Disney (NYSE:DIS) is a media powerhouse playing at a level on which few can compete. However, its business is grounded in the "old" media world, a space that is quickly changing as new markets emerge and media habits alter along with technology. You don't need to lose any sleep, Disney isn't resting on its laurels... it's moving toward the future one step at a time.
What it's got
Disney is in the enviable position of owning one of the most powerful collection of entertainment brands in the world, from Mickey Mouse and the Disney Princesses to Marvel and Star Wars. Add in ABC and ESPN and the media power behind the Disney name is enormous.
A big piece of the value at the company is the ability to cross pollinate; To use one area to strengthen the others. For example, Disney's amusement parks, and cruise line, are built around the media brands it owns and that, in turn, strengthens the affinity people have for those brands. This extends into the company's licensing, too, as toys and other Disney themed merchandise sold at Disney and at stores around the world have a similar mutually beneficial relationship.
But this strength is something to be worried about, too. Many companies in Disney's position would couch themselves in their strengths and ignore the risks of a changing landscape. Think Kodak (NYSE:KODK) and Xerox (NYSE:XRX), among many others. With the recent upheaval in the succession planning process in the executive suite at Disney, it's reasonable to be concerned. I'm watching, but I'm not yet worried.
Changing with the times
Although the departure of what was assumed to be the heir apparent to the CEO was a troubling sign, garnering big headlines, it isn't, in my eyes, a worry yet. Essentially, the board took a hard look at a CEO candidate and decided he didn't have the media experience needed to run Disney. Who will replace Bob Iger is a big question mark hanging over the company, but it's obvious that Disney's board isn't going to settle. This is an issue to watch, but so far the decisions seem appropriate.
Then there's the issue of ESPN. At first blush, Disney appears to be saying this still highly profitable business is doing just fine even though the subscriber numbers could be warning of a bigger problem looming. The risk is that, like so many incumbents, Disney resists change so long in an effort to milk a dying cow that it fails to shift toward a new model in time to remain competitive. On this score, the company's move to include Vice Media content on ESPN shows Disney is willing to experiment.
The deal between ESPN and Vice Media is a two way street, with Vice, a media company aimed at younger viewers, creating content for ESPN and ESPN content appearing on Vice Media's new cable network. Disney, by the way, is a large investor in Vice Media. Clearly, Disney is looking to ensure that a new generation of viewers knows and loves the ESPN brand.
Then there's the recent report that Disney is close to buying a third of Major League Baseball's streaming media business. If the rumors are correct, the deal will include the right to bring that stake up to two thirds at a later date. But here's the more interesting aspect of the deal, it's an online play-which is what so many investors worry will be the Achilles's Heel of ESPN. Moreover, Major League Baseball's streaming business already has agreements with the National Hockey League (which has a small stake in the MLB entity) and the PGA. In other words, if Disney inks this deal, it will seemingly move it in the direction that industry watchers think it needs to go. Even if the deal falls through, it's evidence that Disney is thinking long term and trying to address the issues that face one of its biggest businesses.
This investment would be similar in some ways to the stake Disney has built in Vice. There's a sharing aspect, but also the potential for growth. Disney knows how to reach a certain type of audience, Vice a different type. By investing in Vice, Disney is potentially gaining access to a new viewership that it might not have reached before. Again, this shows a willingness to change. If a deal like that with MLB can get done, Disney will find a way to make it happen.
Let's not forget about China, a vast new market that's largely untapped by Western media companies. The big news has been Disney's new Chinese theme park. However, that's just one of the many ways in which it is looking to reach Chinese consumers. For example, it has long had an English language school in the country. And while a Disney online media service has been shuttered by the Chinese government, a setback to be sure, it's clear that Disney is intent on getting a foothold in what could be a very large market in the very near future.
Now add in the company's partnership to make movies in China. This will help Disney get around government restrictions on how many Western films can be shown in the country in any given year. Which is a good thing since China is one of the largest movie markets in the world. Again, Disney isn't sitting pat, it's pushing toward the future.
Mistakes will be made
Is Disney going to spin every deal and potential deal above into gold? No. The company is going to make mistakes, but these moves show it isn't willing do nothing. Frankly, the only action that will move the needle right away is the opening of the Chinese theme park, the others are all small forays in new directions. But if those directions prove fruitful, it will help change what Disney is today into what Disney needs to be to better compete tomorrow.
Much of what's taking shape now could be missed as fine print at a media company as large as Disney. When you start to add up all the little things, however, a picture starts to emerge. Yes, a new CEO will, ultimately, be the one to oversee many of these deals and potential deals, but the foundation is being built for that handover. Disney will have a direction and the CEO will simply have to step in and follow the existing course-he or she will have to lead, not fix or change or resurrect the Disney brand. When you step back to look at the whole, Disney still has a great business and looks like it's doing all the right things to keep it that way. All a new CEO needs to do is not mess it up.
Disclosure: I am/we are long DIS.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.