For a media company the size of Walt Disney
My Foolish colleague Rick Aristotle Munarriz provided an extensive look into what's been driving growth for the company over the past year. You'll see that it experienced growth across all of its major business segments -- networks, parks, studio, and consumer products.
Rick also highlighted that in fiscal 2007, you won't see Disney resting on past successes; it plans to increase capital expenditures during the year somewhere in the neighborhood of $400 million to $500 million, according to the conference call. Approximately half of this increase will be devoted to theme-park development, which will further reinforce Disney's competitive advantage against the likes of Cedar Fair and Six Flags. The other half of the increase will be dedicated to digital initiatives.
We'll use this latest edition of Fool on Call to look at those initiatives. Using the company's latest quarterly earnings conference call, we will unearth some of the steps Disney is taking to expand in the following high-growth segments:
- Internet and downloadable content.
- Interactive gaming.
Surfing, Disney style
In FY 2007, Disney is aiming to generate approximately $700 million in revenues from Internet and downloadable content. Pirates of the Caribbean: Dead Man's Chest was the year's biggest film and Disney's third-largest ever, with global box-office revenues surpassing the $1 billion mark. Look for Disney to capitalize on the film's success even further in the coming months. DVD sales will be one natural complement, but in addition, the film will be available before Christmas for download via iTunes.
"Over the past year, approximately 85 million of our TV shows, movies, and shorts have been played or downloaded on iTunes, DisneyChannel.com, and ABC.com," remarked CEO Bob Iger. Among ABC TV programs alone, 12 million have been purchased on iTunes since October of last year. Since June, 53 million shows have been played at DisneyChannel.com. Additionally, in the first eight weeks of Monday Night Football this season, ESPN.com has "averaged more than 27 million page views each game day." The results led Iger to surmise that "TV viewing and Web use can reinforce rather than cannibalize each other."
While ESPN.com and ABC.com continue to go through "substantial ongoing upgrades," investors should also watch for a new "state-of-the-art" Disney.com in FY2007. Parents will be able to use the site for booking vacation trips to Disney's cruise lines or theme parks. And kids can chat with friends, watch Disney shows, and play interactive multiplayer games. Iger indicated during the question-and-answer portion of the call that the new Disney.com is slated for release "sometime after the first of the year."
The social-networking aspect of Disney.com is one area worth paying particular attention too. News Corp.
Over the next several years, Disney will significantly ramp up efforts in the critically important video game market. In FY 2007 alone, the company expects to spend roughly 30% more in this segment compared to 2006. Over the next five to seven years, investments in annual video game development are targeted at around $350 million.
According to CFO Tom Staggs, "Video games represent an important long-term growth opportunity for us, with the potential for very attractive returns on our investment." With Microsoft's
The good news for Disney is that it is already naturally positioned to expand its presence in this market. Kids-and-tweens games currently account for roughly $8.5 billion, or half of the video game market -- Disney's natural demographic target. Evidence of the potential can be found in the success of its Kingdom Hearts franchise. Kingdom Hearts 2 was "one of the year's biggest-selling video games," with the franchise now having sold more than 10 million copies worldwide.
Going forward, look for Disney to publish more of its own titles, "the majority of which will be Disney-branded." Pirates of the Caribbean seems like a natural fit, and indeed, Iger indicated that Pirates would soon be turned into an online multiplayer game.
Publishing titles in-house benefits Disney by giving it a greater piece of the profits. The drawback of such a strategy, however, is that video game development is more complex than ever before; it requires significant resources and expertise to make attractive, user-friendly games. Activision
Videogaming represents too important of a market for Disney to drop the ball, so this will be one area that long-term investors will want to monitor over the next few years. Can Disney do it better in-house, grabbing greater profits and a bigger piece of the market in the process? Stay tuned.
Disney has posted strong earnings growth over the past few years. Keeping up at this pace will prove to be quite a challenge, but Disney seems to be making the right moves, both in interactive gaming and in Internet content. And we haven't even mentioned the enormous growth opportunities currently under way from the burgeoning middle classes in China and India.
In total, long-term-minded shareholders have to feel good about their ownership in Walt Disney -- a brand that continues to find new ways to share its magic.
More Foolish magical analysis:
Cedar Fair is an Income Investor pick, and Microsoft is a selection of Inside Value.
Fool contributor Jeremy MacNealy has a player rating of 97.93 and is ranked 269th out of 12,959 participants at Motley Fool CAPS, the Fool's new stock-rating service that's open to everyone -- including you. Jeremy has no financial interest in any company mentioned. The Motley Fool has a nifty disclosure policy.