Activist company

Walt Disney Company (The): Light Side of the Force

Streaming is the new normal

All industry players are moving to streaming: Apple, Amazon and now Disney for a few years. It took Disney less than 3 years to catch up with Netflix, which highlights the quality of execution and the power of Disney’s outstanding catalog. The company said total Disney+ subscriptions rose to 152.1 million in the fiscal third quarter, above the 147 million analysts expected.

Disney+ subscribers by quarter since 2020:

Source: Statista

If we add this data with the users of these subsidiaries Hulu and ESPN+, we obtain a number of subscribers higher than Netflix (221 million subscribers against 220 for Netflix at the end of the first half of 2022). Pay attention to the number of subscribers which is advantageously presented by Disney as well as the low profit generated by the subscribers.

Source: The Walt Disney Company

The streaming market is gradually consolidating with Disney and Netflix in the lead (220 million subscribers each), Amazon Prime Video (120 million), Warner Bros. Discovery (92 million) and Paramount (43 million) behind. Don’t forget YouTube Premium just behind (25 million).

Considering the quality of the catalogs from Disney, Warner Bros. Discovery (which owns HBO and the Discovery library), and Paramount, Netflix is ​​a bit of the poor relation, despite being a trailblazer and trailblazer in streaming.

Again, Disney should be commended for its flawless execution. They’re fully in line with their 2020 goal of reaching 300 million subscribers by 2023. Meanwhile, Netflix’s growth is slowing (it’s even losing subscribers).

This good news gives some respite to CEO Bob Chapek, under fire from critics after a somewhat tumultuous news (“woke agenda”, conflict with Governor DeSantis in Florida where Disney has its largest park, etc.) Chapek succeeds to two exceptional CEOs (Michael Eisner and Bob Iger), one can therefore imagine the pressure he is under. But if he streams the trial, he’ll have earned his place in the pantheon of genius CEOs at Disney.

In the last quarter, the streaming/DTC (direct-to-consumer) segment generated $5.1 billion in revenue, still less than the traditional television segment ($7.2 billion) and the parks segment themed ($7.4 billion). There is also the licensing business, which generates $2.1 billion in revenue. That said, the DTC segment is experiencing very strong growth: it should exceed $20 billion in revenues this year, whereas it barely generated $3 billion four years ago.

This is the only growth driver, since the other activities are mature – very profitable indeed – but mature.

That said, this DTC/streaming segment is not in a state of recovery and continues to generate losses: 1 billion dollars in the last quarter and already 2.5 billion dollars over the last nine months. The continuous inflation of investments in the production of new films does not help. Initially, Disney had planned 17 billion dollars of investments this year. In reality, it will be more like 30 billion dollars. These investments are part of a real “arms race” between the big names in streaming.

Margin competition

Disney is the one with the best competitive position because in addition to its unique content library, which is by far the most attractive for a young and family audience (+ heavy consumer of content), its other very profitable activities (TV and parks) allow it to self-finance the development of its DTC offer. Amazon is taking a big risk diverting resources from its core retail business to entertainment, even though Amazon has the largest customer base in the world with direct access to their credit card. Netflix depends on capital markets to continue to fund its growth. WarnerBrosDiscovery intends to “milk” its HBO and Discovery libraries all the way, but the group is heavily in debt and operating on a shoestring. Behind Paramount has a niche card to play but does not have the scale to deal with it (that said, it is not a direct competitor to Disney).

Third point in the capital

In this context, we scratch our heads with the recent acquisition of Third Point Capital, led by legendary investor Daniel Loeb. In reality, it looks more like a simple marketing campaign to boost the share price (exactly as Loeb did with the same Disney in 2020) than a real militant campaign. Firstly, because the amount Third Point is investing is modest ($1 billion), and secondly, because Loeb’s proposals don’t really make sense (he suggests a spin-off from ESPN+, which is a real gem of the crown). Indeed, ESPN broadcasts the NFL, NBA, MLB and PGA and is a huge incentive for households to subscribe to Disney+, because ESPN is offered as a package (“ok, I’ll take Disney for the kids and then I can watch sports”). And in that sense, it’s a very smart business offering.

A sustainable industry?

In any case, with Disney, as with others, one always wonders whether or not there will be a reward at the end of all this effort or whether this streaming industry is not one of the most value-destroying most epic in history. of capitalism. There is so much free content on the internet and then the pricing power of the actors is for some increasingly weak. Especially since the cost of producing new content is skyrocketing.

Disney Flying Effect

After much discussion of the rising Disney+ star, let’s understand that The Walt Disney Company is much more than just streaming. The different businesses of the company coexist and interact with a certain efficiency.

Source: TitleMax

Walt Disney understood well before anyone else the interest that can be found in optimizing a user experience. Each service is designed to meet the needs of young and old alike in terms of magic and a change of scenery. On its “Parks and Experiences” offer alone (theme parks, cruises, vacation villages, etc.), Disney has many franchises that attract customers who travel for the event. A Disney day is then organized during the holidays. The goal for parents is to offer their child a dream and a taste of the magic of childhood. The company has a well-oiled flywheel effect (understand the force of inertia). With each new saga, the success of the films attracts customers to the parks. Visitors leave with goods: stuffed animals, mugs and costumes. Merchandising creates memories that occupy the attention space of visitors at home. They then want to continue consuming “Disney” magic. Disney+ is taking advantage of this well-thought-out inertial momentum to offer them more and more content to watch while waiting for the next film.

The diagram below, drawn up by Walt Disney himself in 1957, is proof of this. He laid out the foundations of the company in a sketch made on a napkin known as the Synergy Map. Disney’s Synergy Map is a virtuous circle in its business ecosystem.

As you can see, the strength of the company lies in its ability to keep the customer informed, which in turn will transmit the desire to consume “Disney” to its offspring.

Evaluation

In terms of valuation, honestly, it’s impossible to put a price on Disney given the complexity and low visibility. Based on a classic P/E, the stock does not look particularly attractive. Additionally, profitability is under pressure for the reasons mentioned above and it is difficult to reconcile GAAP results with cash flow. A sum of the parts wouldn’t make sense because Disney is definitely not for sale in pieces. It is a whole that must be embraced or left behind. The choice is yours.

In a word

We are dealing here with an extremely well-managed company with competitive advantages on all sides (margin image, content catalogs, flywheel, etc.). The company is also well-armed in the streaming race. However, doubts remain about the viability of this industry.

Evolution of turnover quarter by quarter over the last twelve years:

Source: Statista

Also, Disney is certainly a solid company in the long term, but with a little soft growth. There may be better things to do with your money. Something to think about.