Disney (NYSE:DIS) is one of the world's largest and most recognizable media companies. It owns iconic properties that seem to have an ageless quality about them, from Mickey Mouse to Star Wars. There's really no need to worry about Disney right now, but a move by key partner Hasbro (NASDAQ:HAS) is worth watching.
The Disney Model
One of the most amazing things about Disney is the way it uses its assets to support each other. For example, Mickey Mouse has an obvious place in cartoons, but it's also a key image at the company's amusement parks and cruise lines, and supports its licensing deals, too. On the cartoon front, Mickey finds his way into movies and television/cable shows. He's a harder fit with Disney's sports juggernaut ESPN, but visit the company's ESPN complex at Disney World in Florida and you'll see Mickey Mouse show up with a baseball cap every so often.
This ability to cross pollinate is one of the key things that sets Disney apart from its competitors. That said, it doesn't do everything in this process. For example, the licensing business is inherently about selling manufacturers the right to use its intellectual properties. Licensing represented about 9% of revenues in 2015 and about 12% of operating income. So it's a pretty big deal and relies on key partners to produce and sell products.
On that score, Hasbro is an increasingly important company to Disney. Indeed, Disney just moved its princess dolls from Mattel (NASDAQ:MAT) to Hasbro because MAT wasn't paying enough attention to the product line. The toymaker already created products based on Disney's collection of brands and Disney's Marvell and Lucasfilms properties. Deals like these made up around 28% of Hasbro's net income last year, roughly $1.3 billion, and the Disney Princess deal, which is a pretty big win for Hasbro, wasn't in place at that point. So this is a mutually important relationship.
Disney uses other partners, too, throughout its business. For example, Boulder Media is an animation studio that is doing some work for Disney, it creates Randy Cunningham: Ninth Grade Ninja in the United Kingdom and is working on Wander Over Yonder for Disney in the United States. Disney's media businesses accounted for nearly 60% of revenues and two-thirds of operating income in 2015. Boulder's work contributed only a tiny fraction of that, but it was just bought by Hasbro - which makes Hasbro a much more important, and perhaps complicated, partner at this point.
Doing it the Disney way
The first takeaway here is that Hasbro has increasingly moved toward the Disney model in recent years. Essentially, it has been working to create brands around its toys that live in the toy isle and in the media space via television and movies. Like Disney, this allows Hasbro to benefit from cross pollination.
From Hasbro's point of view, buying Boulder is a logical next step in the process. In fact, it's probably a really good move for the company. The only problem is that it sets up a potential conflict with key partners like Disney, as the toymaker increasingly moves toward being a media company of its own. It's clearly the right move for Hasbro to make in many ways, but it comes with complications.
At the moment, Hasbro is far more toy company than media company. So there probably isn't much risk that the nearly 30% of revenues from licensing deals goes away any time soon. But it does set up a situation in which a company like Disney has to look at Hasbro as both a partner and a more material competitor. That's hardly new for Disney, which works with and competes with other media companies, but it's kind of a different thing for Hasbro, which for a very long time just made and sold toys.
A growing risk?
In the near term, Hasbro's acquisition could make the relationship between it and Disney run more smoothly. However, as Hasbro shifts its business model, both Hasbro and Disney will be increasingly forced to consider implications beyond dolls and action figures. The problem for Disney is that the list of major toymakers is pretty small and a key competitive advantage that Mattel and Hasbro have is distribution - that's something that isn't easy to replicate. In other words, they are pretty much the only game in town.
So the big question: Who does Disney turn to if it isn't pleased with Hasbro's business direction? Mattel, for reference, is moving in a similar direction, though it's not nearly as far along. So, really, there is no easy answer. As for Hasbro, how far can it move into media before a company like Disney starts to balk and, potentially, pull vital licensing agreements. Hasbro can't afford to just let 30% or so of its business go away overnight.
It's too soon to tell what's going to happen as Hasbro more aggressively seeks to shift into the media space. But for Disney shareholders, who may not think too much about Hasbro, it's really a move worth watching. It portends a shifting landscape in toys and media that could have material implications for Disney, let alone other media-focused names. I wouldn't call it a big risk right now, but I wouldn't ignore it, either.
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.