Star Wars And DisneyLife Are Two Important Things For Disney To Look Forward To

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Disney (NYSE:DIS) last week reported its Q4 and annual earnings for fiscal 2015. (Fiscal years end with September.) Now that the dust has settled, we take a closer look on its performance, focusing in particular on the outlook and the company’s initiatives in streaming services. The quarterly earnings were above expectations driven by a solid growth across its business segments, including media networks, theme parks and studio entertainment. Now apart from earnings, Disney in its analyst conference call talked about DisneyLife, an over-the-top streaming service to be launched in U.K. There have been a number of such services launched by popular networks, including HBO, CBS and Showtime, targeting millennials and those households that have yet to subscribe to pay-TV. However, it has more to do with the changes in technology and viewing habits and these brands want their content readily available on newer platforms. We maintain our view that there will be a demand for both pay-TV and streaming, that they will co-exist for the foreseeable future.  It thus makes sense for key networks and brands to be available on new platforms. While Disney will launch its streaming service first in U.K., it is matter of time when they offer that in the U.S., in our view.

Looking at Q4 performance, media networks saw solid growth in affiliate as well as advertising income, including ESPN. Disney launched the SEC Network in August last year, so its full quarter impact was visible only in Q4 2015 earnings.  This primarily lifted the affiliate revenues for the segment. Theme parks continued to see steady growth in attendance as well as average guest spending, partly due to the increased ticket prices. Looking at the studio operations, the operating income more than doubled for the quarter, reflecting the benefits of Inside Out and Ant Man, along with television distribution growth and lower impairments. [1] This was the last earnings report before Disney starts to reap benefits from the much anticipated Star War series.

Star Wars is a very big franchise for Disney. It has a massive fan following, which will help the movie achieve high box-office grossing. Also, Disney has been aggressively pushing the brand across its platforms. For instance, it launched a series of new retail merchandise based on the series. It further introduced Star Wars in the third version of its popular video game, Infinity. Furthermore, it is bringing Star Wars based attractions in its theme parks, including Shanghai and the U.S. This is the right strategy for Disney and we have seen it doing wonders for the company with past such initiatives. Disney has seen tremendous success in a similar setup with Pixar and Marvel brands earlier and it should be easy for it to repeat the same now with Lucasfilm. And it is not just one Star Wars movie; Disney will release one movie in the series every year till 2020. It is thus clear that Star Wars will remain a key focus area and growth driver for Disney for the next half decade.

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Another important takeaway from Disney was DisneyLife – an over the top streaming service, which will include Disney’s’ movies, TV series, books and music offerings in a bundle priced at £9.99 per month in U.K. Disney plans to expand this service into other European markets, including France, Spain, Italy and Germany and we believe it’s a matter of time it will start rolling this in the U.S. as well. Now digital platforms are seeing rapid growth. For instance, Netflix’s subscriber base grew from a little under 22 million in 2011 to more than 40 million subscribers currently. [2] In this changing environment, the challenge for the media industry at large is to make the content accessible in and out of the home. Accordingly, more and more streaming options are finding their way in the market, Now Disney’s brands have massive following and it should find many takers for the service in Europe and aid Disney’s international revenues.

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Notes:
  1. The Walt Disney (DIS) Robert A. Iger on Q4 2015 Results – Earnings Call Transcript, Seeking Alpha, Nov 5, 2015 []
  2. Netflix’s SEC Filings []