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Forget Mickey Mouse: This Once-Overlooked Asset Is What Makes Disney Great

By Jamal Carnette, CFA - Aug 2, 2014 at 10:05AM

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Mickey Mouse as a brand means less to the company for this once-overlooked reason.

There are very few companies with the illustrious history of The Walt Disney Company (DIS 2.33%). Started by Walt Disney, much of this empire was built upon the iconic animated character of Mickey Mouse -- so much so that Disney is commonly referred to as "The House of Mouse." And while many of us fondly remember that legendary jingle, "M-I-C ... K-E-Y ... M-O-U-S-E," a more apt theme song for The Walt Disney Company this century can be found blaring on ESPN almost hourly: DA DA DA ... DA DA DA.

Big growth from a small mammal
Walt Disney --  then the Disney Brothers Studio -- originated in late 1923 when its namesake signed a contract to produce a series of comedies with M.J Winkler of Felix the Cat fame. The company's breakthrough cartoon, Steamboat Willie, was Mickey's -- and Minnie's -- first appearance, gracing screens in 1928.

Don't be sad Mickey and Co., it was a really good run. Source: Wikimedia Commons

The cartoon and character ended up being a tremendous success. Yes, there were ups and downs, but the next few decades were a time of tremendous growth in the history of the company. Walt Disney famously quipped on the Emmy-Award Winning Disneyland TV show: "I only hope that we never lose sight of one thing -- that it all started with a Mouse."

Even so, it is hard building a $150 billion company on the back of a creature the size of a shoe -- even if he has a snazzy jumpsuit on.

In defense of Michael Eisner – well, sort of
Michael Eisner, the CEO from 1984 to 2005, has a dubious distinction among Disney shareholders. Blamed for the corporatization of the brand, and for producing lackluster results, he was forced out of the company rather unceremoniously by a shareholder vote that stripped him of the board chairmanship. He stepped down as CEO soon thereafter.

However, Eisner -- perhaps unwittingly -- provided the most value to the current Disney shareholders through its purchase of Capital Cities/ABC in 1995. That's because nearly a decade prior, ABC bought a little-known sports programming network you now know as ESPN.

However, Eisner can't be faulted for understating ESPN's potential -- even analysts missed it. Rarely mentioned in the acquisition write-ups for The New York Times, SFGate, and others, it appears ESPN was thought of as a minute part of the deal -- essentially a nice addition, but not a game-changer.

My, have times changed
You can't blame Eisner, the media, or analysts for failing to see the value in ESPN. America has been on an all-out craze for all things sports ever since that deal, making ESPN the king of cable networks. ESPN and ESPN2 command a shocking $5.13 and $0.68 of monthly affiliate fees -- the cable-provider revenue that's paid back to the content owner. For perspective, the average fee for basic channels is $0.26; ESPN commands nearly 20 times the average basic cable channel.

Also, the NPD group recently estimated the average cable bill at $90 a month. So, for the average person, nearly 6.5% of the cable bill is going directly to ESPN, with 80% of it making its way back to Disney. (Hearst still owns the remaining 20% of the company.)

Why the discrepancy between ESPN and other channels? Among the traditional metrics, viewership, hours viewed, etc., ESPN stands out. But it's more than that. ESPN is a strong deterrent against a powerful trend in cable -- so called "cord-cutting" -- in which many households are abandoning cable in favor of streaming and online services. Nobody has quite figured out how to combat it, outside of news and sports.

Wake up Berman, Disney shareholders need you for returns. Source: Wikimedia Commons

No longer the House of Mouse?
Disney continues to reap the benefits of ESPN -- a recent Wunderlich Securities valuation placed ESPN's value as a stand-alone entity at $50.8 billion. At the time of that valuation, Disney as an entire company was worth $137 billion. The ABC network has had a rough go and is only worth an estimated $3.2 billion.

So right now, ESPN alone is nearly 40% of the total value of Disney. Eventually, we'll have to stop calling Disney "The House of Mouse" and change that to ESPN's affable, longtime sports anchor: "The House of Berman."

Jamal Carnette has no position in any stocks mentioned. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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