Some Choice Quotes From The 2011 Disney Annual Report

Disney has finally managed to get their 2011 annual results online, and as always, it includes letter to sharholders and the necessary financial documents as well. Seeing as this is something that animators and animation fans would not normally read, let’s see what kind of stuff they’re saying in there. (Don’t worry, we’ll get to DreamWorks as soon as they get it online)

It kicks off with this piece of marketing fluff:

 Fiscal 2011 was a year of great accomplishment for The Walt Disney Company, marked by creativity and innovation across our businesses globally, record financial results and numerous important steps to position the Company for the future.

In other words, we did our job the same as always and hope to continue doing so in the future.

From there we get to this statement:

Our financial and capital strength has allowed us to make important near and long term investments, two of the most significant being Pixar and Marvel. Animation is the heart and soul of Disney, and since becoming part of the Company nearly six years ago, Pixar has greatly advanced Disney’s animation studio with incredible creativity and technological innovation as well as bringing us beloved new characters, magical stories, and an unprecedented number of hit movies. With Iron Man, Thor and Captain America, we have just begun to mine Marvel’s rich roster of characters and stories, and leverage them across our businesses to create all-important franchises.

I’m quite curious as to why a deal made 6 years ago needs to be included in the annual report like it happened this year. It also basically admits that animation at Disney was broken beyond repair.

Moving along:

And nearly 20 years after its debut, last fall’s extraordinarily successful re-release of The Lion King in 3D reminded us of the magic of Disney storytelling and how it touches people’s lives generation after generation.

I’m sure the fact that you’re still in business helps in that regard.

There’s the new releases:

 Two new animated features debut in 2012, starting in June with Disney-Pixar’s Brave, featuring a feisty heroine on a grand adventure in the Scottish highlands. Then, in November, Disney Animation Studios brings us, Wreck-It Ralph, a journey across the arcade through every generation of video games.

I’m just trying to imagine Bob Iger saying “feisty heroine”.

From there, we move into the 10-K, a substantial document that lays out the company’s business, how it does business and how it was conducted over the past year. It’s a lot of boring numbers for the most part, but there are still a few nuggets in there.

On the Disney Channel in Russia:

On November 18, 2011, the Company acquired a 49% ownership interest in the Seven TV network from UTH Russia Limited (UTH) for $300 million. The Seven TV network will be converted to an ad-supported, free-to-air Disney Channel in Russia.

On the company’s theatrical business:

We generally produce and distribute live-action family films and full length animated films.

So here, finally, after 23 pages do we get to animated films. What this represents is just how far down the list of priorities animation really is for the company (the TV stations and theme parks came first don’t you know). This should be a reminder that for Disney, animation is only a small part of doing business, despite what Bob Iger says in his letter.

Then there’s the risk factors (emphasis is their’s):

The success of our businesses is highly dependent on the existence and maintenance of intellectual property rights in the entertainment products and services we create.

The value to us of our intellectual property rights is dependent on the scope and duration of our rights as defined by applicable laws in the United States and abroad and the manner in which those laws are construed. If those laws are drafted or interpreted in ways that limit the extent or duration of our rights, or if existing laws are changed, our ability to generate revenue from our intellectual property may decrease, or the cost of obtaining and maintaining rights may increase.

The unauthorized use of our intellectual property rights may increase the cost of protecting these rights or reduce our revenues. New technologies such as the convergence of computing, communication, and entertainment devices, the falling prices of devices incorporating such technologies, and increased broadband internet speed and penetration have made the unauthorized digital copying and distribution of our films, television productions and other creative works easier and faster and enforcement of intellectual property rights more challenging. There is evidence that unauthorized use of intellectual property rights in the entertainment industry generally is a significant and rapidly growing phenomenon. Inadequate laws or weak enforcement mechanisms to protect intellectual property in one country can adversely affect the results of the Company’s operations worldwide, despite the Company’s efforts to protect its intellectual property rights. These developments require us to devote substantial resources to protecting our intellectual property against unlicensed use and present the risk of increased losses of revenue as a result of unlicensed digital distribution of our content and sales of unauthorized DVDs, Blu-ray discs and other products.

With respect to intellectual property developed by the Company and rights acquired by the Company from others, the Company is subject to the risk of challenges to our rights in intellectual property by third parties. Successful challenges to our rights in intellectual property may result in increased costs for obtaining rights or the loss of the opportunity to earn revenue from the intellectual property that is the subject of challenged rights. The Company is not aware of any challenges to its intellectual property rights that it currently foresees having a material effect on its operations.

While this essentially lays out why it is important for the company to be able to control its content (and thus charge money to do so), it does not take technological an societal advances into account, and as an investor, this rearward looking view should be of some concern.

The rest of the document is filled with lovely numbers and ratios that I would love to share but would ultimately bore you to death with.

Once DreamWorks gets their 10-K up, we’ll have a look at that, and compare Disney with a “real” studio.

 

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