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Disney and the Online Animation Industry

Acknowledgements

Content Abstract Introduction

The Golden Age of Hollywood was the most flourishing in cinema history. In fact, more films were released by major studios in the 1930s than any other decade, at an average of about 800 a year, compared to less than 500 per year today (Craig Benzine, 2017).

This remarkable amount of films came from an incredibly limited number of studios. Only five big production companies took part in the process: MGM, Paramount Pictures, Warner Brothers, 20th Century Fox and RKO.

The Big Five major studios dominated the production, distribution and exhibition of films, taking advantage of a direct-to-consumer broadcasting method called Studio System. This strategy allowed production companies to control the exhibition through the direct ownership of movie theatres and by using manipulative techniques such as blind bidding to force independent movie owners to purchase unseen films or block booking to make them buy multiple titles as a unit.

In 1938, against all logic and when the major studios were dry of ideas, there was one standout film which quickly became the highest grossing film to that point. That blockbuster was Walt Disney's Snow White and the Seven Dwarfs, an independently produced feature animation experiment that outdistanced the studio powerhouses by an embarrassing margin (The Society of independent motion pictures producers, 2005).

The Golden Age of Hollywood and its studio system collapsed as a result of two major reasons: the advent of television and a 1948 US Supreme Court case. In the case, known as “United States vs. Paramount Pictures,” the government argued that the major studios were in violation of antitrust laws. The government action forced the separation of the production of films from their exhibition.

Soon the Big Five sold all of the theatres and the Walt Disney Company started its rise to become the undisputed global storyteller, a role whose consequences are rarely questioned by the audience (Giroux, 2010).

Over the decades the players at the chessboard of major studios changed, evolved, merged or lost. The new media conglomerates saw the potential of cartoons, and although they took a share of the market from Disney, today the majority of entertainment consumed by children still comes from a very limited number of multinational companies.

The new ways children enjoy entertainment, the democratisation of technology and the return of direct-to-consumer formats may offer new possibilities to both consumers and the so far excluded animation studios.  Literature review

From the Big Six to the Big Five

Rupert Murdoch's acquisition of 20th Century Fox in 1985 heralded the beginning of the latest Hollywood era, characterised by a sustained conglomeration of the entertainment industry. Between 1989 and 1994, Paramount, Warner Bros., Columbia, and Universal all changed ownership in a series of conglomerate purchases and mergers that brought them new financial and marketing muscle (Taylor, 2010). Children entertainment was also affected by this process of conglomeration in the larger entertainment environment and continues to be impacted today.

According to Ed Catmull (2014), Pixar Animation Studios had been independent since 1986 when he started the company due to a synthesis of forces between animator John Lasseter and the recently fired Apple executive Steve Jobs. However, after a long lasting collaboration mostly based on distribution deals, Pixar finally sold to Disney in 2006.

Elsewhere in the industry, the trend has been similar. Founded in 1987 to focus on TV commercials and visual effects, Blue Sky Studios was bought by 20th Century Fox in 1997 to form a new animation company and created successes like the Ice Age franchise (Fritz, 2008). In 2007, producer Chris Meledandri left Blue Sky to found Illumination Entertainment. A few months later a distribution deal was signed with Comcast and the company started producing several billion grossing movies (Fleming, 2008).

In 1994 former Disney executive Jeffrey Katzenberg recruited some of the top animators from the Walt Disney Company (Sito, 2006) and founded, together with Steven Spielberg, DreamWorks Animation. In 2016, after creating memorable franchises such as Shrek, Madagascar and Kung Fu Panda the company was bought by Comcast (Westcott, Brannon and Hancock, 2016).

It is true that some big players in the animation competition, such as Warner Bros. and Sony Pictures Animation, were not subjected to similar big changes over the last decades (Crunchbase.com, 2018). However, the general trend in the industry has still been of increased concentration.

Disney has continued this aggressive process of acquisitions. Between 2009 and 2012, it completed two large brand purchases: Marvel Studios together with Marvel Animation (IGN UK, 2009). and Lucasfilm together Lucasfilm Animation (Schou, 2012). Although the acquisitions added up to approximately $4 billion (Goldman, 2009) (Sylt, 2018), the riskiest move is yet to come.

In December 2017 the Walt Disney Company announced the plan of buying 21st Century Fox (Nolter, 2017). To give birth to the megamerger, on June 20 2018, Disney signed a $71.3 billion deal (The Walt Disney Company, 2018). When the acquisition will be completed in 2019, Disney and only four more media conglomerates will control the most popular animation studios and children's television networks.

Fig. Schema

Disney: The Big Friendly Giant?

While the children's entertainment industry become increasingly conglomerated, it has at the same time expanded rapidly, partly due to the powerful scalability features inherent in animation. Disney has benefited from both these processes, increasing its already tremendous influence and power.

The international marketplace for animation and for children's programming in general has been booming (Blumenthal and Goodenough, 1998). Disney's strategic acquisitions have allowed it to tap into this growing opportunity.

With 15 Academy Awards and an average worldwide gross of over $600 million per film, Pixar might just be the most successful creative enterprise ever—and one of the most profitable. (Satell, 2015). Its success started with the release of Toy Story, the first full-length computer animated film in history. The movie singlehandedly proved that CGI could be used to tell a character driven story; and in doing so, changed the future of animation forever (Capatides, n.d.).

After completing the $7.4 billion purchase of Pixar in 2006 (The Associated Press, 2006), Disney's chairman Bob Iger said in a written statement: "The addition of Pixar significantly enhances Disney animation, which is a critical creative engine for driving growth across our businesses." In a CNN interview with journalist Paul La Monica, Barry Ritholtz, chief investment officer with Ritholtz Capital Partners argued “The question isn't did Disney pay too much but how expensive would it have been for Disney if Pixar fell into someone else's hands”.

The increasing popularity of CGI animated characters and Disney's struggles with this technology (La Monica, 2006) accelerated the acquisition of Pixar and this revolutionary collaboration helped

Disney Animation recapture its happy ending. The restored blockbuster-making ability gave birth to Frozen, the highest-grossing animated film so far (Cave and Davidson, 2015).

While its strategy on acquisitions has helped Disney grow to tremendous proportions, it has in general escaped the scrutiny that accompanies such size through a clever brand and positioning strategy. In the book The Mouse that Roared, Henry A. Giroux (2010) tries to explain how Disney represents the merger of corporate power, entertainment and what he calls ‘puppet pedagogy'. He notices that what is interesting about Disney when compared to other companies is that Disney made a spectacle of innocence. Mickey Mouse's company hides behind a shroud of innocence separating corporate power from corporate culture and its romance coerces us to treat it as the ultimate form of dream, particularly one that never needs to be questioned.

Disney's recent activities follow this pattern. 21st Century Fox will spin off Fox News and Fox Business to its shareholders immediately prior the acquisition (The Walt Disney Company, 2017). Andrew Walker and Chris DeMuth (2017) explain this move by arguing that it will keep Disney's hands clean and allow its chairman Bob Iger to more easily run for office at the 2020 elections.

And it continues to increase this power, sometimes in seemingly unscrupulous ways. A recent example of how Disney used its favourable position on the market to take advantage of smaller businesses is evident in its unusual requirements for the movie theatres which showed "The Last Jedi”. Cinemas were effectively forced to play the movie in their largest auditoriums for a minimum of 4 weeks and hand over 65% of ticket sale revenue to The Walt Disney Company (Guerrasio, 2017).

Today, Disney is a transnational media conglomerate owning video production companies, TV and radio networks, internet sites, cable systems, magazines, sports teams, music studios, theatres and themed parks. In 2018, it made $55,137 billion in revenue, ranking it ahead of Facebook and Coca-Cola in Fortune 500. As a result Disney exerts a tremendous influence on national and international popular culture (Mickey Mouse monopoly, 2001). The impact is particularly pronounced once children's entertainment is considered.

Justin Lewis, professor of communication and head of the Cardiff School of Journalism, Media and Cultural Studies at Cardiff University considers the amount of power held by Disney to be extraordinary. In a 2002 interview he said that because Disney's products are so ubiquitous and wide spread globally, its stories will be the stories that will form and help form a child's imaginary world all over the globe.  Similar to Henry A Giroux, Lewis emphasises the importance of questioning the role of Disney as  dominant storyteller for children globally and how, by not questioning their stories and messages, parents are silently allowing the company to shape their children's imagination.

To be sure, there are also benefits arising from Disney's massive power and reach. Positive consequences of Disney's established power were considered by several researchers from the University of Buffalo while studying 57 Disney and Pixar movies, in which 71 characters died (Gambini, 2017). Kelly Tenzek, clinical assistant professor in UB's Department of Communication explained how “these films can be used as conversation starters for difficult and what are oftentimes taboo topics like death and dying,” she continues “These are important conversations to have with children, but waiting until the end of life is way too late and can lead to a poor end-of-life experience.”

However, even while scholars remain divided over the ethical implications of Disney's power, its extraordinary impact on how children all over the world think and dream remains largely uncontested. Considering that children psychology and education are affected by cartoons to variable extents (Raza and Gondal, 2016) (Habib and Soliman, 2015) (George, 2013), taking into account the market share of distributors (Boxofficemojo, 2018), and acknowledging the fact that nearly every major children's program which is produced in the United States is also seen elsewhere in the world (Blumenthal and Goodenough, 1998), we can accept, at least partially, that the values promoted by major studios' animated films, such as Disney's, are the ones which have the largest impact, whether these values be classified as positive or negative.

A new generation of kids

As the new generation of children begin to come online, patterns of content consumption and preferred channels for such consumption are changing rapidly. While TV still remains a powerful distribution channel, it is no longer the only one as online channels quickly gain ground.

In the 2001 article How American Children Spend Their Time the authors Hoffert and Sandberg (1997) of the University of Michigan collected the data coming from several reports. They noticed that children from 0 to 12 year old watched television for a weekly average of 12:04 hours making it the fourth most popular activity after sleeping (74:33 hours), school (20:55 hours) and playing (15:16 hours).

The children analysed in this report can be considered millennials because they were born between 1980 and 1995 (Finn and Donovan, 2013). Two generations later, the ways children approach screens and spend their time have changed (Lloyds, 2018). Generation Alpha is a label given by futurist and demographer Mark McCrindle to anyone born after 2010. These are the children who follow the “true digital native” of generation Z (Williams, 2015)

According to Forbes' contributor Deep Patel, Gen Z has been living in a world of smartphones and free Wi-Fi for as long as they can remember, but if ninety-two percent of them have some sort of digital footprint, Alpha kids will grow up with iPads in hand, never live without a smartphone, and have the ability to transfer a thought online in seconds (Sterbenz, 2015). McCrindle considers these massive technological changes the ones that make Generation Alpha the most transformative generation ever to the extent that their use of multiple screens may allow us to also refer to them as Generation Glass.

Though the general trend of children increasingly preferring online channels continues, information about the way children consume content varies depending on age groups. The Office of Communications, commonly known as Ofcom, is the UK authority which officially regulates TV, radio, video on demand and broadband services. In 2017 it published the report Children and Parents: Media Use and Attitude in which it analysed the relation between children, screens and media content. According to Ofcom more younger children are going online than in the previous years. Compared to 2016 there are more children in the age ranges of 3-4, 5-7 and 8-11 going online, with 10% increases for the two youngest age groups who are now spending an average of 08:30 hours per week connected. As a consequence 53% of 3-4s are now online, as are 79% of 5-7s, 94% of 8-11s and, with no increment from 2016, 99% of 12-15s.

Fig media consumption

Meanwhile, the popularity of online channels continues to expand. The strong preference for YouTube by children aged 12 to 15 is again confirmed by an online survey in which it emerged as the best known and the most watched content provider. Netflix is second and the traditional broadcasters such as BBC, ITV, Channel 4 and Disney Channel follow. The use of YouTube by children aged 3 to 11s has also risen since 2016 with an increment of 11 percentage points for kids aged 3-4 (48% vs. 37%), 17 percentage points for kids aged 5-7 (71% vs. 54%), and eight percentage points for kids aged 8-11 (81% vs. 73%). Almost half of the users in the youngest age group enjoy Youtube's content only through the YouTube Kids app and in terms of online content, children aged 3-7 are most likely to watch cartoons, while 8-15s are most likely to watch funny videos and music videos.

As a consequence Little Baby Bum's 54-minute compilation of nursery rhymes is the 20th most-popular video in YouTube history, with 2.1 billion views (Stokel-Walker and Shaw, 2018).

The YouTube channel featuring 3D animated character was founded by Derek Holder and his wife in 2011 and has experienced a constant growth in views and ad based revenues since then. The couple sold the brand last summer to Moonbug for a confidential price estimated to be between £6 million to £8.5 million (Binder, 2018).

The American market has been experiencing similar changes. A 2015 study by Nielsen showed that the number of young TV viewers had been experiencing a constant fall since 2010 on American main Children networks.

Fig American Fall

As a consequence traditional kids' TV brands still have the greatest awareness among their target demographic. But when asked what brands interested them most, digital upstart like Netflix and YouTube lead the pack. (Steinberg, 2015).

Fig brand awareness

The data coming from Nielsen (2015) also show that viewership of Nickelodeon, the Disney Channel and the Cartoon Network, the three most-popular children networks in America, is down more than 20 percent when compared to 2017.

Media conglomerates can still manage to make money from children's TV through toy branding and by licensing content for millions of dollars, but according to Birk Rawlings who left Nickelodeon to run the YouTube channel DreamWorksTV, “the traditional brands are stuck in a tough position: they can see what is changing, but to embrace what's new they must run away from a healthy business.”

Since 2010, when Nickelodeon committed the original sin by licensing several of its kids shows to Netflix, the number of subscriptions on the online streaming service rocketed from less than 20 million to more than 125 million. So, while between 2010 and 2017 the amount of time that the youngest watchers spent viewing conventional TV fell by a third, Netflix shares have climbed 58 percent, and the company is ramping up the competition further by bringing more youth-oriented production in-house (Shaw, 2018).

The Next Move

The growth of Netflix is also tangible in the evolution of its market capitalisation. In only four years the value of the company increased by 641% and last June it hit $152.8B positioning ahead of Disney, Comcast and Time Warner (Yahoo Finance, 2018).

According to Tara Lachapelle “market value is a function of stock price, and in the case of Netflix, that price is based more on investors' hopes than concrete financials.” The revenues of the company are in fact less than one fifth of Disney's and its cashflow is a leakage of nearly one billion every six month. Disney's operations can generate that amount of cash in three weeks.

Online streaming platforms like Netflix rely extensively on licensed content. A slice of the money that Disney makes comes from licensing to Netflix itself. Todd Spangler reported on Variety that the 80% of what Netflix users watch is licensed content. However, just as licensing content from studios is an important part of Netflix's business, access to the streaming market is relevant for the studios too because streaming media is where cord-cutterrs are moving (Richter, 2018). This had previously led Disney to arrive to a distribution agreement with Netflix in the first place.

However, recognising its power in this situation and the growing opportunity. Disney announced in 2017 that it will end its distribution agreement with Netflix. The reason behind Disney's strategy is the same behind its attempt of buying Star Wars rights back from AT&T Inc.'s Turner Broadcasting (Shaw, 2018). Disney aims to be independent of streaming platforms like Netflix, leveraging its massive content library to build a whole new service called Disney+ from the ground up.

Therefore, while gaining back licenses to its content, Disney is also expanding its current range of titles. Licensing to streaming services like Netflix, Amazon Prime or Hulu is not the only way for studios to get their movies and children content online. By acquiring 21st Century Fox, The Walt Disney Company will not simply get a greater market capitalisation, but also add thousands of titles to its already enormous library to ensure the success of Disney+ (Watercutter, 2017). The streaming service, whose launch is announced for 2019, will allow users to have access to 90 years of beloved movies as well as a large portfolio of children content coming from The Walt Disney Studios, Pixar, Marvel Studios, Lucasfilm, Blue Sky Studios and Fox (BBC News, 2018). By combining its dominant position in content creation with a new streaming service, Disney could expand its power even further.

Disney is a master at generating money when distribution methods change. When Home Video became popular through VHS and DVD technologies, Disney pioneered a system called the Disney Vault, where animated features were virtually locked away for years and made available for lucrative limited run sales (Morrison, 2016). The moratorium strategy of crating craving through artificial scarcity worked. Russel Brandom of The Verge reported that a study in the year 2000 found that 55% of Disney fans replaced their VHS tapes with DVDs compared to only 14% for other studios.

Cable provided further possibilities. Although Disney initially licensed its content to HBO, they soon realised that the real money was in running their own network and launched Disney Channel (Scott, 1983). Last year The Walt Disney Company reported that 40% of its revenues were coming from cable channels, including the ABC networks and ESPN.

The media giant is now trying to take advantage of the same business techniques adopted in the past and as cord-cutters move away from cable towards services like Netflix, Disney is using its vast range of content to set up its own streaming service.

Other large studios are following suit. Comcast has its Xfinity streaming service, Time Warner has HBO Go and the only way to see the latest Star Trek series is by paying a monthly subscription to CBS All Access.  The tech giants' wheels are also in motion. Google's owner Alphabet is offering original content on YouTube Premium while Amazon Prime is what the clients of the e-commerce platform get. Facebook is developing original content for its ‘Watch' video feature, and Apple is expected to launch a new streaming services in 2019.

The situation of smaller studios in this rapidly changing environment remains under researched in comparison. In a world of streaming and content creation giants, their next strategic moves will determine the state of future competition in this growing but increasingly concentrated space as well as the type and source of content which the next generations of children consume.
 Methodology

How it matches the research question? Literature review gap is that the perspective of small animation studios on the changing climate and increasing concentration has not been taken into account.

Description of design/method of research:

Qualitative interviews. Description of how these will be conducted. What areas will be tackled and why. Which studios will be interviewed and why.

Interview description: For  the  purposes  of  this  research,  in  depth  interviews  were  used.    In depth interviews are personal and unstructured interviews, whose aim is to  identify  participant's  emotions,  feelings,  and  opinions  regarding  a  particular  research  subject.  The main  advantage  of  personal  interviews is  that they  involve personal and direct contact between interviewers and interviewees, as  well  as  eliminate  non-response  rates,  but  interviewers  need  to  have  developed  the  necessary  skills  to  successfully  carry  an  interview. What is more, unstructured interviews offer flexibility in  terms of the flow of the interview, thereby leaving room for the generation of  conclusions that were not initially meant to be derived regarding a research subject. However, there is the risk that the interview may deviate from the pre-specified research aims and objectives (Denzin and Lincoln, 2017) As far as data collection tools were concerned, the conduction of the research  involved  the  use  of  semi-structured questionnaire,  which  was  used  as an  interview guide for the researcher. Some certain questions were prepared, so  as  for  the  researcher  to  guide  the  interview  towards  the  satisfaction  of  research objectives, but additional questions were made encountered during  the interviews.  

Sample questions

Online questionnaire description: through Google

Sample questions of online questionnaire

Sample selection: why these companies were chosen

Purposive sampling: The method of purposive sampling was used  to develop the sample of the  research under discussion.  According to this method, which  belongs to the  category  of  non-probability  sampling  techniques,  sample  members  are  selected  on  the  basis  of  their  knowledge,  relationships  and  expertise  regarding a research subject (Freedman et al., 2007).

Justification of research method:

Why this method?

Qualitative: Even with a small sample set it helps provide a fairly holistic and deep analysis of the research question, minimising limitations to the scope of  the  research (Denzin and Lincoln, 2017)

Under represented group who will be quite impacted.

Current literature only covers large companies.

Current literature is mostly analysing documentary evidence and quantitative work etc. instead of qualitative.

Limits

Quantitive would be good supplement but hard to find data given small research scale.

Qualitative data is more 'rich', time  consuming, and less able to be generalised. (Miles & Huberman (2014. Qualitative Data Analysis)

Small-scale set of interviews because the individual perspectives of a set of interviewees on the problem is more valuable to you than a larger set of data about responses to the same question.

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