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Geoff Gannon July 1, 2007

On Disney, Pixar, and Ratatouille

One of the Eight Best Investing BlogsCheap Stocks, has posted the second part of its look at Disney (DIS).

Another one of the eight best investing blogs, 24/7 Wall St., has a new post entitled “Disney’s Pixar Purchase: Never Give a Sucker an Even Break“. The post mentions that this weekend’s estimated $47.2 million opening for Disney/Pixar’s “Ratatouille” was the worst Pixar opening in nine years.

Regardless, Ratatouille was number one at the box office despite tough competition from films such as Live Free or Die Hard and Evan Almighty – well, not exactly tough competition in the latter case as Evan Almighty has been a big financial disappointment.

You could see it coming. If you look at any list of top grossing movies (adjusted for inflation) comedies don’t do particularly well, especially considering how many get produced. The recipe for a huge money maker is simple – and goes back to long before the beginning of movies – make it epic, make it exciting, make it fantastical or historical (just don’t make it commonplace), and make it for all ages. Most comedies don’t score well on those counts. I suppose Evan Almighty does better than most comedies in aping the epic dramas that work. In fact, it matched them a bit too well with a price tag around $175 million.

Why have I spent a full paragraph on Evan Almighty when I’m supposed to be writing about Disney, Pixar, and Ratatouille? Because price matters. Here’s some of what 24/7 Wall St. had to say about Disney’s acquisition of Pixar:

It would appear that Jobs sold at the top. It would also appear that Disney got a lousy deal. It’s their own fault. Jobs was able to get more for the company than it was worth. The markets have learned not to underestimate him…But, Disney got burned.

I’m sticking with that I wrote about a year and a half ago:

Is Pixar worth $7 billion (or whatever the offer ends up being)? That’s a complicated question. First of all, you have to ask if $7 billion of Disney’s stock at today’s market price is actually worth more or less than $7 billion. What’s the chance that Disney’s stock is currently undervalued and Pixar’s is currently overvalued? It’s a real possibility.

On the plus side, this could mean Disney CEO Robert Iger wants to take Disney in a different direction from what we’ve seen lately. I’ve always thought the real value at Disney would come from providing content not distributing it. If the company really wants to be some sort of “diversified entertainment company” wouldn’t a company built around kids make more sense?

A company focused on animation, theme parks, the Disney Channel, etc. would make more sense to me. In fact, a few years ago, I would have been very happy if Disney announced an acquisition of a toy maker, video game publisher, or licensing company that had something to

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Geoff Gannon July 1, 2007

On the Dangers of Homogeneity

One of the Eight Best Investing BlogsValue Discipline, has an excellent new post entitled “The Dangers of Homogeneous Thinking.” Diversity of thought and interpretation is an important concept.

A lack of variation within any population is a dangerous thing. An evolutionary system in which an overall sense of conservatism (carrying what has worked in the past into the future) combined with a lot of variation at the margins (sometimes in extreme and eccentric ways) has often succeeded in consistently creating truly remarkable and effective outcomes that could never have been devised by a single omniscient actor.

This is something I spend a lot of time thinking about. Unfortunately, there is a tendency for success to sow the seeds of future failure, because the greatest enemy of great new ideas is acceptable old ideas.

Major League Baseball is an extreme example of a system in which variation is surprisingly stifled. I’ll use it, because although large corporate bureaucracies display some of the same attributes (and thus outcomes), any discussion of specific corporations would be both less concrete and somewhat more controversial – because it’s closer to the topic I normally write about here.

Pitching techniques are surprisingly uniform in Major League Baseball. There’s basically no evidence to suggest that any physical constraints should cause such bizarre uniformity. Historical evidence shows that other techniques are pretty effective. Furthermore, employing an unusual technique should be especially effective during a period in which a batter is highly accustomed to pitches thrown at different angles and speeds from a different release point following from a different motion. In other words, there’s a lot of evidence to suggest that pitching counter to a batter’s overall experience and his expectations of a certain situation should (all other things being equal) work better than pitching like everyone else does and like the batter expects (both generally and in a specific situation).

Anyway, pitching techniques don’t vary a lot in the major leagues today. Try to pick a range of speeds and a range of release points that will encompass a large percentage of all the pitches thrown in the major leagues. It’s not very hard to do. The range won’t be that wide. Why is this?

I’ve come to only one good conclusion. I’m not sure if it’s the right conclusion; but, it’s the best I can come up with for this very important question – and the question really is important, because a system like professional baseball should display a lot of variation in this regard if it works the way most such systems do.

My best guess is that it doesn’t. I think the relationship between the major leagues and the minor leagues is the answer. Not all professional baseball players are doing everything they can to win. Some are doing everything they can to advance.

There’s a huge difference between those two motivations. If winning is the key to success at all levels, then techniques (however …

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