Disney's high quality content along with its established movie and character franchises affords it the unique ability to manage the disruption to traditional content and media delivery platforms. Through its licensing and theme park operations, the company is also uniquely positioned to monetise its creative content, often over decades, whilst relying on familiar character and franchise content to reduce the risk inherent in traditional creative output.

Not a Mickey Mouse Business

While Disney is most closely associated with its familiar and much-loved cartoon characters, the largest contributor to its success over the past few decades has arguably been ESPN, which enjoys exclusive television rights to the NFL and NBA as well as to college football and basketball.

Live sports content is key to any cable or satellite television provider, ensuring ESPN’s ability to earn significantly higher share of the subscription fee than any other content provider. The channel’s core 18 - 49 year old male audience is also a key advertising demographic, implying the benefit of a dual income stream.

Peak Cable

The pay TV market has, of course, seen significant disruption from the rise of cheaper digital alternatives, such as Netflix, resulting in subscriber losses owing to the so-called “chord cutting phenomenon”. US Pay TV subscribers peaked at 103m households in 2012 and is estimated to have fallen to 97m in 2017. Disney has not been immune to this disruptive threat, albeit that affiliate fees are generally determined by multi-year contracts, with annual escalations, implying the revenue decline has not been as severe as the rate at which subscribers have declined.

The digital threat is further mitigated by the value consumers see in ESPN and the Disney Channel, which means that these are generally included in the so-called “skinny bundles” offered by cable companies to entice subscribers to spend less but retain some form of subscription.

To illustrate this point, consider that fourth quarter 2018 (Sep-18) revenue from Disney’s Media Networks division rose 9% year-on-year, as affiliate fee revenue growth of 5% offset subscriber losses of 1%.

Going Over the Top

Disney’s response to the “cord cutting” phenomenon has been to invest in its own direct to consumer services. ESPN+ launched in April 2018, surpassing the 1 million subscriber mark within 5 months. When its acquisition of 21st Century Fox closes, in mid-2019, Disney will control 60% of Hulu, a direct competitor to Netflix. While Disney+ will launch late in 2019, at which point the company’s distribution deal with Netflix will terminate, forcing its major competitor to invest in original content.
Figure 6. Annual US Pay TV Subscribers. Source: Northstar Asset Management.
Content is King

As television transfers from an aggregated-linear model to a direct-on demand one, we are confident that Disney’s content library, its cast of characters and movie franchises along with its unrivalled ability to monetise these through its theme parks and consumer products business ensures it is well placed to navigate the changing media landscape.

While Disney’s internally generated content affords it superior economics, we are mindful that disruption introduces greater uncertainty and therefore approach valuing the business on a “sum-of-the-parts” basis, recognising terminal decline in its traditional media and networks business as well as the significant value in its Studio and Parks, Resorts and Consumer Products businesses.