• by Diane Mermigas , September 25, 2009

Walt Disney CEO Bob Iger is likely to couple the appointment of a new studio chief with new initiatives and changes aimed at reinventing the film business for the digital age.

The recent, abrupt departure of veteran studio chief Dick Cook frees Iger to revamp the studio process and structure in response to the intensifying impact of the digital tsunami and the recession on Disney's free-falling filmed entertainment revenues and earnings. The studio, which has contributed as much as 15% of Disney's total operating income, has posted its first quarterly losses in about five years.

The cross-company leveraging of Disney's evergreen brand and character franchises, a hallmark of Iger's four-year tenure, has been a vulnerable defense to rapidly changing consumer behavior. Iger is likely to embrace some dramatic new approaches to film distribution, marketing, merchandising and financing.

That probably will include more related aggressive production of video games inspired by its newly acquired Marvel Entertainment stable of superheroes. Making another acquisition -- such as leading video game maker Electronic Arts -- also would advance its burgeoning XD video game platform and keep all production and profits in-house for online, television, film and consoles. Disney declines comment on its plans.

Iger has openly discussed launching a subscription-based Web site and other payment services, including electronic sell-through that could continue to alter traditional film exhibition windows. He's likely to leverage Disney's core family and "tween" girls' attraction to experiment with paid content that translates a $5-per-hour movie theater attendance to better than 25 cents-per-hour online viewing. Disney ultimately may favor consumers determining where, on what screen, and when they want to first view some new films.

The integration of Marvel Entertainment and a new distribution deal with Steven Spielberg's DreamWorks SKG will afford opportunities for creating and testing some new ways of doing business. Most immediately, Disney will likely tap Marvel's superheroes to create live-action films, TV programs or even a branded cable network. Marvel merchandise will also fortify Disney's recession-depressed consumer products, generating an incremental $40 million in revenues and $30 million in earnings, Bernstein estimates. Marvel's licensing business generated nearly $400 million in revenues in 2008.

Disney may even create a clearinghouse like the new Epix venture from Paramount, MGM and Lionsgate, which provides one-stop, studio-controlled distribution of films to mobile and other emerging on-demand platforms.

While developing a host of hybrid approaches to paid content, Iger has begun to forge new licensing terms with Redbox and other discount film renters to protect suffering DVD sales, particularly with the November release of "Up." Ultimately, Iger will be working on a long-term alternative to the entire industry's declining DVD sales and the short-term recessionary boost to DVD rentals.

The need for such enterprising maneuvers is evident in the dismal performance of Disney's studio entertainment unit.

*Disney's studio operating income is projected to decline 25% over five years to $353 million in 2012 on a 7% in decline in revenues that bottom at $5.5 billion in 2012, according to Bernstein. Operating income is off two-thirds from 2008, when it topped $1 billion, which Iger partly blames on poor film choices and execution. Revised estimates for fiscal 2009 call for filmed entertainment earnings to decline more than 80% from the prior year.

*Pixar animated masterpieces like "Up" are profit tentpoles too infrequently produced to offset ongoing losses from Disney's core businesses. "Up" was flat with last year's "Wall-E" in global box office (about $538 million) and profitability, according to Credit Suisse. Pixar's competitive edge has been dulled by the widespread industry adoption of computer-generated animation.

*Before the summer film cycle and the release of "Up," Disney's share of the U.S. box office this year was at a multi-year low of 8.7%, according to Credit Suisse. Disney's 2008 U.S. box office per film was a three-year low of $48 million.

*Disney's ROI from live-action films has sunk to new lows. Since "Pirates 3" opened on May 25, 2007, Disney has released 33 films with a median global box office gross of only $68 million -- "a far cry from Marvel's $297 million median," according to Bernstein analyst Michael Nathanson. Although "Pirates" boosted studio margins to the mid-teens, Disney's fiscal-year 2009 margins are down to 4%.

*Like other industry peers, Disney's returns are being hurt by what will be another 15% to 20% decline in DVD sales in 2009, slightly offset by the recession-boosted DVD rentals -- up 8% so far this year. Disney has been taking double-digit writedowns on lower-than-expected returns on new theater and DVD releases.

*All results have been exacerbated by the cyclical decline of its advertising and consumer spending-supported business, as well as the systemic weakness in broadcast television. Disney's total EBITA is expected to decline -24% in 2009 (from nearly gaining +23% in 2007), and rebound only to average annual high single-digit growth through 2014, according to Credit Suisse analyst Spencer Wang.

Speculation mounts about who Iger will appoint as a sole or as co-studio chiefs. Insiders reportedly include Chief Creative Officer John Lasseter, Disney Channel CEO Rich Ross and Marvel production Chief Kevin Feige. There is a lot of conjecture about Disney's future film slate, and whether Johnny Depp's participation in a fourth "Pirates of the Caribbean" and a remake of "The Lone Ranger" is in jeopardy in the wake of Cook's exit. Such obsessions miss the big picture: Iger's new script for the film business, complete with special effects.