Note: Disney's Q4 and FY'22 ended on October 1, 2022.
Disney is a well-diversified media company, and a small change in a single business driver does not hold much significance from a value standpoint. However, the drivers mentioned below are one of the most important and sensitive drivers of Disney's value.
For additional details, select a driver above or a division from the interactive Trefis split for Disney at the top of the page.
Disney is a diversified media company and makes money through several businesses, including cable networks, broadcasting networks, theme parks & hotels, filmed entertainment, and consumer products. The company has also added a direct-to-consumer business to its portfolio recently.
Its cable networks include ESPN, the Disney Channel, ABC Family, and others. Disney's broadcasting arm, ABC Network, is one of the biggest broadcasting networks in the U.S., with a wide viewership.
Besides TV networks, Disney boasts several theme parks and resorts that attract millions of visitors every year. Furthermore, the company leverages its famous characters and brands to sell various merchandise. Its filmed entertainment unit produces and distributes movies under the Disney Studios brand.
We believe that Disney's media and entertainment distribution business, which includes its direct-to-consumer, linear, and content licensing operations, to be its most valuable division for the following reasons:
Disney's DTC business is growing quickly, driven by the popular Disney+ streaming offering. DTC Subscription Revenues grew to around $15 billion in FY'22 from around $8 billion in FY'19. We expect revenue to grow to over $40 billion by the end of our review period.
Cable and satellite companies such as Comcast and DirecTV pay Disney to include its cable channels, such as ESPN, Disney Channel, ABC Family, and others, in their programming packages. These operators pay a handsome amount of fees for ESPN and Disney Channel. The high fee charged and high ad pricing results in healthy ad revenues, making ESPN and other cable networks most valuable to Disney.
With the high fee charged, Disney's cable networks, such as ESPN and Disney Channel, have high penetration. ESPN and Disney Channel are present in approximately 95% of U.S. pay-TV households.
Disney has doubled down on the streaming space with the launch of its Disney+ offering in late 2019. While competition in the streaming market is intense, Disney's deep library of legacy content and popular franchises such as Star Wars and Marvel could give it an edge over rivals. Disney is also investing heavily in content specific to its streaming businesses. For example, for FY'22, Disney expects content spending to rise to $33 billion, up from about $25 billion a year ago. Although the streaming business is loss-making currently, it could provide Disney with recurring profits in the future as it builds scale.
Increasing competition among pay-TV providers, such as Comcast, Time Warner, DirecTV, AT&T, and Verizon, is favorable for media companies, including Disney, which can gain negotiating power in discussions regarding the pricing of subscription fees for their programming content.
ESPN increases its fee per subscriber every year, owing to a rise in sports programming costs which have become a cause of worry for pay-TV service providers. Some of them are considering dropping ESPN from lower-priced programming packages.
DVD sales have declined in recent years due to the growth of rental companies and online video - causing worry to media companies such as Disney. However, these media companies are now pushing for rental windows and licensing of their older content to recoup lost profits.
With the growth of online streaming companies such as Netflix that monetize older content primarily, licensing opportunities have expanded for media companies. However, given a decline in traditional television viewership, ratings are hit hard, resulting in lower advertising revenues for most media companies. So far, licensing revenue growth has not been able to offset the declines seen on the advertising front completely. Having said that, broadcasting networks such as FOX, CBS, NBC, and ABC have been able to contain the advertising decline due to their exposure to sports programming, which garners very high viewership and better ad pricing.