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).
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|
|Disney Channels Worldwide||103.2 million||100%|
|ABC Family||98 million||100%|
|A&E Television Networks||77 million||50%|
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.
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.
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.