This High-Quality Company Is Firing on All Cylinders
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Monsters University is off to a very strong start after taking in more than $82 million in its opening weekend. This is great news for Disney(NYSE: DIS) investors, not just because of what it means financially but, more importantly, because it shows that the company hasn´t lost any of its magic when it comes to consistently creating widely successful content.
This wonderful story is far from over, and Disney still offers plenty of growth opportunities for investors in the long term.
A unique company
Disney is a unique business in several ways. To begin with, the company benefits from its tremendously valuable intellectual property, which sets it apart from the competition. Disney owns brands like ABC, ESPN, and Pixar among others, and it has the rights to profit from an amazing portfolio of fictional characters, from Mickey Mouse to Darth Vader, going through many of the most popular and recognizable names in the industry.
The company has a diversified business model that makes it very different from its competitors. Disney has the chance to monetize its characters and franchises across multiple platforms: movies, shows, home videos, theme parks, merchandising etc. This provides a lot of leverage when it comes to making money from its properties, and it´s an unparalleled advantage in the media and entertainment industry.
ESPN brings in nearly 75% of cable network sales via affiliate fees and advertising, and the leading sports network in the world benefits from indisputable competitive strength. It would be tremendously difficult for competing networks to replicate the expensive long term contracts ESPN has signed with major sports leagues and associations around the planet, so this cash cow is a distinctive strategic asset for Disney.
Parks and resorts are not only a big and profitable business, but also a powerful venue to cultivate the lifelong relationship Disney has with its customers, both kids and their parents. Customer experience at the parks is full of those small but important details, which can make all the difference in the world, especially when it comes to the emotional connection people build with a brand.
When a little girl goes to the parks dressed like a princess, like many of them usually do, security guards - the real security guards, not actors - sometimes ask them for autographs saying something along the lines of, “Excuse me, Princess, can I have your autograph?”
Needless to say, this is a delightful scene to watch, and it’s the kind of thing that can be very effective in terms of ensuring customer loyalty in the long term.
Disney has made a series of important acquisitions over the last years, including the purchase of Pixar for $7.4 billion in 2006, Marvel for $4.24 billion in 2009, and Lucasfilm and the Star Wars franchise for $4.05 billion in 2012. Considering that the company has an unparalleled ability when it comes to monetizing its catalog of characters, these acquisitions bode well in terms of growth prospects in the middle-term.
Competition is always a risk to watch, and new technologies like online video streaming mean that Disney will need to adapt to changing industry dynamics. Streaming is clearly the future of home video consumption, and this could negatively affect the company´s profitability, especially in movie sales.
The good news for Disney and other content producers is that Netflix (NASDAQ: NFLX) and Amazon (NASDAQ: AMZN) are immersed in an intense bidding war for content, and this is quite helpful when it comes to negotiating juicy conditions for their content streaming deals.
Both companies offer a wide selection of video for a convenient price: while Netflix charges a flat a $7.99 per month for unlimited consumption, Amazon Prime subscribers pay $79 a year for unlimited streaming and free two-day shipping on Amazon products. With more than 75,000 movies and TV titles, Netflix has a bigger library, but Amazon has been closing the gap over the last months, aggressively bidding for content and building its own collection with more than 40,000 titles.
In December, Disney and Netflix made an agreement giving Netflix the rights to stream new releases, including those from Pixar and Marvel, starting late 2016. Financial terms of the agreement were not disclosed, but analysts estimate that Disney will be receiving something in the area of $300 million per year from this deal.
Disney content is very valuable to Netflix, especially after it lost key programming to Amazon when its deal with Viacom (NASDAQ: VIAB) expired in late May. Children are crucial when it comes to streaming subscription, according to Amazon, kids’ shows are one of the most watched TV genres on Prime Instant Video, and parents usually give a lot of consideration to children's content when choosing a subscription service.
Viacom owns popular characters like Dora the Explorer and Sponge Bob, and Nickelodeon is Disney Channel´s biggest competitor. Players like Disney and Viacom are in a comfortable position to negotiate with streaming companies like Netflix and Amazon knowing that their children's programming is a key strategic asset, so the streaming revolution may actually turn out to be very profitable for high quality content producers.
Disney is a high quality company with irreplaceable strategic assets, powerful brands and an enormous catalog of unique characters. The company keeps producing successful content, and acquisitions over the last years should provide plenty of growth opportunities in the middle term. The online streaming revolution is not looking like a problem for Disney, so the House of Mouse is in a position of strength to continue delivering solid returns for years to come.
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Andrés Cardenal owns shares of Disney, Amazon and Netflix. The Motley Fool recommends Amazon.com, Netflix, and Walt Disney. The Motley Fool owns shares of Amazon.com, Netflix, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!