The Walt Disney Case Study
By: Sammy Khayat
Management 100W
October 12, 2004

Disney Outline:

Executive Summary:

     Success for the entertainment industry depends on their ability to anticipate and prepare for the benefits and risks associated with newly developed technology. The first part of the case study will give a brief overview of Disney and the current challenges the entertainment industries are facing. The next section will focus on copyright infringement, which is one of two major problems the entertainment industries are facing. Copyright infringement will be discussed briefly and then three solutions for dealing with the problem will be explained in minor detail. The three solutions are the following, (A) the Digital Millennium Copyright Act (DMCA), (B) Digital Rights Management (DRM), and (C) the Electronic Media Management System (EMMS). The case study then focuses on the second major problem; file sharing, and how the DRM functional architecture will help to minimize the impact the P2P architecture had on the entertainment industry. The third section will summarize the role Disney should play in facilitating change and continuing to globalize in the international markets. The forth section will discuss Disney’s brand and how the brand is recognized throughout the divisions of the corporation. Additionally, the case study will explain how the lawsuits and regulations made by the entertainment industry affect their brand. The fifth section will address how Disney is using their business model to generate new business in the PC market and Indian market. The final section will outline the long-term impacts of Michael Eisner’s decisions. Thus, before discussing any major issue the case study will now provide an overview about the Disney Company and the entertainment industry.

Background:

Disney:

      The Walt Disney Company was founded in 1923 and is one of the largest media and entertainment corporations in the world. The Disney Corporation is dedicated to bringing animated movies (e.g. Sleeping Beauty) into people’s homes with the main objective of putting a smile on everyone’s face. Though both the information age and technology trends will reshape Disney’s business model, both will never reshape Disney’s impact on our lives.

Entertainment Industry:

      As technology changes, the entertainment industry has been forced into a position of constant adjustment. Technology has changed the landscape the entertainment industry is built on because the development of the P2P architecture (implemented worldwide). Before the internet boom in 1995, consumers used to purchase “entertainment” products (e.g. music CD’s) from brick and mortar organizations. In today’s digital medium consumers have the option of downloading free music and movies from a file sharing network (P2P architecture) like Napster. However, two illegal activities have been linked to Napster (which shut down in 2001) and the file sharing networks of today, which are copyright infringement and internet piracy. The entertainment industry was slow to recognize the impact of file sharing because the industries integration into information technology has come at a slow pace. Since the plague of Napster the entertainment industry have stepped up their efforts to regulate new technology trends (e.g. high-definition digital radio). Controversies erupted over the entertainment industry’s regulations because they slow down innovation, which in effect jeopardizes business growth (e.g. Sonicblue Inc.). As Fred von Lohmann (senior intellectual property attorney) said, “It strikes us as a really bad idea to regulate new technologies in their infancy, in utero if you will.” [1] The counter argument from Fritz Attaway (executive vice president for government relations) stated, “Our objective is not to stop technology, but to ensure that technology can provide a secure environment for our content.” Thus, with controversies continuing to mount the case study now addresses the approaches the entertainment industry should/have taken to minimize the impact of copyright infringement.

Problem A: Copyright Infringement:

     Copyright infringement(A) is continuing to expand because file sharing over the internet allows users to download free music to their PC and redistribute the product to other users without permission. There are three solutions the entertainment have or must take to minimize the impact of copyright infringement on the entertainment industry.

Solution A:

     In 1998, Congress enacted the Digital Millennium Copyright Act (DMCA), which strengthened copyright protection in the digital medium. [2] The act will protect copyright materials by enforcing rules and regulations on the internet service providers (ISP). The act will increase the monitoring of copyrighted materials posted on individual’s websites because ISP’s will have more control over the content users post on their servers.

Solution B:

     Besides the development of new acts, policies, and regulations, the entertainment industry must incorporate a new business model because their old model is inadequate to address the issues evolving around the digital age. The entertainment industry should incorporate the Digital Rights Management (DRM)(B) model because this model will allow for new strategies to combat copyright infringement and file sharing. DRM refers to protecting ownership/copyright of electronic content by restricting what actions an authorized recipient may take in regard to that content. [3] The two approaches the DRM employs to secure content over the digital medium are listed below.

  1. “Containment,” an approach where the content is encrypted in a shell so that it can only be accessed by authorized users.
  2. “Marking,” the practice of placing a watermark, flag, or a XrML tag on content as a signal to a device that the media is copy protected. [4]
Note: The two mentioned approached above are vulnerable to cracking, according to Professor Ed Felten

Song writers and artists benefit from the DRM because they can configure the access of his/her content, for example, a document maybe viewable but not printable, or can only be used for a limited time.

Solution C:

     IBM has developed the Electronic Media Management System (EMMS)(C), which is a software suite helping (in this case) the entertainment industry control the distribution of media and protecting the industries assets. One major benefit of the EMMS software is digital rights management, which protects widely distributed popular digital media assets such as books, video games, music and software. [5] The list below summarizes some of the benefits song writers and artists will receive through the implementation of the EMMS.
  1. Enables music content owners to implement advanced right-management capabilities to enforce usage of their assets only by authorized users and processes.
  2. Provides enhanced security features for encrypted digital content and usage rights.
  3. Utilizes secure container technology to facilitate downloads of rich media or business data according to license terms specified by content owners.
For years the entertainment industries have battled for control over intellectual assets and property over the digital medium. Now with the implementation of EMMS, the entertainment industry will have more control of what the end – user downloads. The EMMS will increase capital gains for the entertainment industry because the services requested from song writers and artists will be paid for. In addition, the solutions outlined above will increase the control songwriters and artists have over the digital medium but the entertainment industry must first combat the risks associated with the P2P architecture; notably file sharing.

Problem B: P2P Architecture (File Sharing)

      Peer-to-peer (P2P) architecture is a distributed computing network in which each client computer shares files or computer resources directly with others but not through a central server (as in traditional client/server architecture). [6] The diagram below represents a centralized P2P network (one of three basic P2P architectures), which was adopted by Napster. Since the internet boom and Napster, file sharing has become the most common online activity. According to the Recording Industry Association of America (RIAA), the number of CD’s shipped in the U.S. fell from 940 million to 800 million or 15% between 2000 and 2002. The decrease in the volume of shipped CD’s and the decline in sales of an estimated $2.5 billion between 2000 and 2003 have all been attributed to file sharing, according to the film and record industry. The entertainment industry has already taken action to stop internet piracy through lawsuits and pressuring congress to pass new laws and regulations. In addition, file sharing will continue to grow unless the entertainment industry adopts the DRM functional architecture to minimize file sharing activities.

Solution A:

Integration of the DRM Functional Architecture:

      The model below is a detailed representation of how DRM will enhance copyright protection and eventually remap today’s P2P architecture.(D) [7] The DRM functional architecture will add copyright protection to song writers and artists content because the architecture is setup to allow users with proper ID to download copyrighted materials (for a determined price of course). The overall DRM framework suited to building digital rights-enabled systems can be modeled in three areas (including sub-systems of each area):
  1. Intellectual Property (IP) Asset Creation and Capture: managing the creation of content so it can be easily traded.
    1. Rights Validation
    2. Rights Creation
    3. Rights Workflow
  2. IP Asset Management: manage and enable the trade of content.
    1. Repository functions
    2. Trading functions
  3. IP Asset Usage: manage the usage of content once it has been traded.
    1. Permissions Management
    2. Tracking Management
Together, the three models provide the core functionality for the DRM functional architecture. Though the structure of the system is complex the system helps control the use of information and who is allowed to use the information. Additionally, the DRM functional architecture provides security over the content posted on the digital medium. The following steps will emphasize on the security measures implemented in the DRM functional architecture when users participate in trade:
  1. User purchases rights from the song writer or artist.
  2. When the prospective owner of digital rights downloads a content file (e.g. music and movies) the DRM software checks the user’s identity.
  3. After authentication, the DRM software contacts a financial clearinghouse to arrange payment.
However, most of the proposed solutions outlined above are susceptible to change because end users develop new methods to bypass the barriers put in place by new technology. As Cary Sherman, RIAA president said, “There’s no minimizing the impact of illegal file-sharing. It robs songwriters and recording artists of their livelihoods, and it ultimately undermines the future of music itself, not to mention threatening the jobs of tens of thousands.”(E) [8]

Disney’s Role:

      As one of the world’s largest entertainment corporations, Disney must take center stage in adopting the EMMS and DRM functional architecture. DMR and EMMS will increase Disney’s competitive advantage because the innovations will lead to immeasurable capital gains and increased control over the digital medium. For Disney to increase their lead further, they must expand their service coverage into international markets (e.g. India) because they can acquire more market shares as a result from the increase in customer base. Equally important is recognizing new technologies and/or new innovations through investment in research and development (R&D), which lead to new services (e.g. broad band services). In addition, Disney must lead the change in the entertainment industry but just as important, Disney must not change their already popular brand.

Disney’s Brand:

      In the end, the company that understands it’s proprietary benefit, fills a gap in the market, and addresses the emotional needs of it’s customers will create a powerful bond that’s price indifferent. [9]

      To be the best amusement park, or best children’s movie studio, or the best anything else is not outlined under Disney’s brand. What differentiates Disney from other competitors is making people happy, which defines their brand. Disney’s brand is recognized through the characters marketed in their films and merchandise. As Sean Mitchell (director of Marketing in Filmed Entertainment Licensing) said (about the film Hercules), "The film's appeal is truly across-the-board. At its heart and soul it's a comedy--very smart, very witty, very funny. We think that little boys will want to become Hercules, and little girls want to become Meg. So we try to reflect that in the products we do; the merchandise brings the characters to life." [10]       Today, with the continuing changes in technology the entertainment industry may indirectly destroy Disney’s brand because of the lawsuits and regulations enforced on consumers and businesses. Broken customer relations with Disney will result from the lawsuits and regulations because these actions communicate to consumers (e.g. radio, TV, or customer experience) that media corporations like Disney no longer support their brand; happiness.

Generating New Business:

PC Market:

      Disney’s business model has always evolved around Mickey Mouse because the animated figure incorporates the positive characteristics of the corporation. From an economical perspective Mickey Mouse is a powerful marketing tool because he is recognized all over the world and generates enormous capital gains. One of two new markets Disney has already incorporated their business model into is the PC market. Integrating the ears of Mickey Mouse on their new personal computers will create a new source of revenue because as the standard of living and digital medium continue to increase more consumers will purchase personal computers. [11] The above statement is a conclusion from the trends in the PC market because between 1990 and 1999 US households with personal computers increased from 22% to 53%. [12]

Indian Market:

      The second approach to generating new business is integrating Disney’s business model into new international markets and cultures. With a new Walt Disneyworld theme park in Tokyo (expected to open in 2005), Disney has expanded their business into the Indian market. With the world’s second largest population in India, Disney appears to have made the right decision in their effort to globalize. India has many indicators that point out to Disney’s globalization efforts; (1) lower labor costs, (2) second largest customer base, (3) low competitive environment, and (4) India’s interest and investment into the entertainment industry.

Change of Disney’s Leadership:

Michael Eisner (CEO):

      The board of Walt Disney Co. late Wednesday (March 3, 2004) stripped CEO Michael Eisner of his role as chairman after about 43 percent of shareholders voted to oppose his re-election to the company's board. The decision by the shareholders to retain their votes can be attributed to many of the following problems;
  1. Declining ratings for ABC television;
  2. Limited success at the box office;
  3. Ill-considered theme park developments;
  4. Corporate losses from a billion-dollar gamble on the Internet (go.com);
  5. Jeffery Katzenberg leaving Disney in 1994.
For the purposes of this case study only the long – term problems; the go.com bust, and Jeffery Katzenberg’s departure will be addressed.

After Michael Eisner lost his chairman role, Disney looked to many new successors but Mel Karmazin stuck out the most because of his past performance as President of Viacom. Mel Karmazin displays a number of qualities that stand out to the board of directors at Disney, shareholders, and Wall Street. He is proclaimed as cultivating talent and relationships, creative vision, and imagination, which are the characteristics that make up Disney. If Mel Karmazin were to work for Disney he would create more revenue for the Disney Company because of his cost cutting strategies, which helped build Infinity.

Long – Term Impact:

      One long – term problem is the public feud between Michael Eisner and Jeffrey Katzenberg. The story is Jeffrey Katzenberg alleges that when he became head of Disney's studio division in 1984, he agreed to, Chairman Michael Eisner's offer of a 2 percent share in the profits generated by his movies in perpetuity, in lieu of a stock option plan. In the dispute surrounding Katzenberg's departure, Eisner said he never agreed to grant the bonus in perpetuity. Katzenberg claims Disney owes him $250 million.(F)
"The basic lesson is a very common one," said Jay Rakow, an attorney with Christensen, Miller, Fink, Jacobs, Glaser, Wiel & Shapiro. "If you have a contract in the entertainment world, even if it's with a friend, it should be fully written down. You can't always rely on deal memos.” [13]
The impacts of the Jeffery Katzenberg trial will be felt within Disney because the claims made in the trial suggested that Disney under-reported earnings and exaggerated expenses. Another impact maybe the potential increase in executive salaries which will drive up the cost of talent.

      In January 29, 2001, the Disney Company announced they were shutting down (their billion dollar investment) Go.com. Michael Eisner said, “We believe this action should help us gain greater competitive advantage as we leverage Disney's creative content, brands, and other assets.” [14] Michael Eisner’s failure put four hundred employees managing the Go.com site on the list of the unemployed. More importantly when Go.com went down consumers, stakeholders, investors, and employees lost their trust with the Disney Company.

Conclusion:

      For future success in the digital age, international markets, and new leadership role, Disney must develop new business models to levitate the risks associated with them. From the beginning, a short background description was given about Disney and the entertainment industry. The information pointed out two main challenges the entertainment industry is facing, which were file sharing and copyright infringement. In the second section three proposed solutions were outlined. The three solutions will decrease the impact of copyright infringement because they increase the control mechanism the entertainment industry and song writers have over their content. The next topic introduced file sharing and how the DRM functional architecture will furthermore increase control and security songwriters and artists have over their content. The third section addressed that Disney must become the leader in changing their management system in order to integrate into the digital age. The forth section discussed Disney’s brand; making people happy and how the entertainment industry could indirectly impact their brand. The last section focused on the bad decisions of Michael Eisner and their long – term impacts on the company. Furthermore, the section proposed who the next leader should be (Mel Karmazin) and what future impact Mel Karmazin will have on the Disney Company. In conclusion, the success of the Walt Disney Company depends upon their ability to recognize new technology trends and develop plans to minimize the risks associated with technology.

Bibliography:

[1] Evangelista, Benny. “Reining in tech Learning from the Napster case, the entertainment industry is trying to block new technology before it takes off.” The Chronicle. 30 August 2004. Newspaper on – line.
Available from http://sfgate.com/cgi-bin/article.cgi?f=/c/a/2004/08/30/BUG688F1UF1.DTL
Internet. Accessed 4 October 2004.

[2] Yu, K. Peter. Why the Entertainment Industry’s Copyright Fight is Futile. August 2002. GigaLaw. 4 October 2004.
http://www.gigalaw.com/articles/2002-all/yu-2002-08-all.html

[3] Russ, Austin. Digital Rights Management. July 2001.
SANS Institute. 3 October 2004.
http://www.sans.org/rr/papers/48/434.pdf

[4] Digital Rights Management and Privacy. 29 March 2004.
EPIC. 8 October 2004.
http://www.epic.org/privacy/drm/default.html

[5] Electronic Media Management System (EMMS).
IBM. 7 October 2004.
http://www-306.ibm.com/software/data/emms/

[6] Turban, Efraim, R. Kelly Rainer, Richard E. Potter. Introduction To Information Technology. New Jersey: John Wiley and Sons, Inc., 2004.

[7] Iannella, Renato. “Digital Rights Management (DRM) Architectures.” D-Lib Magazine. Volume 7 Number 6.
June 2001. 8 October 2004.
http://www.dlib.org/dlib/june01/iannella/06iannella.html

[8] Oberholzer, Felix, Koleman Strumf. The Effect of File Sharing on Record Sales An Empirical Analysis. March 2004
Harvard Business School. 2 October 2004.
http://www.unc.edu/~cigar/papers/FileSharing_March2004.pdf

[9] Orzechowski, Kevin. Building an Operational Brand.
AccessData Corp. 3 October 2004.
http://www.accessdc.com/pdf/WP_Branding.PDF

[10] Wasko, Janet. The Magical-Market World of Disney. April 2001
Looksmart. 9 October 2004.
http://www.findarticles.com/p/articles/mi_m1132/is_11_52/ai_74410355

[11] Berger, Sandy. Mickey Mouse Computer. 14 September 2004.
Compu-Kiss. 9 October 2004
http://www.compukiss.com/populartopics/computercenterhtm/article1227.htm

[12] Ferrara, Melanie. The Importance of the PC to the Computer Market.
6 October 2004.
http://web.bryant.edu/~history/h364proj/fall_01/ferrara/index.htm

[13] Brinsley, John. Major lesson from Katz vs. Mouse: get it in writing – Jeffery Katzenberg’s lawsuit against Walt Disney Co. 10 May 1999.
Looksmart. 11 October 2004.
http://www.findarticles.com/p/articles/mi_m5072/is_19_21/ai_54770179

[14] Gordon, Arthur. Disney to Discontinue Go.com Portal. 29 January 2001.
Internetnews. 11 October 2004.
http://siliconvalley.internet.com/news/article.php/5321_573361

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