Investing In Disney Means All of Disney
I'm in Disney World this week taking a holiday with my wife, so I thought this would be an excellent time to dive into the House of Mouse and take a look at how they make so much money. On Monday, I told you guys about the secretive Club 33 that costs $100,000 just to walk in the door, and on Wednesday I unveiled the exclusive residential neighborhoods of Golden Oak.
Today, I want to spend some time on Disney itself: how it started, how it makes money, and where it could be headed next to see if this company is worth your hard earned investment dollars. Let's go!
July 2022 Update
It's been a fucking YEAR for The Walt Disney Company. Since I published this article back in October 2021, Disney has been in the limelight basically every day since. Well, since my wife wore me down and we're going to Walt Disney World again this year, I wanted to highlight the biggest stories from Disney, including from a business and a public relations perspective. If you want to jump directly to those sections, you can use the following links:
2023 Update
ALRIGHT. This company cannot stop shooting itself in their giant, white, animated feet. After writing a full, 15 minute write up in 2021, Bob Chapek parachuted into the corner office to take over from Bob Iger, only to pick a fight with Jeb Bush-reincarnate Ron DeSantis, then go too "woke" in movie production, have public arguments with movie stars and tank the share price. Well, Q4 2022 welcomed back Iger into his comfy chair so quickly that the lumbar support wasn't even changed yet. And what has Iger done so far? Pick a fight with SAG-AFTRA. Awesome.
This company moves and changes so much faster than any other company I've covered that I have to make a call, and that call is: I'm done. This article isn't getting updated again unless we figure out Mickey Mouse has been the secret leader of a doom cult hell-bent on installing Skrulls in government. Thanks for reading.
Top-Line Numbers:
FY 2020 Revenue: $65.39 billion (-6,06% YoY)
FY 2020 Net Income: -$2.86 billion (-125.91% YoY)
Fiscal Q3 2021 Revenue: $17.02 billion (+44.51% YoY)
Fiscal Q3 2021 Net Income: $918 million (+119.45% YoY)
How Did The Walt Disney Company Get Started?
The Walt Disney Company was officially founded on October 16, 1923 by *gasp* Walt Disney. Originally founded as "Disney Brothers Cartoon Studio" (catchy), they wisely changed the name a couple of times until "The Walt Disney Company" name was formalized in 1986.
Walt and his brother Roy were animators, with Walt located in Kansas City and Roy located in Hollywood. After Walt's original company, "Laugh-O-Gram Studio," went bust, he packed up and moved in with Roy, but not before producing one final piece of content: a short-film entitled Alice In Wonderland. The film was purchased by M.J Winkler Productions, with the studio commissioning an entire series of Alice-themed I.P at $1,500 per reel. This led to the founding of the original "Disney Brothers Cartoon Studio," and, after a few missteps, the company was off and running.
One of those missteps? Oswald the Lucky Rabbit, which was animated by Disney but distributed by Universal, who owned the rights to the character and therefore took all the money. Disney produced 27 Oswald reels before the contract was cancelled, nearly bankrupting the brothers. In order to overcome their losses, they devised of a new character: a mouse named Mortimer. Thank god it was suggested by Walt's wife Lillian that they rename it to "Mickey."
The Disney's got to work animating their new character into an animated short-film entitled Steamboat Willie, which was released to critical and commercial success in 1928.
From there, the animation studio exploded, signing an exclusive contract with Technicolor in 1932. The department continued expanding into the 1940's and 1950's (except when their animation department was gutted because the animators all got drafted into World War II), with the company's IPO taking place on April 2, 1940.
15 years later, in 1955, Walt completed his greatest achievement by opening Disneyland in Anaheim, California. 10 years later, he announced plans to open a sister location in Orlando, Florida named "Disney World." Walt passed away in 1965 due to complications from lung cancer, and the corner office was handed to Roy.
What Does The Walt Disney Company Do?
Similar to my piece on Manchester United, Disney is a multimedia conglomerate with so many legs on the stool it's starting to look more like a porcupine. Though the company started with making animated movies, they have now branched into television, streaming, live-action movies, theme parks, merchandise and live television. Let's dive into each part of the business to see why, even despite their parks closing down for most of 2020 due to COVID, they still made nearly $40 billion.
Disney - The Bull Case
If you really want to simplify it down, Disney is in the business of intellectual property, known as "I.P." I.P is the most important thing you can have as a creator, because it provides you with exclusivity. You can take your I.P and continue to monetize it, either through your own means or licensing agreements.
Disney is the absolute champion of I.P these days, drawing both on their historic back-catalog of characters, as well as the characters and topics they've acquired over the last 20 years. The best place to look to see all of this I.P? The theme parks!
Disney Parks, Experiences and Products
In the business segment the company labels as DPEP (Disney Parks, Experiences and Products), Disney currently has 12 different parks, located at six different "resorts." These include the aforementioned Disneyland and Disney World in California and Florida, as well as parks in Hong Kong, Shanghai, Tokyo and Paris. They also have resort-style hotel properties in Vero Beach, Hilton Head Island and Hawaii that round out the real estate portfolio.
These parks (except the last 3) are massive. The Orlando development I'm in right now contains Animal Kingdom, Magic Kingdom, EPCOT and Hollywood Studios, each with their own sub-parks like Star Wars and Toy Story (more on those later), totalling a square footage larger than the city of San Francisco. These parks are able to squeeze money out of every visitor in the following ways:
Disney hotels
Park admission
Merchandise
Concessions
Normally, I wouldn't look at concessions as a main income source. However, having been to Disney recently, my credit card needed CPR every we walked out of a restaurant. Combined, all of these accounted for 25% of Disney's total fiscal Q3 2021 revenue, and 13% of their operating income.
The parks division is also a continual work in progress, especially with new CEO Bob Chapek at the helm. Chapek formerly headed up this business segment, and under his leadership, the parks have seen major investment. Prior to his ascension to CEO, the finishing touches were put on the Star Wars sections of the California and Florida parks. Next up was the first major expansion under Chapek - the opening of the Marvel Campus in California, as well as the rebranding of "Tower of Terror" at Disneyland to a Guardians of the Galaxy theme. Good thing, too.
The company's most recent earnings report showed that COVID not only didn't slow down demand for the parks; it may have increased it. The park closures last year led to a net loss of $4.5 billion in the same quarter last year. This year? The company reported a net income of $1.1 billion. But it wasn't just the feverish pent-up demand for seeing your favorite princess in-person that led to the jump: it was the introduction of new services and technologies to the park that lets Disney siphon even more cash out of your wallet. Namely, the Minnie Van program and Genie Plus.
The Minnie Van Lyft Program
Something former Disney CEO Bob Iger resisted for a long time was the allure of creating new revenue streams within the actual attractions in the parks, as well as general transportation. Iger's autobiography, The Ride of a Lifetime, addressed this when he discussed the idea of "integrity over all else."
Current CEO Chapek said "hold my beer," when Iger departed the corner office and made a series of sweeping changes to the parks that have since seen revenue skyrocket in the parks. The first was getting rid of the free shuttle from the Orlando International Airport to Walt Disney World, replacing it with Disney's co-branded Lyft rideshare program: "The Minnie Van."
These Disney-themed SUV's cost a metric shitload for families looking to get to the parks. What was previously free for families that had already spent an arm and a leg to get to the parks is now, as Undercover Tourist reports, $150 from the airport (gratuity not included). However, this business unit barely registers as a drop in the ocean compared to the next one: Genie Plus.
The Saga of Genie Plus
I will be the first to tell you that I'm no expert on Disney park logistics. I book the trip, pay for everything and let my wife handle general park-day coordination. So let me tell you: when my wife threw her arms up in despair and yelled "fuck this, I give up," something has gone badly wrong. Enter Genie Plus.
Genie Plus is the new addition to the Disney Parks experience that replaces the legacy "Fast Pass" system. Previously, if you were staying at a Disney hotel, you could book advanced "skip the line" tickets to various attractions at the parks. All of this was included in your ticket/hotel stay, and you could book these up to 60 days out from your park visit. Now, however, there's a new game in town.
Genie Plus is located in the Disney Parks mobile app, and can be purchased for $15 per person per day at Disney World and $20 per person per day at Disneyland. This gives you the same "skip the line" abilities that the Fast Pass system did, with one small caveat: you can only book it on the same day you're visiting the parks, starting at 7am, rather than 60 days out from your visit. For non-Disney hotel park guests, you can only start booking rides when you set foot in the park.
So far, this system rollout has been a commercial success, but a critical failure. A family of four now has to pay an additional $60 per day for something that was previously free, and they have to wake up at 7am to stare at their phones in an attempt to book the most in-demand rides. According to theme park journalist Carlye Wisel on her appearance on The Town with Matthew Belloni, this 7am mad dash has resulted in frequent mobile app issues that can spoil a day in the parks, especially for those not staying in Disney hotels.
There's also one more thing I forgot to mention about Genie Plus: it's not all-encompassing. According to Disney blog AllEars, Genie Plus does not include access to the most popular rides, including: Rise of the Resistance, Guardians of the Galaxy: Cosmic Rewind, Spider-Man W.E.B Slingers and Remy's Ratatouille Adventure. These rides are all accessed via a "pay-per-ride" system that runs another $15 per person per ride.
All of this has led to an absolute explosion in park revenue for Disney. From fiscal Q1 2021 to fiscal Q1 2022, Disney put up hall-of-fame, all-timer type comps. Revenue for the DPEP segment jumped from $3.59 billion to an eyewatering $7.23 billion. Operating income rose from a loss of $119 million in Q1 2021 to profit of $2.45 billion in Q1 2022. Why? The holy duo of vaccine rollouts and Genie Plus that gave a Chapek a stiffy Jonah Hill would be proud of.
Disney Media and Entertainment Distribution
However, as you can see above, one segment dominates the fiscal landscape for Disney at the moment. This is the "DMED" (Disney Media and Entertainment Distribution) segment, which includes Disney's television ventures. These include Disney Channel, ESPN, ABC, National Geographic and an equity investment in A&E Television, and these channels generate revenue via ad sales. And business for these networks is booming.
Despite ABC being mired in controversy in 2021 over the debacle involving "The Bachelor" franchise and its former host Chris Harrison, the network is still generating record revenues, up almost 16% from last year's figures. Critical I.P for them on these networks also includes "Dancing With The Stars," as well as ESPN's involvement in NCAA and NFL football leagues. The biggest revenue driver in this segment, though? Movies!
Disney is no stranger to big-time movie sales. The rise of the "Disney Princess" culture from the 1950's through today is a testament to Disney's ability to continue branding and I.P to maximum effect. This includes their highest ever grossing princess movie, "Frozen," which was released in 2013 and generated $1.266 billion at the global box office. Despite the clear success of the princess category, however, this is chump-change compared to the work Kevin Feige has done at the Marvel Studios division.
Following the $4 billion acquisition of (most) of Marvel's I.P in 2009, box office receipts alone have returned a staggering $14.4 billion for Disney. This doesn't even include the Disney+ shows that drive recurring revenue subscriptions, which I'll touch on in a bit.
All in all, the Marvel division of Disney is now estimated to be worth around $50 billion. Disney hoped lightning would strike twice with the Lucasfilm acquisition in 2012 for another $4 billion, but that one has achieved much more limited success.
Disney has shown themselves to be rulers of the box office, basically since their animation department was brought back to life under Pixar back in the 1990's. Thanks to the leadership of former CEO Bob Iger, Disney produced 10 of the top 16 highest grossing films of all time, effectively doing battle with James Cameron for ultimate box office supremacy.
And while movies are still a key piece of what Disney is doing in the future, it's the smaller screen they're looking to build up next.
Disney Direct-To-Consumer and Disney+
Disney's DTC segment is perhaps the most interesting value proposition they have moving forward. If you're a regular viewer of any Disney television property, you've likely seen the "Disney Bundle" ads that promote membership in Hulu, Disney+ and ESPN+ for one discounted price. That's because the company is pumping huge resources into the streaming services in order to build out the recurring revenue model that everyone is chasing. It was also their safety net when COVID hit them like a ton of bricks, shutting down movie theaters and theme parks.
Turns out, COVID's most minor corporate silver lining possible was the acceleration of Disney's streaming efforts. When Disney unveiled the product in 2019, they set a subscriber goal of 90 million paying subscribers by the end of 2024. Thanks to a combination of strategically leveraging I.P and people developing the world's most aggressive form of agoraphobia, we now sit in October of 2021 at 116 million subscribers and counting. Shout out to Wandavision, Loki, Luca, Soul and random Disney+-specific shorts for that one.
This also hasn't taken into account the massive slate of upcoming shows for the platform, including a Hawkeye show for the holidays and an avalanche of Star Wars content, which is where that series seems to be heading as the movie strategy slows down.
Disney+ isn't the only streaming service making noise, however. ESPN+ is finally starting to make a little bit of progress, increasing their subscriber count by 8% from the prior quarter, sitting now at 14.9 million. While ESPN+ can't offer Disney Princesses and Marvel, it can offer an evolved form of the traditional sporting network. ESPN is getting smarter about which shows to make exclusive to the platform, locking down a lucrative contract with Peyton and Eli Manning to create shows for the platform.
They've also moved into the sports-betting space, leveraging longstanding talent like Mike Greenberg to host gambling-specific content on the platform, as well as roll in new talent on the ground in Las Vegas and striking partnerships with sports-books like Caesar's. It's also taking on new sports for the company, riding the wave of the Premier League's success in the U.S by signing into a broadcasting partnership with the next league down: Spain's La Liga, which began broadcasting on ESPN+ this year, though this partnership was signed one month before Lionel Messi left the league and the overall value of the product tanked.
With major investment into these platforms, including unsung hero Hulu, Disney has seen dividends early. Fiscal Q3 numbers show segment revenue of $4.3 billion for the quarter, up nearly 57% from the same time a year ago. They're also narrowing their losses, down just $293 million this quarter, as opposed to the $624 million they lost in the same quarter last year.
Disney - The Bear Case
In my other write-ups, I'd usually start with business-oriented factors like declining revenue or an unbalanced balance sheet. However, Disney has had a torrid 24 months regarding their public relations department, so we need to start there.
Bob Chapek versus Ron DeSantis: "Don't Say Gay"
Previous Disney CEO Bob Iger was famously outspoken on highly visible political issues from his perch atop The House of Mouse. For the second time in this piece, I'll cite Iger's quotes out of his autobiography where he actually weighed a run for President in 2020, but decided against it. He was outspoken on North Carolina's "bathroom bill" in 2016, as well as Georgia's "heartbeat bill" (though it was worth noting that Disney has business interests in the state of Georgia as that's where all of the Marvel movies are filmed), both of which are more liberal viewpoints.
Current CEO Bob Chapek comes from the other side of the aisle. Chapek is rumored to have more conservative-leaning political beliefs, and that is reflected in his choice of PR director and firms they employ. This was nowhere more prevalent than in the state of Florida's passing of the "Parental Rights in Education Act," which has been given the name "Don't Say Gay" by detractors of the bill. In this piece of legislation, public school educators are prohibited from teaching about the topics of sexual orientation or gender identity until after grade 3, or "in a manner not age appropriate or developmentally appropriate for students."
Flimsily written legislation aside, this bill caused an uproar among the LGBTQ+ community, including a large contingent of employees at Disney. However, Chapek publicly stated that the company would not be making a public statement (???) on the legislation, despite local reporters digging up corporate political contribution records that indicated Disney, among others, had directly contributed campaign funding to sponsors of the bill.
This sparked mass pushback from Disney employees and subsidiaries. Pixar and Marvel, and issuing public statements in support of the LGBTQ+ community, while employees staged walkouts from the corporate office, as well as the theme parks. It also led to the revelation that Disney had been secretly censoring LGBTQ+ themes and scenes in their movies, most recently in the pre-production of Lightyear.
Chapek changed his tune incredibly quickly, publicly speaking out against the bill. This led to protests at Disney corporate buildings by supporters of the legislation, and incensed outlets like Fox News that denounced the flip. It also sparked the ire of current Florida Governor and 2024 GOP Presidential hopeful Ron DeSantis, who essentially declared economic war on Disney, Florida's largest public-sector employer.
DeSantis responded to Disney's criticism of the bill by revoking their "Reedy Creek Improvement District." The Reedy Creek District is essentially a cutout of Florida around Walt Disney World that allows Disney to act as their own government. This district allowed Disney to run their own public works (fire, police, roads, infrastructure, etc), as well as, critically, issuing debt to pay for this.
This debt currently totals about $1 billion, according to Chapek and Disney's books. If the Reedy Creek district is, in fact, dissolved, then that debt has to go somewhere. According to local reporters, that could be bad news for the residents of the outlying areas, as that debt now looks set to transfer to them. That's right! The dissolution of Disney's special tax area is going to hit local Florida residents right in the property taxes, raising the average property tax payment for each homeowner by as much as 20%!
Scarlett Johansson Versus Disney
The biggest issue they ran into regarding some less than stellar public relations was a lawsuit that stemmed from the above "day and date" release of Black Widow. Star of the movie Scarlett Johansson sued Disney over the release strategy of the movie, stating that part of her pay in her contract was predicated on box office numbers. By releasing the movie both in theaters and Disney+ for home viewing, this ate into potentially box office revenue for the movie, and therefore, ate into Johansson's paycheck. Disney's response to the lawsuit was not exactly in the bridge building business...
Effectively, the company invoked the horrors of the pandemic in their response for not paying one of their stars the previously agreed on paycheck. While this lawsuit was quickly settled out of court, the damage had been done.
Mulan and Chinese Government Protests
The other issue the company ran into was the handling of the filming of the live-action version of "Mulan" which was released in 2020 to Disney+. Online boycotts for the movie gained steam in 2019 when the star of the movie, Liu Yifei, voiced her support for the Hong Kong police despite "law enforcement's brutal treatment of pro-democracy protesters."
This gave rise to a fairly short-live hashtag "#BoycottMulan" campaign, which was unfortunately reignited in 2020 upon Disney admitting they filmed various scenes of the movie in the Xinjiang province of China. For those that don't recall, this is the region of the country where the Chinese government allegedly kept up to 2 million Uighur Muslims in concentration camps. While Mulan's release was considered a financial success by grossing over $400 million worldwide, Disney's CFO, Christine McCarthy, did admit that the Uighur controversy "generated a lot of publicity" and could have eaten into the potential box office success of the film, directly affecting the bottom line.
Pandemic-based Fragility
As with any company, there are business risks associated, despite the relative size and strength of the company. The first risk here is something I've touched on throughout this whole piece: COVID. The pandemic, while a hopefully-once-in-a-generation life altering event, showed the fragility of parts of Disney's business. The parks fully closed for nearly an entire year, which decimated the bottom line for full year 2020. Movie theaters also closed, as well as most of the production of those movies, which caused the movie business to experience delays and cancellations across the board.
For Disney, this led to a few different issues: an extended delay of several properties, most notably "Black Widow," which Disney ended up finally releasing in a theater and Disney+ "day and date" release, as well as the company being a bit short on cash.
The cash shortage led Disney to temporarily suspend their dividend, weakening the bull case of such a large multimedia conglomerate with seemingly limited growth levers. The "day and date" movie releases also leads us to the next issue Disney has recently run into: PR.
Analyst Downgrades and Limited Future Growth
I mentioned a little bit earlier that Disney is huge, and they are. For a multimedia company, they are operating in every space they can and have seemingly limited remaining growth levers to spur future explosive growth. That sentiment seems to be shared across the investing landscape, as Disney received its first downgrade in three years as Barclays issued a strong statement on the company. The downgrade stems from comments made by CEO Chapek in late 2021 which alluded to a slowdown in Disney+ subscriber growth. Granted, that slowdown is coming down like a base-jumper off of Mt. Everest, but it's still a slowdown.
Barclays also cited the difference in strategies between Disney+ and its competition like Netflix and Amazon. While Netflix and Amazon actually take enormous losses in the name of content creation volume, Disney takes a more conservative approach, developing more limited amounts of content around its existing I.P. "While the company appears to be targeting one new piece of content a week, not every piece of content has the same franchise value or visibility" says Barclays analyst Kannan Venkateshwar. He also noted that Disney's revised subscriber target of between 230 million and 260 million paying subscribers to Disney+ by the end of 2024 seems a little optimistic. To hit this number, they would need to achieve a growth rate of more than double what they're seeing now. Woof.
Finally, where do they go from here? A company that suspends a dividend and won't compete in content volume with their competitors is one that might be a little cash strapped. That's relative, of course, but Disney's primary growth lever has been the acquisition of other content creators. In 2006, they bought Pixar for $7.4 billion. They bought Marvel for $4 billion in 2009, then splashed another $4 billion on Lucasfilm in 2011. The biggest whale they captured was the non-news portion of Fox Entertainment for $71.3 billion in 2019. So is the next move another acquisition? I can't imagine so.
The Bottom Line
In a previous version of this piece, I argued that Disney's intellectual property moat is what keeps it competitive, and I stand by that. Owning all of your happy memories and being able to package them into a nice, expensive package is an art. However, given the last 12 months, I have concerns.
In the short-term, I think this company is set up for success. DPEP revenue has exploded thanks to Genie Plus and insatiable theme park demand. Marvel is in full flight, Star Wars is pumping out continuous content of questionable quality and The Bachelorette is back on ABC baby, this time with not one, but two incredibly fame hungry leads!
It's the long-term outlook that I'm rethinking. Previously, I marked this as "long" and moved along, but now I'm not so sure. Chapek, despite his bizarre behavior, terrible stock performance and questionable firing decisions (shoutout to Peter Rice and his seven minute sacking), has been handed a new three-year deal with the company. And while he might be a shrewd operator regarding pulling some growth levers, but what's next? What else is Disney going to start charging for that was previously an included part of the experience?
There's also the question of Disney+ and the ability to sustain growth. Chapek has set some lofty goals for the service, and they're falling behind. Not to mention that the content they've been developing for the platform recently hasn't exactly been "can't miss."
Long-term, I'm struggling with Disney. I think it's a great company with an incredible competitive advantage, but the leadership is keeping me from going all-in on this one.
Short-term: Long
Long-term: Neutral
The information in this article is for entertainment purposes only, and should not be viewed as investment advice. Please contact a financial professional for your individual situation. The spouse of this author owns shares in The Walt Disney Company (DIS).
