Being a shareholder in Walt Disney (DIS -0.04%) hasn't been a lot of fun lately (trust me, I'm one of them), unless you enjoy roller-coaster rides with lots of twists and turns. I would prefer the real-life kind at Disney World, thank you very much. But I invest knowing these kinds of phases are par for the course.
The rise of streaming and the pandemic have really put Disney's model to the test, and the latest part of the saga is an announcement last week that it's going to accelerate investments in its parks and experiences division. Let's see what this is all about and how it affects shareholders.
Why parks matter
Disney is synonymous with family entertainment, and its portfolio includes 12 global theme parks, cruises and other experiences, films, other media content, and related products. All of these are interconnected, offering entertainment that brings consumers into the Disney ecosystem.
Parks have been an important piece of this model for decades, providing an experience unmatched anywhere else in the world, at least because no one else has access to Disney's characters and themes. Visiting a Disney park and staying at a Disney-themed hotel is a once-in-a-lifetime dream for some and an annual excursion for others, the thread being a sought-after destination.
Historically, this segment, which encompasses theme parks, cruises, resorts, and other experiences and products, has been Disney's largest by revenue -- and visitors are willing to pay up. Prices have risen since demand soared after park closures, and it now costs $109 per day for a standard ticket and $396 for a four-day pass. The company also offers various other packages, including annual passes for $1,399 per person.
Parks segment revenue increased 13% year over year in fiscal 2023's third quarter (ended July 1), and operating income increased 11%.
Did streaming derail the plan?
Prior to streaming, Disney media centered around television and cable networks. These were powered by advertising and subscription revenue, a well-oiled model that combined with parks to produce robust profits.
Streaming has changed all of this in significant ways. Management had been aggressively focused on growing its streaming business for the past several years, and that pivot was accelerated by a pandemic that kept people at home, glued to TVs while parks were closed.
Cord-cutting means fewer cable subscriptions, and TV advertisers are moving to streaming. Disney's streaming generates both subscription fees and ad dollars, but it has yet to figure out how to turn a profit as it pours money into content creation and marketing. In the meantime, income from the traditionally reliable bases of TV advertisers and cable subscribers is declining.
In the third quarter, streaming revenue increased 9% to $5.5 billion, but the operating loss was $500 million, which was an improvement from more than $1 billion last year. Revenue from linear networks (the old media) decreased 7% from last year, and operating income was down 23% to $1.9 billion.
Disney is making great progress in moving its viewers over to streaming and bringing it closer to profitability, and it's keeping its advertisers for its newly launched ad-supported tier. But this whole business will remain in flux in the short term.
Going back to the core
In the meantime, Disney is moving back to the reliable and growing parks business. It operates seven out of the 10 most-attended global theme parks, with about 100 million visitors annually, and Disney World's Magic Kingdom has been in the top spot for the past several decades.
Management announced that it's going to invest $60 billion in its parks over the next 10 years, about double its current figure. The funds, it said, will be used to "expand and enhance" parks and experiences and increase cruise capacity.
Management said that the company has experienced growth following previous big park investments, such as adding Star Wars Galaxy's Edge to the Disneyland Resort and to Disney's Hollywood Studios to Disney World. And it needs to show more growth right now as investors continue to demonstrate their disappointment. Disney stock is down 24% over the past year.
CEO Bob Iger and parks segment chairman Josh D'Amaro described this initiative as leveraging Disney's storytelling magic, explaining that it has many stories to tell that haven't yet been incorporated into its parks and experiences. They said Disney is in the process of bringing Frozen-themed lands to Hong Kong Disneyland, Walt Disney Studios Park in Paris, and Tokyo Disney Resort, and it's creating a Zootopia-themed land at Shanghai Disney Resort. They gave the Wakanda and Coco themes as examples of stories that have great parks potential.
Disney already has 1,000 of acres of land set aside for parks building, which is enough for seven new parks, and it has already committed to doubling cruise capacity over the next two years. Iger and D'Amaro said that Disney has a market opportunity of 700 million people who have an affinity for Disney but have never been to a park, and it's looking for ways to capitalize on that opportunity. Like much of the rest of the Disney model, the aim is to create a cycle of engaging existing fans and creating new ones through more exciting experiences.
What should Disney shareholders think?
In some ways, this looks like a distraction from the streaming troubles, but ultimately, I think it's a great use of Disney's materials and model. The streaming itself has been a distraction from Disney's core parks and character development, so this is really a pivot back to what it does best.
The worry is that this is a large investment at a time when it doesn't have the reliable ad money from the linear networks segment to fund it, making it somewhat of a gamble. It could even look like a desperate attempt to generate revenue at the expense of profits, and the stock dropped after the announcement.
But management has gotten the signal that investors are looking at the bottom line, and it's likely to be taking that into strong consideration as it embarks in this new direction.
