Disney – All in.

Disney goes all-in on streaming as it should.

• The pandemic and the success of Netflix have pushed Disney to reorganise its entertainment division resulting in it going all-in on streaming.
• This was a move that has been on the cards for a long-time but the pandemic has greatly accelerated the shift towards streaming away from both cinemas and cable TV and Disney is acting to ensure that it is not left behind.
• Disney is reorganising its media and entertainment business where the focus will be producing content primarily for streaming but also ensuring that the legacy platforms (cinema) are not forgotten as it will come back eventually.
• The division will now be split into three units.
• Studios which will produce the big-budget movies and series for streaming and theatrical release, General Entertainment which will produce lower budget content for assets like ABC News, Disney Channels, FX and so on and Sports which consists of ESPN.
• The other divisions such as Disney Parks will stay as they are as increasingly Disney is becoming a company of two halves which the structure is increasingly reflecting.
• This represents a big shift for Disney away from selling content to distributors and going direct to the consumer.
• With distributors out of the picture, the business model for Disney becomes more robust because there are fewer mouths to feed.
• Disney receives only a percentage of the box office takings for the movies that it makes but through its streaming service, it will receive all of the revenue.
• This means that while consumer spending on entertainment may fall due to the recession and the restrictions on public places, it is not necessarily this division of Disney that will suffer.
• Disney+ has gotten off to a good start with 50m subscribers making up half of the 100m streaming subscribers that Disney already has.
• Netflix has 182m subscribers worldwide meaning that Disney still has a long way to go to catch-up.
• I think that Netflix and Disney can co-exist for a while as both have a pretty strong slate of original content although Disney relies much more heavily on its back catalogue.
• This gives Disney time to build a wider library of original content as its back catalogue is one of the most valuable available today.
• I think that these two, in particular, are doing long-term damage to the cinema industry whose demise is being greatly accelerated by the pandemic.
• At the moment they are not stealing revenues from each other but when the pandemic begins to ease and the recession really starts to take hold, this may become an issue.
• Disney’s valuation is one quarter (3.0x 2020 revenues) of Netflix (trading on 12.0x 2020 revenues) and I would prefer to own Disney in this market and have done for some time.
• When the correction comes, it is going to hurt Netflix much more as its valuation is driven by sentiment rather than fundamentals.
• Disney is not exactly cheap either and has issues with its theme parks which are currently operating at a tiny fraction of their capacity.
• Hence, I am not sure I really want to own either of them at this juncture, but if forced it would be Disney by a mile.