Equities

Disney’s transformation to a streaming ‘Netflix’ business model is an unprecedented step for the company. Any business transformation is hard, and in Disney’s case its streaming competitors are well advanced or determined and well capitalised. Netflix launched streaming in 2007, and Amazon and Apple are among the competition. But Disney has uniquely high quality content and distribution reach that radically improve its chance of success. And commentators seem to be overlooking a key point - how Disney will leverage its emerging direct relationship with consumers to improve the rest of its business.

Disney’s greatest advantage in launching a successful streaming service is its exceptional content. It owns Marvel Entertainment (superhero characters including Avengers and X-Men), Star Wars, Avatar, Pirates of the Caribbean, The Lion King, Toy Story, Frozen, The Incredibles, as well as a multitude of Disney classics. Disney’s latest blockbuster film, Avengers: Endgame, has already shattered most box office records and has a clear shot at being the top grossing movie ever (it was #2 after only 11 days!). Disney has released the highest grossing films in 7 of the last 8 years and has dominated the top 10 spots. Over a decade, 33 films have sold more than $1 billion of tickets, and 20 of those are from Disney. Its share of the global box office revenue and historic ‘vault’ approaches 40%. This is ‘must watch’ content that will have value for decades to come.

The company’s second advantage is its extensive customer reach, leveraging all its businesses. The Walt Disney Company has over 100 million visitors to Disney parks, it has cruise line and hotel guests, crowds that visit its comic fan events, operates Disney retail shops, and online it already has 20 million monthly users of the ESPN mobile app. They can offer bundles and free trials to their existing streaming customers: 25 million Hulu subscribers, millions of ESPN+ subscribers and 300 million hotstar users in India. A great jump-start for marketing its streaming platform.


"... commentators seem to be overlooking a key point - how Disney will leverage its emerging direct relationship with consumers to improve the rest of its business."


Disney is about to connect directly with hundreds of millions of fans for the first time. As the world’s most vertically integrated media business this is a big deal. A $6.99 subscription for Disney+ is well received, but how this platform will grow all of Disney’s businesses is more important - and likely still overlooked. Uniquely, Disney captures the value of its stories and characters across every media category. Its movie-goers buy merchandise, go to live events, visit Disneyland, read comics and watch TV channels - and the revenue from these other businesses is far larger. Historically, this relationship has been through third parties, including Netflix. For the first time Disney will know exactly what their customers watch and buy, and use this data to cross-sell and up-sell other products or bundle with the subscription, sold directly and at higher margins.

As news of its streaming plans have come to light many have reappraised the value of Disney. It is up almost 30% since last June when we first bought it in the portfolio. But we believe there is still considerable upside as it executes on the new distribution model and we expect its guidance on the impact of the transformation to prove conservative.



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