Disney (NYSE:DIS), which owes about 45% of its value to ESPN, also has filmed entertainment business which brings just about 10% to its value. Given the big brand of Disney Studios and several successful movies under the banner, a 10% value contribution might seem a little surprising and quite less at first. However, there are a few solid reasons behind it.
Firstly, the EBITDA margin is lower for Disney Studios compared to some of its other businesses. For example, compared to 44% EBITDA margin for cable networks and 26% EBITDA margin for parks & resorts, the filmed entertainment business has close 16% margin.
The other reason is that Disney has seen consistent declines in its home entertainment revenues, driven by a decline in DVD sales. Renting movies and online streaming have become popular choices that have impacted the studios significantly. The decline in revenues is also responsible for the low margins. There is an opportunity to revive these revenues as well as improve margins in the process.
So, what is Disney doing about this?
Focus on electronic versions to offset DVD declines
Disney and other media companies are now focusing on developing additional electronic revenue stream to offset DVD declines. This includes licensing older content to online rental companies such as Netflix (NASDAQ:AMZN), Hulu, Amazon (NASDAQ:AMZN) as well making movies available for sale on online platforms such as iTunes at competitive prices. As online streaming further picks up, DVDs will continue to decline and Disney will look to compensate that with Blu-Rays and electronic versions.
Implementing rental windows
Although this might not be entirely successful, implementing a window period between the time the DVDs go on sale and the time they are available for rental will help recoup DVD sales to some extent. Disney and other studios offer discounts on DVDs to rental companies if they abide by this window.
The decline in DVDs is inevitable, at least in the developed world. Disney can look to push DVD sales in emerging countries as well as create blockbusters based on popular franchises and 3D technology. This is likely to increase revenues due to higher chances of success and higher 3D ticket prices.
Our price estimate for Disney stands at $51.50, implying a premium of more than 5% to the market price.