disney speaker: bob igercdn.media.ir.thewaltdisneycompany.com/2006/events/rai-gs...i'm sure...

Goldman Sachs Communacopia XV

SEPTEMBER 19, 2006 Disney Speaker:

Bob Iger President and Chief Executive Officer,

The Walt Disney Company

moderated by, Anthony Noto

P R E S E N T A T I O N Anthony Noto – Analyst, Goldman Sachs Thank you very much. It is our pleasure to introduce The Walt Disney Company, and our guest, Bob Iger, President and Chief Executive Officer. Disney continues to be our highest-ranked entertainment stock based on a combination of its above-average growth in returns while trading in line with its peers. The Company has successfully leveraged the elements of the “entertainment productivity loop” construct to drive four consecutive years of double-digit growth and the industry's best improvement in return on invested capital, reaching nearly 8.5% in 2006. The superior fundamental

Goldman Sachs Communacopia XV Conference September 19, 2006

performance has resulted in the best stock performance since 2003, up 87%. We believe Disney's above-average growth can continue with or without a robust economy as our outlook for 2007 growth is driven by a positive content cycle with continued momentum in TV syndication, continued growth in television DVD releases of successful new shows, the best performing film plays since 2003 that lead to strong non-theatrical windows in sequels in 2007, improved profitability at ABC, theme park margin expansion and visibility of cable network affiliate fees. Bob Iger has been at the center of driving the superior performance while positioning the Company for continued growth with a focus on creativity, technology and global expansion. Bob became CEO of the Company in October of 2005 and had been President and Chief Operating Officer prior to that, since January 2000. Please join me in welcoming Bob. Bob, thanks for joining us for lunch. A little less than a year ago you outlined three main areas of focus: creating and nurturing branded content, leveraging technology and globalization. How have you executed against these priorities, and how has that execution translated into financial results? And, what are the strategic priorities going forward? Bob Iger – President and Chief Executive Officer, The Walt Disney Company First of all, I should congratulate you (or not) for having this conference the week that the U.N. and the President of the United States is here. I will answer your question - I actually took a subway here, by the way, with Tom Staggs, which is not a pretty sight. Anthony Noto – Analyst, Goldman Sachs We asked the President if he'd do one-on-ones, but he wouldn't do them either. Bob Iger – President and Chief Executive Officer, The Walt Disney Company Maybe he can talk about the entertainment productivity loop cycle. Is that your term? Anthony Noto – Analyst, Goldman Sachs I'm just happy someone knows what it is.


Bob Iger – President and Chief Executive Officer, The Walt Disney Company Anyway, to address your question - and thanks for the generous introduction - we are focused, as you mentioned, on creativity and creative excellence, with a particular focus on our core brands, obviously highlighted by Disney. Our goal is essentially to make great content under those brands - Disney, ESPN, ABC – and apply technology to move it readily which is very, very important in this day and age to the consumer. I should say that we have an incredible focus on the consumer today and believe that for a lot of very apparent reasons, the consumer should drive a lot of the decision-making in terms of where we make content available, when we make it available and at what price. And then, of course, there are two other elements. Technology, which I mentioned earlier, is about getting materials to the consumer, but also using it to create better content. Lastly, globalization. We think we still have great opportunities. Even though the Company is extremely well known globally, for the most part our brand penetration has been relatively superficial in many markets. Even in the most developed markets like the UK and Japan, we believe that with great content and this brand focus we have opportunities to grow the Company. Obviously, this past year - and you mentioned a couple of examples - has been a great year creatively for the Company and we are finding that with great creativity in today's world we have many more opportunities to monetize content than ever before. We're taking full advantage of that so it would probably be appropriate for me to start by highlighting the deal that we announced last week with Apple. I'm sure many of you know we announced that we're going to make Disney, Miramax, Touchstone and Pixar films available on the Apple [iTunes] platform. We were first at announcing movies and we had been first in announcing television about a year ago. We made 75 movies available, which is relatively limited in nature as it takes time to clear all the rights necessary to move traditional content onto digital platforms. Interestingly enough, in less than a week, we've sold over 125,000 movies and generated about $1 million in incremental revenue. We believe this is just the beginning and we are extremely confident that we’ll be able to generate about $50 million in incremental revenue in the first year of having our movies on this platform at no marketing expense to us. In fact, there is very limited additional expense overall – really just the costs of encoding the film. That's pretty interesting. So clearly customers are saying to us that they want content in multiple ways. We believe in this world that


the more often you make content available to buy and the more places you make content available to consume, the bigger the market will be. So, we are very, very bullish on consumption of electronically delivered media. We are taking a very positive and optimistic view about technology. It is our friend. It's a great enabler versus being a threat or a predator. Anthony Noto – Analyst, Goldman Sachs Great. $50 million a year is a penny and a half per share, for those who are keeping count. Bob Iger – President and Chief Executive Officer, The Walt Disney Company It’s just the beginning, by the way. Anthony Noto – Analyst, Goldman Sachs And it makes a difference. The thing that we laid out in our recent report on digital revenue shows that Disney is basically - outside of theme parks - generating the most e-commerce, advertising and what I would call digital revenue stream of any of the major media companies. Do you attribute that to your brands and content, or your strategy, or both? Bob Iger – President and Chief Executive Officer, The Walt Disney Company I think it is a blend. Clearly the combination of high-quality content and strong brands creates opportunities for us whether it is on new technology platforms or in new geographic territories. And I think consumers - particularly as choice increases - gravitate to brands that they know and brands that stand for quality. I also believe that our strategy has helped. We've been very aggressive not just on the Apple platform but building out our dot.com capability. ESPN is the best example. We have extremely aggressive initiatives in the Company to build ESPN and ABC and Disney.com out even more. Probably our


most involved would be ESPN. We have a lot of work to do on the others, but we are focused on that. This is the whole concept of being platform-agnostic and again listening to the consumer. Clearly consumers are turning to these new platforms to consume media. Just look at YouTube™ as an example of that. We feel that it’s imperative for us in order to create long-term value to occupy space on those new platforms because the customer is going to be there anyway. Why feed it to other content generators; why not be there ourselves? So I think it is both. When you have something like Pirates or ESPN or High School Musical – which is a good example of something we've done that has achieved great results this year from a creative perspective - you put that great content on these new platforms and people will show up. Anthony Noto – Analyst, Goldman Sachs It clearly has a benefit to returns. I remember when we met in 2002 before I launched coverage, I sat down with you and Tom Staggs and talked about our concerns about the industry's returns and you both were fairly open, admitting that they were too low and that you would drive them over time and you've done that. I mentioned in my opening remarks that you had the greatest improvement. Everyone was sort of sub 4% and some companies are still in the 4 to 5% range. Disney under the same calculation is up 8.5%. Is it still a goal of the Company to drive free cash flow growth, earnings growth and improvement in returns? It’s clear to us how you've driven returns to this point, but can you get another 150 to 200 basis points to get to double digits? Bob Iger – President and Chief Executive Officer, The Walt Disney Company It is definitely still a priority for the Company. The '90s for Disney represented a time of significant growth, significant expansion, earnings per share growth and obviously great revenue growth. We’ve spent the last four years focused primarily on improving our returns on invested capital. The last couple of years we've tied executive compensation to certain critical metrics - earnings per share obviously, free cash flow, and return on invested capital, to name a few. So we are now really practicing what we preach in many respects in the sense that we believe that over the long-term our shareholders will benefit from improved returns and therefore we have to incentivize executive behavior in that direction and that is what is happening.


To give you a very specific example, our movie executives who are in charge of live-action movies for Disney are compensated based on the IRR of their live-action slate. So it's a real focus. We've had four years of double-digit earnings per share growth, as you know. We'll hit record free cash flow levels this year and during that period of time as you mentioned, we’ve managed to grow return on invested capital and we believe we are going to continue to do that. I'm not going to be specific in terms of giving the guidance you ask for, but I am confident that given the kind of behavior that we are demanding of our executives and the constant attention that is being paid to improving returns, that we should continue to increase returns on invested capital at the Company. Anthony Noto – Analyst, Goldman Sachs Drilling down just a little more…. there have been a lot of announcements that you've made publicly that would show you have a strategy of focusing on those activities that have a high rate of success, like Disney-branded content and higher returns and focusing the Company's capital in that way. I was wondering if there are any new opportunities that you have identified as we go into 2007 and 2008 that are in that sort of thematic area of high rate of success, greater returns and mix perspective. Bob Iger – President and Chief Executive Officer, The Walt Disney Company I'm glad you raised that because our announcement this summer from our studio that we are focused mainly on Disney films was done for a number of reasons. One, we recognize that our return on investment and Disney live-action films have been substantially above our return on investment in non-Disney [films]. We also know that when we have a successful Disney film, it is leverageable across many platforms. If you think Disney today - and you will see this when we relaunch Disney.com sometime around the first calendar quarter of next year - it applies to movies, it applies to television, it applies to games, it applies to shopping, it applies to travel, it applies to learning. It should apply to all different forms of community and it travels very easily across borders. So an investment in something Disney - in this case a film - is much more readily leveraged and we believe that’s going to drive growth for the Company in a variety of different ways. We also announced that we are going to be making roughly 10 live-action films a year. We believe in quality over quantity.


In essence, we concluded that too many movies are being made. We can't cure the rest of the industry, but we discovered that our Company developed a very large and expensive global distribution and marketing infrastructure for films, and then we were making movies so that we could amortize the cost of that infrastructure. The movies were being made for the wrong reasons. You should make a movie because you believe in the concept, you believe in the creative auspices behind it, you believe it has a chance to work and in this case you believe because it is Disney, it’s leverageable. And so what we did is accepted the notion that we have to cut back the number of films, and at the same time we reduced our cost infrastructure by roughly $100 million, which is rather significant. That is one example of the kind of focus we talked about. Another thing that is often missed is that it’s not just that a successful Disney film is leverageable, it’s that we now have an infrastructure across all of these businesses to market something that is Disney far more effectively and much more efficiently from a cost perspective than just about anyone else in the business. If we make a Disney film, what the Disney Channel can do at no real extra cost, - what Radio Disney can do, what our parks can do, our website, and all the different Disney touch points that we have now created - is incredible. And, much less costly and just far more efficient. We believe that there are other opportunities like that. Clearly the same can be said for ESPN and the way it leverages its brand across multiple platforms. ESPN today probably generates -- I say probably but I guarantee this is the case -- more multiplatform media revenue than any other entity in the country today, maybe in the world. ESPN has turned itself into a true multimedia platform. So, what we're looking at is a Company with a real multi-media play. The same will be true for ABC. We don't view ABC as just a broadcast television network today. We view it as a platform that will - side-by-side with other platforms - be used to generate revenue to invest in great creative content and then to move that content seamlessly across platforms to reach as many people as possible and generate as much revenue as possible. Anthony Noto – Analyst, Goldman Sachs I want to dig into individual businesses in a second, but first one more overarching question. I mentioned in my introductory remarks that '06 will be the fourth consecutive year of double-digit operating income growth. Will 2007 be another year of


double-digit operating income growth? There are a lot of concerns around theme parks, the economy, ABC ratings rolling over, etc. Do you have a different view on that? Bob Iger – President and Chief Executive Officer, The Walt Disney Company I don't mean to disappoint you, but as we said in our last earnings comments, we're not going to give guidance for 2007. We've had a great year in 2006. There is clearly some nice momentum heading into 2007. You touched upon it from a creative perspective. What we're saying is take a look at what you can expect to deliver in '07 from a strategy or a product perspective. I can also touch upon some of the critical swing factors. We go into 2007 with two great titles from a home video standpoint in Cars and Pirates. Pirates is now on track to do somewhere in the neighborhood of $1.07 billion in global box office which will make it the third-highest grossing film of all time. Cars, which did $240 million in the U.S., did nicely overseas. Those should be great [DVD] titles. We launch Pirates 3 in the U.S. and in many other markets on Memorial Day weekend and obviously have a lot of confidence in not just that film but that franchise. The studio in general has a good, smart slate for next year. ABC returns some very strong shows in Grey's Anatomy, Desperate Housewives, Lost, and Dancing with the Stars. We have some challenges ahead in terms of new programs, meaning last year's new shows didn't work as well as we'd like, but we have confidence in the new crop. ABC has a fair amount of scatter to sell and so one swing factor will be ABC's ability to not only deliver ratings but convert those ratings to dollars. We have great confidence in Steve McPherson and that group, and believe that ABC's schedule is quite sound. The parks had an excellent year in '06 helped in part by the 50th anniversary celebration. 2007 brings something called "The Year of a Million Dreams" which we think is going to work. You can expect that we should do as well this quarter [in attendance] as we did the same quarter a year ago at the parks, which is no easy task because last year was very, very strong given the halo effect of the 50th anniversary. Licensing has been a good place in Consumer Products, but we're doing some investing at Consumer Products in the video game space, which is a space we really believe in.


At our media networks, ESPN has said it will deliver double-digit growth on average from '05 to '09. I am not going to get more specific than that in terms of how they will do in 2007, but clearly ESPN is an extremely strong franchise off to a very good start with ratings for the Monday Night Football franchise, which is doing well from a sales perspective. So, that is a pretty good snapshot of the year for us. We have a lot of confidence in our businesses and in our strategy and I'm also pleased that we've got a good, solid, very talented management team that has given me an opportunity to focus on long-term strategic issues. We feel good about 2007, but no specific guidance. Anthony Noto – Analyst, Goldman Sachs I tried. Bob Iger – President and Chief Executive Officer, The Walt Disney Company You did. Many have tried. Anthony Noto – Analyst, Goldman Sachs So the broadcast network in 2006, as you mentioned, Bob, was a disappointment. What are the shows that you are most excited about? Bob Iger – President and Chief Executive Officer, The Walt Disney Company The season wasn't a disappointment, because we had great success with Grey's Anatomy, Lost and Dancing with the Stars, and they achieved significant growth in terms of operating income. I try to treat all these shows as my children and you are not allowed to pick favorites. So I can't pick any. I'm just going to disappoint you one question after the other. They have a good schedule. Anthony Noto – Analyst, Goldman Sachs They must issue that line to you when you become a CEO because Les used the same line. I won't go through show by show, although we have internal over/unders. How


many of the shows do you think you need to be successful - instead of specific shows - as it relates to your plan for ABC? Bob Iger – President and Chief Executive Officer, The Walt Disney Company Nirvana is always one hit a year, which I know sounds somewhat conservative, but they don't come that often. If you can hit two as ABC did two years ago with Lost and Desperate Housewives - and they added to it quickly with Grey's Anatomy - that's the equivalent to a grand slam. You take one....two would be great, three would be fantastic. Anthony Noto – Analyst, Goldman Sachs How about the industry trends in broadcast television? The audience for television viewership is declining low single digits. The advertising audience has been predicted by Nielsen and other third parties to potentially be declining double digits by the end of the decade. How do you recoup programs that are being watched by consumers that are customers of distribution companies? How do you recoup that value? Because they [distribution companies] are charging for it. Bob Iger – President and Chief Executive Officer, The Walt Disney Company First of all, our studies indicate that - what I'll call linear deliberate electronic advertising - is going to remain significant through the middle of the next decade at least. So while I completely understand the notion of a decreased source, it [advertising] is still very, very significant from an overall perspective. We also see greater consumption of television - thanks to more compelling devices and more compelling experiences - probably going up somewhere in the neighborhood of 10% in terms of average hours watched in a given week over the next five to ten years. We also see, and I mentioned this earlier, growth in electronically delivered media, because media will be available in more places. Every time we have experimented with this or have tested the waters, we've discovered it to be true. The ABC-Disney-Apple download experience this last year has been quite telling in that not only have they sold millions of downloads, but it doesn't seem to have any impact whatsoever on ABC's ratings, particularly for the most popular shows. Interestingly enough, Lost was


the most downloaded television show. It generated a significant amount of revenue per episode for us and we went out with the DVD of last season's Lost just two weeks ago and the results have been stunning, meaning much stronger than last year which is very, very interesting. It suggests that we didn't have a cannibalization effect. If anything, maybe it kept Lost more top of mind and kept the show more relevant because it touches more people. When we put shows on ABC.com in May we did four shows, two strong shows, one so-so and one that actually ended up failing. Not only did people stream by the millions, but the average age of those streaming ABC shows on-line was 29 years old. The average age of an ABC viewer in primetime is in the mid-40s. Twenty-nine years old! And, what we found is that 85+% of them remembered the commercial sponsor of the program, and 80% said it was a good experience and said they would tell other people about it. We found, again, no reduction in ratings and for the most part what we were told by consumers - because we did a fair amount of research - is that they were watching these shows because they missed them on ABC. It was incremental consumption. So, while, as we look at the media pie or look at the world, it would be one thing to focus on the impact of all this on advertising, we don't think that is going to be that dramatic. We actually believe that if we invest wisely in content, in particular under strong brand umbrellas, and move it aggressively to these other platforms and keep the consumer in mind (I think the record industry learned the hard way about when you don't do that) that we should experience some pretty interesting and compelling growth from a media perspective over the next decade. Anthony Noto – Analyst, Goldman Sachs I agree with everything you said. You have a great consumer population in the download and ABC.com streaming and you have an economic model that puts a circle around that and it’s getting you a new audience. There is one area, though, where someone is getting a free lunch and that is digital video recorders. The reason I don't think you're seeing a ratings impact yet is because the penetration levels are still small. Less than 15% of the television homes have digital video recorders but in five to ten years it's going to be upwards of 50% of the population. So, the cable operators are charging for it. That may be completely incremental consumption but at the end of the


day - and I don't want to call it piracy - they are not paying you for that content and they are charging the consumer. So is that a revenue stream you go after at some point? Bob Iger – President and Chief Executive Officer, The Walt Disney Company Charging cable operators or charging consumers to use PVRs? Anthony Noto – Analyst, Goldman Sachs Operators that are selling the PVR to the consumer, and charging them $5 a month. Bob Iger – President and Chief Executive Officer, The Walt Disney Company Our relationship with cable operators is a strong one. They pay us billions of dollars a year for the right to, in effect, remarket ABC, Disney, ESPN and other services. We are in conversations with a number of them about an array of new products and new features. One does not include some kind of charge for the PVR. There are obviously a lot of discussions around video on demand platforms, which we think will ultimately be good for both the cable operator and for the content provider. But, to answer your question specifically, I don't see that as a real opportunity for us. But again, the relationship we have is a good one and we think the technology they are going to ultimately deploy will create other opportunities for us to generate revenue. Plus we're generating opportunities ourselves direct to the consumer and through new providers. The new device that Apple unveiled last week which they are calling iTV is pretty interesting. What I like about it, by the way, is that it may be an opportunity to actually charge people for a PVR experience in that if they've forgotten to set their TiVo device or their PVR, or they just have no plan to do it, but they want to watch an episode that they missed, they can go to iTunes, buy it for $1.99, zip it to the set-top box source wirelessly and watch it on the television, whereas before you could only watch it on an iPod or on your PC. That's kind of interesting for us because we think that is yet another opportunity to expand the pie, so to speak, and in this case to actually get paid for a DVR type experience.


Anthony Noto – Analyst, Goldman Sachs One of the themes we hit on in the report that we've just published talked about iTV, Intel’s Viiv™, PC and then Microsoft's Media Center, and the potential launch of those products in 2007 and the implications that it could really drive adoption of downloads because watching on your PC or iPod is probably not a mass-market product, but if you could swing it to your television, it would have a lot more appeal. Have you seen iTV? Bob Iger – President and Chief Executive Officer, The Walt Disney Company I have. Anthony Noto – Analyst, Goldman Sachs And how cumbersome is it? How long does it take to download and then view through a TV? Bob Iger – President and Chief Executive Officer, The Walt Disney Company It's a small box about the size of a novel, and not War and Peace, by the way. It plugs into the television like any other peripheral would, like a DVD device. It’s wireless and it detects the presence of computers in your home in a very simple way. You designate the computer you want to feed it and it wirelessly feeds whatever you downloaded on iTunes - which includes videos, TV, music videos, movies, or your entire iTunes music library - to your television set. It can also stream content live through the box to the TV or it has a small hard drive on it so you can download what you put on the device on your computer, on your iTunes, through the television set. So, it is relatively easy to use, a simple kind of plug and play with an extremely easy remote control device. It’s DVD quality, not HD quality at this point. I find it to be pretty compelling. I saw it in a living room setting. It felt like a game changer to me in many respects, and as the content provider, that was very exciting. By the way, while we are on the subject, this will essentially enable people to watch content that they save on their computer on a television - essentially a basic television experience. I also believe you're going to have great growth in people watching television or television-like content on PCs. As screens get higher in quality and bigger you're going to have more single person consumption. I know that's the case with me.


Anthony Noto – Analyst, Goldman Sachs I want to go down that digital path in a second, but before moving off broadcasting I guess I would just ask two questions. The upfront obviously was not the most robust upfront in that it took longer to transpire than it has in the past. What have you seen in the scatter market in terms of demand for your programming? Bob Iger – President and Chief Executive Officer, The Walt Disney Company It’s still relatively early, but ABC is selling scatter at rates that are above the upfront. Until the programming is really put on the air - and most of it unfolds this week and next - it's hard to tell how they will convert, but my sense is that if they've got the goods / got the programs they will do fine in scatter. They also have a nice mix of inventory. They have enough inventory in Grey's Anatomy and Dancing with the Stars and Lost and Desperate Housewives to create some leverage in the upfront. They also have the ability to bundle in new media platforms so starting Friday they are launching Grey's Anatomy, Desperate Housewives, Lost and a number of other shows on ABC.com, with advertising. Some of it is already sold and some of it is yet to be sold. There is so much interest today in the advertising community for new media that I think this will convert to ABC and scatter. Anthony Noto – Analyst, Goldman Sachs Yahoo made the comment in the prior session that in the last few weeks they started to see some softness in two categories: auto and finance. They are still growing very fast but not as fast as they were. Have you seen an economic impact in any specific industrial area? Bob Iger – President and Chief Executive Officer, The Walt Disney Company No, not that I am aware of.


Anthony Noto – Analyst, Goldman Sachs As we think about the digital comments that you made earlier, you talked about $50 million of revenue and therefore profits in 2007 from just the new initiatives with Apple. I wonder if you can talk more holistically, where do you think your non-theme park driven digital revenue could be in 2007? I noticed you didn't mention that as a swing factor. Bob Iger – President and Chief Executive Officer, The Walt Disney Company I didn't mention that as a swing factor. It's going to grow substantially year-to-year. Again, another disappointment. I don't know how many I get, Anthony. I talk more long-term than short-term. We've obviously seen incredible growth over the last five years in advertising search online. The way we look at the world is that there are two forms of advertising online, search and display. Display is everything from more traditional advertising to a banner ad. We believe that over the next five years display [advertising] has a chance to grow at a much more aggressive rate than search - to the point that it is possible that by 2010 or maybe a little bit after, we’ll see display achieving parity with search. This would probably bring it somewhere in the $10 billion plus range. So what we are doing starting in '06 and growing significantly in '07 is putting the mechanisms in place to do a lot more in '08 and beyond. That’s essentially placing our content online so that we can either help grow display or take advantage of growth in display. We also believe, as was the case with the ABC.com experience and as is the case with ESPN.com, that a display ad - particularly a traditional display ad - seems to be a much more compelling experience for the consumer and for the advertiser when it appears within more compelling video. Ads on ESPN.com - particularly on ESPN 360 which is its broadband offering - or ads on ABC.com or on Disney Channel.com just feel much more compelling than a static banner ad on a site that is delivering mostly a text experience. What we are focused on is building out the technical capability, creating the culture and essentially creating the content to move aggressively in a direction that we think is going to grow significantly. And so when we think of the advertising pie – this is probably why I reacted the way I did to your comment about PVRs - we are looking at a


much broader perspective than the narrow perspective of a broadcaster, of a television station owner, or of just a network. We take a much more extensive point of view, which again is probably one of the single greatest movements beyond the strategy that we've implemented over the last year. We see it as a compelling place for us to go to grow the Company. Anthony Noto – Analyst, Goldman Sachs Do you think you have adequate distribution for your digital product? The reason I ask that is Apple has a huge installed base and being on their platform is going to get you to 50, 60 million users without a doubt. ESPN is one of the largest audiences of a traditional media company that was organically grown. But, Terry Semel just said he has 440 million monthly visitors. If you think about what you are doing with just Apple today and if you can multiply that by a factor of four in terms of audience size, why wouldn't you put your content on Yahoo! and MSN and AOL? Bob Iger – President and Chief Executive Officer, The Walt Disney Company First of all we do take a platform-agnostic approach. The deal with Apple is not exclusive, under any circumstances - contractually or otherwise. And certainly Steve Jobs understands that, as a major shareholder of Disney. We are choosy in terms of the partners we pick because we have to have a pretty good digital rights management solution. We have to believe that the platform is going to work. We really believe that our content should be on a platform that we have confidence in. That means it’s user-friendly, well marketed, well-financed, and well-organized. We also believe that it has to provide us with other compelling reasons to put it on, meaning it is going to generate not just usage but some form of incremental revenue. There will be more places that Disney, overall Disney, will appear digitally and I think we will be fine in terms of access to distribution because of the investment in our strong branded content. Traditionally we are building out, as I said earlier, ABC.com, Disney.com, and ESPN.com, to become what I will call the networks of the future for our Company. The Disney launch will be sometime around the first of the year. I am pretty excited about it and very, very impressed with the developments that we've got underway for this platform. We're going to offer things like universal navigation across all Disney sites and a generally consistent experience, but it will have a real customer


focus. We have collected 58 million names of people who have consumed Disney products in the recent past. So, a significant component of this site is the CRM component which will not only enable greater community experiences but essentially tie us to our customers in a much more leverageable way. One example of that will be if you sign on to Disney.com, whether you’ve gone in through the studio because you bought a DVD or the parks because you booked a vacation or you've gone to the Disney Channel and downloaded a show. It will be in effect one experience with the same password and essentially the same entry point will share that customer across all Disney businesses. I mentioned earlier shopping, learning, travel, television, movies, games -- you name it. So we think that we're going to create opportunities for ourselves as well as take advantage of the opportunities that third parties like Yahoo, Google and MSN and many others will provide. Anthony Noto – Analyst, Goldman Sachs When you think about the big cap entertainment companies, I've always thought that Disney had the best chance of taking one brand and making a portal out of it. I know you probably don't want to use the word portal. Disney has a brand that exists in a lot of different categories when everyone else has different brands in different businesses and it makes it a little bit more difficult to have a unified umbrella aggregation strategy. And so will Disney.com be sort of a 2 to 15-year-old portal the way MySpace is 12 to twenty-something? Bob Iger – President and Chief Executive Officer, The Walt Disney Company Well, one of the features it will have is it will create a customized point of entry. So, if you are a preschooler, which will be dictated by a parent, or you are a mom with kids under 12 or you are a Disneyphile or you are a tween, or you are an adult that just happens to like Disney, you click one button and you enter the site through that window and it completely customizes the site to your experience. If you go in as a preschooler, the entire site is customized to your interest so that there will be - as you expect with Disney - a very, very strong and visible character feature. If you go in as a preschooler, all the characters will be preschool characters. If you go in as a tween, you will tend to see more High School Musical, Pirates, National Treasure -- those more, call it,


sophisticated characters. We obviously have a brand that provides us with a competitive advantage, whether it is on a traditional media platform or a new media platform. Our goal right now is to take advantage of that by not only focusing our investment under that brand, but then using technology to essentially leverage the competitive advantage that we have, or grow it. Anthony Noto – Analyst, Goldman Sachs I want to move on to cable networks. I'd love to explore that further, it is a golden opportunity that... Bob Iger – President and Chief Executive Officer, The Walt Disney Company You will see the site sometime around the first of the year, and again, as a new media site it will be very compelling. It will have all the bells and whistles that you'd expect it to have in today's world, like a broadband player that will appear on essentially every Disney site that you go to, whether you've gone to movies or the Disney Channel or you've entered it through the theme parks. And it will be global eventually, yes. There's already development underway in Europe and in Asia to essentially duplicate the same concept. Anthony Noto – Analyst, Goldman Sachs So, a near-term question on cable networks. I'll ask it, I doubt you'll answer, but how did the cable networks do in the upfront? Bob Iger – President and Chief Executive Officer, The Walt Disney Company I can answer that. For ESPN, it was a very strong upfront. We are not that exposed from an advertisement perspective in cable as you know because Disney Channel doesn't take advertising. For ESPN, while it does a lot of business in advertising, that revenue is dwarfed by its subscription revenue. Nevertheless, ESPN had a very strong upfront, in particular it had a great upfront for Monday Night Football, where it drove double-digit CPM increases. ABC Family would be our other advertiser supported cable network, and there we had single digit increases in CPMs.


Anthony Noto – Analyst, Goldman Sachs Do you think that the cable networks will grow double-digits in 2007 given Monday Night Football costs etc., in total? Bob Iger – President and Chief Executive Officer, The Walt Disney Company Back to what I said earlier, no guidance. ESPN is saying it will deliver double-digit growth on average through '09 from '05. That by the way, is the big kahuna, so to speak, in terms of our cable holdings. So, you can interpret that however you would like. Anthony Noto – Analyst, Goldman Sachs You mentioned earlier that you were satisfied with the ratings on football moving to Monday night on ESPN. I was wondering if you can give us a little bit more clarity. Bob Iger – President and Chief Executive Officer, The Walt Disney Company It’s a huge number. The largest audience ever in the history of ESPN. They did a doubleheader. It was the second largest audience in the history of cable, of all cable programming in the history of the earth. (laughter) Thank you -- I'm well prepped. Occasionally I need a little help. Although Tom is saying I still have a photographic memory, I don't always offer same-day delivery. Anthony Noto – Analyst, Goldman Sachs This begs the question, did Tom Staggs bake in the greatest ratings in the history of the earth in paying for Monday Night Football? Bob Iger – President and Chief Executive Officer, The Walt Disney Company The Monday Night Football deal for ESPN was an important one and a good one. As you know, ESPN thrives on its cable subscription fees and football is a very, very important driver of those fees. It still has a lot of other great programming in the collection. The strength of the brand is great programming, with some original programming like


SportsCenter and licensed programming like Monday Night Football, which has created a great business for us and a great business for ESPN. We haven't second-guessed the decision at all to not only buy football, but to spend what we spent. And, actually we were glad we ended up with Monday Night Football because it has given ESPN another marketing hook to sell to both its advertisers and its customers. The experience has been relatively brief, but so far it has been quite good in that it did well in the upfront and the ratings so far have been great. I don't have ratings for last night, but it was the lowest scoring game in the history of Monday Night Football. I learned that on ABC.com this morning. Nine to nothing. Anthony Noto – Analyst, Goldman Sachs I want to move onto theme parks very quickly. You made some pricing changes and some other shifts and other kinds of changes, trying to change the value proposition for different demographics. I am just wondering what impact that had on your ability to reach new families at different demographics. Bob Iger – President and Chief Executive Officer, The Walt Disney Company We've taken our pricing up modestly annually at our theme parks. The bigger business obviously is in Orlando. We have taken pricing up and it seems to get a lot of attention, but in reality a relatively small percentage of our visitors actually buy a single day ticket. The pricing strategy has been designed to extend length of stay, so the longer you stay the less expensive it is in terms of the cost of the daily ticket, to move more people on property from off, and also to expand from a demographic perspective. Orlando had a very, very successful $1,500 package for a family of four and that worked quite well. We obviously look to expand our market in a variety of ways and demographically is certainly one way; geographically is another. The pricing strategy that was implemented there in early '05 has been very successful. So again, while the single day rate increase gets attention, it hasn't had an impact at all from a negative perspective on our business.


Anthony Noto – Analyst, Goldman Sachs Your comments earlier about the marketing program for 2007 would indicate you think there is still an opportunity for attendance growth in 2007. Is that what you implied? Bob Iger – President and Chief Executive Officer, The Walt Disney Company We've got great product, both in Orlando and in California. We continue to add smartly to our menu. We've done very well in terms of pricing strategy. I mentioned moving people to on-property hotels. Obviously the on-property hotel guest is much more valuable to us than the hotel guest that stays off property. The impact on per-caps, basically the spend at Disney, is greater if they stay in one of our hotels. And I think there is certainly upside for that business but again, we’re staying out of the guidance business. Anthony Noto – Analyst, Goldman Sachs Absolutely. I won't ask these two questions then because they are both from the audience and they are about guidance, so I want to go back to Disney.com for a second. How much of a marketing push are you putting behind this and could this really be a big factor in 2007? It sounds like a complete overhaul of the most well-known…. Bob Iger – President and Chief Executive Officer, The Walt Disney Company I don't think it will be a big swing factor from a bottom line perspective in 2007, but I think it will play a very, very big part in our future. Anthony Noto – Analyst, Goldman Sachs Last question I wanted to ask - Steve Jobs is the largest shareholder, individual shareholder in Disney. What role does he play at the Company?


Bob Iger – President and Chief Executive Officer, The Walt Disney Company He is obviously a board member. He has been to two board meetings, and he has already been a great contributor as a board member. For me, he has become a tremendous sounding board. The opportunity to talk to Steve Jobs about new media opportunities or to go to Apple and spend the day with his team to see iTV or the next generation iPod or talk about the iTunes customer and the experience they have with the customer, movie downloads, TV downloads, music downloads, etc. is a great, great opportunity for me and for the Company. He has become very quickly not only a great sounding board but a great adviser and someone that I can turn to readily for advice in a lot of these areas. I think we're lucky to have him. Anthony Noto – Analyst, Goldman Sachs I guess one last question I just thought of because of the Pixar acquisition and the success of Cars and licensing and the success of Pirates and licensing. Do you think about the consumer products business as being able to revitalize with a faster growth rate by positioning films against better licensed products like... Bob Iger – President and Chief Executive Officer, The Walt Disney Company We've had a good couple of years in licensing in general at Consumer Products and save for the investment in video games, you've seen nice growth in Consumer Products. But, we slowed that down a bit because we want to be bigger in the Disney branded video game business. What Consumer Products is trying to do is not only take advantage of film franchises and the Studios' focus on Disney film franchises, but also to be less dependent upon those franchises as well. Not every one of them necessarily works. What they've done over the years is to create a franchise focused on other things. Princess would be a great example of that. Those Princesses came from Disney films, and many of them from years ago. The next big one is Fairies, which is largely a Tinkerbell franchise. You can see it if you go buy a Halloween costume this year, and there will be product against that cross-media.


They've got a number of different opportunities thanks to the Disney Channel and their great success. We haven't said much about this, but Disney Channel in the spring put on a new Mickey Mouse program, Mickey Mouse Clubhouse, which is a CGI generated Mickey Mouse show for kids 2 to 5. It is one of the more successful children’s programs today from a ratings perspective, basically out of nowhere. It's probably the most successful Mickey television program the Company has had in a few decades, and that is music to Consumer Products' ears. We’re launching a Pooh program on the Disney Channel, again in CGI, and we have high hopes for that because that’s an important franchise for Consumer Products as well. And things like High School Musical, which is not quite a traditional film franchise, came out of the Disney Channel, also a great opportunity. So I think you will see a Consumer Products business that will grow from a licensing perspective but will also grow in terms of the breadth of what it licenses. Anthony Noto – Analyst, Goldman Sachs Great. Well Bob, thank you very much. We really appreciate you coming for lunch. Bob Iger – President and Chief Executive Officer, The Walt Disney Company Thank you. Certain statements in this presentation may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are made on the basis of the views and assumptions of the management of The Walt Disney Company regarding future events and business performance as of the time the statements are made and it does not undertake any obligation to update these statements. Actual results may differ materially from those expressed or implied. Such differences may result from actions taken by the Company, including restructuring or strategic initiatives (including capital investments or asset acquisitions or dispositions), as well as from developments beyond the Company's control, including: adverse weather conditions or natural disasters; health concerns; international, political or military developments; technological developments; and changes in domestic and global economic conditions, competitive conditions and consumer preferences. Such developments may affect assumptions regarding the operations of the business of The Walt Disney Company including, among other things, the performance of the Company's theatrical and home entertainment releases, expenses of providing medical and pension benefits, and demand for products and performance of some or all Company businesses either directly or through their impact on those who distribute our products. Additional factors that may affect results are set forth in the Annual Report on Form 10-K of The Walt Disney Company for the year ended October 1, 2005 under the heading "Item 1A—Risk Factors“ and subsequent filings. Reconciliations of non-GAAP financial measures to equivalent GAAP financial measures are available on Disney’s Investor Relations website.

disney speaker: bob igercdn.media.ir.thewaltdisneycompany.com/2006/events/rai-gs...i'm sure...

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