Walt Disney (DIS 0.76%) is arguably the most influential, vertically integrated media company in the world. And like most success stories, its history is riddled with risks, gambles, dreams, failures, and perseverance.
The company's latest risk is its streaming service, Disney+. Launched in November 2019, Disney+ is costing the company a fortune. In fact, Disney's direct-to-consumer segment lost $887 million in its most recently reported quarter, largely due to content and advertising spending.
Due to its size and influence, Disney has long been seen as a safe stock. However, since management stopped paying its dividend in 2020 as the pandemic accelerated, the stock has lost some of its blue-chip luster. Now, management needs to prove it can properly allocate capital to justify not paying a dividend.
The ability to adapt and try new things has always separated Disney from the competition and is possibly one of the biggest reasons it is so successful today. Here's a brief look at the role which risk has played in its history, and why there's reason to believe its Disney+ gamble now could pay off.
Image source: Getty Images.
Converting cartoons into motion pictures
It took a great deal of risk for founder Walt Disney to create his own cartoons and characters like Mickey Mouse, let alone take a jump into the fledgling world of motion pictures. Shortly before his 27th birthday in 1928, Steamboat Willie opened at the Colony Theater in New York. And from there, Disney ran with the Mickey Mouse concept.
Steamboat Willie featured synchronized sound in an era of silent films -- which set the stage for more animated shorts. Nine years later, Disney released its first animated feature film, Snow White and the Seven Dwarfs. From 1932 through 1939, Disney won the Academy Award for Best Cartoon every single year. His gamble paid off as the company became the gold standard in animated film production.
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Expanding into amusement parks
By the time he was 40, Walt Disney was an Academy Award-winning film producer, who had made what was, at that point, the highest-grossing film ever in Snow White and the Seven Dwarfs.
Disney could have retired. Or at the very least, he could have stuck to animated films targeting young audiences. But instead, he would go on to explore live-action films. And then in 1955, he opened Disneyland.
If you have seen The Imagineering Story on Disney+, you'll know that the construction of Disneyland nearly bankrupted the company. And it came not long after the company nearly went under in the early 1940s due to the money-losing releases of Fantasia and Pinocchio.
In anticipation of Disneyland's debut -- and to drum up interest for future amusement park ideas -- Walt Disney appeared on the TV show The Magical World of Disney. From 1954 until his passing in 1966, he discussed his plans for the park on the show, laying out his ideas, some of which eventually would be used to create subsequent parks. The company opened the gates to Disney World in 1971, and EPCOT followed in 1981.
Today, Disney World is the most visited theme park in the world. But 50 years ago, its success was far from certain. Creating an amusement park that focused solely on Disney characters and concepts was a huge risk and bold strategy. The success of Disney amusement parks around the world is a testament to the company's quality content creation, brand, ability to engage its audience through different media forms, and timeless storytelling prowess.
Acquisitions that paid off big time
After the blockbuster release of Toy Story in 1995, Disney's box office performance hit a rough patch. Its acquisition of Pixar in 2006 helped Disney get back on its feet as some of Pixar's greatest hits would come in the years after the acquisition. Disney then bought Marvel Entertainment in 2009, Lucasfilm in 2012, and the 21st Century Fox media properties in 2019.
It would be easy to look back and say that all of these acquisitions were obviously smart plays. But at the time, each one was chock-full of risk.
When Disney bought Marvel, the deal was criticized in some circles because comic book superheroes seemed to conflict with elements of Disney's brand. Similarly, many opponents thought that the Star Wars brand was washed out by 2012, and too reliant on an older fan base. But each bet paid off by several magnitudes. And in 2022, Pixar, Marvel, and Star Wars are dominating Disney's new content spending.
The next big risk: streaming
Netflix's struggles have raised red flags about Disney+ in regards to its long-term growth strategy and profitability outlook in an increasingly saturated streaming video market.
Disney+ is not expected to turn profitable until fiscal 2024 at the earliest. Also, its subscriber growth figures are worse than they look because the numbers are inflated by Disney+ Hotstar subscribers. In Q2 fiscal 2022 (which ended April 2), Disney made just $0.76 in revenue per Disney+ Hotstar subscriber compared to around $6.33 per regular Disney+ subscriber. All told, the company is generating just $4.35 in revenue per average Disney+ subscriber, which simply isn't good enough given how much it's spending on content and advertising.
The biggest question for Disney is whether it can make streaming profitable. As mentioned, its direct-to-consumer segment lost $887 million last quarter. It has a long way to go if it's going to get into the black.
Disney's traditional distribution channels, which include its cable networks, are absolute cash cows. Its linear networks (that is, its cable channels) raked in $2.8 billion in operating income in fiscal Q2. For context, its Parks, Experiences, and Products unit earned $1.8 billion in fiscal Q2 operating income while its "content sales, licensing, and other" category accounted for just $16 million (largely because programming, production, and marketing costs have already been incurred for films yet to be released).
If Disney is unable to consistently earn a high operating margin on its streaming business, that would be a long-term issue. Another likely scenario involves the eventual conversions of ESPN and other linear networks to streaming channels. That could be a net loss for Disney if it ends up making less from streaming these stations than it does from offering them through linear networks.
A bet worth taking
There's no sugarcoating the risks that Disney faces. But the company has proven time and time again that it is more than capable of producing quality content. Streaming complements its other media channels and enhances its brand. Disney+ overlaps with the company's core business much more than, say, the streaming segments of Amazon or Apple fit into their operations.
Disney stock is down 45% from its all-time high. For investors who believe in its ability to execute on its long-term goals, but who have been waiting for the chance to pick up shares at a discount, Disney looks like a great buy now.
