THE WALT DISNEY COMPANY

ITS DIVERSIFICATION STRATEGY

The Walt Disney Company was a broadly diversified media and entertainment company with a
business lineup that included theme parks and resorts, motion picture production and distribution,
cable television networks, the ABC broadcast television network, eight local television stations, and a
variety of other businesses that exploited the company’s intellectual property. The company’s
revenues had increased from approximately $52.5 billion in fiscal 2015 to approximately $62.6
billion in fiscal 2019 and its share price had regularly outperformed the S&P 500. While struggling
somewhat in the mid1980s, the company’s performance had been commendable in almost every
year since Walt Disney created Mickey Mouse in 1928.

Much of the company’s growth in revenues had resulted from acquisitions of leading motion picture
production companies. In 2006, the Walt Disney Company completed the $7.4 billion acquisition of
Pixar, the producer of Toy Story—the highest grossing film of 1995. In 2009, Disney acquired Marvel
Entertainment for $4.2 billion, which had produced highly successful Iron Man, Spider-Man, and
Incredible Hulk films. Walt Disney acquired Lucasfilm in 2012 in a $4 billion cash and stock
transaction. Lucasfilm was founded by George Lucas and was best known for its Star Wars motion
picture franchise. However, the company’s 2019 acquisition of 21st Century Fox for $71.3 billion in
cash and stock had the potential to radically improve its future financial performance.

The acquisition of 21st Century Fox extended Disney’s impressive collection of media franchises to
include 20th Century Fox, FX, National Geographic Channel, and Star India. Twenty-First Century Fox
also held a 30 percent ownership interest in Hulu and a 39.1 percent stake in Sky, Europe’s leading
entertainment company that served nearly 23 million households in five countries. The Fox
broadcast network, 29 local television stations, Fox News, and Fox Sports were not included in the
merger and make up a new independent, public company named Fox Corporation.

Disney CEO Robert Iger commented on the ability of the acquisition to further boost shareholder
value.

The acquisition of 21st Century Fox will bring significant financial value to Disney and the
shareholders of both companies, and after six months of integration planning, we’re even more
enthusiastic and confident in the strategic fit of these complementary assets and the talent at Fox.

The combination of Disney and 21st Century Fox is an extremely compelling proposition for
consumers. It will allow us to create even more appealing high- quality content, expand our direct-
to-consumer offerings and international presence, and deliver more exciting and personalized
entertainment experiences to meet the growing demands of consumers worldwide.

Just weeks after releasing impressive first quarter fiscal 2020 results for the combined company,
Walt Disney Company announced the retirement of CEO Bob Iger—the architect of the series of
acquisitions that had compounded the company’s revenues and drove shareholder value for nearly
15 years. The February 25, 2020 announcement stated that Mr. Iger would remain Executive
Chairman and direct the company’s creative endeavors through 2021, with Mr. Bob Chapek
becoming the Walt Disney Company’s seventh CEO. Mr. Chapek, a 27-year veteran of the company
had most recently held the title of Chairman of Disney Parks, Experiences, and Products and would
not only be required to fully integrate the 21st CenturyFox creative assets and operations into the
Disney organization, but would also have to contend with the effects of the novel Coronavirus
(COVID-19), which were just becoming known to the world.

COMPANY HISTORY

Walt Disney’s venture into animation began in 1919 when he returned to the United States from
France, where he had volunteered to be an ambulance driver for the American Red Cross during
World War I. Disney volunteered for the American Red Cross only after being told he was too young
to enlist for the United States Army. Upon returning after the war, Disney settled in Kansas City,
Missouri, and found work as an animator for Pesman Art Studio. Disney, and fellow Pesman
animator, Ub Iwerks, soon left the company to found Iwerks-Disney Commercial Artists in 1920. The
company lasted only briefly, but Iwerks and Disney were both able to find employment with a
Kansas City company that produced short animated advertisements for local movie theaters. Disney
left his job again in 1922 to found Laugh-O-Grams, where he employed Iwerks and three other
animators to produce short animated cartoons. Laugh-O-Grams was able to sell its short cartoons to
local Kansas City movie theaters, but its costs far exceeded its revenues—forcing Disney to declare
bankruptcy in 1923. Having exhausted his savings, Disney had only enough cash to purchase a one-
way train ticket to Hollywood, California, where his brother, Roy, had offered a temporary room.
Once in California, Roy began to look for buyers for a finished animated-live action film he retained
from Laugh-O-Grams. The film was never distributed, but New York distributors Margaret Winkler
and Charles Mintz were impressed enough with the short film that they granted Disney a contract in
October 1923 to produce a series of short films that blended cartoon animation with live action
motion picture photography. Disney brought Ub Iwerks from Kansas City to Hollywood to work with
Disney Brothers Studio (later to be named Walt Disney Productions) to produce the Alice Comedies
series that would number 50-plus films by the series end in 1927. Disney followed the Alice
Comedies series with a new animated cartoon for Universal Studios. After Disney’s Oswald the Lucky
Rabbit cartoons quickly became a hit, Universal terminated Disney Brothers Studio and hired most of
Disney’s animators to continue producing the cartoon.

In 1928, Disney and Iwerks created Mickey Mouse to replace Oswald as the feature character in Walt
Disney Studios cartoons. Unlike with Oswald, Disney retained all rights over Mickey Mouse and all
subsequent Disney characters. Mickey Mouse and his girlfriend, Minnie Mouse, made their cartoon
debuts later in 1928 in the cartoons, Plane Crazy, The Gallopin’ Gaucho, and Steamboat Willie.
Steamboat Willie was the first cartoon with synchronized sound and became one of the most
famous short films of all time. The animated film’s historical importance was recognized in 1998
when it was added to the National Film Registry by the United States Library of Congress. Mickey
Mouse’s popularity exploded over the next few decades with a Mickey Mouse Club being created in
1929, new accompanying characters such as Pluto, Goofy, Donald Duck, and Daisy Duck being added
to Mickey Mouse cartoon storylines, and Mickey Mouse appearing in Walt Disney’s 1940 feature
length film, Fantasia. Mickey Mouse’s universal appeal reversed Walt Disney’s series of failures in
the animated film industry and became known as the mascot of Disney Studios, Walt Disney
Productions, and The Walt Disney Company.

The success of The Walt Disney Company was sparked by Mickey Mouse, but Disney Studios also
produced several other highly successful animated feature films including Snow White and the Seven
Dwarfs in 1937, Pinocchio in 1940, Dumbo in 1941, Bambi in 1942, Song of the South in 1946,
Cinderella in 1950, Treasure Island in 1950, Peter Pan in 1953, Sleeping Beauty in 1959, and One
Hundred-One Dalmatians in 1961. What would prove to be Disney’s greatest achievement began to
emerge in 1954 when construction began on his Disneyland Park in Anaheim, California. Walt
Disney’s Disneyland resulted from an idea that Disney had many years earlier while sitting on an
amusement park bench watching his young daughters play. Walt Disney thought that there should
be a clean and safe park that had attractions that both parents and children alike would find
entertaining. Walt Disney spent years planning the park and announced the construction of the new
park to America on his Disneyland television show that was launched to promote the new $17
million park. The park was an instant success when it opened in 1955 and recorded revenues of
more than $10 million during its first year of operation. After the success of Disneyland, Walt Disney
began looking for a site in the eastern United States for a second Disney Park. He settled on an area
near Orlando, Florida in 1963 and acquired more than 27,000 acres for the new park by 1965.

Walt Disney died of lung cancer in 1966, but upon his death, Roy O. Disney postponed retirement to
become president and CEO of Walt Disney Productions and oversee the development of Walt Disney
World Resort. Walt Disney World Resort opened in October 1971—only two months before Roy O.
Disney’s death in December 1971. The company was led by Donn Tatum from 1971 to 1976. Tatum
had been with Walt Disney Productions since 1956 and led the further development of Walt Disney
World Resort and began the planning of EPCOT in Orlando and Tokyo Disneyland. Those two parks
were opened during the tenure of Esmond Cardon Walker, who had been an executive at the
company since 1956 and chief operating officer since Walt Disney’s death in 1966. Walker also
launched The Disney Channel before his retirement in 1983. Walt Disney Productions was briefly led
by Ronald Miller, who was the son-in-law of Walt Disney. Miller was ineffective as Disney chief
executive officer and was replaced by Michael Eisner in 1984.

Eisner formulated and oversaw the implementation of a bold strategy for Walt Disney Studios, which
included the acquisitions of ABC, ESPN, Miramax Films, and the Anaheim Angels, and the Fox Family
Channel; the development of Disneyland Paris, Disney-MGM Studios in Orlando, Disney California
Adventure Park, Walt Disney Studios theme park in France, and Hong Kong Disneyland; and the
launch of the Disney Cruise Line, the Disney Interactive game division, and the Disney Store retail
chain. Eisner also restored the company’s reputation for blockbuster animated feature films with the
creation of The Little Mermaid in 1989, and Beauty and the Beast and The Lion King in 1994. Despite
Eisner’s successes, his tendencies toward micromanagement and skirting board approval for many of
his initiatives and his involvement in a long-running derivatives suit led to his removal as chairman in
2004 and his resignation in 2005.

The Walt Disney Company’s CEO in 2018, Robert (Bob) Iger, became a Disney employee in 1996
when the company acquired ABC. Iger was president and CEO of ABC at the time of its acquisition by
The Walt Disney Company and remained in that position until made president of Walt Disney
International by Alan Eisner in 1999. Bob Iger was promoted to president and chief operating officer
of The Walt Disney Company in 2000 and was named as Eisner’s replacement as CEO in 2005. Iger’s
first strategic moves in 2006 included the $7.4 billion acquisition of Pixar animation studios and the
purchase of the rights to Disney’s first cartoon character, Oswald the Lucky Rabbit, from
NBCUniversal. In 2007, Robert Iger commissioned two new 340-meter ships for the Disney Cruise
Lines that would double its fleet size from two ships to four. The new ships ordered by Iger were 40
percent larger than Disney’s two older vessels and entered service in 2011 and 2012. Iger also
engineered the $4.2 billion acquisition of Marvel Entertainment in 2009 that would enable the
Disney production motion pictures featuring Marvel comic book characters such as Iron Man,
Incredible Hulk, Thor, Spider-Man, and Captain America. In 2012, Walt Disney acquired Lucasfilm in a
$4 billion cash and stock transaction. Lucasfilm was founded by George Lucas and was best known
for its Star Wars motion picture franchise. The $71.3 billion acquisition of 21st Century Fox in 2019
was Iger’s most ambitious merger and would create tremendous market expansion opportunities
and difficult integration challenges.

Bob Chapek became The Walt Disney Company’s seventh CEO on February 25, 2020. Chapek had
been a Disney employee for 27 years and produced strong results in several of the company’s
businesses, including its Theme Parks, Disney Resorts, Consumer Products, and Walt Disney Studios
Home Entertainment. His most recent position prior to being named CEO was serving as Chairman of
the Parks, Experiences and Products since the segment’s creation in 2018 and as Chairman of its
predecessor, Parks and Resorts, since 2015. Among the most notable accomplishments of Bob
Chapek was overseeing the opening of Shanghai Disney Resort, the creation of Start Wars: Galaxy’s
Edge lands at Disneyland and Walt Disney World, the expansion of Disney Cruise Line with the
construction of three new ships, and the addition of Marvel-themed attractions around the world.

A financial summary for The Walt Disney Company for 2015 through 2019 is provided in Exhibit 1.
Exhibit 2 tracks the performance of The Walt Disney Company’s common shares between March
2013 and March 29, 2020.
THE WALT DISNEY COMPANY’S CORPORATE STRATEGY AND BUSINESS OPERATIONS IN 2020

In 2020, The Walt Disney Company was broadly diversified into theme parks, hotels and resorts,
cruise ships, cable networks, broadcast television networks, television production, television station
operations, live action and animated motion picture production and distribution, music publishing,
live theatrical productions, children’s book publishing, interactive media, and consumer products
retailing. The company’s corporate strategy was centered on (1) creating high-quality content, (2)
exploiting technological innovations to make entertainment experiences more memorable, and (3)
international expansion. The company’s 2006 acquisition of Pixar and 2009 acquisition of Marvel
were executed to enhance the resources and capabilities of its core animation business with the
addition of new animation skills and characters. The company’s 2011 acquisition of UTV was
engineered to facilitate its international expansion efforts. The acquisition of Lucasfilm’s Star Wars
franchise in 2012 not only allowed the company to produce new films in the series, but integrate
Star Wars into its other business units, including theme park attractions. The company’s 2019
acquisition of 21st Century Fox was made to further expand Disney’s portfolio of high-quality
branded content with new cable channels such as National Geographic, FX and accelerate its direct-
to-consumer (DTC) strategy by giving the company a 60 percent controlling interest in Hulu. Hulu
was made the official streaming service for FX Networks in 2020.

Disney’s corporate strategy also called for sufficient capital to be allocated to its core theme parks
and resorts business to sustain its advantage in the industry. The company expanded the range of
attractions at its theme parks with billion-dollar plus additions such as its new Toy Story Land
attractions opened in 2018 at Shanghai Disneyland and Disney’s Hollywood Studios and its Star Wars
Land opened in Disney’s Hollywood Studios and Anaheim’s Disneyland in 2019. Expansions were also
underway at Tokyo Disney Resort and Hong Kong Disneyland.

The Walt Disney Company’s corporate strategy also attempted to capture synergies existing
between its business units. Two of the company’s highest grossing films, Pirates of the Caribbean:
On Stranger Tides and Cars 2 were also featured at the company’s Florida and California theme
parks. The company had leveraged ESPN’s reputation in sports by building 230-acre ESPN Wide
World of Sports Complex in Orlando that could host amateur and professional events and boost
occupancy in its 18 resort hotels and vacation clubs located at the Walt Disney World resort.

In 2020, the company’s business units were organized into four divisions: Parks, Experiences and
Products, Media Networks, Direct-to-Consumer & International, and Studio Entertainment.

Parks, Experiences and Products

The Walt Disney Company’s parks and resorts division included the Walt Disney World Resort in
Orlando, the Disneyland Resort in California, Disneyland Paris, the Aulani Disney Resort and Spa in
Hawaii, the Disney Vacation Club, the Disney Cruise Line, and Adventures by Disney. The company
also owned a 47 percent interest in Hong Kong Disneyland Resort and a 43 percent interest in
Shanghai Disney Resort. Disney also licensed the operation of Tokyo Disney Resort in Japan. Revenue
for the division was primarily generated through park admission fees, hotel room charges,
merchandise sales, food and beverage sales, sales and rentals of vacation club properties, and fees
charged for cruise vacations.

Revenues from hotel lodgings and food and beverage sales were a sizeable portion of the division’s
revenues. For example, at the 25,000-acre Walt Disney World Resort alone, the company operated
18 resort hotels with approximately 22,000 rooms. Walt Disney World Resort also included the 127-
acre Disney Springs retail, dining, and entertainment complex where visitors could dine and shop
during or after park hours. Walt Disney World Resort in Orlando also included four championship
golf courses, full-service spas, tennis, sailing, water skiing, two water parks, and a 230-acre sports
complex that was host to over 200 amateur and professional events each year. In 2019, Disney
announced plans to build a Star Warsthemed hotel at Walt Disney World Resort.

Walt Disney’s 486-acre resort in California included two theme parks—Disneyland and Disney
California Adventure—along with three hotels and its Downtown Disney retail, dining, and
entertainment complex. Disney California Adventure was opened in 2001 adjacent to the Disneyland
property and included four lands—Golden State, Hollywood Pictures Backlot, Paradise Pier, and
Bug’s Land. The park was initially built to alleviate overcrowding at Disneyland and was expanded
with the addition of World of Color in 2010 and Cars Land in 2012 to strengthen its appeal with
guests.

Aulani was a 21-acre oceanfront family resort located in Oahu, Hawaii. Disneyland Paris included two
theme parks, seven resort hotels, two convention centers, a 27-hole golf course, and a shopping,
dining, and entertainment complex. The company’s Hong Kong Disneyland, Shanghai Disney Resort,
and Tokyo Disney Resort them parks were highly popular with ambitious expansion plans.

The company also offered timeshare sales and rentals in 15 resort facilities through its Disney
Vacation Club. The Disney Cruise Line operated four ships out of North America and Europe. Disney’s
cruise activities were developed to appeal to the interests of children and families. Its Port Canaveral
cruises included a visit to Disney’s Castaway Cay, a 1,000-acre private island in the Bahamas. The
popularity of Disney’s cruise vacations allowed its fleet to be booked to full capacity year-round.

The company’s consumer products division included the company’s Disney Store retail chain and
businesses specializing in merchandise licensing and children’s book and magazine publishing. In
2020, the company owned and operated approximately 200 Disney Stores in North America,
approximately 80 stores in Europe, approximately 50 stores in Japan, and two stores in China. Its
publishing business included comic books, various children’s book magazine titles available in print
and eBook format, and smartphone and tablet computer apps designed for children. The division’s
sales were primarily affected by seasonal shopping trends and changes in consumer disposable
income.

The division’s operating results for fiscal years 2018 and 2019 are presented in Exhibit 3.

Media Networks

The Walt Disney Company’s media networks business unit included its domestic and international
cable networks, the ABC television network, television production, and U.S. domestic television
stations. The company’s television production was limited to television programming for ABC and its
eight local television stations were all ABC affiliates. Six of Disney’s eight domestic television stations
were located in the 10 largest U.S. television markets. In all, ABC had 240 affiliates in the United
States.

When asked about the decline in cable television viewership, Bob Iger suggested that content
delivery method was less important than the quality and appeal of content.

Well, for the most part, we’ve looked at channels less as channels and more as brands. And it’s less
important to us how people get those channels. . .but what’s more important to us is the quality of
the brand and intellectual property that fits under that brand umbrella. And our intention is
to. . .migrate those brands and those products in the more modern direction from a distribution and
consumption perspective.

Exhibit 4 provides the market ranking for Disney’s local stations and its number of subscribers and
ownership percentage of its cable networks for 2013, 2017, and 2019. The exhibit also provides a
brief description of its ABC broadcasting and television production operations. The division also
included ESPN Radio, which aired sports-oriented radio programming on 400 terrestrial radio
stations (4 of which were owned by Disney) in the United States. Operating results for Disney’s
media net- works division for fiscal 2015 through fiscal 2019 are presented in Exhibit 5.
Direct-to-Consumer & International

Among the most significant challenges to Disney’s media networks division was the competition for
viewers, which impacted advertising rates and revenues. Not only did the company compete against
other broadcasters and cable networks for viewers, but it also competed against other types of
entertainment and delivery platforms. For example, consumers might prefer to watch videos,
movies, or other content on the Internet or Internet streaming services rather than watch cable or
broadcast television. The effect of the Internet on broadcast news had been significant and the
growth of streaming services had the potential to affect the advertising revenue potential of all of
Disney’s media businesses.

The combat competing streaming content providers and capitalize on such opportunities, Disney
launched two direct-to-consumer (DTC) streaming services and Over-the-Top (OTT) services that
delivered content without a distributor. Disney’s ESPN+ DTC video streaming service was launched in
2018 and its Disney+ DTC subscription service that included Disney, Pixar, Marvel, Star Wars, and
National Geographic branded programming was launched in the United States and four other
countries in 2019. Within its first year, ESPN+ had attracted more than 3.5 million paid subscribers.
The company expected Disney+ to also have strong appeal with media consumers and intended to
launch Disney+ in additional countries in 2020 through 2024.

Disney+ users would have immediate access to 500 movies and 7,500 episodes of television content.
Disney+ also launched with 10 original movies, and the company planned to increase Disney+
content to include 630 movies and 10,000 television episodes by 2024. Disney also planned to add
60 original series, specials and movies each year to the Disney+ library by 2024. Programming was
priced at $6.99 per month for Disney+ or ESPN+ or at a $12.99 bundle price that included both DTC
subscription services and ad-supported Hulu.

The company’s acquisition of a controlling interest in Hulu was an integral component of its overall
DTC strategy, both domestically and internationally. Hulu was planned as the official streaming
service for all FX Networks programming as well as supporting ESPN+ and Disney+.

The company’s international channels produced local programs or delivered Disney produced
content to cable providers operating in countries throughout the world. Disney branded television
channels were broadcasted in approximately 35 languages in 165 countries. Fox programming was
broadcasted in 40 languages in 95 countries. National Geographic was available in 80 countries,
while ESPN programming was available in 15 countries outside the United States. Star operated
approximately 80 channels in ten languages in India, Asia, the United Kingdom, Europe, the Middle
East, and parts of Africa. The division also operated UTC, Bindass and Hungama branded channels in
India. Operating results for Disney’s Direct-to-Consumer & International division for fiscal year 2018
and 2019 are presented in Exhibit 6.

Studio Entertainment

The Walt Disney Company’s studio entertainment division produced live-action and animated
motion pictures, direct-to-video content, musical recordings, and Disney on Ice and Disney Live! live
performances. The division’s motion pictures were produced and distributed under Walt Disney
Pictures, 20th Century Fox, Pixar, Marvel, Lucasfilm, Fox Searchlight Pictures, and Blue-Sky Studios
banners. The division planned to release approximately 25 feature films in 2020 had Disney
produced more than 1,000 feature films and 100 full-length animated films throughout its history.
The company’s complete library of Disney-produced and acquired films stood at 2,300 titles as of
September 2019. Disney’s most financially successful films in 2019 included The Lion King, Toy Story
4, Frozen 2, Star Wars: The Rise of Skywalker, and Aladdin. The company’s largest grossing films in
2018 were the Incredibles 2 and Ant-Man and the Wasp. All of the company’s best-grossing films in
both years were either remakes or sequels of previous Disney, Lucasfilm, or Marvel blockbusters.

Most motion pictures typically incurred losses during the theatrical distribution of the film because
of production costs and the cost of extensive advertising campaigns accompanying the launch of the
film. Profits for many films did not occur until the movie became available on DVD or Blu-Ray disks
for home entertainment, which usually began three to six months after the film’s theatrical release.
Revenue was also generated when a movie moved to pay-per-view (PPV)/video-on-demand (VOD)
two months after the release of the DVD and when the motion picture became available on
subscription premium cable channels such as HBO about 16 months after PPV/VOD availability.
Broadcast networks such as ABC could purchase telecast rights to movies later as could basic cable
channels such as Lifetime or the Hallmark Channel. Premium cable channels such as Showtime and
Starz might also purchase telecast rights to movies long after its theatrical release. Similarly,
subscription video on demand (SVOD) services such as Netflix might acquire distribution rights to a
film for a 12- to 19-month window. Telecast right fees decreased as the length of time from initial
release increased. Operating results for the Walt Disney Company’s Studio Entertainment division
for fiscal 2015 through fiscal 2019 are produced in Exhibit 7.

The company’s consolidated statements of income for fiscal 2017 through fiscal 2019 are presented
in Exhibit 8. The Walt Disney Company’s balance sheets for fiscal 2018 and fiscal 2019 are presented
in Exhibit 9.
UNCERTAINTY AS THE WALT DISNEY COMPANY ENTERS THE SECOND HALF OF 2020

The Walt Disney Company reported a revenue increase of 29 percent during its first six months of
2020 compared to the same period in 2019. However, the company’s earnings per share
experienced a 73 percent year-over-year decline during the first six months of 2020. The company’s
strong revenue growth was a result of the inclusion of 21st Century Fox business units into the
company’s financial reports, but the steep 73 percent decline in EPS signalled the difficulty of the
effective integration of Fox businesses into the Disney organization. The dramatic decline in net
income from operations from $8.2 billion for the six months ending March 30, 2019 to $2.6 billion
for the six months ending March 28, 2020, also reflected the early costs of the novel coronavirus
pandemic on the company.

The greatest impact of COVID-19 on the company’s divisions occurred in its Parks, Experiences and
Products division, which saw a year-over-year declines in Q1 2020 revenue and operating income of
10 percent and 58 percent, respectively. Disney had closed its domestic parks and resorts, cruise line
business and Disneyland Paris in mid-March 2020. The company’s theme parks and resorts in Asia
were closed earlier in 2020. The company estimated that approximately $1 billion of the company’s
operating profit decline could be attributed to the company’s necessary response to the pandemic. A
summary of The Walt Disney Company’s second quarter revenue and operating income by division
for Fiscal 2019 and Fiscal 2020 is presented in Exhibit 10.

Walt Disney Company CEO Bob Chapek, commented on the Company’s Q2 2020 performance and its
long-term prospects as it entered the second half of Fiscal 2020.

While the COVID-19 pandemic has had an appreciable financial impact on a number of our
businesses, we are confident in our ability to withstand this disruption and emerge from it in a
strong position. Disney has repeatedly shown that it is exceptionally resilient, bolstered by the
quality of our storytelling and the strong affinity consumers have for our brands.