Uncharted waters

Robert A. Iger was the first network executive to take the plunge into digital downloads. But leading Disney into the multiplatform universe won't be without its challenges.

Magic Kingdom chief Robert A. Iger made two powerful decisions when he took command a year ago. First, he gave the go-ahead for ABC's hit shows "Desperate Housewives" and "Lost" to be available on iTunes, which opened the floodgates for networks and studios to sell their exclusive content online. And second, he shelled out $7.4 billion for Pixar Animation Studios, demonstrating his commitment to reinvigorating the Walt Disney Co.'s animation brain trust.

But Iger could have an even more impressive encore for 2007, depending on how he meets a number of formidable challenges in the coming year. He must develop more lucrative new-media platforms, which he has called the "future networks" of ABC.com, Disney.com and ESPN.com. He must continue to extend Disney's family-friendly brand around the world, as well as make all of the company's businesses more interactive, global and innovative. His response and the ingenuity he applies to dealing with such matters will shape Disney's digital future and define his legacy at the company. Only the sixth CEO since the company's founding in 1923, Iger is in a position to forge a new generation of content, creativity and distribution and customer relations, all while radically reinventing Disney's business models.

A self-professed tech aficionado, Iger has exhibited a penchant for initiating change rather than just talking about it, breaking away from obsolete practices and noncore assets, launching new ventures and just as quickly collapsing them if they fail, playing his cards close to his vest and keeping close confidence with his division and department heads. John Pepper Jr., the former Procter & Gamble chairman who was named nonexecutive chairman of Disney's board of directors in June, has experience in developing new businesses in emerging foreign markets and should be welcome counsel for Iger and his team in the coming years.

Those who know Iger well say he is a freethinker who eliminated the company's strategic planning unit and decentralized Disney's core business units. He has reorganized the company's film and home entertainment units, eliminating 650 jobs across international and domestic divisions worldwide. He also pared down the studio's annual film release slate to 12-13 titles from 17-20 in recent years, with a renewed focus on the Walt Disney Pictures family-friendly sweet spot. And he sold the company's 22 ABC Radio stations earlier this year in a $2.7 billion deal with Citadel Broadcasting Corp.

For now, Wall Street is conditionally endorsing Iger's moves. Disney's stock price is trading up about 30% at about $31-$32 a share, up from $24-$25 a year ago. But Wall Street's support partly comes in response to what has been Disney's impressive double-digit earnings growth and margins, thanks to strong results in its core entertainment, theme parks and media networks units. The turnaround in ABC's primetime performance that began two years ago could not have been more perfectly timed to help Iger ascend to CEO. Now, Disney is projecting more than $1 billion in operating income during the next five years from the three shows, all produced by Disney's Touchstone Television unit, that are driving the recovery: "Desperate Housewives," "Grey's Anatomy" and "Lost."

Disney's cable group is delivering impressive results as well, highlighted by Disney Channel's extraordinarily successful run with original series and telefilms with ancillary revenue tentacles that extend throughout the company, i.e., the multiplatform "High School Musical" phenomenon.

Another one of Iger's lethal weapons is Disney's unparalleled partnership with Steve Jobs, CEO of Apple and former head of Pixar who is now a Disney board member and its single-largest shareholder with a 6% stake following the acquisition. Disney's partnership with Apple has married high-demand content with popular portable digital devices like the iPod. It's an alliance that has shown the broader entertainment industry how software and hardware providers prosper together in working toward common goals. Perhaps the bluntest compliment to Iger's early tenure as CEO came from the intrepid digital entrepreneur Mark Cuban.

"Bob Iger has gone contrary to what every current and previous TV network head with his announcement with Apple. Bob Iger has saved network TV ... by saying yes to giving consumers his content where, how and when they want to consume it," Cuban says.

Indeed, it took conviction for Iger to be the first in Hollywood to step out on a limb with Jobs and license ABC and Disney Channel shows to the iTunes platform for iPod viewing at $1.99 a pop last fall. In September, Disney was the lone Hollywood major to license a selection of 75 new and library feature-film titles to iTunes at prices ranging from $10-$15.

"Typically, the pain that is expected when you change the rules or break tradition is worse than the pain you actually feel, which is what happened when we launched the product on the iTunes platform first. You're going to see a lot more of that from us," Iger said during a Bear Stearns & Co. conference. "It's basically a willingness to invest in the concept, invest in the technology to move the concepts and new platforms and be willing to no longer be a slave to the old business models because the consumer doesn't care about them," Iger explained.

Disney sold 125,000 digital movie downloads, which generated $1 million in revenue, the first week iTunes offered the movies. Iger says he expects the iTunes movie licensing to generate about $50 million in revenue in the first year from the sale of 75 film titles for viewing on the video iPod. Since striking the TV-iTunes licensing deal in October 2005, Disney has sold nearly 14 million TV show downloads on iTunes Store, without noticeably diminishing ratings for "Lost," "Housewives" and others on traditional platforms.

Iger also has moved to reach beyond the initial iPod downloads to a range of content access that Disney has helped pioneer with Apple and on its own branded Web sites. He will need to forge other distribution platforms and vehicles for ABC broadcast, ESPN and Disney content while maintaining a balance between new and old revenue models supported by both advertising and fees.

"The focus of the company is really to build out ABC.com, Disney.com and ESPN.com to be what I'll call networks of the future that offer multiple services," Iger said during Disney's second-quarter earnings call in May.

A two-month trial in May and June of offering streaming video of full-length, sponsored episodes of ABC series through the ABC.com Web site found that users downloaded 5.7 million ABC series episodes, each sponsored by a single advertiser. The average age of the online users during the test was 29, and thanks to the single-sponsor approach, online viewers reported an 87% recall of the sponsor, more than triple the average rate for ads on broadcast and cable television. Disney and ABC are now are using this feedback to convince advertisers to innovate and work with them.

During Disney's third-quarter earnings announcement in August, Iger reiterated the company's focus on "getting better at selling advertising on a multiplatform basis."

"I am confident that there is a tremendous opportunity in both online video and in mobile video. That is going to create revenue-generating opportunities that are, in some cases, advertiser-generated, in some cases, subscription-generated, and, in other cases, on a video-on-demand basis," he said.

On the international front, where Iger excelled in reorganizing Disney's far-flung operations during his six-year tenure as president and chief operating officer, Iger will have to continue to hedge expansion at a time when unpredictable geopolitics and other issues have made it more important to align with local partners in theme park and other ventures. Those international endeavors recently have included a staging of "The Lion King" musical in Shanghai, China, acquiring the 24-hour Hindi-language children's channel Hungama and developing original local-language productions like the Italian schoolyard friends adventure "Those at Recess."

"The riskiest thing we can do is to just maintain the status quo. We must experiment strategically and invest wisely," Iger said during Disney's annual shareholders meeting in March. "And while we may not always bat a thousand with new initiatives, they are essential to our company's future growth."

One recent case in point: The much ballyhooed launch and then quick collapse of Mobile ESPN MVNO (mobile video network provider) this year, on which the company quickly lost about $100 million. After focusing on the launch of its own ESPN-branded mobile phone service, now ESPN content will be widely licensed and distributed through all mobile carriers, underscoring Iger's determination to still make the proposition work. On the flip side, Disney's family-friendly mobile phone service, with its parental controls and branded content, is taking off. Because the cell phone is the dominant global interactive device, Disney must make cracking the cell phone screen a significant priority for future growth.

"It is a given that content being made for traditional platforms will migrate to nontraditional platforms on a permanent basis. What we don't know about yet is consumer behavior, pricing and what works best from a timing perspective, but we are committed as a company to learning and learning fast," Iger remarked during an A.G. Edwards investors' conference in April. "I don't want to wake up and see all the traffic and revenue moving on to new platforms and us not being there. We should have license to occupy more of that space."