Transition Phase of Walt Disney Company (NYSE:DIS)

Walt Disney is no stranger to us.

Their business units are cable (ESPN), Broadcasting (ABC TV network, TV stations), Parks and Resorts (international and local), Studio Entertainment plus Consumer Interactive Media Segment.

How do they synergise together?

In the words of Chief Financial Officer, Jay Rasulo: “… unlike other media companies, we really do have a very clear strategy of an ecosystem in which we both own the franchises and own the means of distribution to get those franchises out across almost all consumer touch points.” In other words, Disney is growing by using its various segments to help maximize the economic value of its products. In addition, managers are trying to expand the company’s international presence.

One can understand the entire machinery behind Disney’s operations. Build up their characters well, insert movie-inspired theme park attractions to boost ticketing sales, license their characters for high margin profitability, grow their library further using toys and music. Once in a while, reboot their characters by doing multiple story plots.

Riding behind the big success of Blank Panther and Avengers: Infinity War (1.25b global box office, 10 May 18), one may be surprised why hasn’t Disney share price moved at all?

There is no doubt on the future success of the Studio Entertainment as movies are converging to superheroe themse. And Disney has the intellectual properties to plan it out on a multi-year basis.

The key lies behind their segment contribution to the overall group.

As of FY2017, cable biz is the largest contributor (37.1%) of operating income. Coming second at 26.2%, it is the Parks and Resorts. For Studio Entertainment, it is merely 16.4%.

So What’s the Issue?

ESPN. It was once a cash cow. There are a lot more players entering in this industry of content. Amazon, Netflix, Apple, Google are all ready to spend top dollars to secure content. Last year, Amazon splashed $329m to secure the rights for Lord of the Rings. Disney is being squeezed.

One side, the subscriber counts are dropping which may or may not lead to lower advertising dollars. The other side, higher programming expenses.This forms a profitability squeeze.

Right now, content consumption habits and preferences are changing. Cord-cutting is big issue, and a shift to OTT needs to be quick.

It’s a Waiting Game

There are two sides to stay relevant – Content & Distribution.

Disney probably enjoys one of the lower production costs because of their inherent content production abilities and their hoard of untapped intellectual properties. Disney owns Pixar, Marvel, and LucasFilm. Content should not be an issue for Disney, as long as, their content stays relevant.

We look towards some of Disney’s competitors, it is apparent that they are splashing enormous amount of money to acquire or produce content. Take a look at Netflix. Their balance sheet is not the most ideal and they’re not a sharpshooter.

Longevity of IPs is something I value a lot. Out of several Netflix’s productions, which ones are the most memorable or recycable?

If one were to look at the movie rankings, you would have spotted a lot of Disney’s productions. Disney is excellent at creating appealing content.

Now, we will think about who will last longer in the race? Netflix’s busines model is not as diverse as Disney’s. Disney has a few cash cows units. In terms of the race to create content and edge ahead, one may question, at what cost? Netflix has already stretched their balance sheet tremendously.

Disney, with its cash flow, balance sheet and content expertise, can outlast and play the game longer that anyone.

For ESPN, I am waiting for a clearer direction but their ESPN+ with BAMTECH is a good start. Meanwhile, I wouldn’t put my money into the stock.