(June 3): Spoiler alert. Among the Marvel characters who survive Avengers: Endgame are Thor, Hawkeye, Scarlet Witch, Ant-Man, The Hulk, The Black Panther, Falcon, Bucky Barnes and, of course, Captain Marvel. These characters may or may not have spin-offs, keeping interest in the Marvel universe alive among fans. Spin-offs from the Avengers already include Ironman, Captain America, Thor, Guardians of the Galaxy, The Black Panther and Captain Marvel.
As at May 19, Avengers: Endgame had earned US$2.615 billion ($3.6 billion) worldwide — just US$173 million less than Avatar’s record. In its obituary of Stan Lee, the creator of the Marvel Comic Book Universe, the New York Times said Marvel movies had grossed US$24 billion as at April 2018.
The Walt Disney Co paid US$4.24 billion for Marvel Entertainment In 2009. How do these movies help Disney? They contribute to the studio entertainment segment of Disney’s operations, and globally, the Marvel characters and Star Wars sequels and spin-offs are the most visible part of that segment. To be sure, there is more to the segment than just the Marvel and Star Wars universes. (Disney acquired Lucasfilm in 2012 and the rights to produce Star Wars movies and other spin-offs associated with the franchise.) In addition, there are cross-selling opportunities.
For instance, under its parks, experiences and consumer products segment, the Star Wars: Galaxy’s Edge land is going to open in Disneyland on May 31 and in Disney World on Aug 29. “On opening day, we’ll transport guests to a galaxy far, far away to live their own Star Wars adventure exploring the planet Batuu and mingling with famous and infamous characters hanging out at the cantina, building a droid or flying the fastest hunk of junk in the galaxy in our phenomenal Millennium Falcon: Smugglers Run attraction,” says Bob Iger, group CEO of Disney to shareholders during an annual general meeting on March 7. “We’re going to have a second big opening later in the year when we debut the land’s second big E-Ticket attraction, which we are calling Star Wars: Rise of the Resistance. This is the most technologically advanced and immersive attraction that we have ever imagined.”
For Marvel fans, Disney is building a new Marvel-themed land at Disney California and opening a Marvel-themed hotel at Disneyland Paris.
Disney restructures
In 2018, Iger announced that Disney was positioning for the future, and “creating a more effective, global framework to serve consumers worldwide, increase growth and maximise shareholder value”.
The studio entertainment and media networks divisions serve as content engines for the company. “We are combining the management of our direct-to-consumer distribution platforms, technology and international operations to deliver the entertainment and sports content consumers around the world want most, with more choice, personalisation and convenience than ever before,” Iger said.
The media networks division encompasses cable network and broadcasting. ESPN and ABC are in this division, and also productions such as Grey’s Anatomy, Criminal Minds and How to Get Away with Murder. Advertisers buy time slots during the screening of these programmes.
In the direct-to-consumer and international business segment, Disney’s content will allow the group to provide different entertainment experiences in a direct-to-consumer future. National Geographic, ESPN+ and the new Disney+ segments are in this division.
“Building our direct-to-consumer business remains one of our top priorities as a company. We’re investing in technology and in content to deliver great, great streaming experiences. The success of ESPN+ certainly bodes well for our Disney+ service, which is going to be launching just later this year,” Iger added.
Pedestrian 2QFY2019 growth
All in, the three months to March 31 was a pedestrian quarter for Disney. For one thing, studio entertainment revenues fell 15% y-o-y to US$2.1 billion because sales from the release of Captain Marvel could not match that of Star Wars: The Last Jedi (Christmas 2017) and surprise hit Black Panther booked in the same period in 2018.
Revenues in 2QFY2019 rose 3% to US$14.93 billion while net profit fell 10% to US$3.82 billion. Diluted earnings per share from continuing operations for the quarter increased 81% to US$3.53 from US$1.95 in the year-earlier quarter. Excluding certain items affecting comparability such as a non-cash gain recognised from the acquisition of a controlling interest in Hulu, and from a change in the US Tax Cuts and Jobs Act 2017, EPS for the quarter decreased 13% to US$1.61 from US$1.84 a year ago. EPS from continuing operations for the six months ended March 31, 2019 increased to US$5.42 from US$4.86 a year ago, but decreased to US$3.45 from US$3.73 excluding the one-offs.
Parks, experiences and consumer products contribute some 55% to 60% of earnings in any given year. Around 35% of profits is from the media network segment. The remaining 5% to 10% comes from the studio entertainment, and direct-to-consumer and international segments.
The direct-to-consumer and international segment is expected to show revenue growth when Disney+ is rolled out later this year, although the streaming service may be loss-making for the first couple of years. Subscribers to Disney+ are projected to hit 60 million to 90 million over the first five years. This, coupled with Hulu and ESPN+ subscribers, is expected to take subscriber numbers to the 110 million to 160 million range by 2024.
On the international front, Disney, through its acquisition of 21st Century Fox, is expected to add roughly 75 million streaming subscribers in India via its Hotstar platform.
A major risk of Disney+ is likely to be the loss in licensing revenue. Payments from Netflix, which contribute roughly US$150 million per year in operating income and US$350 million a year in revenue, will be lost.
The loss in licensing revenue is projected to increase to US$750 million in FY2020 and US$250 million in FY2021, mainly driven by the cannibalisation of licensing fees, particularly in traditional pay-TV output forgone and from licensing 7,000 TV shows. Disney is also expected to spend roughly US$750 million to US$850 million on big-budget exclusive TV shows and movies along with originals, and this figure might be in excess of US$1 billion if it continues to add content to its platform. Disney+ may only break even after 2024. The monthly fee for Disney+ is just US$6.99 compared with the US$8.99 to US$15.99 range for Netflix.
The consensus adjusted EPS forecast for FY2019 and FY2020 are US$6.80 and US$6.59 respectively from US$7.08 in FY2018, mainly owing to its acquisition of 21st Century Fox and investment in Disney+. However, Disney’s EPS is expected to rebound beyond FY2020, with a US$7.33 and US$8.08 forecast for FY2021 and FY2022 respectively. Revenue is expected to grow 20.8% and 17.0% y-o-y for FY2019 and FY2020 respectively, owing to earnings accretion from Fox and the rollout of Disney+. Disney reported free cash flow of US$2.72 billion for 2QFY2019 and US$3.62 billion for 1HFY2019. Free cash flow is expected to remain positive in FY2019 and FY2020.
In CY2019, Disney still has levers to pull. The company will end 2019 with Star Wars Episode IX: The Rise of Skywalker. The much awaited sequel will bring 40 years of Skywalker storytelling to a close, says Iger.
Growth for global entertainment sector is in VR and video streaming
(June 3): Deloitte, in its 2019 media and entertainment industry outlook report says: “Themes such as video streaming, cord-cutting, personalised content and advertising, and data privacy will continue to shape the industry.”
The report indicates that revenues should continue to grow (see Chart 1). The fastest growth is likely to be led by virtual reality (VR), over-the-top (OTT) services (delivery of film and other content via the internet), video games and e-sports (see Chart 2).
In the meantime, growth in the traditional TV and home video segment is projected to be negatively affected by increased cord-cutting (cancelling or forgoing a pay-TV subscription in favour of an alternative internet-based or wireless service) and plummeting DVD sales.
The main entertainment disruptor is streaming services company Netflix, which uses its platform to provide content to its subscribers. Now, Netflix is being disrupted by Disney+ and has started to build its own content. In its 1QFY2019 financial report, the company announced a series of price increases in the US, Brazil, Mexico and parts of Europe, which should improve margins.
However, building its own content requires capital expenditure, and hence Netflix’s operating and free cash flow have been negative for the past eight years.
Still, market observers are expecting content such as Michael Bay’s Six Underground and Martin Scorsese’s The Irishman to be successes, which may help Netflix garner more subscribers. It has 148.9 million subscribers currently.
Netflix’s main competitors for direct-to-consumer subscription video services are Disney+ and Apple TV+. The company has said that these launches are not likely to materially affect its earnings or lack thereof.
Netflix has reaffirmed that its free cash flow will continue to be negative for the next few years, mainly driven by investments in content. It adds that free cash flow metrics should improve in 2020 and that it will fund investments through operating profits and debt. The company’s current net gearing is already at 122%.
