Question:

   In 2004, Disney had a long string of box-office failures.  How did it affect its earnings?

Answer:

Like other major studios in Hollywood, Disney’s principal business is no longer movies– or, at least, not movies shown in theaters. So “box-office” gross, though still reported as news by the media, is no longer a valid harbinger of movie-company profits.
In the quarter of 2004 when most of the flops were written off, the entire studio division accounted for just over 2.4 percent of Disney's corporate operating income– and most of that came not from its current theatrical releases but from its rich library-- including DVDs, videos, and television licenses from past movies. Indeed, during that same period as these box-office failures, Disney’s corporate earnings soared by nearly 50 percent.
    Indeed, during that same quarter Disney made nearly twice as much from its toy-licensing operation (Winnie the Pooh, Mickey Mouse, and the rest of the soft and cuddly moneymakers) as it did from its entire movie division.  Like the other studios, the principal business of Disney is entertaining the world’s most sought-after audience: youth. It accomplishes this primarily via television, DVD and video sales, toy licensing, and its theme parks (see Table 1). Consider, the sports cable network, ESPN (of which Disney owns 80 percent.)  ESPN charges a monthly "carriage fee" averaging $1.75 per subscriber on all cable operators carrying its sports networks as part of their basic service.  Since cable operators need to carry ESPN to keep their subscribers, the carriage fee is amounts to an effective tax on cable households-- and one that ESPN is able to raise by 20-percent a year.   Even the largest operator, Comcast, which gets a volume discount, will pay ESPN almost a quarter of a billion dollars this year.  As a result, ESPN provided Disney with over $1.1 billion in cash flow in 2004 (about five times as much as the big-screen division.)

While box-office take may both fascinate the public and provide grist for the media’s mill, it is no longer a crucial variable in the profits equation at Disney-- or at any of the other entertainment conglomerates that constitute the new Hollywood
              TABLE 1
      Disney’s Operating Income
      3rd Quarter 2004 (Reported August 2004 in millions of dollars)   

In re-electing Eisner, Disney's shareholders recognized the new reality of Hollywood.