Iwerks Entertainment, Inc.

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Iwerks Entertainment, Inc.

4540 West Valerio Street
Burbank, California 91505
Telephone: (818) 841-7766
Fax: (818) 840-6188
Web site: http://www.iwerks.com

Public Company
Employees: 115
Sales: $34.86 million (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: IWRKD
NAIC: 512111 Motion Picture and Video Production; 512131 Motion Picture Theaters (Except Drive-ins); 51121 Software Publishers

Iwerks Entertainment, Inc. designs and manufactures high-technology, software-based entertainment attractions. The companys products combine advanced theater systems with entertainment or educational software to create multi-sensory attractions found at location-based entertainment centers, theme parks, movie theaters, museums, science centers, shopping centers, casinos, resorts, and various other locations. With the largest library of ride simulation films in the industry, Iwerks Entertainment specializes in ride simulation theater systems using sophisticated hardware and company-produced films to give the viewer the physical and visual impression that he or she is actually experiencing the action onscreen. The company has installed more than 250 theaters and touring attractions in 38 countries.


The story behind Iwerks incorporation in the mid-1980s began more than a half-century earlier in Kansas City, Missouri, at the Pesman-Rubin Studios. It was there that two of the most renowned innovators in the entertainment industry worked side by side as young adults, struggling to forge their careers. At Pesman-Rubin, Walt Disney and Ub Iwerks worked amid a clutter of wooden desks, busily creating artwork for local newspaper advertisements and theater programs. Disney and Iwerks spent only a month together at Pesman-Rubin, but their brief association developed into a partnership when, after being laid off, the pair formed the Disney-Iwerks Company in Kansas City. The entrepreneurs subsisted on a trickle of business before financial pressures forced them to abandon their partnership and seek work elsewhere. Iwerks remained in Kansas City, while Disney, attracted by opportunities in the West, packed his belongings and moved to Los Angeles.

Disney realized his first success with Laugh-O-Grams, brief cartoons that he sold to movie theaters. At the time, animation was a novel art form with few adept practitioners, but Disney knew of one skilled animator, his former partner Iwerks. Iwerks joined Disney in Los Angeles, bringing together the two creative minds that helped make Walt Disney Companies a multibillion-dollar entertainment conglomerate. Iwerks was credited with pioneering several of the technological advancements underpinning modern animation, as well as playing a critical role in the technological development of the hugely popular Disney theme parks. His impressive achievements became a legacy, a wealth of experience and knowledge that he passed on to his son, Don Iwerks. Don Iwerks followed his fathers example and joined the Disney organization in 1951, beginning a tenure of service that would span three decades. Like his father, Don Iwerks made a reputation for himself as a creative trailblazer, ultimately finding his niche among a team of Disney executives who designed and manufactured the film systems employed at Disneyland and Disney World. In 1986, after 35 years working for Walt Disney Companies, Don Iwerks set out on his own and formed Iwerks Entertainment, a company whose background was steeped in Disney tradition and whose future drew its promise from two generations of Iwerks innovation.

From its inception, Iwerks Entertainment took its cue from Don Iwerkss work at Walt Disney Companies. The high-technology, cinematic attractions at Disneyland and Disney World were proven winners, convincing Don Iwerks that the attractions could stand on their own and attract lines of customers outside the borders of sprawling theme parks. Further, Iwerks reasoned, the high-technology attractions could draw even larger audiences if presented at more conveniently accessible locations than Disneyland and Disney World. By penetrating more markets, Iwerks could expect larger audiences, but the strategy also depended on a vast amount of capital. Financing the design and manufacture of high-tech attractions was not a major problem within the immensely wealthy Disney organization; it would prove to be a perennial problem for the independent Iwerks Entertainment. Nevertheless, Don Iwerks was convinced he could develop the worlds premier location-based entertainment (LBE) company. He began in 1986 to muster the creative and financial resources he would need to establish a network of LBE attractions.

International Growth During the Late 1980s and Early 1990s

Iwerks Entertainment secured its toehold in the business world overseas. The companys first three sales, consisting of its proprietary large format film projection product, were in Asia, one in South Korea and the other two in Japan. The initial success in international markets established a trend that intensified as the company progressed through its formative years. Overseas markets, particularly in the Far East, were more receptive to multimedia attractions than the U.S. market, which at the time was more inclined to invest in what were commonly referred to as hard rides, the traditional concrete-and-steel attractions such as roller-coasters. An Iwerks Entertainment research program revealed as much, prompting the beginning of very concentrated efforts in the Far East in 1989, according to a company executive quoted in the March 15, 1993 issue of Amusement Business. Following its findings, the company became involved in a series of projects in the Far East, as well as in other international markets. In 1990, Iwerks Entertainment served as a subcontractor for a project at the Osaka World Expo in Japan, which led to its role as the major contractor for three pavilions at the Universal Exposition of Seville in Spain in 1992 and an identical role for five pavilions at The Taejon International Exposition in South Korea in 1993. Other major projects in 1993 typified the companys focus on the Far East: Iwerks Entertainment large format film systems debuted in China, Japan, Taiwan, and Malaysia.

Although Iwerks Entertainment was involved in numerous other projects during the late 1980s and early 1990s, the companys involvement in major expositions during the early 1990s figured prominently as a revenue contributor. The companys exposition projects also set a dangerous precedent. In 1992 and 1993, Iwerks Entertainment earned 50 percent and 40 percent, respectively, of its total revenues from sales of attractions to world expositions, which loomed as an alarming portion of the companys business as executives looked toward the future and noted that no major expositions were scheduled to open in 1994 and 1995 (the next major exposition was the Specialty Exposition: The Oceans in Portugal in 1998). Clearly, it was time for a change in strategy. Unless company officials were willing to forsake roughly half of their business, some other markets needed to be explored to replace the sales derived from expositions.

Aside from pressing financial vulnerabilities, other factors pointed to a need for new strategic direction in the early 1990s. In the early part of the decade, the LBE industry was still trying to define itself, still struggling to determine exactly what it should offer to the public and how companies within the industry should operate. Among the handful of competitors in the industry, there were competing strategies and visions of the future that all generally revolved around technological issues. As a whole, the industry had not settled on determining its identity largely because the technologies it used were constantly changing. At Iwerks Entertainment, where the company began with its proprietary large format film projection product, the currents of technological innovation had diversified the companys expertise into a variety of new multimedia formats, including ride simulation, 360 degree video, group interactive, and three-dimensional attractions. With the addition of these new capabilities, coupled with the imminent departure of any major exposition customers, the question facing Iwerks Entertainment executives was how to best utilize new and emerging technologies in the marketplace and, thereby, become the model of how a successful LBE company should operate.

Iwerks Entertainments new strategy hinged on what it called Cinetropolis entertainment centers, the single solution for delivering its growing portfolio of products to the marketplace. The Cinetropolis concept, which Iwerks Entertainment management began developing in 1992, combined the companys various attractions with restaurants and retail establishments, all tailored in a highly themed environment. Touted as the theme park of the 1990s, Cinetropolis emerged as the multimedia vehicle to compensate for the lack of exposition projects, becoming the central focus of the companys corporate strategy. Considerable effort and finances were directed toward bringing the concept to life, resulting in the debut of the first Cinetropolis entertainment complex at the Foxwoods Casino in Connecticut in January 1994. The Cinetropolis operation, developed in partnership with Foxwoods, was intended to lure families to the casino complex, where they could immerse themselves in a variety of film-based attractions. Included within the first Cinetropolis were a 350-seat giant screen theater, a 360 degree theater presenting an Iwerks-produced film called Dinosaur Adventure, and a 48-seat Turbo Ride Theater, offering a variety of simulated adventures.

Company Perspectives:

The leading full-service provider of systems and services to build business for and with our clients in large format, ride simulation, and specialty venue attractions. The smile on the face of a young girl in Hong Kong, the squeals of delight from teenagers in New York, and the wide eyes of a parent in Dublin tell us we are doing something right. All over the world, over 100 million people have had an Iwerks experience. We feel there are five billion people left to impress.

The opening of the Connecticut Cinetropolis marked the beginning of an exceptionally busy year for Iwerks Entertainment, its first year as a publicly traded concern. The companys initial public offering (IPO) had been completed in October 1993, when Iwerks Entertainment stock debuted at $18 per share. By the following day, the companys share price had soared to $37, its rise fueled by investors desire to latch on to the promising trend toward multimedia entertainment. In the wake of the resoundingly successful IPO, the Connecticut Cinetropolis had emerged as the companys direction for the future, with construction of a second Cinetropolis, slated to open in Chiyu, Japan, in November 1994, underway.

The company was also moving stridently forward in other directions, showing no fear of over-expansion. Construction was underway for a 450-seat Iwerks Entertainment theater just outside Utahs Zion National Park, expected to be completed in May 1994, and roughly a dozen projects were being completed in the Far East; but the biggest news of the year arrived a few weeks after the Connecticut Cinetropolis opened. In February 1994, the company announced it had signed a definitive agreement to acquire Florida-based Omni Films International Inc., a movie-based entertainment company regarded as Iwerks Entertainments second largest competitor. The acquisition, completed in May 1994, established the companys Attractions and Technology Division as the single dominant force in the high-growth ride simulation industry, giving it simulation theaters in approximately 50 sites throughout the world and the largest single simulation film library.

Mid-1990s: Change in Strategy

Although the progress achieved in 1994 was meaningful, it came at a cost, enveloping Iwerks Entertainment in financial difficulties. As the company rapidly expanded its operationstoo quickly, a company official later concededearnings plunged and analysts grew wary. From its celebrated high of $37 per share, the companys stock value began to fall precipitously, dropping to one-third of its per share price in a six-month period. The resultant turmoil at company headquarters led to a change in management, a corporate-wide reorganization, and a change in its strategic direction. Citing a lack of market response to the Cinetropolis concept in its annual filing to the Securities and Exchange Commission in 1996, Iwerks Entertainment declared it would redirect its focus on less capital intensive projects and no longer regard the ownership and operation of its own attractions as its first priority strategically.

Despite the setback, Iwerks Entertainment emerged from the mid-1990s as arguably the strongest contender in the LBE industry. Profitability was restored after the sweeping changes, enabling executives to genuinely celebrate the companys tenth anniversary. During the late 1990s, the companys strategic focus was settled on the ride simulation attraction business. In 1997, the company made a bid to greatly increase its interests in ride simulation by announcing a merger with Showscan Entertainment Inc., a competitor with 70 motion simulation theaters and a film library of 28 titles. The deal was scotched, however, when a group of Iwerks Entertainment shareholders voted against the merger in 1998, claiming it would dilute the value of their holdings.

On the international front, Iwerks Entertainments heavy presence in the Far East incurred a decisive blow during the late 1990s when a pernicious economic crisis crippled many Asian markets. The company, which continued to derive roughly 40 percent of its revenue from across the Pacific, stepped up its involvement in Chinese markets to compensate for the loss in business. The push into China, relatively unaffected by the depressed economic climate surrounding it, was applauded by outside observers, who saw a wealth of opportunities in China for Iwerks Entertainment.

As Iwerks Entertainment exited the 1990s, it occupied an entrenched market position in an industry it had helped to create. The company ranked as the second largest provider of large format theater systems in the world, behind Imax Corporation, and as the industry leader in ride simulation attractions. In an industry defined by technological sophistication, Iwerks Entertainments success depended greatly on continued innovation, something the company paid strong attention to throughout its history, despite the numerous hiccups along the way. As the company charted its course for the beginning of the 21st century, effective and stable leadership stood as the companys most pressing problem. After numerous and frequent executive management changes during the 1990s, the company named Don Iwerks as its chairman and interim chief executive officer in February 2000. To Iwerks, who came out of retirement to take charge of the company, fell the critical task of successfully managing and executing Iwerks Entertainments legacy of innovation.

Principal Subsidiaries

Iwerks Film Production.

Principal Competitors

Cinema Ride, Inc.; Imax Corporation; Showscan Entertainment Inc.

Key Dates:

Don Iwerks leaves Walt Disney Companies to start Iwerks Entertainment.
Company completes initial public offering of stock.
Omni Films International Inc. is acquired.
Proposed merger with Showscan Entertainment Inc. is blocked by Iwerks Entertainment shareholders.
After retiring, Don Iwerks rejoins the company as chairman and interim chief executive officer.

Further Reading

Berger, Robin, Interactive Entertainment Forms Stock Gets Rattled, Los Angeles Business Journal, May 16, 1994, p. 8.

Johnson, Stephen S., Take a Ride on Iwerks, Forbes, November 18, 1996, p. 290.

Kanter, Larry, All Eyes on China, Los Angeles Business Journal, February 23, 1998, p. 1.

Langberg, Mike, Virtual Reality Interactive Systems Profiting in Theme Parks, Knight-Ridder/Tribune Business News, May 17, 1994, p. 05170178.

Medina, Hildy, Marriage in Motion, Los Angeles Business Journal, August 11, 1997, p. 14.

OBrien, Tim, Iwerks Efforts in Far East Pay Off, Amusement Business, March 13, 1993, p. 18.

Ray, Susan, Iwerks First Cinetropolis Premieres in Connecticut, Amusement Business, January 31, 1994, p. 20.

, Kinsey: Software-Driven Attractions to Fit Entertainment Needs in Future, Amusement Business, July 18, 1994, p. 40.

Spring, Greg, Iwerks Forecasts $3 Million Loss for the Year, Los Angeles Business Journal, September 4, 1994, p. 5.

, Iwerks Reports Its First Profit in Two Years, Los Angeles Business Journal, December 18, 1995, p. 10.

Waddell, Ray, Showscan and Iwerks Announce Plans to Merge, Amusement Business, August 11, 1997, p. 1.

Zoltak, James, Two New Iwerks Attractions Open, Amusement Business, January 27, 1997, p. 23.

Jeffrey L. Covell