Disney: The Renaissance and the Empire

Disney entered 1984 as a company worth more dead than alive. Earnings had fallen 26 percent over two years, the stock had dropped from 82 to 52 dollars, and corporate raiders were actively planning to sell the film library to MGM and the theme parks to hotel operators. Roy E. Disney orchestrated a boardroom coup on September 7, 1984, ousting CEO Ron Miller, and the company fended off the raiders by selling roughly 25 percent of itself to the Bass family of Fort Worth. Within 14 days Disney hired Michael Eisner as chairman and CEO and Frank Wells as president. When Eisner arrived, the parks had not raised ticket or parking prices meaningfully since Walt's death despite the inflation of the 1970s, parking was still one dollar, and film generated only two million dollars in profit against a quarter billion from parks and consumer products.

Eisner and Wells immediately raised prices, with all incremental revenue falling directly to the bottom line. They produced 75 live action films over eight years financed entirely by a partner called Silver Screens, with 27 of the first 33 profitable, applying the same modest-budget singles-and-doubles approach Eisner had used at Paramount. The decisive creative move was transforming Disney animated films into Broadway-style musicals, a structural insight articulated by Howard Ashman, who identified that animation and musical theater shared the same grammar. Ashman's contributions to The Little Mermaid, including the Jamaican characterization of Sebastian that produced Under the Sea, launched the Renaissance. Beauty and the Beast grossed 330 million dollars against a 25 million dollar budget, Aladdin 500 million against 28 million, and The Lion King 750 million against 45 million, making it the most successful traditionally hand-drawn animated film in history at the time.

Home video transformed the economics entirely. Pinocchio's first VHS run of 1.7 million units at 29.95 dollars sold out almost instantly. Aladdin sold 30 million tapes in 1993 generating roughly 900 million dollars in sales. The Lion King sold 32 million units in 1995, the best-selling VHS of all time, generating approximately one billion dollars in tape revenue on top of 750 million in theatrical box office, with Disney capturing roughly 50 percent cash flow margin on tape sales. Disney also built more than 750 retail stores in malls across America and produced The Lion King as a Broadway musical, which has now run approximately 30 years across London, New York, and a touring company, generating an average of 350 million dollars per year and over 11 billion dollars in total, making it arguably the highest-grossing entertainment product in history across any medium.

The Capital Cities ABC acquisition in 1995 for 19 billion dollars, the second-largest acquisition in history at the time, was initiated in a parking lot conversation at Sun Valley where Eisner encountered Warren Buffett and was introduced to Tom Murphy, with a deal reached within roughly a week. The stated rationale was television distribution for Disney content, not ESPN. ESPN had been acquired by ABC from Getty Oil via Texaco in 1984 and pioneered the affiliate fee model by charging cable operators per subscriber, using the threat of pulling live sports as leverage. At the time of the deal ESPN had 66 million subscribers at under one dollar per month in average affiliate fees. That figure is now 9.42 dollars per month. ESPN became the crown jewel of Disney almost entirely by accident, and its cash flows funded the expansion of parks, hotels, and the three major acquisitions that followed. Disney's cable networks segment accounted for 60 percent of total company operating income between 2008 and 2011, with ESPN representing approximately three quarters of that segment.

ESPN's cash flows effectively paid for Pixar at 7.4 billion dollars in 2006, Marvel at 4 billion in 2009, and Lucasfilm at 4 billion in 2012, with the three deals together representing roughly four years of ESPN affiliate fee profits. The Pixar acquisition was the most consequential. Steve Jobs had bought the company from George Lucas for 5 million dollars in 1986 and invested approximately 54 million more over nine years. Toy Story opened November 22, 1995, grossed nearly 400 million dollars worldwide, and became the highest-grossing film of the year in the United States. Pixar went public one week later at a 1.5 billion dollar market cap, the largest IPO of 1995, and that transaction is how Steve Jobs became a billionaire. By the time Bob Iger acquired Pixar, the relationship between Jobs and Eisner had collapsed entirely, with Pixar publicly announcing in January 2004 it was ending negotiations with Disney. Iger's first call after learning he would become CEO was to Jobs, and the acquisition gave Disney not just Pixar but the leadership team that revived Disney Animation, producing Frozen, Tangled, Zootopia, and Moana. The Toy Story franchise alone generated over 4 billion dollars at the global box office and approximately 30 billion dollars in lifetime retail consumer goods sales.

On August 4, 2015, the same day Disney stock hit an all-time high, Iger disclosed on the earnings call that ESPN was losing subscribers to cord-cutting. Disney stock dropped 10 percent the following day and has been flat for the 11 years since, while the S&P 500 tripled.