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WIKI ANALYSIS
The Walt Disney Company (NYSE: DIS) is a leading media and entertainment conglomerate, earning $36.1 billion in revenue in 2009.[1] The company is divided into five major business segments: Media Networks (including the ABC network), Parks and Resorts, Studio Entertainment (including Pixar), Consumer Products and Interactive Media. Under the leadership of its new CEO, Bob Iger, Disney has renewed its emphasis on its core strategy of creating and distributing attractive content for children and syndicating this content through its various entertainment channels. For example, when Disney produces a new movie, it continues to capitalize on the characters in the movie long after it has left the box office. Before the movie leaves theaters, the company will have already released a line of complementary toys and action figures. This is followed by the release of the movie on DVD and - depending on its popularity - a presence in Disney's theme parks or its own television show.
In line with this strategy of maximizing the value of its content, Disney recently began distributing its content in new ways, such as video-on-demand online and television shows formatted for video iPod users. Although distribution through these new mediums comes with significant risks of piracy, the migration of younger audiences (Disney's core customer base) away from traditional television to new media makes finding new ways to reach out to this demographic critically important. Disney has also invested $350 million to develop its own in-house video game development capabilities.
Disney purchased animated film studio Pixar in 2005, though the two had a previous distribution agreement prior to the acquisition. Pixar, which produced such hits as "Up," Cars and The Incredibles, will provide Disney with an ongoing stream of original content that can be syndicated across its various business segments.
In another major acquisition, Disney purchased comic book company Marvel for $4 billion in cash and stock on August 31, 2009. The purchase gives Disney the rights to 5000 Marvel characters, including Spider Man, X-Men, and Iron Man, and their associated royalty and licensing revenues from games, movies, clothing, toys, and theme park rides. [2]
Disney reported $36.1 billion in revenue in 2009, down 4.5% from 2008, and net income of $3.3 billion, down 25%.[1] The company has suffered from declining advertising and theme park revenue amidst a global slowdown in demand. As for 2010 and beyond, a large part of the company's success will depend on its ability to continue creating hit characters and movies. Hit movies affect more than just the studio entertainment business, for all of Disney's other business divisions depend on strong new content in order to drive sales.
2010 Q1 Results
For the quarter ending January 2, 2010, Disney reported net income of $844 million,[3] slightly down compared to $845 million in the first fiscal quarter of 2009, solidly beating analyst expectations on both earnings and revenue. On a per share basis, earnings were 44 cents a share, compared to average analyst expectations of 38 cents per share. Sales rose 1% to $9.7 billion, beating expectations of $9.66 billion, boosted by strong performance from the company's TV networks. TV ad sales rose 7% in the quarter, while movie studio and theme park revenue were both flat.[4]
Company Overview
The Walt Disney Company was founded in 1923 as a movie studio, and its iconic Mickey Mouse character appeared for the first time five years later. In 1955, Disneyland Resort opened in Anaheim, California, and the company went public two years later. Over the following decades, Disney continued to expand, acquiring film distributors and perfecting its model for consumer product merchandising. In 1996, Disney acquired ABC, and in 2006, Disney finally purchased its long-time partner Pixar.
Major Sources of Revenue
- Overall advertising spending is largely driven by the economy, as well as by the presence of large-scale TV events like the Olympics. Disney's success in attracting advertising money and affiliate fees is driven by the quality of programming and the size of the audience it attracts.
- Affiliate fees are payments from cable and satellite companies for programming. These fees provide a stable source of revenue and are expected to grow in virtually any economic environment. Disney generates the highest affiliate fees in the industry, largely due to the popularity of its ESPN programming.
- Film and DVD syndication and merchandising are both more volatile than Disney's other sources of revenue. Success in this segment is determined by Disney's ability to produce hit movies--a difficult task with unpredictable results. A blockbuster movie can significantly boost revenues for years to come, but a pricey flop can also lead to extended lower sales.
- Domestic theme parks' revenues depend on the number of visitors, which is related to the strength of the dollar. A weaker dollar encourages more foreign travelers to visit the U.S. and more domestic travelers to stay within the country, but a stronger dollar makes products and services (including admissions to Disney's theme parks) relatively more expensive.
Business Segments
The Walt Disney Company divides its operations into four business segments: Media Networks, Parks and Resorts, Studio Entertainment, and Consumer Products.
- Media Networks: Media Networks manages Disney's operations in the television, Internet, and radio media industries. The division is centered around its American Broadcasting Company (ABC) television network, though Disney also a number of other successful networks, including ESPN, Walt Disney Television, and SOAPnet. Additionally, Disney holds substantial ownership interests in Lifetime and A&E. The Walt Disney Internet Group runs websites for many of the company's media networks. Only Disney's radio presence has been decreasing, with the recent sale of its ABC Radio Network to Citadel Broadcasting (CDL). However, Disney does still own a number of radio stations across the country and world.
- Parks and Resorts: This segment deals with the operation of Disney's theme parks and resorts, both in the U.S. and abroad. Also included in this segment is the Disney Cruise Line, which offers cruises from Florida to Disney's private island, Castaway Cay, in the Bahamas. Disney has been working to expand this segment in recent years. Efforts to this end include the completion of the Hong Kong Disneyland and the announcement of the construction of two new cruise ships 50% larger than previous ones. Parks and Resorts was a significant driver of growth prior to the 2008 Financial Crisis. However, as disposable income declines as a result of the economic downturn, consumers have been less declined to visit Disney theme parks. The company attempted to increase publicity and drive attendance through its "free birthday ticket" promotion in 2009, in which it gave away about 1.2 million free theme park tickets.[5] Attendance at Disney's US resorts was up 2% in the fiscal year ending Oct 31, 2009. [6]
- Studio Entertainment: Often regarded as Disney's most visible business, Studio Entertainment is actually subject to a great deal of variability in terms of both revenue and profit generation, as its performance is driven largely by Disney's ability to produce hit movies to be released in theaters, on television, and on home video. A flop, like the 2002 movie Treasure Planet, can be quite detrimental to the company's profits. On the other hand, a blockbuster hit, like the Pirates of the Caribbean series, can boost sales and profits substantially. In September 2009, Disney Studios Chairman Dick Cook was forced to resign at the request of CEO Robert Iger, who had been unhappy with the studio's direction and performance. In October 2009, the company announced it would be cutting 70% of its staff at its Miramax Films specialty label and reducing the number of Miramax films per year to 3. [7]
- Consumer Products: The Consumer Products segment licenses the Disney brand for a variety of merchandise. Products bearing the Disney brand range from toys and apparel to home décor and electronics. The Disney Store chain of retailers also falls under this segment's umbrella. Though revenues for the Consumer Products division have traditionally come from licensing the Disney brand to other manufacturers, current chairman Andy Mooney has been expanding the segment's reach from licensing to manufacturing its own products. Current initiatives in this division include the recent $350 million investment in developing Disney's video game business, aimed at increasing the company's presence in this rapidly growing market. In July 2009, Disney announced plans to launch eight mobile games for the iPhone, Android, Blackberry, and Java/Brew, aiming to compete in the mobile gaming market. [8]
- Disney Online: On June 1, 2009, Disney acquired Kaboose.com, BabyZone.com, and another 6 parent-oriented sites for $18 million.[9] The company announced it would create a new division called Disney Online Mom and Family portfolio to oversee these new assets as well as the company's existing assets. The company said that mothers are an attractive segment because they make most household buying decisions. [9]
New Management
In 2003, former Disney vice chairman Roy Disney resigned to protest CEO Michael Eisner's leadership. In 2004, Roy Disney and another former board member, Stanley Gold, convinced 43% of Disney shareholders to withhold support for Eisner's re-election. Amidst growing criticism, Eisner finally stepped down in 2005, and Bob Iger became the new CEO.
Iger made a number of changes to the company and has generally been seen as a positive influence. He restored a great deal of autonomy to individual business units. He also installed a number of cost-cutting measures that have yielded the highest profit margin in years.
Trends and Forces
Volatility of advertising revenues
Overall advertising spending is largely driven by the economy, as well as by the presence of large-scale TV events like the Olympics. Disney's ABC has recently achieved success with shows like Lost, Grey's Anatomy, and Desperate Housewives. Advertisers are willing to pay more for airtime during shows like these because they attract large numbers of viewers. Similarly, ad prices spike during playoff sports coverage and Superbowl coverage. A very disappointing sports season or flagging TV show ratings can significantly hurt advertising revenues, as does a general economic downturn
Consistency in affiliate fees
Sensitivity to short-term fluctuations in advertising spending are somewhat offset by steady revenues from cable networks' affiliate fees, which tends to provide a more stable revenue stream.
However, a large portion of affiliate fees come from sports coverage channels in the ESPN network, where the cost of sports coverage is rising. Extended increases in sports coverage cost may materially affect operating income after 2013, when Disney's current contracts with broadcasters will expire.
Growing technology investments
With the decline of traditional media to favor of influential technologies like Youtube and Apple's iTunes/iPod, it becomes necessary for media conglomerates to learn how to tap into these channels to access the audience and the advertising revenue. Disney recently began to post both full videos and clips of its programming online at ABC.com, ESPN.com, and Disney.com. In addition, Disney has begun to sell ABC content for use on iTunes and video iPods. These are new initiatives, but they have been very popular and could be a considerable source of future growth. yu qay
Exposure to movie attendance
The Studio Entertainment division's revenues are subject to conditions in the larger movie industry, including the rate of movie attendance. In recent years, the advent of online video and a rising amount of piracy has led to slow or flat growth in movie attendance, causing studios such as Disney to reevaluate their film distribution methods. One way the company has addressed declining cimema viewership is through enhancing the consumer movie experience, such as filming shows in I-MAX and 3-D. In 2009, Disney Pixar's 3-D "Up" grossed $68.1 million, coming only second to News Corp's "Avatar." In the future, film studios are expected to focus more on the higher-margin DVD and television broadcast segments as a result of this decline in cinema viewership.
Slowing DVD business
The DVD market has begun to mature over the last 2 years. Consumer spending on home videos dropped by about 2% in the past year. Fortunately, For Disney which derives a large portion of its revenues from syndication of its content the impact, however, as DVD sales growth has not slowed as much for Disney's target audience (kids).
Opportunity: the weakening dollar
The value of the dollar relative to other currencies can change substantially over time. If the dollar weakens against the Euro for instance, this implies that the dollar can buy less in European goods and the Euro can buy more in American goods. This means that foreign goods become more expensive for Americans and American goods become less expensive for foreigners. This can have substantial implications for businesses whose end products are sold to foreign consumers. Disney theme parks for instance are frequented by Eurpean tourists. The long term weakening of the dollar against the Euro has makes it less expensive for European tourist to visit Disney parks and resorts increasing their overall attendance.
Video games investment
As children grow up, they tend to trade their toys for more sophisticated forms of entertainment such as video games. However, children are making switch earlier and earlier, a phenomenon termed as "age compression", so the market for video games is growing larger. Disney, however, does not currently have a large presence in this rapidly growing video game market, spurring its recent $350 million investment in developing its video game business over the next few years. In July 2009, the company announced it was launching eight games for the mobile phone market. [8]
Competitors
Disney's major competitors are the other large media conglomerates, such as News Corporation (NWS) and Time Warner (TWX), who directly compete with Disney in various business lines. Below is a chart of some of these competitors by line of business.
Below is a chart of box office shares of major media conglomerates. In the film business, Disney's Pixar also competes directly with smaller entertainment companies like Dreamworks Animation SKG (DWA).
References
- ↑ 1.0 1.1 Google Finance DIS
- ↑ Bloomberg "Disney’s Marvel Buy Traps Hollywood in Spider-Man Web"
- ↑ Marketwatch "The Walt Disney Company Reports First Quarter Earnings"
- ↑ CNN Money "Disney beats Street on earnings and revenue"
- ↑ Orlando Sentinel "More than a million people visited Disney free on their birthday"
- ↑
- ↑ Los Angeles Times "Disney to slash Miramax Films staff to 20, reduce releases to 3 a year"
- ↑ 8.0 8.1 Silicon Valley Insider, "Disney And Nickelodeon Enter Mobile Gaming Market (DIS, VIA)"
- ↑ 9.0 9.1 Reuters, "Disney buys mom-oriented websites from Kaboose"
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