Disney Boots Movie Head But No Major Changes Expected

Rich Ross, Disney’s (NYSE:DIS) filmed entertainment business chairman, recently resigned from his position. His stint at Disney was marked by some unsuccessful movies including the latest John Carter, which is estimated to have cost the film studio $200 million. ^[1] A peek into the box office results of last few years show that Disney’s studio entertainment arm has lagged behind bigger rivals such as News Corp (NASDAQ:NWS), Viacom (NASDAQ:VIA) and Time Warner (NYSE:TWX) in terms of market share. Rich Ross’s focus on spending more money on fewer movies based on famous and marketable characters hasn’t really produced great results. But does his departure imply any strategic change for Disney’s movie business?

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If we look at 2011, 5 out of top 6 movies in terms of worldwide gross revenues were based on marketable characters – characters that have been in existence for a while, either through comics or prior TV shows. There is a clear value in the approach that Rich Ross adopted, but his inexperience in the movie business might have cost him his job, as the majority of his professional experience has been in the TV business. He had handled Disney’s TV business before he assumed the role as Chairman of the company’s studio entertainment arm.

We think that while Ross’ departure is likely to shake up Disney’s movie business management, the broad level strategy might be unaffected.  The value of such marketable characters extends beyond movies and their popularity and support could be leveraged to lift other businesses such as consumer products and parks & resorts.

Our price estimate for Disney stands at $52.15, implying a premium of little over 20% to the market price.

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1. Rich Ross, Disney Studio Chairman, Is Forced Out, The New York Times, April 20, 2012 [↩]