Disney's 'Tween Machine How the Disney Channel became must-see TV--and the company's unlikely cash cow.
By Julia Boorstin Additional reporting by Alynda Wheat

(FORTUNE Magazine) – At first the movie premiere looks like any other. There's the red carpet, the moody lighting, the black-clad waiters. But the waiters are serving Shirley Temples and star-shaped turkey-and-cheese sandwiches, not Cosmopolitans and canapes. The guests aren't world-weary Hollywood types, but 10-year-olds shrieking for autographs. You've probably never heard of the Cheetah Girls, the singing and dancing quartet prompting the frenzy, but it seems as if most of the 8-to 14-year-old girls in the nation have. They've read the Cheetah Girls books; they know the Cheetah Girls lingo; they can chant the words to the Cheetah Girls songs in the made-for-TV movie that this event is celebrating.

The screaming 'tweens--those sought-after consumers poised somewhere between little-kid-hood and adolescence--are here because of a grand plan hatched at the Disney Channel in recent years. It has essentially recreated the old Hollywood star system with its 'tween actors and actresses. It makes mostly little-known kids into big names and then directs their talents into every corner of the $25 billion Disney empire--from TV shows to movies to records to merchandise. Once an ugly stepchild, the Disney Channel has become a prized possession for the larger corporation, whose marquee theme-park business is struggling. The channel is now the company's fastest-growing segment, with a growth rate twice that of cable darling ESPN over the past five years. Earlier this month, the Disney Channel revealed its margins for the first time. They're a whopping 50%. That means the Disney Channel accounted for about half of the Disney cable networks' $1 billion operating income last year, even though it brings in only about a fifth of its $5 billion revenues (see chart). "The Disney Channel is probably the best run of all the businesses at Disney," says Richard Bilotti, a Morgan Stanley analyst.

To see the machine at work, take a look at 16-year-old Hilary Duff, the actress Vanity Fair dubbed the "Tween Queen" and put on its July cover in a group shot with other young stars. In 2000 the Disney Channel cast the then-obscure 12-year-old in the title role of a new weekly series, Lizzie McGuire. The sitcom about an everyday middle-schooler became a huge hit. In September 2001, it also began running on Saturday mornings on ABC, another Disney property. In May 2002, Disney Press began publishing Lizzie books; there are seven so far and five more in the works. In August 2002, Disney's Buena Vista Music Group released a soundtrack for the series--Duff does some of the singing--which went platinum the following July. In September 2002, Lizzie began airing every single day on the Disney Channel.

Also in 2002, Disney's consumer products division began marketing everything from Lizzie dolls and sleeping bags to Lizzie pencils and notebooks. Last February it licensed the Lizzie name to retailer Kohl's for a line of apparel that is already a top seller in Kohl's 450 stores. Last May, Walt Disney Pictures released The Lizzie McGuire Movie (Duff's reported pay: $1 million), which debuted as the No. 2 film in the country and grossed nearly $50 million at the U.S. box office. Buena Vista released the movie soundtrack, of course; it went platinum too. It's hard to quantify how much the Lizzie franchise has earned for Disney altogether, but it's reasonable to assume that the amount is nearing $100 million.

Ten years ago Disney did none of this--despite the fact that Britney Spears, Justin Timberlake, and Christina Aguilera all got their start as Mouseketeers on the Disney Channel's Mickey Mouse Club show. The three went on to sell tens of millions of dollars' worth of CDs and tour tickets and cut all kinds of ancillary deals, not a penny of which flowed to Disney. CEO Michael Eisner won't make that mistake again. "This next generation--the Hilary Duffs, the Ravens--we now recognize how important they are," he says.

Much of the credit for the channel's success goes to Anne Sweeney, 45, president of the Disney Channel Worldwide and of the ABC Cable Networks Group (which includes Lifetime, E!, A&E, and several others--everything except the ESPN channels). When Sweeney arrived at the Disney Channel in 1996, it was chock-a-block with cartoons and movies like 1960's Pollyanna that she quickly realized were too uncool to appeal to her then 10-year-old son, Christopher. "Kids his age were dabbling with MTV but feeling it was too old for them," says Sweeney. "And they weren't enjoying shows for much younger kids."

So Sweeney began creating hipper programming that would appeal directly to underserved 'tweens--there are 29 million of them--including shows their parents wouldn't mind watching with them. She struck gold with Lizzie, then built on the formula with sitcoms like That's So Raven and Even Stevens and cartoons like Kim Possible, which uses some of the 'tween stars' voices. At the same time Sweeney completed an initiative launched by her predecessor to shift the channel from premium to basic cable, a move that expanded her audience to 83 million homes, vs. 14 million seven years ago. Last month the Disney Channel had more prime-time viewers than competitors Nickelodeon and the Cartoon Network.

Because the Disney Channel doesn't run commercials, it can't milk its success the usual way: by raising the price of advertising. Instead it began charging cable providers more and using its stars to generate new revenue streams for the parent company. Every week Sweeney attends a meeting with the heads of various Disney divisions--Walt Disney Pictures, Buena Vista, Parks & Entertainment--to discuss potential synergies among their businesses. It was as a result of these meetings that Lizzie spread throughout the empire. Says Andy Mooney, head of the company's consumer products division: "The Disney Channel will likely someday be responsible for more than 50% of all our consumer products."

Sweeney has had to grapple with problems along the way. Managing the 'tween stars isn't easy. For one thing, they have quick expiration dates; the Disney Channel can't follow them through high school, since their fans will have long since graduated to MTV. And before the biggest stars age out, they can get very expensive. "Once a show is a hit," says Disney Channel entertainment head Rich Ross, "producers and stars can renegotiate deals, and costs can balloon." Sweeney's strategy, therefore, is to shoot no more than 65 episodes of any show, and to shoot them fast, before key actors outgrow their roles. Once the shows are in the can, Disney can air them at a leisurely pace. More important, it can rerun the hits for years, picking up new generations of 'tween-aged viewers and limiting the amount it pays the stars (who receive standard residuals).

Right now Sweeney is grooming her channel's up-and-comers, such as 14-year-old Alison Michalka, who co-stars in Phil of the Future, an upcoming series about a time-traveling family. But the channel's hottest newcomer is 17-year-old Raven (formerly known as Raven-Symone), who played Bill Cosby's step-granddaughter in the last three years of the 1984--92 TV series The Cosby Show. (Though Raven's age would normally make her too old for 'tweendom, the Disney Channel thinks it can use her for a few years because she appears younger than 17.) Raven was fading into child-star obscurity when Disney decided to build the sitcom That's So Raven around her. The show debuted last January, and when it became a hit, Disney cast Raven as one of the Cheetah Girls. Now she is shooting a Disney feature called All American Girl and recording songs for another Disney film's soundtrack. She also joined some ABC stars earlier this month at Disneyland to promote ABC's newest prime-time lineup. "They've given me all this," says Raven. "I have to give back to them."

That, of course, is just what Disney is counting on. But the loyalty doesn't always last. When Hilary Duff finished shooting the Lizzie series last year, for example, Disney tried to cast her in another movie or in an ABC sitcom. But Duff wants to build her own empire. She has two non-Disney movies in the works, a Hilary Duff prepaid Visa card, a Hilary Duff videodisc for Hasbro, a clothing and accessories line called Stuff by Hilary Duff, and possibly a concert tour and book. Disney's Buena Vista did succeed in signing Duff to her first solo album, Metamorphosis, which quickly climbed to No. 2 on the Billboard chart after it was released last month. But the company will see zero revenue from the other ventures.

For the Disney corporation, that's a bummer. But for the Disney Channel, it's no big deal. Some analysts say that Duff's current activities only attract more attention to her original show and to the channel. Fact is, Disney doesn't need Hilary Duff to keep the Lizzie McGuire franchise alive. It has filmed all 65 episodes of the sitcom, which will be in first run until early next year. After that, there are reruns--which could keep going well after Hilary gets her first facelift.

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