Disney - Compelling Long-Term Investment In 2019 And Beyond

"Reaching one million paid subscribers is an important milestone for any video subscription service, but reaching this benchmark in such a short amount of time is an incredible testament to the teams from DTCI and ESPN who have worked tirelessly to bring this product to market and continually improve it since our April launch," said Disney Direct-to-Consumer and International Chairman Kevin Mayer.

Hulu's live TV service, which launched in May 2017, has over 1 million subscribers, roughly a year and four months after the debut of the streaming service. Collectively, Hulu has more than 20 million U.S. subscribers. Consumers are awaiting Disney's stand-alone streaming service in 2019, which will include Pixar, Marvel, Disney, Lucasfilm and National Geographic content. Collectively, Disney’s streaming initiatives are bearing fruit and as Bob Iger stated in a recent interview, its streaming efforts are a marathon, not a sprint (Figure 2).

Figure 1 – Disney’s 2019 movie release schedule with potentially eight films that could easily eclipse $1 billion in worldwide box office sales 

Figure 2 – Disney’s most bold move yet, abandoning Netflix and offering a direct-to-consumer Disney branded Netflix alternative

Fox Acquisition and Sky Divestiture Approved:

China is the latest to approve the $71 billion Disney and Fox transaction and with a few other jurisdictions pending such as Brazil. As these jurisdictions move on a rolling approval basis, this huge deal could close in the spring of 2019. The Department of Justice approved the Disney’s $71 billion acquisition for Fox thwarting Comcast’s (CMCSA) desperate attempts for the Fox assets. The government’s approval came with conditions that Disney must divest all of Fox’s 22 regional sports networks. Disney and Fox easily gained approval by shareholders on their $71.3 billion acquisition during the shareholder voting that was held in July. Disney will expand its moat and acquire properties such as Avatar, the X-Men movies, Titanic and TV shows such as The Simpsons and This Is Us. The acquisition also gives Disney the cable networks FX and National Geographic; a controlling stake in the streaming service Hulu, which has more than 20 million subscribers.

Comcast prevailed in a winning bid for UK broadcaster Sky as Fox agreed to divest its Sky ownership. This divestiture enables Disney to reduce its debt that was required to purchase the Fox media assets and will allow more investment into its streaming services such as Hulu, ESPN Plus and its Disney branded streaming service. This presents some complications with the blended ownership of Hulu since Comcast owns 30% of the streaming service.

Bloomberg Intelligence analysts Geetha Ranganathan and Paul Sweeney note that Disney will have 60% ownership of Hulu. The analysts say Hulu might finally be rid of the “messy ownership structure that has plagued it all along” and Comcast could still choose to sell its 30% interest. Buckingham Research analyst Matthew Harrigan says his firm doesn’t think it “makes sense” for Comcast to hold onto its Hulu position just to block Disney from having 90% ownership. Harrigan says there can be multiple winners in the direct-to-consumer market and that it will prove “essential” for Comcast and Sky to “work amicably” with Disney, particularly Disney’s DTC products like Disneyflix and ESPN. Harrigan notes that both Comcast and Disney have to compete with the likes of Netflix, Amazon and Apple, so it “makes no sense” for Comcast to be an albatross to Disney. 

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Disclosure: The author does not hold shares of Disney however may engage in options trading with the underlying security. The author has no business relationship with any companies mentioned in ...

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