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Welcome to the Art and Finance vlog. Now, anyone can understand business, economics, and finance!
Disney needs no introduction. If you’re a living, breathing, human being, there’s a chance you’ve come into contact with a Disney product. You can’t escape. Are you a kid? Watch some Disney and Pixar movies. Teenager? How about Marvel, Star Wars and ESPN, or how about Maker Studios, which owns Pewdiepie and other major YouTubers? Adult and too old for any of this? Oops, either nostalgia or your kids will drag you back to Disney’s IP, now recycled for a new generation. You can’t escape.
Basically, some of the strongest intellectual properties in entertainment are owned by Disney, making the company virtually omnipresent and extremely profitable. The success Disney enjoys today is by no means an accident. Indeed, plans were set into motion in 2005 that transformed Disney from a stagnating media company to the global, money-printing powerhouse it is today.
So in this episode of the Art and Finance vlog, we’ll take a look at the business strategy that Disney followed to achieve success.
And this is where this guy, Bob Iger, comes into the picture. Prior to 2005, Disney was in dire straits, with profitability sinking due, in my opinion, to too much of a focus on expanding the distribution of its assorted entertainment properties instead of focusing more on storytelling.
Toward the end of this period, there was a major power struggle among Disney executives and its board of directors, famously recounted in James B. Stewart’s book, DisneyWar, and, when the dust had settled, the role of CEO and the keys to the kingdom were given to Bob Iger, an executive from Capital Cities/ABC, which Disney acquired in 1996.
Iger immediately set into motion his grand strategy to rehabilitate Disney. On his second day day as CEO, he announced that Disney would buy Pixar, then owned by Steve Jobs and to whom Disney was losing out in animated movies. Jobs didn’t want to sell, but Iger doggedly pursued the deal, and in 2006 eventually acquired Pixar for $7.4 billion and a seat on the board of Disney for Jobs.
Iger continued to put his impressive dealmaking skills to work in the following years, with Disney acquiring Marvel in 2009 for $4 billion and Lucasfilm for $4.1 billion in 2012. None of this was easy, and I highly recommend you read this article in the Economist for all the details.
What was the reasoning for all these acquisitions? In hindsight, it was obvious for Disney to acquire all these media companies, but that might have not been the case back then. Corporate mergers and acquisitions, or M&A, are famous for NOT working out.
The basic idea behind M&A is that company A has a product/service and seeks to merge with, or acquire, company B because company B has a product/service that, in THEORY, works well when paired with those of company A, resulting in financial benefits. This is known as synergy, and often doesn’t work out. Yet for Disney, it has. Huh?
In my view, synergies work with Disney because of several key characteristics of Disney’s business and recent strategy. The first is that Disney is already an established entertainment corporation of considerable size and scale. So, not only do they have the experience in creating lucrative entertainment brands, but they also have the balance sheet to take risks. In fact, during the acquisition of Pixar, Iger made clear to Steve Jobs that Disney would allow Pixar creative freedom, and insulation from pressure from outside investors, which is possible because of Disney’s size.
Because Disney can afford to take risks, it can afford to put, as the Economist put it, storytelling at the heart of its empire. Disney franchises, from Marvel to Star Wars, tell stories that they KNOW their fans will enjoy. Disney UNDERSTANDS what its various audiences want, and gives it to them. You know what to expect from a Marvel movie and a Pixar movie, and it seems that Disney has found what makes Star Wars fans tick. And because you know what to expect from these movies, each movie released draws in with stunning regularity a sizeable audience, in turn making the movie profitable. This is all, in essence, a franchise strategy.
Marvel, Star Wars, and Pixar are all franchises with characters and shared universes at their hearts. And they’re all owned by Disney.
Now that Disney’s media properties seem to bring in relatively stable cash flow from a repeat audience of fans, the company can further earn money from these franchises through related endeavours such as merchandising and theme parks (WSJ Milk), two businesses with which Disney has extensive experience. As a result from all this, Disney is realising the synergies from its acquisitions.
This grand, franchise-focused strategy of Iger’s seems to be paying off. Return on equity, a measure of a company’s profitability, is off the charts!
But do the good times ever last? One risk is that people will eventually tire of Pixar, Marvel, and Star Wars movies. Not only that, but Disney is dealing with a near-term problem. The shift in younger audiences’ eyeballs from TV to the Internet has hit Disney’s legacy cable business, ESPN in particular.
Yeah, did you actually know that Disney owns ESPN? Well, it does, and it’s currently not working out for Disney. ESPN was once an incredibly lucrative business, since it has exclusive rights to broadcast many sporting events on cable TV. However, with more of young viewers’ attention moving to the Internet and other content, ESPN has seen its subscriber numbers decline.
ESPN and Disney’s other cable TV offerings are no joke. They fall under Disney’s “Media Networks” segment, which historically has accounted for almost half of total company revenue, and within which ESPN reportedly accounts for a considerable amount.
But interestingly enough, the Studio Entertainment division, basically Disney’s film division, has become more profitable in recent years. It appears that Disney can still grow its business through its non-sports franchises, with new intellectual property over the long term, and the potential success of Disneyland theme parks in China over the near term.
The growth and stagnation of Disney’s Studio Entertainment and Media Networks divisions, respectively, are important to Iger and the rest of Disney’s management since Disney is a public company, meaning that shares of stock ownership in the company are traded publicly. This means that Disney is accountable to public investors. And if I held Disney’s stock (I don’t, by the way), the best outcome for me would be if Disney spun off its Media Networks division into a separate business and hence separate stock, and keep its profitable businesses in Disney stock.
On the other hand, Disney’s management may not want to spin off its troubled businesses for several reasons, for example if a hypothetical spun-off company finds it more difficult to get funding from outside investors. Let’s watch, wait and see what unfolds with Disney going forward.
And that’s it for this episode. I’m still experimenting with the release schedule of Art and Finance’s content. Let’s keep this vlog quarterly for the moment, as I’m working on a bunch of other projects for Art and Finance, much of which will be broadcast on our YouTube channel as well. Thanks again for you support, and see you in April!
Ramon Rodrigo Cuenca, CFA
Art and Finance