Over At Disney, Investors Aren't So Charmed

Just as Steven Spielberg's Dreamworks SKG may be starting to live up to its early hype, that other media giant is starting to show signs of age. If Walt Disney (DIS) ever had a direct competitor, it would be Dreamworks, which will be producing animated films, live-action features, television programming, and running entertainment complexes. But Disney isn't showing the kind of gumption it used to in the face of the enemy. In fact, it seems to be in retreat on all fronts.

Perhaps nothing symbolizes Disney's recent problems more than the crowd of crying European children that gathered at EuroDisney's central plaza earlier this week. The actors who wear Disney character costumes had gone on strike because they were being paid 7% less than the stiltwalkers, leaving the kids with a parade lacking the characters they had come to see.

Disney shareholders have been crying recently, too. Not long ago, the stock was a high-flyer, having risen 29% in just the second half of 1997. But in June alone, Disney has watched its market value drop by $14 billion, or 19%. The stock closed at 106.44 on July 2, nearly 22 points off its 52-week high. The reasons are numerous, ranging from bad fortune to bad movies. And it's hard to tell where the stock may level out.

Disney's problems started last year with a string of poorly performing movies that seems to go on and on. Whether it was Krippendorf's Tribe, or Mr. Magoo, audiences just weren't interested in Disney's fare. As a result, the company's box-office revenue dropped by 46% in the December quarter and an astonishing 76% in the first quarter of calendar 1998.

Executives hoped that this summer's one-two punch of Mulan, a movie based on a Chinese folk tale, and science-fiction thriller Armageddon would restore the sparkle to Mickey's wand. But then the Asian meltdown happened, and Mulan, which didn't veer far from the story lines of other recent Disney animated features, floundered, being beaten in its first week at the box office by the sleeper Dr. Dolittle.

Armageddon, which has already been victimized by poor reviews and negative buzz, will premier over the July 4 weekend. Like Sony's early summer disappointment, Godzilla, Armageddon will have to rake in spectacular receipts just to break even. "They've already spent $150 million on it, which means they'll have to make that just in the domestic market in order to get out of the hole," says Josephthal & Co. analyst Dennis McAlpine. "That means they will have to make at least $50 million in the opening weekend, which is a daunting task."

The other part of Disney's programming business, its ABC television subsidiary, is having problems, too. Except for Spin City and a couple of other hits, the network has been losing ratings and viewers. Analyst Laura Martin of CS First Boston has credited the sinking ratings at ABC as the main reason for cutting her Disney earnings estimate for 1998 from $3.12 to $2.90. She still has a "buy" on the stock, though.

The third leg of Disney's business, theme parks, actually reported increased revenues in the quarter ended Mar. 31. Theme-park revenues rose 3% from the comparable 1997 quarter, to $1.2 billion this year. But several analysts worry that the margins there will continue to be squeezed as the company keeps spending heavily on modernizing the parks. As if Disney bosses didn't have enough to worry about, the recent forest fires in Florida have threatened the Orlando region and could hamper traffic to Disney World on the Fourth of July -- one of its busiest weekends of the year.

Disney's biggest problem doesn't have to do with acts of nature, though. Rather, it's competition -- and lots of it. If Disney had bought ABC 10 years ago, it would have been considered a coup. But it bought the network at a time when there are already six nets instead of three. And thanks to cable TV, the barriers to entry for new contenders are lower than ever. And now, Disney is under assault by Dreamworks, which has structured itself in a similar manner to Disney.

How is Disney responding? By sticking with the tried and true. Mulan, for instance, doesn't stray far from the plot lines of any other animated Disney movies of recent vintage. "Mulan looks to me like a cross between Pocahantas and Hercules," says McAlpine.

Indeed, what's missing for now is the kind of creative countercharge for which Disney CEO Michael Eisner is famous. Right now, in fact, much of what used to be the Disney magic is coming from Dreamworks.

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