South-Western EconNews

Disney's Kingdom Needs Some Magic

Subject

Profits, losses, and shutdowns

Topic

Production and Costs

Key Words

Sales, profits, costs, economy, revenues

News Story

On the surface, Disney is living up to its reputation for gaiety and happy endings. It has just opened its latest theme park, California Adventure. However, in fact, the company's performance in 2000 did not have a happy ending. While sales and profits were up for the year, the last quarter showed profits were down.

The performance of Disney's different divisions varied. The theme parks maintained reliable attendance levels and its resorts were busy. However, there is concern that costs are rising and the economy is slowing. ABC, which Disney owns, is in a dangerous position. A year ago it rode the success of "Who Wants to be a Millionaire?" to high profits. However, the ratings for the show are down 26 percent on average. The audience has increased in median age from 41 to 46, while advertisers tend to seek viewers 18 to 49. ABC has not been able to produce new successful sitcoms to bolster its schedule, partly because its complacency caused it to make few pilot shows last season.

The consumer products division, which sells movie-related merchandise, continued to suffer, with both revenues and profits falling. Disney intends to close 100 of the 700 stores. The worst performing part of the Disney company was its internet business. Go.com. found it hard to compete against America Online and Yahoo!, and Disney abandoned the operation, releasing 400 staff and putting its search engine up for sale.

(Updated March 1, 2001)

Questions

1.	a) Draw a diagram with axes representing Disney's theme parks' costs and prices on the one hand and attendance on the other. Show the average total and marginal cost curves, and a high price relative to the cost curves. Mark the amount of profit. b) There is concern that rising costs will hurt profit. Draw what will happen if higher costs transpire as expected. c) If the economy weakens, how will it be represented on your diagram? Why? What will be the implications?
2.	a) Draw a similar diagram representing ABC television's costs and viewership. Show how ABC increased its profit through increasing the price it charged advertisers because of Millionaire's success, and by reducing its spending on making pilot shows. b) Now show the effect of a smaller and aging viewer population. Explain what you have drawn.
3.	a) Draw a diagram of the costs, prices and users of Go.com. In addition to the cost curves you drew on your previous diagrams, add an average variable cost curve. Draw a price line representing the price charged to advertisers, such that the company was operating, but at a loss. b) Now show what must have happened to the price line as users failed to materialize and the company was shut down. Explain what you have drawn.
4.	Disney is closing 100 of its 700 stores. In general terms, which stores would you close down and why? Use economics in your answer.

Source

Edward Helmore, "Why House of Mouse is haunted by failures," The Observer, February 11, 2001.