Although Disney's films and animated studio are the most familiar to fans, they don't provide shareholders the bulk of their returns. Source: The Walt Disney Co.
For Walt Disney (DIS 1.54%) investors, it's been an amazing year. While the S&P 500 has gained nearly 12% in the past 12 months, the House of Mouse has nearly tripled that with a gain of roughly 33%. CEO Bob Iger is looking more and more like a visionary thanks to profit-fueling acquisitions of Marvel and Pixar, with Lucasfilm widely expected to become a major profit generator starting later this year with its first installment of the Star Wars franchise since being bought by Disney in 2012.
Disney is firing on all cylinders and exceeding all expectations. For perspective, Frozen took the world by storm in 2013-2014 by racking up $1.3 billion in global box office gross, shocking analysts and followers, many of whom expected the film would be only a moderate success. The fervent reception appeared to surprise Disney, which had halted production of the movie in 2010. In 2014, Disney had a similar breakout success with Guardians of the Galaxy.
With all this box office success, you'd expect Disney to be heavily dependent on its studio entertainment business -- and you'd be mostly wrong. In FY14, Disney's studio entertainment division provided roughly 15% of companywide revenue and 12% of its total operating income. Compare that to its media networks division (featuring Disney channels, ABC, and, most crucially, ESPN -- which provided 43% of total revenue and 56% of operating income. Now Disney is looking to bolster its relationship with ESPN fans with its newest investment.
$250 million for fantasy -- just not the type many Disney fans might expect
Disney is investing in fantasy all right, just not of the princess and/or evil stepmother variety. Instead, the company is deepening its relationship with hard-core sports fans by investing $250 million in the fantasy, play-for-real-money sports business DraftKings. The move values DraftKings at $900 million, according to The Wall Street Journal. In return, DraftKings will invest over $500 million in advertising through ESPN's platforms in the coming years.
For Disney, this is a great deal. First, it provides a willing source of advertising revenue for its digital media sites -- most notably, ESPN.com. Second, there should be operational synergies on the revenue side as DraftKings users consume content in an attempt to beat each other in the skill game of daily fantasy sports. Disney can capitalize on that demand by selling premium "Insider" subscriptions to ESPN.com to DraftKings users looking for the inside track to win money.
Is Disney getting into gambling?
This is an interesting business for Disney to invest in, considering its child-friendly brand and reputation. But both DraftKings and larger rival FanDuel (owned by Comcast) steadfastly maintain that these are games of skill and not gambling, and are legal for online play. Specifically, they note the Unlawful Internet Gambling Enforcement Act carves out space for fantasy sports; apparently, Disney agrees.
It appears Disney is trying to turn around its ESPN.com website. Although it is a traffic monster -- Fast Company reported the site had 22 million daily users last year -- the company only recently gave ESPN.com its first redesign since 2009.
Last year, the company bought noted statistician Nate Silver's 538 website in an attempt to deepen its statistical analysis and buy a new-media, viral-focused entity after working with Bill Simmons to launch long-form site Grantland in 2011. Even after those moves, ESPN.com still appears to lack the social media clout of smaller rivals Bleacher Report and Deadspin.
In the end, it appears Disney aims to improve a sluggish business with significant potential that supports its important ESPN television business. Essentially, Disney is looking at the proverbial low-hanging fruit to enrich shareholders. Will this particular deal work out well for shareholders? I'm not sure, but personally I'm not willing to bet against Disney based on its recent history.
