Disney in China

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Licensed exclusively for use by Professor Martinsons and his authorized agents.
Unauthorized use or reproduction of this case is strictly prohibited.

“I only hope that we don’t lose sight of one thing – it was all started by a mouse” – Walt Disney

This quote is not entirely true, but Mickey Mouse did play a key role in the development of
Disney Brothers Studio, the company that Walt Disney and his brother, Roy, founded in 1923.
Walt became the creative force, developing stories and overseeing animation, while Roy managed
the money. The first significant success for the Disneys was Steamboat Willie in 1928. The main
character in this short cartoon was a mouse named Mickey, who quickly achieved international
popularity. The Disneys subsequently produced a series of feature-length animated films, such as
Snow White and the Seven Dwarfs (1937), Fantasia (1940), and Cinderella (1950). In the 1950s,
the renamed Walt Disney Company (WDC) branched out from films to develop television shows
(such as Mickey Mouse Club) and one of the world's first themed amusement parks.

Theme Parks
The Disneyland theme park in Anaheim, California was to be “a place where the young and young
at heart can have fun together.” It was a bold and risky venture which required millions of dollars
in bank loans to pay for the land and construction. The big bet paid off. Disneyland was profitable
soon after opening in 1955. Revenues came from admission tickets, food and souvenirs. In 1965,
Walt Disney purchased about 27,000 acres of land near Orlando, Florida on which he planned to
build Disney World and an Experimental Prototype Community of Tomorrow (EPCOT). The
Disney World /EPCOT complex opened in 1971. It has been a big success over the past 5 decades.

After completing two large parks in the United States, WDC began to look for opportunities
overseas. After 5 years of negotiations and 3 more years to complete construction, the first Disney
theme park outside the United States opened in 1983. In order to limit its risks, WDC took no
ownership in Tokyo Disneyland. Oriental Land (a Japanese property firm) became the majority
shareholder while Mitsui Real Estate and Keisei Railway Company took on minority stakes. WDC
licensed its concept and retained full control over the design and operations of the park. It earned
a development fee and would receive 5% of the gross revenue on all food and merchandise, 10%
of the gross revenue on admissions, and 10% on any corporate sponsorship agreements.

By foregoing the risks of ownership with Tokyo Disneyland, WDC severely limited its returns on
what became the world’s most popular theme park. While WDC’s royalties grew from US$ 40
million in 1983 to about US$ 180 million in 2019, financial data from Oriental Land suggest that
Tokyo Disneyland’s annual profits have recently exceeded US$ 1 billion.

Disney in Decline
WDC was determined to avoid repeating its costly mistake when it entered the European market.
It took a 49% equity stake in a second overseas venture. The cost of developing EuroDisney near
Paris, France was initially estimated to be US$1 billion. As a result of incentives and concessions
from the French government and a highly-leveraged financial structure, WDC invested only US$

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200 million in cash. In return for operating the park, it would receive 10% from ticket sales and
5% from merchandise sales, regardless of the park’s profitability.

Development costs for EuroDisney ultimately rose to US$ 5 billion and the venture was
overloaded with debt by the time it opened in 1992. EuroDisney was a disappointment, partly
because it had naively adopted Disney’s formula from the United States. Despite advance
warnings of a cultural disaster “like Chernobyl” from some industry analysts, management
ignored the significant cultural differences between Americans and the French.

EuroDisney adjusted its hotel and admission prices and modified many culturally-insensitive
practices, but it still needed to be financially restructured by 1994. WDC agreed to forego its
management fees, sold off part of its equity stake, and became a major creditor. The existing
lenders agreed to defer interest payments while a Saudi Arabian prince invested US$ 500 million.
The renamed Disneyland Paris theme park reported a small profit in 1995, but soon reverted to
loss making. Additional bailouts were negotiated in 2004 and 2012. Disneyland Paris achieved an
annual profit in 2019 for the first time in more than a decade.

Problems were also growing at the corporate level. Creativity at WDC declined soon after the
founding brothers died, Walt in 1965 and Roy in 1971. The leadership could not successfully
answer the question: “What would Walt do?” The lack of bold new productions along with large
development expenses hurt WDC financially. In the 1980s, it faced serious threats of being bought
out and/or dismantled. Hostile takeover bids were thwarted before oil tycoon Sid Bass rescued
WDC by investing US$ 365 million and hiring Michael Eisner as the CEO.

Revival In The Eisner Era

Eisner achieved a turnaround of WDC in the late 1980s and early 1990s. He built up its brand
while preserving its key corporate values: quality, creativity, intrapreneurship, and teamwork.
Recognizing that the “management of creativity” was a distinctive competence, Eisner deliberately
fostered a tension between Disney’s creative and financial teams. He encouraged innovative ideas
and nurtured promising concepts, but also expected each business unit to meet clear objectives.

Eisner pioneered the “retail-as-entertainment” concept by launching Disney Stores. He also

realized that people who watched Disney films and TV shows were more likely to visit its theme
parks and buy its home videos and licensed products. Success with this media-driven business
model enabled profits to grow at an average of more than 20% per year from 1985 to 1997.

Financial results for WDC started to tail off in 1998. Operating margins declined from 18% in
1997 to 13% in 1999. In the late 1990s, the studio entertainment division was hit hard by a
sluggish home video market while declining sales of Disney toys and merchandise hurt the
consumer products division. In 2001, Disney closed its e-portal (GO) and reviewed recent
investments in cruise ships and an ice hockey team.

Michael Eisner realized that big changes were needed to revive the magic of Disney. After
visiting China in 1998, Eisner decided that the time was right for WDC to establish itself in the
world’s most populous country. WDC was getting only a small share of the huge profits from
Tokyo Disneyland and had yet to achieve profitability with Disneyland Paris.

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Eisner did not want to repeat either mistake in China. However, he also recognized that Disney’s
business model may have to be adapted or even abandoned in mainland China due to tight controls
on foreign media. The Chinese authorities told him that the Disney Channel could not be licensed
to broadcast in mainland China because “cultural security” had to be preserved. Eisner believed
that a theme park in China could succeed despite this restriction. It would also position Disney to
develop other businesses as China became more affluent and its media regulations were relaxed.

Disney in Hong Kong

In the 1990s Hong Kong was a major trading and financial centre, and one of the world’s freest
and most competitive economies. It had a well-developed infrastructure and attracted millions of
tourists from both overseas and mainland China. However, it lacked attractions bigger than Ocean
Park (35,000 visitors per day) and horse racing (up to 60,000 attendees twice a week).

Hong Kong suffered an economic recession shortly after its political handover in 1997. A sharp
drop in tourists, from nearly 12 million visitors spending HK$ 104 billion in 1996 to 8 million
spending HK$ 65 billion in 1998, alarmed a government that aimed to lower unemployment and
diversify the economy away from financial services, property development, trade, and education.

The Walt Disney Company and an eager (or perhaps desperate) Hong Kong Government (HKG)
moved from casual dating in 1998 to serious courting in 1999 before agreeing to develop a theme
park at Penny’s Bay on Lantau Island. WDC invested US$ 314 million in return for a 43 percent
stake in Hong Kong International Theme Parks Limited (HKITP), the parent company of Hong
Kong Disneyland (HKDL). The Hong Kong Government agreed to spend about US$3 billion to
develop the park and the surrounding infrastructure in return for a 57 percent stake in HKITP.
HKDL was forecast to attract more than 5 million visitors per year, mostly from mainland China.

The plan for HKDL included many classic Disney attractions and rides, unique shops and
restaurants, dazzling live entertainment, about 2100 rooms in 3 resort hotels, and “all the magic,
fantasy, adventure and discovery of a Disney theme park”. Design elements from other theme
parks have been incorporated, but HKDL is fundamentally a subset of California’s Disneyland.

The fall of 2005 was an eventful time for both the WDC and its activities in Hong Kong. Robert
Iger replaced Michael Eisner as the corporate CEO on October 1st. Days earlier, on the 12th of
September 2005, Hong Kong welcomed a “familiar yet fresh Disney experience” that transplanted
the quintessentially-American magic of Disney while avoiding the big mistakes made in Europe.

HKDL hosted over 1 million guests during its first 100 days of business but subsequently fell
short of key performance targets. Attendance was below projections and HKDL recorded a net
loss in each of its first 6 years. It finally made an annual profit (US$14 million) in 2012. Profits
grew in 2013 and 2014 before HKDL recorded a series of annual losses again starting in 2015.

In November 2009, the two HKDL partners agreed to expand the park by adding 3 new themed
lands between 2011 and 2013: a Toy Story “playland” for children, Grizzly Gulch (a new theme
for Disney featuring a large roller coaster in an abandoned mining town), and Mystic Point,
featuring a haunted mansion set in a dense rain forest. In November 2016, HKDL announced a
further expansion project that will cost US$1.5 billion over 6 years (2017-2023) and add 20 new
attractions to the existing 110. It incorporates themes from the Marvel stable of superheroes
(including The Avengers) and the Frozen films while transforming a sleeping beauty castle.

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Disney Today and Tomorrow
The Walt Disney Company became the world’s largest entertainment provider by combining
organic growth and acquisitions. After its purchase of Pixar Animation Studios in 2006, Steve Jobs
became WDC’s biggest individual shareholder and one of its Directors. Subsequently, WDC paid
about US$4 billion each to acquire Marvel Entertainment (known for its Spiderman and Ironman
characters) in 2009 and Lucasfilm (associated with Star Wars and Indiana Jones) in 2012. In late
2017 it announced a US$66 billion deal to buy the entertainment assets of 21st Century Fox.

Based on attendance data compiled by the Themed Entertainment Association, remarkably WDC
was involved with a majority of the world’s 10 most popular parks in 2020. It has consistently
added attractions while expanding its hotels and resorts to encourage longer stays and repeat visits.
It has also made efforts to attract meetings and conferences. Both the popularity and profitability
of its theme park business experienced steady growth from the 1980s until the COVID pandemic.

WDC views China as a key market in its future growth. A joint venture with the Shanghai Shendi
Group built a Disney theme park on the outskirts of Shanghai as part of a resort. The Shanghai
Disney Resort (SHDR) opened in June 2016, cost US$5.5 billion, and spans an area 11 times the
size of the original Disneyland in California. The complex includes 2 hotels and a Downtown
Disney shopping centre. It varies significantly from the typical Magic Kingdom theme park. Most
notably, a large Gardens of Imagination replaces the traditional “main street" as the park’s hub.

HKDL and SHDR face keen competition. China has about 300 theme parks, including those
developed by Chimelong and Universal Studios. 50 of them have attracted over 1 million visitors
per year. The Dalian Wanda Group also had grand plans for theme parks and shopping plazas. Its
founder, Wang Jianlin, vowed to “make Disney’s China venture unprofitable for decades”.

WDC aims to rapidly expand its business in China beyond theme parks. It had plans for 1,000
retail outlets, including both dedicated Disney Stores and collaborative efforts such as Man Is In
The Forest with Hong Kong’s CLOT Inc. It also envisions showing feature-length Disney films in
thousands of PRC cinemas while Broadway-style shows like The Lion King play in major cities.

However, bringing WDC content to the Chinese market faces challenges. Broadcast regulations in
mainland China prevent WDC from implementing its media-driven business model based on a
dedicated Disney television channel or Internet streaming. Instead, WDC is creating awareness of
its characters in other ways. Disney English is a language school that uses immersive storytelling
with Disney characters while the Disney Dragon Club produces and distributes videos. Disneylife
is an online service using a Mickey Mouse-shaped connection device that was started in December
2015 by Alibaba under a multi-year licensing agreement with WDC. However, its operations were
abruptly suspended in April 2016 at the request of Chinese regulators. Even a new Disney
streaming service in Hong Kong has self-censored episodes of TV shows such as The Simpsons.

The pandemic forced closures of every Disney theme park. China-U.S tensions are a big concern
for an iconic American business operating in China. WDC has also developed several streaming
services to compete against Netflix that have been annually losing multiple billions of dollars.

Amid a ‘new normal’, cultural conflicts and poor performance, the directors of Walt Disney
Company in November 2022 asked Robert Iger to interrupt his retirement and return as CEO. Iger
is making many strategic and operational changes.

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Questions

CLEAR, CONCISE and CONVINCING answers to the following questions should be based on:
i) evidence from the case and beyond it (please reference each source!);
ii) relevant concepts, theories, frameworks/models and principles; and
iii) EXPLICITLY STATED assumptions.

1. Explain how the theme parks in Hong Kong and Shanghai support WDC’s mission and vision.
Evaluate (and comment on) the attractiveness of the theme park industry in/around China.
Identify the key success factors for the theme park industry.

2. Explain how the resources and capabilities of WDC and the Hong Kong Government
complement each other and contribute to HKDL. To what extent do their contributions and
responsibilities resemble those of successful Sino-foreign joint ventures? Specify the
strategic goals of the HKDL partners and comment on the degree to which they converge
and/or diverge. Comment on whether/how HKDL could/should collaborate with Ocean Park.

3. Is HKDL successful? (consider its KPIs) What are its biggest threats and opportunities?
What strategic initiatives have been implemented/planned in response to those threats and
opportunities? What are the major source(s) of resistance to the planned changes? Why?

4. Why has Tokyo Disneyland been more successful than Disneyland Paris? What elements of
the ‘American theme park recipe’ is WDC duplicating in China, and what has been changed?
How successful are the two Disney theme parks in China compared to those elsewhere?

5. What should be the key performance indicators for the Shanghai Disney Resort this year?
Why? What are the biggest threats and resource challenges that SHDR faces? What are the
most important things (mission-critical activities) to ensure that SHDR is successful?

6. Describe/diagram WDC’s media-driven business model in terms of the relationships and

sequencing of activities between its business units. Map the business units in terms of their
global market share and industry growth (hint: apply the BCG matrix).

7. Describe how Disney creates awareness and interest in its characters and content in the United
States (Hint: consider the marketing funnel). Explain how this American ‘recipe’ must be
adapted for the Hong Kong and mainland China markets. Comment on the extent to which
these markets are aware of and attracted to Disney characters and its entertainment products?

8. Identify and justify the KPIs that Walt Disney Company should use to evaluate its overall
performance in mainland China over the next 5 years. Specify the key success factors for
WDC in China. Will WDC be successful in China? Why or why not?

For discussion (if time permits):

9. At a corporate level, what strategic options does WDC have for its money-losing streaming
services? What corporate strategy would you recommend for its streaming services?
Why?