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Here in Edinburgh, August is a month synonymous with the Edinburgh Fringe Festival - a celebration of imagination, creativity and storytelling that takes over the city.
In keeping with the artistic theme this month, we've chosen to discuss a recent new buy for the Global Alpha portfolio, Walt Disney.
Disney is an iconic brand with a strong competitive edge that comes from the breadth and quality of its intellectual property (IP). The company has been entertaining families for just over a century and is a great example of a compounder that has been able to build upon its success over the decades.
Disney is a business in transition, and as such, we feel the market is distracted by some of the negative news stories about the company over the last few years – in particular, concerns over the decline of ‘traditional’ linear TV and the future succession of Disney’s CEO Bob Iger.
Because of the noise surrounding the business, people are forgetting what makes the company special and are underappreciating the long-term opportunity. Disney is an ‘IP machine’ that can capture audiences across an incredibly broad range of demographics. No other company has been able to leverage its content in the way Disney has over such a long period of time. The decline of linear TV is a challenge but it’s important to appreciate that Disney has a range of growing and diverse revenue streams.
Experiences, Entertainment, Sports
Its revenue streams can be split into three broad areas, all of which - we believe - have compelling growth drivers:
- Experiences: Parks and resorts have been a staple of Disney since the opening of Disneyland (aka ‘the happiest place on Earth’) in 1955. The company now hosts over 150 million visitors across its 12 parks each year. This unit makes up around 40-50 per cent of total group revenue but Disney is not resting on its laurels. Over the next 10 years it is looking to invest up to $60bn into building new parks and upgrading existing parks. This will allow Disney to build upon what has so far been a stable and reliable cash cow for the business.
- Entertainment: This covers traditional TV channels including ABC, FX, and National Geographic but also the company’s streaming service, Disney+. The direction of travel across the industry is away from linear TV and towards streaming. Disney+ was launched in 2019 and recently had its first profitable quarter following a period of focusing on quality content, cracking down on password sharing and cost-saving measures introduced by Iger. Disney is in a unique position compared to its competitors in this space such as Netflix and Amazon as it already owns a huge catalogue of content spanning decades.
- Sports: Disney broadcasts a range of live sports through ESPN, which it acquired in 1995. Sport has traditionally been seen as 'premium content' on TV, and ESPN, the 'premium platform'. To put this into perspective, affiliate fees that are paid by companies to carry ESPN are roughly twenty-times higher than the average for other cable channels, and three-to-four-times higher than the next most expensive sports channel. The opportunity to 'bundle' sports with other entertainment packages makes for an attractive offering.
Durability
Disney’s biggest strengths are in the durability of its content and its ability to leverage existing IP. This is a brand that millions of people across different generations have strong emotional ties to. Because of this, the company is able to monetise characters that first appeared on screens decades ago and continues to do so in ways that are irreplicable.
As an example, Snow White and the Seven Dwarfs was Disney's first ever film (released in 1937), and almost 88 years later, Disney is set to release a live-action remake. This should help capture a new generation of fans to visit its parks and buy merchandise. Disney has a successful track record of recycling old IP with recent remakes of The Lion King, Beauty and the Beast, and The Little Mermaid.
Even for its new intellectual property, Disney is able to extend the life cycle of content much further than other producers. Moana was released in 2016 but was the USA’s most streamed film in 2023 – with a combined watch time of 11.6 billion minutes. Disney took five of the top 10 places with Encanto, Elemental, Frozen, and Black Panther: Wakanda Forever rounding off the list.
A big testament to the durability of Disney IP, the strong brand loyalty the company commands, and the diversity of its customer base, can be seen in the ‘Disney Adult’ phenomenon. As the name suggests, this term describes adults who are devout fans of Disney and regularly visit its parks and consume content on Disney+. In fact, former CEO Bob Chapek, claimed that roughly half of subscriptions to the company’s streaming service are from adults with no children.
However, ‘Disney Adults’ are only part of the story as the company has been able to attract a diverse customer base to Disney+ through the clever acquisition of IP with established fan bases. The streaming service hosts content ranging from Marvel films, Star Wars films and series, to shows from FX and ABC including The Bear, Shogun and Grey’s Anatomy.
What do we see that others don't?
One question that hangs over Disney is around governance and the succession of its current CEO, Iger. He originally became CEO in 2005 at a time when Disney was struggling following a series of unsuccessful films at the box office. Iger’s focus was on returning Disney to what had traditionally made the company successful – high-quality and highly creative content.
In 2020, Chapek succeeded Iger as CEO, having led the Parks and Resorts business for five years. This was a challenging time for Disney where inflation pressures led to a hike in prices. Under Chapek, there was a period of overhiring, rapid expansion and an increase in the company’s fixed costs. 2022 saw the return of Iger after Chapek’s quantity-over-quality approach had failed to work for the business. Iger was once again able to steer the company’s focus to its core business of producing quality content. In the two years since his return, the company introduced cost-cutting measures which in turn has made the business more dynamic and profitable.
Iger is set to step down again in 2026 but Disney has learned lessons from the last transition. Our focus is on engaging with Disney and the team around Iger to understand where ‘experience’ gaps may exist and what the next phase of Disney looks like.
Although the market is apprehensive about the transitional phase Disney is going through, we’re confident it will be able to navigate this successfully. Disney is a timeless brand that has been able to capture new audiences again and again across multiple generations. The company has a strong competitive advantage thanks to its wealth of IP and its extremely loyal customer base.
As well as this, Disney has a diverse range of revenue streams with different growth drivers. In particular, we’re looking forward to seeing how its investments into Experiences will play out and the opportunities the company has in streaming with Disney+.
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The views expressed should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.
This communication was produced and approved in October 2024 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.
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