Streaming is the new normal

All the players in the industry are moving to streaming: Apple, Amazon and now Disney for a few years. It took Disney less than 3 years to catch up with Netflix, which highlights the quality of execution and the power of Disney's out-of-this-world catalog. The company announced that total Disney+ subscriptions rose to 152.1 million in the fiscal third quarter, above the 147 million analysts expected.

Disney+ subscribers by quarter since 2020 :

Source: Statista

If we add up these data with the users of these Hulu and ESPN+ subsidiaries, we get a higher number of subscribers than Netflix (221 million subscribers versus 220 for Netflix at the end of the first half of 2022). Beware of the number of subscribers that is presented in an advantageous way by Disney as well as the low profit generated by subscribers. 

Source: The Walt Disney Company

The streaming market is gradually consolidating with Disney and Netflix in the lead (220 million subscribers each), Amazon Prime Video (120 million), Warner Bros Discovery (92 million) and Paramount (43 million) behind. Don't forget YouTube Premium just behind (25 million).

Given the quality of the catalogs of Disney, Warner Bros Discovery (which owns HBO and the Discovery library) and Paramount, Netflix is a bit of a poor relation, even though it was a pioneer and a first-mover in streaming.

Once again, Disney should be commended for executing perfectly. They are flawlessly in line with their 2020 goal of reaching 300 million subscribers by 2023. Meanwhile, Netflix's growth is slipping (it's even losing subscribers).

This good news gives some respite to CEO Bob Chapek, who is under fire after a somewhat tumultuous news ("woke agenda", conflict with Governor DeSantis in Florida where Disney has its largest park, and so on) Chapek succeeds two exceptional CEOs (Michael Eisner and Bob Iger), so one can imagine the pressure he is under. But if he transforms the streaming trial, he will have earned his place in the pantheon of genius CEOs at Disney.

Last quarter, the streaming/DTC (direct-to-consumer) segment generated $5.1 billion in revenue, still less than the traditional TV segment ($7.2 billion) and the theme park segment ($7.4 billion). There is also the licensing business, which generates $2.1 billion in revenue. That said, the DTC segment is growing very strongly: it is expected to exceed $20 billion in revenue this year, whereas it generated barely $3 billion four years ago.

This is the only growth driver, since the other activities are mature - very profitable, of course - but mature.

That said, this DTC/streaming segment is not in a state of recovery and continues to generate losses: $1 billion in the last quarter and already $2.5 billion over the last nine months. The continued inflation of investments in the production of new films does not help. Initially Disney had budgeted $17 billion in investments this year. In reality, it will be more like $30 billion. These investments are part of a real "arms race" between the big names in streaming.

Competition on the sidelines

Disney is the one with the best competitive position because in addition to its unique content library, which is by far the most attractive for a young and family audience (+great content consumer), its other very profitable businesses (TV and parks) allow it to self-finance the development of its DTC offer. Amazon is taking a big risk by diverting resources from its core retail business to entertainment, even though Amazon has the largest customer base in the world with direct access to their credit card. Netflix is dependent on the capital markets to continue funding its growth. WarnerBrosDiscovery intends to "milker" its HBO and Discovery libraries to the hilt, but the group is heavily leveraged and walking on a shoestring. Behind Paramount has a niche card to play but does not have the scale to face up to it (that said, it is not a direct competitor of Disney).

Third Point in the capital

In this context, we are scratching our heads with the recent acquisition of Third Point Capital, led by legendary investor Daniel Loeb. In reality, it looks more like a simple marketing campaign to boost the share price (exactly as Loeb did with the same Disney in 2020) than a real activist campaign. First, because the amount invested by Third Point is modest ($1 billion), and second, because Loeb's proposals don't really make sense (he's suggesting a spin off of ESPN+, which is a real jewel in the crown). Indeed, ESPN broadcasts the NFL, NBA, MLB and PGA and provides a huge incentive for householders to subscribe to Disney+ because ESPN comes as a bundle ("ok I'll take Disney for the kids and then I can watch sports"). And in that sense, it's a very smart commercial offer.

A sustainable industry?

In any case, with Disney, as with others, there is always the question of whether or not there will be a reward at the end of all these efforts or if this streaming industry is not one of the most epic destruction of value in the history of capitalism. There is so much free content on the internet and then the pricing power of the players is for some weaker and weaker. Especially since the cost of producing new content is exploding.

Disney's flywheel effect

After having discussed a lot about the rising star Disney+, let's understand that The Walt Disney Company is much more than just streaming. The different businesses of the company coexist and interact with a certain efficiency.

Source : TitleMax

Walt Disney understood long before anyone else the value that can be found in optimizing a user experience. Each service is designed to meet the needs of young and old alike in terms of magic and change of scenery. Just on its "Parks and Experiences" offer (theme parks, cruises, vacation villages, etc.), Disney has many franchises that attract customers who travel for the event. A Disney day is then organized during the vacations. The goal for the parents is to offer their child a dream and a taste of the magic of childhood. The company has a well-oiled flywheel effect (understand inertial force). With each new saga, the success of the films attracts customers to the parks. Visitors leave with merchandise: stuffed animals, mugs and costumes. The merchandising creates souvenirs that occupy the attentional space of visitors at home. They then want to continue consuming the "Disney" magic. Disney+ takes over this well thought out inertial momentum to offer them more and more content to watch while waiting for the next movie.

The diagram below, drawn up by Walt Disney himself in 1957, is proof of this. He defined the foundations of the company in a sketch made on a napkin and known as the Synergy Map. Disney's Synergy Map is a virtuous cycle of its business ecosystem.

As you can see, the company's strength lies in its ability to keep the customer in the loop, who in turn will pass on the desire to consume "Disney" to his offspring.

Valuation

In terms of valuation, honestly, it is impossible to put a price on Disney given the complexity and low visibility. On the basis of a classic P/E, the share does not seem particularly attractive. In addition, profitability is under pressure for the reasons mentioned above and there is a difficulty in reconciling GAAP earnings with cash flow. A sum of the parts would not make sense because Disney is certainly not for sale in pieces. It's a whole that needs to be embraced or left out. The choice is yours.

In a nutshell

We are dealing here with an extremely well-run company with competitive advantages on all sides (margin image, content catalogs, flywheel, etc). The company is also well armed in the streaming race. However, there is still a doubt about the viability of this industry.

Evolution of the turnover quarter by quarter over the last twelve years :

Source: Statista

Also, Disney is certainly a solid company in the long run, but with somewhat sluggish growth. Maybe there are better things to do with your money. Something to think about.