Mouse's Strategic Retreat Pays Off

Last year, the Walt Disney Co. surrendered in the Internet portal wars after spending hundreds of millions of dollars to compete against Yahoo!, America Online and others.

But it didn't give up entirely.

In a strategic retreat, the company refocused on Web projects that highlighted its core brands, such as ABC News and ESPN, which is the exclusive provider of sports on the MSN service.

That strategy has started to pay off. Last week, Disney announced a modest milestone - its Internet properties are profitable.

The company doesn't report the results of its Internet properties as a group, so Disney did not provide any profit figure when it reported fourth-quarter earnings. But the company said profits from individual sites, led by ESPN and Disney's online store; from licensing content to other Internet sites; and from advertising and subscriptions pushed online operations into the black.

Disney's Internet ventures contribute only about several hundred million dollars to the company's $25 billion in annual revenue. Nonetheless, Disney can say it is profiting online while so many others are still struggling to make the Internet pay.

"I feel good that we've been able to sort of figure it out," said Steve Wadsworth, president of the Walt Disney Internet Group.

What Disney learned and other companies are discovering is that it's best to abandon a one-size-fits-all approach to the Web.

"There is not one single formula that is going to work," said Charlene Li, principal analyst for Forrester Research, a technology consulting firm based in Cambridge, Mass. "What works for Disney.com and its characters isn't the same thing that will work for ESPN. Even The New York Times and The Boston Globe are completely different. They're owned by the same company, but they use completely different approaches."

Disney's announcement of its modest profit is a victory of sorts for chairman and CEO Michael Eisner. During the heyday of e-commerce, he resisted pressure to merge with Yahoo or Microsoft, even after Internet giant America Online merged with Time Warner.

Today, AOL is struggling, weighed down by declining advertising revenue and a government investigation into its accounting practices. Chairman Steve Case reportedly has considered separating the companies.

And Vivendi Universal, formed on the promise of delivering entertainment over wireless networks to cell phones and computers, is selling off parts of the company acquired when Vivendi bought Universal in 2000.

Disney entered the portal wars in 1999 by buying the search engine Infoseek. It formed a separate company, issued a tracking stock and opened the Go Network. The move was as much defensive as it was ambitious.

Like other so-called content providers, Disney once charged Internet services such as AOL for its content. That changed as AOL and other service providers grew stronger and began charging for access to the millions of consumers who viewed their sites.

Not long after Go.com was launched, however, it became clear it would take a much bigger investment to compete against AOL, Yahoo and others than Disney was willing to make.

"Even if we plowed huge amounts of money into it, Go wasn't going to be No. 1 in the portal space," Wadsworth said. "Maybe it would be No. 3 or 4. And so we made the hard decision early."

In 2000, Disney repositioned Go.com to be an entertainment and leisure site. But the losses continued to mount and the online advertising market collapsed. For that year, the company's Internet operations, which included Go.com and its online catalog business, lost $401 million.

In 2001, the company halted Go, cut more than 500 jobs and wrote off its Internet investment.

"They were smart enough to cut it off early and stop the bleeding," said Harold Vogel of Vogel Capital Management in New York.

But Disney didn't abandon the Internet. It decentralized, giving managers of the company's separate divisions - ABC, ESPN, Consumer Products and Theme Parks - more control over their individual sites.

The move met resistance when the company for the first time forced divisions to record the profits and losses from Web operations within their own budgets.

On one hand, for example, ESPN now had total control of the content on its site and could include the Web in packages it offered to advertisers. But it also had to bear its share of running the site, costs that were previously born by Disney's Internet Group.

The strategy gave each division a higher stake in making the Web pay.

"There is a fundamental shift that happens when accountability shifts with it," Wadsworth said. "The level of accountability wasn't where it needed to be."

In the last year, unfettered by Go.com, Disney has struck potentially lucrative Internet deals.

ABC News now provides video on demand through Real Networks media player, and this month Disney and Microsoft launched a cobranded Internet service, Disney on MSN.

"I'm anxious and optimistic, but in some ways also nervous that we position ourselves right, that we make sure we don't miss big opportunities, but at the same time don't overgrab or jump out too soon and get ahead of ourselves," Wadsworth said. "And striking that balance is a tough one."

By Gary Gentile