Fool on the Street: Disney's Growth Model

Here at The Motley Fool, we believe individual investors should have the same access to information that Wall Street has. In that spirit, we've listened in on some investment-bank conferences with major companies and are giving you the rundown. We call this feature "Fool on the Street."

Merrill Lynch recently held its annual Media Fall Preview event, inviting industry executives and Wall Street analysts to trade queries and barbs over the upcoming media season. To give you the inside scoop on what these analysts know that individual investors don't, I listened in on a question-and-answer session with Disney's (NYSE: DIS  ) longtime CFO, Tom Staggs, and Merrill's star media analyst, Jessica Reif-Cohen. Let's don mouse ears for this round.

The model
Jessica kicked off the show by repeating the three pillars on which Disney builds its strategy these days: "One, to invest in quality content using your strongest brands; and two, leverage new platforms and technologies to deliver this product; and three, better exploit international opportunities."

Tom immediately took that structure to the next level by adding, "Underlying that, really, is a fundamental belief that you've got an expansion of consumer choice, you've got an expansion of markets around the world, and you've got the ability to even further differentiate strong branded content around the world."

That's why Disney wants to focus on "branded quality product" to drive its growth. Customers have plenty of entertainment choices today, so it only makes sense to win them over by making the best content you possibly can. Suck the consumers into your system with a strong product like High School Musical or Pirates of the Caribbean, and that one movie ticket can turn into hundreds of dollars in branded retail goods, online advertising revenue, theme park curiosity, and all the rest.

Do this often enough with hit properties on parade, and you're building a mighty strong company brand that translates into customer loyalty and near-automatic blockbuster hits, as long as you don't drop the ball entirely on the content-generation side.

For example, Tom described the Disney Channel cable network as a "big driver of growth of the Disney brand and therefore the company as a whole." Interestingly enough, the cable segment itself isn't expected to grow that much -- it's just channeling strength into the rest of the Disney machine. The company treats this channel as an internal marketing tool on steroids, wrapped in kiddie-format daytime shows and teen-tailored evenings.

Generation neXt
Since CEO Bob Iger took the operational wheel, I have applauded Disney for its willingness to embrace new technology even as competitors like News Corp. (NYSE: NWS  ) , CBS (NYSE: CBS  ) , and Sony (NYSE: SNE  ) had to be dragged along, kicking and screaming.

Last year, ABC President Anne Sweeney told us how ABC thought of piracy as just another form of competition rather than as the root of all evil. Now, Tom tells us that ABC.com has served up about 130 million episodes of the network's hit series, including Desperate Housewives and Ugly Betty.

While he's "excited about that," some perspective might be in order. "You're talking about a business with billions of dollars of advertising revenue and we still measure digital revenue in tens of millions," he said. "From the standpoint of relative mass, [broadcasting is] still the traditional outlet. But again ... what we are seeing is that the opportunity that people have to interact with our programming, to view episodes when it's convenient, is something that helps drive engagement with our show, drives greater engagement with ABC, and actually helps support as opposed to cannibalize the base television business."

Staggs thinks that Blu-ray will win the high-definition format war eventually, but he can't say when. And he doesn't mind cable companies like Time Warner Cable (NYSE: TWC  ) or Comcast (Nasdaq: CMCSA  ) trying out "day and date" distribution through their on-demand services, where movies are made available on digital cable the same day as the DVD release.

It really doesn't matter to Disney how and where the product is distributed, after all. Black-and-white celluloid became Technicolor movies; VHS battled it out with Betamax and pushed aside Laserdiscs; there's the rise of the DVD and the budding online distribution market; and nobody knows what we'll use in 10 or 20 years.

But whatever medium replaces the DVD, our kids will refresh their Disney libraries in holo-cube format, or ultra-definition brain-stem plug-ins, or whatever. That's what Disney's quality focus does: It builds an entire culture of Disney addicts, who will pass the tender affliction on to the next generation.

The quick-shot department
In his chat with Jessica, Tom noted that Disney was in the midst of budgeting for the coming year, and still deciding where to go with the MVNO family-friendly cell-phone service. Well, we know now that the company is giving up on that effort, because of distribution challenges and a "hyper-competitive" cell-phone market.

As for international growth, Disney already makes market-specific films for release in China or India, building up the Disney brand globally with content that feels familiar in Shanghai or Bangalore.

That wraps up our report from this presentation with Walt Disney and his business heirs, but stay on the lookout for more "Fool on the Street" reports that bring you juicy information that only the analysts have heard.

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