New domain for kingdom

Bill Gates and Steve Case are about to get a big run for their money--from Mickey Mouse.

Jeff Pelline Staff Writer, CNET News.com
Jeff Pelline is editor of CNET News.com. Jeff promises to buy a Toyota Prius once hybrid cars are allowed in the carpool lane with solo drivers.
Jeff Pelline
7 min read
Bill Gates and Steve Case are about to get a run for their money--from Mickey Mouse.

Ever since the Walt Disney Company announced its intent to expand its online presence, companies Special report: Wishing on a star from Silicon Valley to Wall Street have looked to the entertainment giant to see what course Hollywood might take in cyberspace. Disney has kept its strategy under tight wraps, but CNET has learned that it is planning a major fee-based online service aimed at the family market that is expected to include everything from celebrities hosting online features to the company's own branded "D-mail."

The venture, which could pose serious competition for America Online and other online services that are targeting families, is expected to be rolled out in stages starting at about $5 a month for access to some proprietary content and eventually rising to a $20 monthly charge that will include an Internet connection, sources said. While details of the online service are still being worked out, those familiar with the plan said its features include "D-mail," Disney's version of email; "D-ball," a big red ball that acts as an online navigational tool; chat rooms and bulletin boards; and filtering software that will help ensure that curious children don't stray from Disney-rated sites to X-rated ones on the wide-open Internet.

The move by Disney, which would be the first entertainment company to create an online service, could be a harbinger of fundamental changes in the competitive landscape as more media conglomerates in Hollywood and elsewhere consider following suit. Specifically, in the race to enlist parents and their children, the service will compete directly with AOL, CompuServe, Prodigy, the Microsoft Network, and regular Internet service providers.

Announcement of the Disney service, which is scheduled for a spring launch, is not expected until January. But the company has already begun laying the groundwork by quietly launching services to sell videos, books, toys, and clothing on the Internet through its existing Web sites this month.

Once it is launched, subscribers to the service also may be mailed CD-ROMs regularly throughout the year, which not only provide fresh content but also make it much faster to download sound and video to the 28.8-kbps modems used in most homes. The focus will be educational content, but online hosts could include celebrities such as Whoopi Goldberg to make learning more fun.

Disney now has three main Web sites: Disney.com, which features the company's core assets, including theme parks, movies, music, television channels, and theatrical productions; Family.com, which focuses on children's education, activities such as pumpkin Special report: Wishing on a star carving, and community calendar listings for regions throughout the country; and Movies.com, which features Disney's latest hits. There's also the possibility that the sites would be consolidated for the online service.

Another option being discussed is a 3D virtual world that lets you meet and play online with Disney characters, or "avatars." Each time you visit, they they will remember your identity, similar to Disney rival Time Warner, which already invests in a similar service dubbed The Palace.

Disney's online technology partners include Netscape, Open Market and Steven Jobs's Next Software. (Jobs's other company, Pixar, helped Disney create the mega-hit Toy Story.)

Disney's online telephone partner is AT&T, but the company also has talked with MCI Telecommunications about supplying a backbone for the service, sources said. Disney, AT&T, and MCI spokespersons said they have no knowledge of such talks, although they conceded that their policy is not to comment on any negotiations until an agreement is reached.

Like other online services, Disney's would make money from three areas: fees, advertising, and product sales. Despite an alliance with Netscape, the company runs ads for Microsoft's Internet Explorer on its Web site.

On the surface, analysts said, Disney Online is poised to become a giant force that could help reshape the industry's landscape. For example, the $16.5 billion-a-year conglomerate could distribute proprietary software for its online service at Disney World and at Disney Stores, not just in the mail. The market itself is huge; there are an estimated 50 million U.S. households with children.

"It could be one of the few sites that reaches Special report: Wishing on a star critical mass and could become a viable Web business," said Kate Delhagen, an analyst with Forrester Research. "They've got a brand that parents trust."

On the other hand, the company is inexperienced in the interactive world, exemplified by the release of a bug-ridden Lion King CD-ROM last Christmas. There's also been a learning curve in getting the online sites built with e-commerce software from Open Market and the Web object software tools from Next to work smoothly, according to those who were involved.

"There is a risk of tarnishing Disney's reputation with high-margin customers if they don't set it up right," said Scott Wright, who follows the company for Argus Research.

Observers also worry that Disney may find it difficult to blend its own corporate style, keeping a tight control on the content at its theme parks, in movies, and in books, with that of the Web--a free-for-all of information, some of it unsuitable for children.

"The Web is all about decentralization, and the way that Disney has been able to maintain its brand is to have tight editorial control," said Lori Fena, executive director of the Electronic Frontier Foundation. "It will be a challenging process to essentially create the Disney Channel online. At the same time there's a huge demand to create safe playgrounds for children."

Disney Online spokeswoman Rebecca Buxton would not confirm any details of Disney's ambitious online project and said it was "premature" to make any executives available for interviews for this article. Disney Online chief Jake Winebaum, reached by email, also declined any comment until January.

Buxton confirmed Special report: Wishing on a star that later this month, however, the company will announce that it has put the Disney Store online. Launched without fanfare, the service quietly opened about a month ago to make sure it was running smoothly in time for the holiday shopping rush. The store lets you buy dozens of products online with your credit card. For example, you can click your mouse on a pair of Winnie the Pooh sneakers, and an order form appears with the price ($38) and a list of shoe sizes (five through ten, including half-sizes).

Buxton also said that Disney will relaunch the Family.com Web site later this year with some "surprises." Disney recently struck an online-content alliance with FamilyFun magazine, and it has been negotiating to buy the Family Planet site from Starwave.

The online strategy is key to Disney's overall growth plan, analysts said. Computer users are good Disney customers; they typically are affluent, creative, and mobile. And from the desktop, consumers could tap into the Disney world with the click of--you guessed it--a mouse.

"Here's an opportunity, because of technology, to converge disparate properties under one umbrella," Delhagen said.

That's already been happening to some extent since Disney launched the Disney.com Web site in February. Besides letting you shop online, the site lets you book a room at Disney World or Euro Disney by sending email, a much cheaper way of making reservations than a phone call overseas. You can also download sound and picture clips from your favorite Disney movie onto your PC. ("Hakuna Matata" from the Lion King is but one).

The links recently have been extended to include Capital Cities/ABC, which Disney bought last year for $19 billion, making Disney the world's second-largest media conglomerate behind Time Warner. Last week, for instance, the site offered a link to ABC television that promoted the network's airing of The Lion King.

Wall Street analysts believe that creating this Special report: Wishing on a star kind of "synergy" is crucial for Disney to sustain its torrid growth rate, especially in light of the Cap Cities/ABC buyout. Otherwise, they worry that the company risks falling into the same trap as Time Warner, which has yet to make its 1989 merger with Warner Communications a financial success, not to mention the challenges posed by its recent buyout of Turner Entertainment.

The synergy could come at a relatively small cost too. Analysts estimate that Disney has spent millions of dollars to create its two-year-old online division, which now has a staff or more than 100. But that's a pittance considering the group's money-making potential and its contribution to Disney's overall marketing effort.

But Disney's successful ascent online is not assured. Competition in the online market is cutthroat. Many companies have yet to make money, and Disney CEO Michael Eisner and his management team--whose motto is "average is awful"--have a low tolerance for money-losing ventures despite the company's deep pockets. Time Warner already has voiced dismay at the profit

Michael Eisner,
Disney chairman and CEO

picture online, hinting that it may back off in some areas. Time Warner's online service, Pathfinder, also has struggled.

In addition, the business model for the online world is changing rapidly. AOL, for example, is shifting away from a proprietary online service in favor of a Web-based one. Other companies, including CNET: The Computer Network, are spinning off their stock of Internet domain names, rather than consolidating them.

Disney's would-be competitors are trying to keep a stiff upper lip. As one AOL spokeswoman said: "We welcome the competition."  

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