through 1996, Disney had taken the position that compelling content will find distribution, and

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had avoided large investments in distribution. By 1996, however, the company seemed to have
lost confidence in its pure play, horizontal strategy, and when ABC became the last remaining
broadcast network available, Disney decided to invest $19 billion in its acquisition.
- Losing confidence in Disneys traditional strategy?
While Disney presumably faced two strategic inflection points (SIP) by 1996: (1) the importance
of distribution, and (2) digitization and the Internet, Disneys acquisition of ABC clearly
indicates which of the two SIPs top management considered most salient and urgent. The
unsettling incident in May 2000 involving a cable company, owned by Time Warner, dropping
ABC programming from its lineup during a critical ratings period called sweeps week
exacerbated the concern about the monopoly power of the distribution gate keepers.
Nevertheless, the ABC acquisition seems to have been a defensive strategic action motivated by
what other players were doing, rather than deriving directly from Disneys own corporate
strategy. The instructor can start a potentially stimulating discussion by questioning whether it
was indeed a strategic imperative for Disney to spend $19 billion on acquiring ABC. With or
without such a discussion, this point needs naturally to the next question.
Note: Some students may suggest that it was simply hubris on the part of Eisner that led to
Disney acquiring ABC. While there may be an element of truth in that, the instructor can point
out that such explanations are, in general, not very satisfactory. Deeper insight is usually
obtained by trying to find out first what the underlying forces are that shape top managements
strategic actions before falling back on personality factors. One interesting conclusion of this
segment of the discussion is that companies sometimes take strategic actions because they feel
they have to because others have already taken certain strategic actions, rather than because they
really wanted to take those actions.

3. What was the interplay of forces that made digitization of content and digital
distribution of content possible and reinforced its adoption and use? What are the strategic
implications for Disney?
This segment of the discussion can effectively use the Extended Industry Analysis Framework,
the framework of Dynamic Forces driving Company Evolution, as well as the Framework of the
Strategy-Making Process in established Firms.
- Technology: the emergence of digital content and the Internet.
Digital technology - hardware and software has invaded the entertainment industry since the
emergence of the microprocessor. From Ataris electronic games, through the early PC video
games of Electronic Arts and Nintendos introduction of console-based videogames, to todays
X-box and Playstation entertainment systems, electronic entertainment content has grown
dramatically. Video games have created new characters and stories. Digital animation has begun
to replace traditional pen-based animation and has also created new characters and stories.

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Digital technology facilitates various forms of interactivity with digital content available to
consumers that traditional technologies and content cannot match. This creates new usage
patterns (and expectations).
Video arcades have become new ways for delivering and experiencing video games. The Internet
has become a new distribution channel for digital content and has also created new usage
patterns and behaviors. So have wireless communication devices.
Digital distribution channels have stimulated the emergence of complementary technologies
(e.g., peer-to-peer computing and communication) that make possible the illegal - or at least
unauthorized proliferation of proprietary content for free.
- Culture: the changing family.
While the case does not touch on it, the instructor can ask the class to relate the technological
changes to cultural changes that are affecting the concept of family in the so-called postmodern society. More and more children grow up in one-parent households and in other forms of
family that are non-traditional. In two-parent households, both parents often work, leaving kids
to spend more time entertaining themselves. The tolerance for violence, sexually explicit
language and imagery has significantly increased and kids confront topics traditionally
associated with growing up at earlier ages, and so on.
- Digitization poses a strategic inflection point (and an identity crisis) for Disney.
As pointed out under question 1, before the mid 1990s Disney had a clear vision of its identity
and a clear strategy. It positioned itself as a traditional family entertainment company with a
distinctive competence in traditional animation. Disneys distinctive competencies served to
support the companys product market position extremely well. Disneys strategic actions were
very well aligned with its vision and strategy. Disneys strategy diamond looked beautiful.
The technological and cultural changes discussed above posed a strategic inflection point for
Disney and a potentially big identity crisis. First, there is a greater supply of content than before,
with new characters and stories. Second, the new characters (e.g., Nintendos Mario) can do
things that Disneys characters (e,g., Mickey) cannot do without losing their traditional
wholesomeness. Hence, Disney faces some potential problems with how it has positioned itself
in the industry.
Note: An interesting question to ask here is Who owns Mickey? The superficial answer is of
course Disney. A deeper answer is that the public owns Mickey, which constrains what Disney
can allow Mickey to do. A good parallel here is Coca Cola. The instructor can ask what happened
when Coca Cola endeavored to announce a change in the taste of Coke. A disapproving uproar of
the consumers forced Coca Cola to back off and to introduce Classic Coke. (And it was not
even clear whether consumers could really discriminate between the new and the traditional
Coke taste.)

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-Digital technologies (especially related to animation) are not a distinctive competence of

Disney.
The company missed the boat on digital animation for many years. Instead, Disney formed a
joint venture with Pixar where it would invest in, distribute and retain copyrights to digitally
animated features created by Pixar. In some respects, it was as if Disney was outsourcing digital
animation. The company would regret not better developing its assets in this newly important
area as its home-grown digital animation features fared poorly at the box office. At the time of
the case, Disney was left without a substantial digital animation capability and the joint venture
with Pixar was nearing its end.
Note: It is interesting and somewhat poignant to note that John Lasseter, executive vice president
and creative force at digital animation giant Pixar, left Disney in order to pursue digital
animation. From the time that Lasseter left Disney through the time of the cases, the company
did not have assets aligned to succeed in digital animation. This fact, which is mentioned in the
case, allows the instructor to bring up the importance of managing autonomous strategic action.
While it is of course always easy in retrospect to identify important autonomous strategic actions
(most of them do not succeed), the question can legitimately be asked whether top management
paid enough attention to the possibility that computer-aided content creation might one day
threaten pen-based content creation. Also, looking forward, it raises the question what Disney
should do to catch up on this now critically important competence.
- Relatively poor track record in video games: Disney is not a software company.
Another manifestation of the digital competence crisis that Disney faces is its lackluster
performance in video games. With a market segment share of 3 percent, Disney is the number 8th
player in the industry.
Note: A potentially interesting question here is to go back to the AOL and Time Warner case.
Before the merger, AOL was a software company that had largely failed in content production;
Time Warner was a content company that had largely failed as a software company. In the same
line of thought it may be interesting to also compare Microsoft and Disney. While the case does
not focus on Microsoft, many students will probably be able to contribute to this discussion. In
some ways, Disney faces the opposite problem of Microsoft. Microsoft, a software company,
found out that becoming a content company was extremely difficult. Disney, a content company,
is finding out that becoming a software company is very difficult. These are the sorts of strategic
challenges that companies face when their industries converge or collide.
4. During 2001-2003, what has Disney done - strategically and organizationally - to deal
with the new situation created by digitization of content and digital distribution?
In July 2001, Disney acquired the Fox Family cable network from News Corp for $5.2 billion,
which indicated its continued pre-occupation with SIP (1).
- By 2001, Disneys strategy for the digital entertainment industry seemed mostly rhetoric.
On the other hand, Disney had taken few concrete actions to address SIP (2). The company
made several false steps in deciding a strategy for its Website, expensively dropping the Go.com

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network in January 2001. In September 2001, it had formed an alliance with Murdochs News
Corp to deliver feature films over the Internet: Movies.com. Its ability to distribute much of its
content over the Internet, however, was governed by the roll out of consumer broadband access something beyond the companys control. Furthermore, Disney continued to ambivalent about
the prospect of digital distribution of content over the Internet. On the one hand, the Internet
could become another valuable distribution channel to augment their other distribution channels,
but, on the other hand, as a content producer it worries about the uncertain digital rights
management regimes to protect its content from unlawful duplication, i.e., piracy.
In September 2001, Disney formed the Buena Vista Game Entertainment Studio to handle the
companys line of video games. As noted earlier, Disney was a relatively laggard in this space
and it remained to be seen how it would fare in the competition with the major players, such as
Electronic Arts, Vivendi Universal, Infogames Entertainment, and Microsoft.
Finally, by 2001, Disney did not seem to have a strategy for dealing with the growing importance
of digital animation, which poses a potentially lethal threat to its traditional distinctive
competence. Disney continued to be extremely dependent on Pixar. At the same time,
DreamWorks (co-founded by another Disney exile, Jeffrey Katzenberg), and other new
specialized companies were moving into the market and increasing the level of competition
(including the competition for talent).
- By 2003, glimmers of an inchoate strategy?
By early 2003, Eisner seems to have embraced the idea of the digital entertainment industry as
an unavoidable reality in the making. This leads him to herald the coming of the Digital Decade
for us at Disney and his intent to put the company in front of the digital transformation of the
entertainment industry in his speech of April 2003.
While this still seems to be mostly rhetoric, his speech at the shareholder meeting of March 2003
points at a potential change in outlook on the value that the digital revolution can bring to a
company like Disney. The corner stone of his new vision seems to be Disneys potential ability to
use digital technology to increase the emotional connection with audiences, in part through the
enabling of new dimensions of experience (e.g., hyper-reality of 3-D animation) and the new
forms of interactivity that they seem to imply. Eisner calls this an offensive strategy that will
help combat the problem of piracy as effectively as defensive legislation and encryption
strategies. This seems a potentially watershed change in attitude, one that puts the burden of
exploiting the opportunity of the digital revolution (rather than coping with the threat) squarely
back with Disneys creative talent and competence. This is where it used to be in the old world
and this is where it should have belonged from the beginning in the new world as well!
At the practical level, however, Disney is still behind. First, its plan to digitally stream movies
via the unused portion of a stations spectrum to set-top boxes is still in the making. Its new
Moviebeam service is only in the announcement stage. Similarly, the prospects of offering
video-on-demand with cable, satellite and IT providers were still in the talking stage.
Perhaps most important, Disney seems still far behind in the area of digital animation
competence and product development. In 2003, Disneys last four animated films not produced

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by Pixar earned $357 million compared to the $856 million earned by Pixars last four releases
(including hits such as Toy Story, A Bugs Life, and Monsters Inc.). This level of success is
changing the strategic relationship between Disney and Pixar, with Pixar wanting to renegotiate
its financial deals with Disney and looking to other potential partners to strike more lucrative
deals. Clearly, this is an extremely salient and urgent strategic issue for Disney. As Eisner points
out, Disney is now sorely missing the talent of John Lasseter.
5. What tensions do you expect digitization of content and digital distribution to have
created within Disney? For instance, how should Disney manage digital animation film
opportunities in the future? Looking forward, what should Disney do differently?
While the case does not offer any data on internal discussions and debate at Disney, the instructor
can ask the students to speculate a bit on what must be going on within Disney regarding the
issue of developing digital animation competencies.
- Role of autonomous strategic initiatives (John Lasseter).
This discussion can refer back to the Microsoft case and the role of Jay Allard in alerting the
company to the importance of the Internet early on. It is also an opportunity to refer back to the
potential importance of autonomous strategic initiatives, like those of John Lasseter in digital
animation when he was still at Disney (early 1980s).
- Role of strategic dissonance.
The students will probably agree that there is likely to be strategic dissonance in Disneys
organization between the traditional die-hard pen-based animation artists and a newer group of
animation artists (probably mostly younger), who are familiar with what their peers in digital
animation are actually doing and understand it at a fairly deep level of technical sophistication.
The latter group is probably trying to convince the others (and management) that digital
animation should become a distinctive competence of Disney, at least complementing but
perhaps eventually replacing the pen-based animation competence.
- Resolving the strategic dissonance and moving to new strategic action.
Ultimately it is the responsibility of top management to resolve the strategic dissonance and to
move the organization toward strategic action. The instructor can ask what the implications are
of Eisners statements of 2003 for resolving the strategic dissonance, and most students will
probably agree that he is ready to forcefully move the company toward digital animation
competence.
This then raises the question of how he should go about it. This could be an extremely lively and
interesting discussion. For instance, some students will suggest trying to bring Lasseter back to
Disney. Others will argue that this is unlikely to be successful, and they may suggest trying to
hire the second greatest talent in the world in digital animation. Quite possibly some of the
proponents of digital animation competence within Disney know already who that would be.
This raise the question of whether you could just hire one person or whether that new star will
want to bring some of his/her own people. But what about the traditional animation talent at
Disney? Do we give them a chance to make the transition, even if that takes time, and so on.

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In order to provide some insight in what really happened at Disney after 2003with respect to
these issues, the instructor might refer the students to the supplementary reading provided at the
end of this teaching note.
SUMMARY
1. A clear strategy gives a company confidence that it can gain and maintain control over its
destiny. The pattern of successful strategic actions over time determines the companys identity
(its genetic heritage). Disneys horizontal strategy as a pure play in content and its relentless
efforts to exploit that content through re-purposing until the mid-1990s is an example.
2. A companys strategic actions at any given time are to a great extent determined by the desire
to protect the basis of its past strategic successes and to continue along the same track for the
future. Strategic momentum, however, may turn into strategic inertia.
3. Strategic inflection points test the companys confidence in its strategy. Threats to a highly
successful existing strategy are usually perceived as more salient than potential opportunities
associated with a new strategy. A moderate level of paranoia is healthy to maintain the
companys strategic alertness and prevent complacency. Excessive paranoia, however, may
foreclose adopting novel approaches to exploiting existing opportunities and/or pursuing new
ones.
4. Companies feel sometimes compelled to take diverging strategic action in response to strategic
moves by competitors even if they would prefer not to. Taking action that diverges from the
strategy may suggest that confidence has waned. This may have been the case with Disneys
acquiring ABC in response to consolidation and vertical integration moves by major competitors
and the ensuing threat of diminished access to distribution.
5. The extent to which top management views an environmental change as a strategic inflection
point is revealed by the amount of resources they allocate to respond to it. By that measure,
Disney viewed the threat to distribution far more strongly than the opportunities associated with
digitization of content.
6. A strong brand is a strategic asset. The customer, however, is partial owner of the brand. Faced
with new digital animation characters successfully competing for the attention of children and
parents, Disney may not able to let its characters behave in similar ways. Disneys Mickey, for
instance, may not be able to emulate Nintendos Mario. Success thus may create environmental
lock-in and reinforce strategic inertia.
7. Digitization of animation is a new competency that allows novel forms of animation that
extend beyond the capabilities of traditional animation, and thereby pose a potential strategic
inflection point for the incumbents, which they cannot easily replicate internally. This requires
acquisition or partnering (e.g., Disney with Pixar) and the concomitant strategic problem of
managing new dependencies.
8. Others?

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Supplementary Reading
Has the Sky Stopped Falling at Disney? The New York Times, Sunday, September 18, 2005,
Section 3, p. 1