HKU568 MITSURU MISAWA TOKYO DISNEYLAND AND THE DISNEYSEA PARK: CORPORATE GOVERNANCE AND DIFFERENCES IN CAPITAL BUDGETING CONCEPTS AND METHODS BETWEEN AMERICAN AND JAPANESE COMPANIES In the spring of 1997, it had been 14 years since Tokyo Disneyland opened its doors for business. Company executives at Japanese Oriental Land Corp. (OL), known to many as the company that brought Disneyland to Japan [see Exhibit 1] were enjoying the success of their well-established company, and began looking at new business endeavours that would allow for further growth and enhance OL’s earning capability. While there was an undoubted need for growth and expansion, the timing and approach of any new endeavour would be critical. Management knew that most of OL’s customers were repeat visitors. However, while customers were expected to return two or three times, it was not clear if they would come back for a fourth visit. There was concern that customers would eventually get bored with the existing attractions and facilities, resulting in a severe shortage of customers. The company forecasted that the number of visitors in 1998 would be 4% lower than the year before. Some years before, OL had received an inquiry from their licenser, the Walt Disney Company (WD), to consider the idea of constructing a new entertainment park, the DisneySea Park Project. The conditions of this new joint project would be similar to the conditions of the original—OL would pay WD a licensing fee for the continuous use of the name “Disney”, and in return, WD would provide OL with valuable technical advice and management support for the new project. Prof. Mitsuru Misawa prepared this case for class discussion. Dr. Misawa is a professor of finance and director of the Center for Japanese Global Investment and Finance at the University of Hawaii at Manoa. This case is not intended to show effective or ineffective handling of decision or business processes. This case is Part 2 of a two-part case series about Tokyo Disneyland, Japan. It may be taught on a stand-alone basis or combined with the other case to create a joint-negotiation exercise. During his time as an executive officer at the Industrial Bank of Japan (IBJ, now Mizuho Financial Group), Dr. Misawa acted as an investment banker in charge of the Oriental Land Corporation (OL: Tokyo Disneyland) in Japan. He therefore had first-hand involvement and extensive dealings with this project. He has had considerable access to relevant information as well as broad- based familiarity with the issues discussed. © 2006 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise (including the internet)—without the permission of The University of Hong Kong. Ref. 06/281C Do Not Copy or Post 1 This document is authorized for use only by Daniel Sevall until May 2013. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860. 06/281C Tokyo Disneyland and the DisneySea Park: Corporate Governance and Differences in Capital Budgeting Concepts and Methods Between American and Japanese Companies OL’s directors had to make a tough decision. As a licensee, WD had its own agenda and negotiations with them had been hard in the past. Meanwhile, OL had a number of stakeholders it had to please including: the parent company, the main bank, landlords, and shareholders, all of whom had their own representatives on OL’s board of directors. The relationship among these parties determined and controlled the firm’s strategic direction. OL’s management had to incorporate all of these various interests in their decision-making process to come up with an optimal decision. The first step would be a thorough financial analysis of the new project, which could be presented to the various parties. The Original Tokyo Disneyland In April 1979, nineteen years after OL’s establishment, the company signed a license agreement with WD, involving the design, construction, and operation of Tokyo Disneyland.1 In December 1980, the construction of Tokyo Disneyland began in Maihama district, in the village of Urayasu (currently Maihama, in the city of Urayasu). Less than three years after construction had begun, Tokyo Disneyland opened its doors for business in April 1983. Tokyo Disneyland was a smashing hit. The first year it drew 10.3 million visitors, in line with WD’s expectations. After the opening year, the number of visitors never went below 10 million, reaching 13.38 million by the fifth year. The number of visitors peaked in 1998, at 17.45 million and the park’s attendance figures never dropped below 16 million in the years that followed. A prediction that the initial enthusiasm would wear off was proven wrong [see Exhibit 2]. According to a visitor analysis conducted by OL in 1988, the percentage of repeat customers was 75%,2 far above US Disney’s 50%. Geographically speaking, about 70% of the park’s visitors were from the neighbouring Kanto area, near Tokyo. A large number of repeat visitors from other regions also contributed to the park’s success. Visitors spent an average of ¥7,000 (US$59.31)3 on admission fee, foods, beverages and novelty goods exceeding the original estimate of ¥5,000 (US$42.37), resulting in total sales of ¥80 billion(US$0.88 billion).4 On revisiting, people had new experiences because the park kept adding new attractions. Some of those new attractions were: Tokyo Disneyland Electrical Parade (1985), Big Thunder 5 Mountain (1987), and Splash Mountain (1992). 1 For OL’s chronology, see [www document] http://www.olc.co.jp/en/company/history/index.html. 2 For the ratio of repeat customers as a percentage of the total number of entrants, see Arima, T., “Disneyland Story”, Nikkei Business Bunko, July 1st 2001, pp 170-171. 3 This case uses the following rate for all currency conversions: US$1 = ¥118.02 in 1997. 4 See Takahashi, M. (OL’s first president), An excerpt from “Watakushi no Rirekisho (My Personal History)” series, Nikkei (Japan Economic Journal), no. 28, July 29th 1999, p 40. 5 As to the additional attractions, see Kagami, T., An excerpt from “Umi wo Koeru Souzouryoku (Imagination Extending across Seas)”, Kodansha, May 26th 2003, pp 72-73. Do Not Copy or Post 2 This document is authorized for use only by Daniel Sevall until May 2013. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860. 06/281C Tokyo Disneyland and the DisneySea Park: Corporate Governance and Differences in Capital Budgeting Concepts and Methods Between American and Japanese Companies Negotiations Involving Tokyo Disneyland Walt Disney’s Position In January 1979, OL received a stern letter from WD saying, 6 If you cannot accept the terms, we have to stop this project. -Donn Tatum, chairman of WD Walt Disney had proven to be a tough negotiator when it negotiated the terms for Tokyo Disneyland. Although WD liked the location of Urayasu, its offer in 1979 was to provide only the know-how without shouldering any risk.7 It was not willing to pay anything for the construction of the park, but it wanted 10% royalty on the admission fee and sales of foods and beverages.8 OL strongly objected to this proposal, with its board of directors saying that “We have never seen such a lopsided contract condition and high royalty.” 9 Finally, an agreement was signed which stipulated a license fee of 10% on admission fees and 5% on food, beverages and novelty goods. OL was able to make the project profitable in four years, despite hefty licensing fees that were an average 7% of sales. The reason was not an increase in the number of entrants, but rather an increase in customer spending on food and beverages as well as on novelty goods. At the time of the negotiations, Walt Disney’s financial position was weak.10 Disneyland and Walt Disney World were attracting approximately 10 million entrants each year, and WD could not raise the entrance fee to increase income. Also, the movie and TV production division was doing poorly. Under these conditions, collecting a fixed amount of money from their overseas partner, regardless of the theme park’s success, was an attractive proposition for WD. This was a tough condition for the Japanese partner, but if Disney could find a partner who would want to do the project under these terms, they would draft a contract, assuming the partner could build a Disneyland to their stringent quality standards.11 In 1984, a management change at Walt Disney created a powerful team, with Michael Eisner as the company’s chairman and Frank Wells as its president. With the help of the license income from Tokyo Disneyland, Eisner’s management team built hotels in Disney World. In turn, the income from the hotels helped to revive WD, whose performance had been at an all time low under the leadership of E. Cardon Walker as chairman (1980-1983) and Ron W. 12 Miller as president (1980-1984). 6 For the details, see Takahashi, M. (OL’s first president)—An excerpt from “Watakushi no Rirekisho (My Personal History)” series, Nikkei (Japan Economic Journal), July 23rd 1999, p 40. 7 For the details, see Takahashi, M. (OL’s first president)—An excerpt from “Watakushi no Rirekisho (My Personal History)” series, Nikkei (Japan Economic Journal), no. 16, July 17th 1999, p 40. 8 Ibid. 9 Ibid. 10 See Arima, T., “Disneyland Story”, Nikkei Business Bunko, July 1st 2001, pp 146-147.