Source: Disney
As one of the largest entertainment-oriented businesses in the world, The Walt Disney Company (DIS 0.76%) has created a large economic moat for itself. In doing so, the business has seen its sales and profits go through the roof, especially in recent years, but many investors don't fully understand the multi-faceted resources the company has developed that have gotten it where it is today. This article will more deeply explore two of the most important assets that management has cultivated over the years with the hope of understanding how the world's happiest company came to be the behemoth it is today.
Distribution Relationships
Over the years, Disney has created many relationships with telecommunications giants like Comcast (CMCSA +0.60%) and streaming services like Netflix (NFLX 0.09%). These have proven valuable, some to a greater extent than others.
Comcast and Disney have something of a love/hate relationship. Even though Comcast's NBCUniversal subsidiary owns the Universal Studios name and some of its parks (while licensing the name out to third parties), it has a history of working with Disney.
Source: Disney
Up until 2012, for instance, Comcast owned 15.8% of A&E Television Networks, or AETN, the cable network that controls programming for HISTORY, Lifetime, and LMN, to name a few. However, the terms of the contract Comcast signed when it acquired the stake in AETN stipulated that Disney and its other partner, Hearst Corporation, would have the right to redeem Comcast's ownership for $3 billion. After this occurred in August 2012, Disney's ownership in AETN rose from 42.1% to 50%.
A more recent example that shows how much these businesses are intertwined involves Hulu, a joint venture that involves Disney and Comcast. Since it bought into Hulu in 2009, Disney's stake in the Netflix rival has risen from 27% to 33% as the business increased its subscriber base to more than 6 million users.
Both Hulu and Disney's cable networks fall under the company's Media Networks segment. In 2013, this segment reported revenue of $20.4 billion, up 9% from two years earlier and representing 45% of the company's revenue. From a profit standpoint, Media Networks was even more impressive, with segment operating profit of $6.8 billion, roughly 64% of Disney's aggregate segment operating profit for the year.
Netflix also has a love/hate connection with Disney. Although neither company has ever taken a direct stance against the other, the fact that Disney owns a piece of Hulu puts the world's largest streaming business in an awkward position. In spite of this issue though, Netflix has been able to win Disney over... at least for now.
Source: Netflix
After the current licensing arrangements for Disney's Pay 1 and Pay 2 television spots expire at the end of 2015, Netflix will take up the mantle and get the sole right to distribute Disney's theatrical content to its subscribers. This relationship will expand its business with Disney, which previously consisted almost solely of the company buying Disney's physical DVDs 28 days after their release so its subscribers could order them via mail. Whether the companies will extend their streaming relationship after it expires in 2018 or whether it will pass on to Hulu is something that only time will tell, but for now the connection that Disney and Netflix share will likely create a good deal of value for both businesses.
Currently, Disney's only source of revenue from Netflix comes from the company's Home Entertainment category, which reported revenue of $1.75 billion in 2013 and represented 29% of Disney's Studio Entertainment's sales. However, after the company begins executing its contract with Disney in 2016, Netflix will be able to grab a piece of its new partner's Television and SVOD Distribution category which, in 2013, had revenue of $2.4 billion.
Content is king
In addition to its connections with Comcast and Netflix, Disney has another indelible strength -- original content ownership. In its most recent annual report, management claimed that the business owned a large library of valuable titles that more or less make Disney what it is today. Of these, approximately 1,400 are domestic titles, and it has an even larger international library of 2,700 titles and all of these that are no longer played in theaters fall under the company's Home Entertainment operations.
The domestic content includes 984 full-length, live-action films and 95 full-length animated features. According to the company's most recent annual report, these features are, at least at first, reported under Disney's Theatrical Distribution category in its Studio Entertainment segment and, in 2013, brought in sales of $1.87 billion. The company has acquired the rest of the content over its lifetime.
Source: Disney
Along with its nice portfolio of titles, Disney also owns nice stakes in market leaders in the cable industry. At the end of 2013, the business reported an 80% stake in ESPN and 100% ownership of Disney Channels Worldwide, SOAPnet, and ABC Family. According to management, Disney's smallest major network in terms of subscribers is Lifetime Real Women at 16 million, while Disney Channels -- International is its largest and boasts 172 million viewers.
Foolish takeaway
A business needs competent business partners to flourish and Disney seems to have found them in Comcast and Netflix. Just as important, however, is that the company in question needs to maintain some sort of competitive edge over its rivals. In Disney's case, this happens to be the large amount of content that its management has bought and pushed through the company's development channels over time. In the event that management falters and allows the business's relationships to fall apart, or if the company seems unable to develop or acquire valuable content, the future of Disney could become bleak, but given the company's long-term success, it's more likely than not that the business will continue to flourish.
