Forget Mickey Mouse, Here's Disney's Secret to Success!

Right now, Disney is one of the largest and most successful businesses in the world. Did you know that one segment accounted for nearly half of the company's sales and almost two-thirds of its profits?

Jun 29, 2014 at 11:00AM

Images

Source: Wikimedia Commons

The largest and most profitable portion of The Walt Disney Company (NYSE:DIS) is its Media Networks segment. Based on its 2013 annual report, this segment makes up 45.2% of the media conglomerate's revenue and 64% of its combined segment operating income. In a sense, Media Networks is Disney. Given this fact, an understanding of how this part of the company's business operates is necessary to truly comprehend and appreciate how large and profitable Disney is as a franchise.

A case study on the value of Disney's cable networks
One way that Disney's Media Networks segment draws in revenue is through its cable networks. By charging a fee to Multi-channel Video Programming Distributors (MVPDs) for the distribution of original and acquired programming, the segment's cable networks operations draw in considerable revenue. To illustrate the value of Disney's properties, we need only look at Comcast (NASDAQ:CMCSA) and Twenty-First Century Fox (NASDAQ:FOXA).

Images

Source: Wikimedia Commons

Prior to August 2012, Comcast's NBCUniversal owned a 15.8% piece of A&E Television Networks. However, due to the terms of its acquisition, A&E was able to redeem this stake from the company in exchange for $3 billion in cash. This represented a $1 billion pre-tax profit for NBCUniversal and contributed $495 million to Comcast's net income.

As a result of the transaction, Disney's ownership in A&E was pushed up from 42.1% to 50%, with Hearst Corporation holding the other 50%. Under the assumption that this network's value hasn't changed materially, Disney's piece of it is worth $9.5 billion; that's almost 7% of the company's market capitalization.

In addition to A&E, Disney also owns a piece of the following networks: ESPN, Disney Channels Worldwide, ABC Family, and SOAPnet.

  Average Subscriber Base Disney's Ownership
ESPN 76.2 million 80%
Disney Channels Worldwide 103.2 million 100%
ABC Family 98 million 100%
SOAPnet 67 million 100%
A&E Television Networks 77 million 50%

Source: Disney

As we can see in the table above, Disney's average number of subscribers per cable network is significant. Unfortunately, it's hard to place a value on each of these. If you assume that the 77 million average subscribers for each of A&E's channels is worth the $9.5 billion to Disney that the company's 50% stake implies, however, then the aggregate value of these other networks would be worth around $81.1 billion.

Cable's not all that matters
In 2013, Media Networks brought in revenue of $20.4 billion, up 9% from the $18.7 billion that the segment brought in two years earlier. The segment's operating profit for these operations came out to $6.8 billion, up from $6.1 billion in 2011 for a segment operating margin of 33.5%. While Disney's cable networks accounted for a good part of these results, another contributor was its Broadcasting operations.

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Source: Wikimedia Commons

Currently, Disney's Broadcasting operations is spread across 239 television stations domestically and reaches 99% of all U.S. television households. The company also owns eight stations that reach approximately 23% of television households. Through these, Media Networks distributes content made either for it or for third parties that include (but are not limited to) Grey's Anatomy and Criminal Minds. Disney also has a 33% stake in Hulu, a video streaming service that is also owned by Comcast (through NBCUniversal) and Twenty-First Century Fox (through Fox Entertainment Group.)

According to Hulu, its streaming operations currently have over 6 million subscribers and the company reported revenue of around $1 billion in 2013. Its subscriber count is up from a modest 2 million in April 2012 and shows no sign of slowing down. In its most recent annual report, Twenty-First Century Fox, which has a 33% ownership in the company, said that it has committed to invest an aggregate of $250 million in the business's development. Disney and Comcast agreed to invest $257 million and $247 million, respectively.

Foolish takeaway
Disney is a large and profitable company. One of the biggest reasons why the entertainment giant has seen such success is because of its Media Networks segment. In addition to being big and profitable, this portion of Disney's web is growing at a nice clip and will likely continue to do so down the road.

Because of the quality of its content and the business relationships it has with Comcast and Twenty-First Century Fox, it appears that management has the tools and desire to innovate for the foreseeable future. While this does not prove that the company is an attractive investment, it does make suggest that investors would be foolish (instead of Foolish) to give the company valuable consideration before discarding it as being too big to profit from.

Your cable company is scared, but you can get rich

Right now, there's a war for YOUR living room and Disney's one of the companies that might profit the most.  However, Disney isn't the only one who will profit from this next big wave to hit the markets!  And here's a hint: Cable companies are unlikely to get a piece of this action even though they already hold a big slice of the pie.  And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple. 

 

Daniel Jones has no position in any stocks mentioned. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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