Company Town : Disney Channel Lets Out a Quiet Roar

Separating the offices of the Disney Channel and parent Walt Disney Co. is a stretch of freeway slicing through Burbank.

From a business standpoint, the freeway symbolizes the kind of dividing line that has long separated the mother ship from one of its most autonomous units--and one of its quietest.

While Disney’s larger operations, such as its movie business and theme parks, operate under intense public and Wall Street scrutiny, the cable channel in nine years has quietly tripled its annual revenue to $275 million while posting a 39% compounded growth rate in pretax income--a profit growth that company officials say has never fallen below 20% in any year.

Channel officials won’t say exactly how much profit that translated into last year. But based on various analyst estimates, somewhere in the $75-million range probably isn’t too far off.

Later this week, the channel will announce a staggering gain of nearly 5 million subscribers last year alone, to a total of 12.6 million. The one-year jump will vault Disney into second place, behind Home Box Office, among cable channels in number of subscribers nationwide.

The increase in subscribers partly represents Disney’s efforts to attract teen-age and adult viewers as well as children, while maintaining its clean image. For example, the “Adventures in Wonderland” series airs in the morning for preschoolers, then a film from the Disney archives or a critically acclaimed series such as “Avonlea” airs in the early evening for the family. A Billy Joel concert is shown for the parents after the kids are in bed.

Says Disney Channel President John Cooke: “We want it to be a unanimous vote around the dinner table for the channel.”

More important, the rapid expansion reflects what so far has been a successful shift in marketing strategy, undertaken four years ago amid much doubt. The channel, which required a fee from each household, began to mass-market itself even if it meant bringing in less money per subscriber.

Call it a Wal-Mart style strategy: more volume, lower margins.

It works like this: In the old days, everyone who got the channel paid a fee--say, $7.95 a month--or purchased some sort of package of channels that included Disney and “premium” channels such as HBO or Showtime. Disney’s cut was maybe $3 to $4 per subscriber.

A lot of people still get the channel that way, but in the last four years, Disney has been prodding cable operators to offer the channel as part of an expanded batch of channels.

Now the TV viewer gets basic cable channels and, for a few dollars more, the Disney Channel, CNN, ESPN, fly fishing, bowling, whatever. Disney’s cut drops to about $1 or so for each subscriber.

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Cable operators, looking to boost revenue by recruiting subscribers at a time when Washington has been taking an increasingly restrictive hand in how much money they can make, are taking the bait and signing up scores more viewers for expanded service. This year, roughly half the Disney Channel subscribers don’t pay a special fee for the channel, but get it as part of expanded basic service.

Indeed, last year’s jump came primarily from three cable operators that decided to offer Disney in their packages of channels. For Disney, Cooke says, the jump in volume has more than made up for the lower subscriber fees.

Some skeptics wonder what will happen if subscriber growth slows with the lower fee Disney earns, especially given the channel’s desire to spend money developing programs instead of relying to any great extent on Disney’s rich library.

But Cooke notes that a key part of Disney’s growth strategy is to take advantage of the many ways to deliver programs, such as via Hughes DirectTv and other satellite systems.

Cooke also wants to exploit the prospect of regional phone companies competing with cable to offer video services. Cooke is the point man for Disney in its talks about a prospective venture with regional phone companies Ameritech, BellSouth and SBC Communications (formerly Southwestern Bell) in which the phone companies would tap Disney’s programming expertise.

The 12-year-old channel began for the most part as a place to air Disney’s library. Its appeal to parents in the beginning was pretty simple: an oasis of wholesomeness on cable.

Under Cooke, who was named to head the channel in 1985, the company broadened its family programming, picking up a batch of Emmys and Cable Ace awards.

Disney still won’t air R-rated films. It will show PG-13 movies only if they are edited--as it did with the recent film version of “Much Ado About Nothing.” Swearing, nudity and excessive violence are all trimmed out first.

“We want parents to be able to never have to reach for the remote control when a child walks into the room,” Cooke says.

In addition to the dollars it brings in, the channel plays a key role in promoting Disney itself. Lengthy segments are devoted to Disney’s projects at theme parks or promoting Disney movies. Disney Chairman Michael D. Eisner likens the channel to something of a “house organ” where Disney stockholders, employees and fans can catch up on what the company is doing.

“It is autonomous, but on another level it is the most synergistic of all of our companies,” Eisner says. “It’s involved in consumer products, movies, our parks. It fills in our audience.”

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Disney’s Maine man: Former Senate Majority Leader George Mitchell was named a Walt Disney director Monday, filling the seat once held by the late Samuel L. Williams.