Disney Comments on Its Movie Studio Growth

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On Disney's (NYSE:DIS) Fiscal 3Q conference call, executives discussed the growth in Disney's movie studio:

Bob Iger-President and CEO

Disney Pixar's “Cars” is ... the number one animated movie of the year and ranks as the number two domestic movie of the year in total box office receipts. “Cars” also was a major factor in our consumer products growth this quarter, with our broadest merchandise presence of any property since “The Lion King”...

At present, we are putting our plans in place for aggressive programs for the holiday season to coincide with the film's release on DVD. Down the road, you shouldn't be surprised to see a “Cars” based attraction at one or more of our theme parks around the world. We see enormous potential for this entertainment property and believe it's enduring appeal, particularly among young boys, can generate significant returns for the Company over the long term.

... Disney's enormously successful franchise, “Pirates of the Caribbean - Dead Man's Chest”, which opened in theaters in July, is the number one movie of the year, crossing the $790 million mark in global box office receipts, including capturing the number one spot overseas for the fifth consecutive weekend. “Pirates” has come to represent perhaps our biggest cross-platform franchise ever...

Tom Staggs -Senior Executive Vice President and Chief Financial Officer

We generated very solid box office results from our theatrical slate this quarter, led by “Cars” and we benefited from less expensive Miramax titles versus the prior year. Our success in Studio directly influences the results in consumer products, and that was certainly the case this quarter. Licensing operating income was up by more than 35%, due in large measure to the performance of “Cars” and “Pirates” merchandise. This leveraging of successful film titles in other segments is an important factor in the shift to Disney-branded films...

Kathy Styponias - Prudential

A question on your studio strategy. How the strategy pans out, obviously, is going to depend upon the cost of the films that you put out as well as how well they do in the box office. But I was wondering, Tom, if you can give us a sense of, given the cost reductions that you have announced, specifically the headcount, would it be fair to assume that reduces your cost structure at the studio by about $100 million?

Tom Staggs

Sure, Kathy. With regard to the studio strategy, it is safe to assume we obviously are, the point is that we will have a lower cost base. As you know, many of the costs of the studio are capitalized into the films and then they come through the film. So I'm not speaking of timing, but your estimate of $100 million is in the right ballpark for what we think the net effect will be in that regard.

David Miller - Sanders Morris Harris

Congratulations on the stellar results. Bob, just one simple question. Obviously "Pirates 2" and "Cars" will be both analog and Blu-ray media events by fiscal Q1 of 2007, yet as you know, player penetration within the Blu-ray market is obviously pretty limited at this point. Are you going to be using these titles as levers to expand the market? I'm trying to get at what if anything, do you see doing to help expand the market using these two titles as levers? Thanks very much.

Bob Iger

Eventually "Cars" and "Pirates" will obviously be released in the Blu-ray format although in the initial array movies that will be made available, I guess it would be the fourth quarter of '06 and early first quarter of ‘07. They are not part of it because they are releases come a little bit later in the first quarter.

I believe that they will help and in the end you need a few things in terms of platform penetration. You obviously need great hardware and you need great software. It is still really early, obviously in the life of the next generation DVD, to predict I think, in all likelihood adoption of next-gen DVD formats will be slower to market than the first generation DVD format or standard def DVD which was obviously rather dramatic; but long term I believe in the value of high-definition television in general, whether you are watching it in effect through multi-channel providers or whether you are watching it on a disk that you have purchased.


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