(continued)

In an effort to improve our odds for continued success in the live-action film business, we are implementing a strategy that calls for the making of a higher percentage of Disney-labeled films ... a strategy that, needless to say, could only be undertaken by our studio. Disney continues to be the only brand name in the entertainment industry. For 75 years, it has earned the trust of the public. Under our new strategy, we hope to build on this trust with a renewed emphasis on Disney family films.

Another area that is getting our strategic attention is broadcasting. All three of the once-dominant networks have seen audience erosion, and the ABC network has been no exception. But the fact is that ABC's prime-time ratings receive too much emphasis as a measure of our broadcasting division's performance. The entire ABC network — daytime, prime-time, news and late night — continues to comprise less than 10 percent of broadcasting's operating income. This is a primary reason that we opted, in 1995, to purchase Cap Cities/ABC rather than one of the other networks that was then available. Not only were we getting one of the major broadcast networks, which is still a completely unique entertainment asset in its enormous audience reach, but we were also getting some of the rising brands on the cable spectrum, such as ESPN, A&E, Lifetime and The History Channel, as well as some of the strongest owned-and-operated stations in the country. To be sure, the days of total dominance by just three networks are over. But with our wide range of broadcast assets, which also include the Disney Channel here and abroad, we are well positioned to play a strong role in the ongoing evolution of the incredible medium that is television.

O.K., I have now dutifully stated a rational, mature, restrained and, I hope, intelligent overview of the broadcast and cable landscape. Now, please allow me to succumb to my more native impulses by simply saying, "Watch Sports Night on ABC!" It is fantastic and it is one of the building blocks we are putting together to eventually make ABC number one, irrespective of the new competition! (There, now I feel better.)

In much the same way we have invested in cable television, we have also invested in another growing area of home entertainment that is drawing eyes to screens — the Internet. Under the management of our Buena Vista Internet Group, we were already reaping benefits from the Internet, thanks to Disney.com, the web's most-visited entertainment site; ESPN.com, the most-visited sports site, and ABCNEWS.com, the fastest growing news site. In recognition of the immense opportunity that the Internet poses, we took three important steps this year to move from being a major participant on the Internet to becoming a true leader. First, we purchased Starwave, one of the top Internet technology companies. Then, we sold Starwave to Infoseek in exchange for a 43 percent stake in this popular search engine. With these two partners in place, we announced the creation of the Go Network, which will be launched in the spring and, we believe, be something of a next step in the development of the world wide web. Once Internet users enter the Go Network, they will find a wealth of integrated services just a click away, all of which offer content from units of The Walt Disney Company, plus access to every other destination on the world wide web.

The opportunity posed by the Internet is both very new and very old. As I've expressed before in these letters, I firmly believe that Disney is ruled by the royalty of King Content and Queen Creativity. Serving as their advancing army is Technology. This is as it has always been. Creativity gave birth to the Content we call Mickey Mouse. And, look where Technology has led him — onto movie screens and television screens, videotape and theme park attractions, T-shirts and toys, CD-ROM's and video games. Every one of these technological venues has offered a new way for Mickey to engage audiences and gain fans. Now Mickey is encountering the opportunities of the Internet.

But, beyond Mickey, this new medium is wonderfully suited for the development of new characters, and it is on the backs of new characters that our Internet business will grow. These characters can also be coordinated with our parks and consumer products and co-produced with our broadcast and cable entities. For example, Zoog Disney on the Disney Channel has created the new characters that also appear on the Disney.com and the ZOOGDisney.com sites.

Just as the Buena Vista Internet Group is providing a new venue for Disney content inside the home, Disney Regional Entertainment is providing new venues for Disney content outside the home. We have developed three lines of business, each of which has an inherent potential for growth. Club Disney came first, offering a richly themed play space for young children and their parents (adults without children may not enter!). Then came the first DisneyQuest, an interactive entertainment zone within one giant 100,000-square-foot building that offers a whole new way for families to enjoy the Disney experience. One month later, we opened the first ESPNZone, a lively extension of the ESPN brand that gives fans a place to talk sports, eat sports, watch sports and play sports. Over the coming years, more Club Disneys, DisneyQuests and ESPNZones will be established in cities across America. If the concepts are successful, as we anticipate, then they should be readily exportable overseas. The closest model for these efforts is the Disney Stores and our new ESPN Stores, which owe their great popularity not just to the merchandise but to the fact that people like being able to step inside a Disney-designed environment close to home. Now we'll be providing three significant new ways for guests to enter the world of Disney and, judging from the early results, the appeal and the potential are great.

It should be emphasized that the new venues of Disney Regional Entertainment are designed to complement the Disney theme park experience, not replace it. Indeed, we suspect they may whet more than a few appetites for a trip to Orlando or Anaheim. Fortunately, lots of trips to Orlando and Anaheim are already being taken. Our Attractions division had a spectacular year in 1998. For the fourth consecutive year, park attendance and hotel occupancy were up across the board, partly because there were more parks to attend and more hotel rooms to occupy. Disney's Animal Kingdom was filled to capacity for much of the summer, and the new Coronado Springs Resort was an instant hit. Disneyland's new Tomorrowland was also a big draw, and the All-Star Movies Resort recently opened to sell-out business.

We plan to build on this success by continuing to improve our parks in little ways and big ways. Among the big ways, there are the additions of major attractions, such as the GM Test Track, Downtown Disney and the Rock 'n' Roller Coaster at Walt Disney World, Disneyland's new Tomorrowland and the Asia section of Disney's Animal Kingdom. And then there are the really big ways: the creation of entirely new theme parks. Currently under way are Disney's California Adventure in Anaheim and Tokyo DisneySea in Japan. Until now, Disneyland and Tokyo Disneyland have been wonderful single-day venues that most families visit during one rising and setting of the sun. With the addition of these new adjacent parks, they will be transformed into true resort destinations.