Three Things Which Are Key To Disney’s Growth In Future

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The key drivers of Disney‘s (NYSE:DIS) growth in future include:  1) creating innovations to attract visitors to its theme parks; 2) driving revenues for its resorts; and, 3) increasing viewership and subscription fees for ESPN and streaming services.  While the ESPN segment and “Parks and Resorts” together constitute more than 60% of Disney’s valuation, according to our estimates, streaming services could hold a strong potential for growth in future. To fuel revenue growth in the long term, Disney has established a strategy to leverage growth in video consumption on handheld devices.  This stragety includes the launch of Disney Life in the U.K., which has the potential to expand in other regions as well.

U.S. Resort Operations

Parks and Resorts constitute more than 30% of Disney’s valuation, according to  as per our estimates, and we expect the room revenues for Disney’s hotel properties to continue their uptrend in future. One of the most important drivers of Disney’s hotel operations are its theme parks. The attendance in its U.S. theme parks increased from 70 million in 2009 to 77 million in 2014. Disney continues to work on new theme attractions and rides to attract visitors to its parks. The company is working on developing Avatar Land and bringing Star Wars and Frozen attractions into its theme parks. The U.S. disposable personal income has been on an uptrend over the past few years and has moved from a little over $11,500 billion in January 2011 to an all time high of $13,477 billion in September 2015. [1] The U.S. GDP is also seeing strong momentum with projected growth of 2% till 2020. [2] As the U.S. and global economies improve,  tourism will increase, driving growth in tandem of attendance to Disney’s parks.  We estimate the attendance figure to cross 100 million by the end of our forecast period. This attendance growth will also drive demand for Disney’s hotels located in these theme parks.

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ESPN Subscription Fees and Increased Viewership

ESPN is a very important segment for Disney and constitutes nearly 30% of its valuation according to our estimates. The network has been spending heavily to acquire programming rights and has periodically passed on some of the increased costs to pay-TV operators. This, in turn, has led to higher bundle costs and many subscribers have left the network, trimming ESPN’s subscriber base from 100 million subscribers in 2010 to 95 million in 2014 [3]. However, during the same period monthly subscription fees increased from $4.40 to $6.05 according to our estimates.  We expect this trajectory to continue in the coming years and estimate subscription fees to be around $9 towards the end of our forecast period due to rising costs and demand for ESPN’s programs. ESPN has committed to $44 billion in programming rights second only to 21st Century Fox’s $48.6 billion commitments. [4] We believe that demand for sports programming will drive ESPN’s growth in the coming years and allow increase in subscription fees over the years. We also expect ESPN’s viewership to increase as a result of its high quality content which will boost the network’s advertising revenues

Streaming Services

Disney is looking at ways to adapt to the changing consumer behavior of watching videos on mobile devices.  Accordingly, it is launching Disney Life in the U.K., an over-the-top streaming service that will include Disney’s movies, TV series, books and movie offerings at a bundled price of £9.99 per month. The company plans to expand this service into other European countries such as France, Spain, Italy and Germany. Online streaming platforms such as You Tube and Netflix are gaining viewership primarily due to ease of watching videos, especially on handheld devices that offer continuous availability of high quality content on these platforms.  Advertisers are now shifting ad spending to mobile platforms and reducing budgets on TV ads.  According to eMarketer, Mobile advertising is the key driver of growth around the world and advertisers will spend $64.25 billion worldwide on mobile advertising  in 2015, an increase of nearly 60% over 2014. [5] Budgets for TV ads are expected to shrink by 3% each year out to 2020. (Read Trends In Global Advertising Industry : Winners and Losers- Part 1.) In view of these trends, we believe Disney’s focus on streaming services will be a key driver of growth in future.

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Notes:
  1. United States Disposable Personal Income, tradingeconomics.com []
  2. United States, Economic Forecasts, 2012-2020 Outlook, tradingeconomics []
  3. Disney’s SEC Filings []
  4. Disney’s ESPN Said Planning To Eliminate As Many As 350 Jobs, Bloomberg, October 21, 2015 []
  5. Advertisers Will Spend Nearly $600 Billion Worldwide In 2015, eMarketer, Dec 2014 []