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Investing in Disney: A comprehensive primer and analysis

Part 5
Investing in Disney: A comprehensive primer and analysis (Part 5 of 11)

Must-know: Disney’s unpredictable Studio Entertainment business

Studio Entertainment

Although Disney isn’t completely dependent on the success of its films, losses from expensive movies such as John Carter and The Lone Ranger have been a drag on its overall revenue. Disney took a $200 million write-down on John Carter, and expected a $190 million write-down on The Lone Ranger, indicating the risks of the company’s “tentpole” strategy of spending more than any other studio on most of its movies. The studio has witnessed management changes as well when, in 2009, Dick Cook (a longtime head of Walt Disney Studios) resigned. In 2009, the studio division had posted weak results due to fall in DVD sales because of recession, changing technology, and box office underperformance. Cook was replaced by Rich Ross, who was also ousted in 2012 following the debacle of John Carter, an expensive science fiction epic. Hollywood veteran and former Warner Brothers chief Alan Horn was named as the chairman of the division in 2012.

The domestic box office raked in a record $10.92 billion in 2013, increasing 1% from 2012. Attendance declined about 0.2%, to 1.36 billion. Ticket sales increased 11% year-over-year due to a record $4.7 billion summer season. Among studios, Disney came in the second spot behind Warner Bros, driven by the success of Iron Man 3 and Frozen.

Disney studioEnlarge Graph

*Data is based on calendar grosses grouped by studio between January 1 and December 29 of 2013 and 2012.

The Studio Entertainment segment produces and acquires live-action and animated motion pictures, direct-to-video content, musical recordings, and live stage plays. The businesses generate revenue from the distribution of films in the theatrical, home entertainment, and television markets. The company distributes produced and acquired films (including its film and television library) in the theatrical, home entertainment, and television markets primarily under the Walt Disney Pictures, Pixar, Marvel, Touchstone, and Lucasfilm banners. It produces and distributes Indian movies worldwide through its UTV banner. Significant operating expenses include film cost amortization, which consists of production cost and participations and residuals expense amortization, distribution expenses, and costs of sales.

Theatrical market

Disney produces and distributes both live-action films and full-length animated films. During fiscal 2014, it expects to distribute domestically ten of its own produced feature films and four DreamWorks films. As of September 28, 2013, the company had released domestically approximately 984 full-length live-action features and 95 full-length animated features.

Home entertainment market

In the domestic market, the company distributes home entertainment releases directly under each of its motion picture banners. In the international market, it distributes home entertainment releases under each of its motion picture banners both directly and through independent distribution companies. Plus, it acquires and produces original content for direct-to-video release.

Domestic and international home entertainment distribution typically starts three to six months after the theatrical release in each market. Home entertainment releases may be distributed in both physical (DVD and Blu-ray) and electronic formats. Titles are generally sold to retailers, such as Wal-Mart and Best Buy, and physical rental channels, such as Netflix. However, the rental channels may be delayed up to 28 days after the start of home entertainment distribution.

As of September 28, 2013, it had approximately 1,400 active produced and acquired titles, including 1,000 live-action titles and 400 animated titles, in the domestic home entertainment marketplace and approximately 2,700 active produced and acquired titles, including 2,200 live-action titles and 500 animated titles, in the international marketplace.

Television market

Disney licenses its titles to PPV/VOD service providers (typically MVPDs) for electronic delivery to consumers for a specified rental period (such as 24 hours) at a price comparable to that of physical media rentals.

Disney Music Group

The Disney Music Group includes Walt Disney Records, Hollywood Records, Disney Music Publishing, and Buena Vista Concerts.

Disney Theatrical Productions

Disney Theatrical Productions develops, produces, and licenses live entertainment events. The company has produced and licensed Broadway musicals around the world, including Beauty and the Beast, The Lion King, Elton John & Tim Rice’s Aida, TARZAN, Mary Poppins (a co-production with Cameron Mackintosh Ltd.), The Little Mermaid, and Newsies. Other stage musical ventures have included an off-Broadway production of Peter and the Starcatcher and a regional theatre production of The Jungle Book. A new musical, Aladdin, will open in Toronto in fall 2013. In addition, the company licenses musicals for local, school, and community theatre productions globally through Music Theatre International.

Disney Theatrical Productions also delivers live shows globally through its license to Feld Entertainment, the producer of Disney On Ice and Disney Live!. Feld’s newest production, Disney Junior on Tour: Pirate and Princess Adventure, launched in July 2013 for a North America tour.

Fiscal 2013 performance

For fiscal 2013, revenues increased 3%, to $6.0 billion, and segment operating income decreased $61 million, to $661 million. Higher theatrical distribution revenues were driven by two Disney feature animation releases in the current year, Wreck-It Ralph and Planes, compared to none in the prior year. Other significant titles released were Iron Man 3, Monsters University, Oz: The Great and Powerful, The Lone Ranger, and Lincoln in the current year compared to Marvel’s The Avengers, Brave, John Carter, and The Muppets in the prior year. Theatrical distribution results were essentially flat year-over-year, as increased revenues were offset by incremental distribution and production cost amortization.

The decrease in operating income was primarily due to a decrease in home entertainment results, partially offset by an increase in SVOD sales of library titles and lower film impairments. Lower home entertainment results were driven by decreased unit sales reflecting the performance of Brave, Iron Man 3, Wreck-It Ralph, and Cinderella Diamond Release in the current year compared to Marvel’s The Avengers, Cars 2, and The Lion King Diamond Release in the prior year along with lower catalog sales. Lower film impairments were due to the write-down of The Lone Ranger in the current year.

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