The business splits roughly into 4 sections
- Studio Entertainment. Comprising the group's film, music and theatres
- Disney Consumer Products and Interactive Media. Comprising the toys, clothing, merchandising and small (for Disney) but growing interactive business.
- Media Networks. The TV business
- Parks and Resorts
Networks produces about 55% of profits and is in my opinion the least related to the other units. Though with the growth of Disney TV this may be changing.
Readers may be aware that one of Disney's current major revenue streams is ESPN. Disney owns the Channel and it is routinely bundled into cable bundles, which are still very much a part of the US TV scene. Each subscriber to ESPN brings in circa $6 a month. However in the US there is an ongoing level of "cord cutting" as users stop taking cable bundles and either do not use the TV or use it more digitally via Netflix or Amazon prime. In the last year Disney has lost circa 3,000,000 subscriber fees from an initial starting point of 95,000,000 subscibers. This loss of subscription sales is genuinely worrying and is likely to continue for some time. Though I do wonder whether in a country the size of the US there is not sufficient demand for the ESPN channel, though perhaps at a lower cost to the subscriber level. I would expect that if revenues do continue to fall ESPN will have some capability to drive down the costs it pays for the rights it is televising. And possibly a greater move into ESPN controlled content.
To my mind the jewel in the Disney crown is that over the last few years they have proved themselves capable of creating significant new sub-brands. The two I would use as examples, as they cover separate demographics, are Frozen and the Marvel superheroes. These have not only been fantastic film franchises but have had significant merchandising spin offs and can be utilised to add features and attractions to the theme parks. I am not aware of how Mickey Mouse as a character is doing and what revenues can be attributed to him. But the last few years have proven that Disney can create significant new revenue streams from new or renewed characters.
Whilst the significance of the decrease in ESPN revenue should not be underestimated, the biggest cloud on the Disney horizon IMHO is the forthcoming change in CEO. The last 10 years of success at Disney have been led by Bob Iger who is now 64 and will at some stage retire. Mr Iger has to my mind played a significant part in ensuring that Disney realised that it could both create its own and purchase for revitalisation brands for the current generations. His replacements actions are perhaps the only significant factor that would call into question the LTBH thesis.
Given there is no expectation of any short term mispricing in Disney and that this is a long term play the initial position is small with the intention of addition over time.