Meet the Part of Disney That's Dying!

Source: Disney

One of the most successful companies in recent years has been Walt Disney (NYSE: DIS  ) . However, in spite of rising revenue and soaring profits, there is a part of Disney that's dying: its home entertainment operations. Even as rival Lions Gate Entertainment (NYSE: LGF  ) is seeing its same operations grow, the continuously declining home entertainment portion of Disney tells a lot about where not only it, but also Lions Gate, is headed.

Home entertainment is getting hammered!
Over at least the past five years, Disney's home entertainment operations, which include the entertainment giant's DVD, Blu-ray, and digital movie distribution sales, have seen revenue fall significantly. Between 2009 and 2013, revenue from this part of Disney declined by 37% from $2.76 billion to $1.75 billion, with no signs of improving.

(billions) 2013 2012 2011 2010 2009
Home Entertainment Revenue $1.75 $2.22 $2.44 $2.67 $2.76

Source: Disney

The main driver behind this decline in revenue has been lower units sold as consumers move away from physical and downloaded content in favor of Subscription Video on Demand (SVOD). Between just 2012 and 2013, the company's unit count fell 19%, signaling that the future of Disney's home entertainment business might be in doubt.

Lions Gate appears to be defying the odds
Unlike Disney, Lions Gate seems to have had some success with its home entertainment operations. Over the same five-year period, the company has seen its home entertainment sales (excluding the part attributable to television production) rise 54% from $540.4 million to $829.6 million. However, unlike Disney, Lions Gate's revenue from these operations is very volatile because of the company's history of mixed movie results.

(millions) 2013 2012 2011 2010 2009
Lions Gate's Home Entertainment $829.6 $900.0 $582.0 $635.6 $540.4

Source: Lions Gate

Most of this jump took place between 2011 and 2012 (the company's 2012-2013 fiscal years), when sales soared 55% from $582 million to $900 million; it was the result of an increase to 14 titles compared to the five titles released a year earlier. According to management, the biggest contributors for the period were The Hunger Games and The Twilight Saga -- Breaking Dawn Part 2.

Final takeaway
Over the past five years, Disney's home entertainment sales have fallen consistently, while Lions Gate's have risen but in a volatile fashion. One way to interpret this disparity is that Disney can't keep up with the competition coming from its rival. Obviously, this would be a sign of worse times to come for Disney and better times ahead for Lions Gate. However, there is another way to interpret the information that suggests the picture isn't really great for either player.

Source: Disney

As consumers move away from physical and downloaded content, sales from SVOD and television content, through third-parties (a resource Lions Gate also relies on), have increased by 15% from $2 billion to nearly $2.4 billion. Unfortunately, this hasn't been enough to offset the falloff in home entertainment revenue, but it does signal that the long-term trend for Disney's physical content sales will be negative.

At 29% of its Studio Entertainment sales in 2013, loss of this revenue will be significant, but with its revenue making up just 4% of Disney's consolidated sales, it shouldn't have a great impact on the underlying business.  For Lions Gate, however, any loss resulting from a shift away from Home Entertainment revenue could be significant, given the fact that almost 32% of the company's revenue came from these operations during its most recent fiscal year.

In all likelihood, Lions Gate will see the same kind of impact, with the short-term outperformance the business has posted in recent years only serving as a temporary peak after a period of little film success. In the event that management can come out with more blockbusters, it's possible that Lions Gate's home entertainment sales could continue rising. But any reversion to the mean of its sales, or even stagnant revenue, should show a long-term decline in the revenue coming from home entertainment.

Now, meet the part of Disney that will thrive for years to come!
Despite the challenges facing Disney's home entertainment operations, there is something coming up that will be a boon for business. The beautiful thing about it is that there's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple. 

 


Read/Post Comments (7) | Recommend This Article (25)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 20, 2014, at 1:51 PM, msorrentino wrote:

    Disney could partially solve this by providing a subscription option for its Disney Movies Anywhere website.

  • Report this Comment On July 20, 2014, at 3:05 PM, tw170 wrote:

    Years ago, Disney stopped making a lot of direct-to-video movies and sequels in order to re-focus their efforts on high-quality theatrical releases. Except, I think, for Tinkerbell, they have very few dvd-only series left. They had to expect a drop in home entertainment sales when they did that. I'd be interested to know if it's actually "dying" or has actually been down-sized.

  • Report this Comment On July 20, 2014, at 8:05 PM, Cuntfelatio69 wrote:

    I have noticed a trend in your reporting wherein you keep on pushing an agenda concerning the drop in "hard copy" sales over download on demand. Well, the reason for the drop is the STINKING ECONOMY under a feckless administration who puts agenda over pragmatism.

    DL copies are cr@p! Hard copies you own forever while the former has a limited DL quota/count. What's worst, copyright protection on DL won't allow you to back them up on existing memory sticks. Take PSN for example.

    If DL is the wave of the future, I wonder why PS and MS didn't go "your" way and just released DL content.

    Not everyone in the world have class AAA ISPs like Japan and Korea. Even the USA pales in comparison with the two. So all this bunk about DL being the future medium to replace physical copies is simply a "lunatic" talking!

  • Report this Comment On July 20, 2014, at 11:26 PM, utazdevl wrote:

    Lionsgate isn't "defying" any odds. In the last 5 years, they have made several acquisition (Summit, New World) and distribution deals (Panteleon, A24 and Roadside Attractions) that have given them more and more physical product to put out through their home entertainment arm. Their increased revenue is a direct result of an increased volume.

    Meanwhile, Disney has DECREASED the amount of titles they produce, and use their acquisition (i.e. Marvel) to replace product, rather than increase it and their biggest distribution deal in that time has been Dreamworks, which has has a spotty run since the deal signed.

  • Report this Comment On July 21, 2014, at 4:25 AM, Hotstock1 wrote:

    Their prices for their DVDs and Blu-ray discs are too high.

  • Report this Comment On July 21, 2014, at 9:09 AM, topperfan wrote:

    Their movies never go on sale! I'm not going to spen $20 on Thor when I can get Batman or Spider-Man for $5-10

  • Report this Comment On July 22, 2014, at 1:02 AM, abahr08 wrote:

    Disney is one of those First Mover organizations that is not going to last forever...Disney has hardships like any of the other companies that are around.

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