Disney Business Quality Report (DIS) - FREE SAMPLE
Disney is the world’s leading entertainment company. This Disney Business Quality report explains the Generational Quality ranking that Disney received under my quality ranking system.
Basic Company Information
Company Name: The Walt Disney Company
Ticker: DIS
Quality Ranking: Generational (6)
Primary Reason: Renewable Intellectual Property
Size: Mega-cap
Last Updated: 09/14/2018
Key Points:
Demand for entertainment is infinitely durable.
Disney is the industry leader in producing branded entertainment.
Disney possesses renewable intellectual property that can be leveraged across generations.
Business lines are complimentarily creating a self-reinforcing cycle of product demand and brand strength. (Lollapalooza effect)
Disney’s Business Quality Description:
The Walt Disney Company is a branded entertainment company that operates multiple lines of businesses. These lines of business include:
Blockbuster Movies
Branded Consumer Products
Disney Theme Parks and Resorts
Cable Networks (Including ESPN and ABC)
Durability
The durability of entertainment demand is infinite. Entertainment companies will always exist. While there is no guarantee that Disney will be one of them, they have accumulated enormous advantages.
Moat
Disney creates branded entertainment. Their brands are numerous, strong, and recognizable worldwide. The Disney business utilizes a self-reinforcing cycle that increases both revenues and brand strength. Disney’s blockbuster movies lead to ticket sales at their resorts. Next, resort sales lead to sales of consumer products like toys. Finally, sales of toys, accessories, and resort visits lead to additional movie ticket sales.
Due to the combined power of intellectual property and branding, the Disney business model is practically unassailable. If your daughter liked the Frozen movies, there is a good chance they will want to dress up as Elsa for Halloween and receive Elsa toys for Christmas. If your child enjoys the Avengers movies, they could easily want to dress up as Iron Man, Black Widow, or Captain America for Halloween. All of these consumer products have to be licensed from Disney.
Competitors are also unable to directly attack Disney’s brands. The only way to compete is to try and produce better but different movies. You can’t simply copy Frozen by producing a “generic” movie called “Ice Princess” and sell Ice Princess toys. When a family is considering a Disney vacation, there are zero true competitors for that vacation. Universal Studios is the only close contestant, but they don’t truly compete with each other. If your daughter wants to meet Elsa or your son wants to meet Iron Man, they have to go to Disney World. Universal Studios doesn’t have the same attractions. On the other hand, if you want to visit Harry Potter World, your only option is Universal Studios. Consequently, they are basically different markets. Disney and Universal Studios are the only competitors in the sense that time is limited.
Brands can compete against brands, but generic competition cannot compete.
Disney strengthens their moat each time someone visits one of their parks or resorts.
Disney owns renewable Intellectual Property
Owning Disney is like owning an oil company that can put oil back into the ground after selling it. Later, they can pump the oil back out again and profit multiple times from the same oil. Oil in this analogy is the intellectual property created by Disney’s movie studios. This analogy was first pioneered by Charlie Munger, Warren Buffet’s partner at Berkshire Hathaway.
Here are a few recent examples of Disney repurposing old content generations after the first release:
Cinderella Animated Film (1950) -> Cinderella Live Action Film (2015)
Sleeping Beauty Animated Film (1959) -> Maleficient Live Action Film (2014)
The Jungle Book Animated Film (1967) -> The Jungle Book Live Action Film (2016)
Beauty and the Beast Animated Film (1991) -> Beauty and the Beast Live Action Film (2017)
Updating old stories and repurposing them for new generations is a competitive advantage for Disney. Disney uses iconic stories to capture the hearts and minds of its viewers. Children become lifelong Disney fans at a young age, locking in a moat for Disney that makes it difficult for any competitor to overcome.
Netflix and the rise of Generic Entertainment
Netflix is supposed to be the harbinger of generic entertainment options. First of all, Netflix provides cheap and readily available entertainment. They might not have the movie you want to see, but they do have plenty of movie options. The same is true for Netflix’s TV show lineup.
Netflix has recently shifted focus and begun creating their own content. Their goal is to become a movie studio instead of purely an entertainment platform. Many investors have seen this as a direct attack on Disney’s business model. As a result, Netflix has seen its stock price rise while Disney’s has fallen. Yet, this is simply a misunderstanding in the competitive dynamics of entertainment. Netflix can no more compete with Disney than Universal Studios can.
Entertainment is not a zero-sum game. Netflix has grown the entertainment pie. Yet, news coverage suggests that Netflix is stealing business from Disney directly. However, Disney makes its money from branded content. Netflix does not. Netflix may or may not create branded blockbusters going forward. Yet, they won’t be creating an Avengers or Star Wars knock-off. Disney holds exclusive rights to those profits from those franchises.
Instead, Netflix can simply hope to grow their own stable of brands.
In conclusion, Netflix is not a threat to Disney. On the contrary, Netflix has shown Disney the way of the future. Disney is entering the streaming game slowly but surely. Disney will be a force to be reckoned with in this arena because you don’t need the most content to compete. You simply need content that is demanded by consumers. Disney’s brands have strong demand. As I outlined earlier, there is only one Frozen, one Avengers, one Star Wars. When it comes to branded entertainment there is only one Disney.
Why Disney doesn’t deserve a lower quality rating
The next lowest quality rating is an “Excellent Business” under my quality analysis framework. The defining characteristic between an Excellent business and a Generational business is the durability of the after-tax owner’s earnings.
Disney avoids an Excellent rating because the durability of entertainment IP extends well beyond a single generation. Disney has been creating branded content for a century. Those brands, those characters, and those stories are the sole property of Disney. Both now and in the future, Disney is able to profit from their history of creating iconic storylines that capture the hearts and minds of the American people. In addition, Disney is now a global brand. Likewise, the Fox acquisition makes Disney into the world’s sole entertainment superpower.
Disney’s moat is strong and it won’t be going away for a long time. Therefore, whenever Disney is attractively priced, it would make a great addition to any portfolio. Once purchased, I plan to never sell my Disney shares.
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