Apple Taking Notes From Disney

Is Apple's (AAPL) success a result of coincidence or brilliance? Has CEO Steve Jobs been dealt a lucky hand or is his success a function of careful analysis that showed him how history could repeat itself?

It is my opinion that Steve Jobs has carried around the blueprint for Apple’s success since he took back the permanent CEO spot back in 2000. During his latest tenure at Apple he has completely transformed the company from a one trick pony into a four-tiered empire. Has anything this dramatic happened before?

I really wanted to find a company who had done what Apple is now doing. Historical analysis gives me convictional peace as I set time and price targets, but my search for comparable companies kept coming up empty. Sure there are examples like Tyra Banks going from supermodel to talk show host or Ronald Reagan going from acting to politics, but these reinvention stories don’t help me come up with investable limits on Apple.

The real question is whether the Apple story is sustainable or just a fad. After hours and hours of frustrating research, I finally found the the perfect comparison: Disney (DIS). The funny thing is, all I had to do was follow Steve Jobs’ money trail to find it. He’s their largest shareholder. The irony amazes me. Somehow Steve Jobs has been integrally involved in the two great turnaround stories of our lifetime. The similarities between the two help to explain the vision that Steve Jobs created for Apple.

A quick recap of Disney's history shows that after Walt Disney’s death in 1966, and the completion of Disney World in 1971, the Disney brand began its steep decline. Conditions got so bad that on June 3rd, 1984, Disney stock closed at an adjusted price of .78 cents. The widespread disgust over this valuation led to hostile takeover threats and even the near distinction of the company. Disney was out of sync with the times, their animation division was near dead, and their growth was non existent - until October of 1984, when Michael Eisner came in as CEO and began the turnaround. He took them into new markets where they flourished. He created a brand called Touchstone films and television that allowed them to produce box office hits for the masses.

This innovation led to the relationship with Pixar in 1991 and the purchases of Miramax, ABC and ESPN. The first Disney store was opened on March 28, 1987 in Glendale, California. This evolved into an international chain of specialty stores selling exclusive Disney items, which helped to introduce a whole new generation to their library of animated classics, which in turn led to a renaissance in Disney toy sales. Eisner was also involved with resort expansion overseas and the development of California Adventure, Downtown Disney, new hotels, and the entertainment district.

How did these strategic moves affect stock price? Disney stock rose during 13 of the 14 years after Eisner took over, with average yearly returns of 30.7% and a high of 117% in 1986 (calculated per April yoy price from 1984-1998).

In May of 1985, Steve Jobs was relieved of his duties as head of the Mac division in the very company he had founded in 1976. Isn’t it interesting that the Disney renovation of the 1980s happened just as Mr. Jobs left Apple? It is no coincidence that he used the Disney growth strategy as the blueprint for Apple’s success, as he had plenty of free time to observe what they were doing. While he was away from the company, Apple suffered through a period of mismanagement and outdated product lines. When he returned in 1997, he began the process of implementing a Disney-like strategy. Just as Disney did with Touchstone, Apple did with the iPod. They opened up their brand to a new generation of users. This led to the development of iTunes music, movies, television shows, podcasts and games.

Apple also opened up their own international chain of retail stores - just like Disney did. They have formed partnerships with companies like Nike (NKE), Microsoft (MSFT) and Best Buy (BBY) to better their offering - just like Disney did with Pixar. This experience obviously taught Steve the importance of working well with others, although Apple still retains exclusive rights to their operating system - just as Disney keeps their exclusive advantage.

It has been eight years since Steve Jobs took over the CEO position on a permanent basis. Since that time, Apple stock has been up 6 out of the 8 years, with average yearly returns of 25.3% and a high of 167% in 2005 (calculated per April yoy price from 2000-2008).

Just as Steve Jobs mirrored Apple after Disney, I too am going to use Disney stock performance as part of my Apple stock performance forecast. So far the correlation between innovation and performance is trending too close to be called a coincidence. There is no reason to believe that the Apple story going to end anytime soon; according to the Disney trend, they still have another 6 years of 25% yoy stock growth ahead of them. What one company can do, so can another. Mr. Jobs’ position as Disney’s largest shareholder is a stroke of fateful brilliance; after all, they taught him everything he knows.

Disclosure: Author holds a position in AAPL

Comments

[Option watcher:]

You want a Disney comparison to Apple? I'll give you a perfect up/down crash and burn failed recovery with just one name! Britney Spears...

How does her example compare with Apple? Well lets see! You have the hottest product of your corporate life and you tie yourself to one company (ATT) with a multi year exclusivity contract. Next you count on purchasers to actually activate with this company as it is critical to your earnings projections.

How about missed opportunities? You finally move to an Intel chip platform but, make your operating system exclusive to to that chip on your hardware platform only!! Dumb move. Why? Because MSFT has released there worst O/S ever with Vista. You had the opportunity of a lifetime to gain significant market share by finally allowing your O/S to run on a standard PC. Lets face it. People that already buy your hardware will continue to do so, so why worry about that. Every residential customer I meet with Vista or XP have said they would absolutely by your O/S to put on their existing PC if priced at $200 or less. What they will not do is pay 5x that amount for hardware they don't need just to try your O/S.

Oh and you missed the boat on China. 1.4 billion people and half of the with cell phones and you hold out for a revenue sharing contract? Are you insane? If you could sell an Iphone to every person in the USA but, with no revenue sharing contract would you turn away those sales? Well China would have been that many sales this year already. How is that ATT revenue sharing plan working out for you? What's that? More than 20% sold are not activated you say? How is that exclusivity deal working for you now?

When you do stupid things you tend to take a fall that you can't fully recover from. Just ask Britney. Her novelty has worn off and so will the Iphone's and probably before you wake up to all the missed opportunities........

2008 Apr 23 07:36 AM

[digivision:]

what a simplistic and narrow minded comment LOL

so you'd prefer getting $100 profit for every iphone sold right now then $100 + $50 every month over 5 years period ??
you're a smart one ..

2008 Apr 23 09:25 AM

[digivision:]

you would do that only to gain market share??? market share means nothing , it's the bottom line that counts

2008 Apr 23 09:26 AM

[deaverb:]

As the first commentator said, Apple has stayed too proprietary, their long term weakness--this drove our company to have to make all PC software (ugh). We never got cooperation to make MAC software.

Having said that, let's praise the fabulous part of Apple: MAC, iPhone (I have one and love it), iPod (had one; gave it to a family member now that I use the iPhone), iTunes--holding out for 99 cents. As long as Steve stays, and stays "Steve," Apple will soar as the author says.

2008 Apr 23 10:26 AM

[Shorting Sh...:]

I can't help but feel the first commentator is bitter about something. If Apple allows the Mac OSX on the PC, whose brand image will suffer when there are problems (and there will be problems)?

People will pay for reliability, appeal, and good customer service, as well as features.

And, with due respect to Steve, lets not forget Tim, a masterful supply chain designer and Ron, the Retail Guru.

2008 Apr 23 11:04 AM

[lgp:]

I always feel that those with stances like those of "optionwatcher" should demonstrate their confidence in their views by selling Apple short. If they are right, they could make a lot of money. If not, well....

2008 Apr 23 12:27 PM

[Stephen Col...:]

Jason:

For the second time in less than a week, I found your written words fascinating and substantial. Thank you.

2008 Apr 23 02:08 PM

[chinatown74:]

Eisner did not create Touchstone. Ron Miller did. It was in place before Miller was unfairly ousted and Howdy Doody was brought in to run the company. I'm sure Eisner would like the credit, but give it where it is due.

2008 Apr 23 09:43 PM

[brewer:]

Disney stores didn't have that much success I thought. The certainly did not achieve highest profit per square foot of any retail store, as Apple did.

What the first commentator has left out is that we all need to upgrade at least once every 5 years or so, and that, to buy a generic PC that is hobbled with Windows is a very sad mistake. The Mac is about the same price as a good quality PC, even cheaper than DELL on some models, if you can believe that. Apple hardware is a fantastic bargain at the current prices. If people are too shortsighted to see that, well, 'Dude, you are getting a Dell!'

Sure Apple should sell OS X to all comers. Look at M$--their retail price for a boxed copy of Windoze is totally absurd. The reality is that virtually no one buys OS releases or upgrades in the PC market. It's too difficult to install. Most PC users by new hardware instead. :-) Can you blame them when M$ practically gives the software for free (well $50) when buying hardware, but charges nearly 10 times that much for a boxed copy???

I believe Apple will release OS X for generic PCs someday, but they are waiting for the right time as this will be the DEATH KNELL for Windoze.

As it is, Mac will eventually overtake Windows on the hardware front alone. This is already happening in the retail market, and I believe it's beginning to happen even in the corporate areana, such is the angst over the Vista debacle. Microsoft has no choice but to keep suspending the elimination of XP, which they have done twice already. Also, Microsoft has no road map for starting over, which is really the only solution to the horrible mess they are in. What I really want to know is when the investors will notice. I mean, I know investors don't necessarily know anything about the companies they invest in, but are they blind or what?

2008 Apr 24 03:12 PM

[brewer:]

One final note. Grow your hair out, Jason, and with enough body you would look a lot like Roger Daltry. :-)

2008 Apr 24 03:13 PM