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Dr. Stephen Strange’s part played by Benedict Cumberbatch has failed to receive the adoration in theatres. MCU’s (Marvel Cinematic Universe) new release, “Dr. Strange and the Multiverse of Madness” has grossed over half a billion dollars, so far ($552M) with a CinemaScore of B+, which is the lowest for the MCU franchise. But did it really fail in terms of building the franchise for Dr. Strange and Marvel?
I’d say the success of Dr. Strange 2 (DS2), should also be measured in terms of what to expect from MCU in upcoming movies. DS2 is the bridge to the new, cross-platform world that Marvel exists in, thanks to Disney+. Multiverse connects the film side of MCU to shows like WandaVision and Loki, on the streaming (series) side, there is seamless connectivity now. As I have stated in the past, it builds on the MCU IP. and the exponential love of Marvel and Disney. We will explore this love some more in the sections below.
Q2’22 Result Summary
Dr. Strange was not the only thing that had Disney in focus, the Q2 report was also out. Just to state, Disney did well, unlike Dr. Strange. Here is the summary:
|SEGMENT (Q2’22)||REPORTED VALUE (Q2’22)||REPORTED VALUE (Q2’21)||% Change (’21 to ’22)|
|Disney Parks, Experiences, and Products (DPEP)||$6.7B||$3.17B||109%|
|Disney Media and Entertainment Distribution (DMED)||$13.6B||$12.44B||9%|
|Free Cash Flow (FCF)||$686M||$623M||10%|
Here is the chart with the segment breakdown of Disney’s revenue.
The cool thing to see was Parks and experiences business thriving, It’s up by 109%, compared to last year. Increased attendance, occupied room nights, guest spending, and cruise ship sailings. Merchandise sales also increased, Mickey and Minnie, Spider-Man, Star Wars Classic, and Disney Princesses continue to play a key role in building the IP brand value of Disney.
Disney also added 7.5M more subscribers to Disney+ and Hotstar brands. Direct-to-consumer efforts, Disney+, Hotstar, Hulu, and ESPN+ are taking over as the drivers of long-term growth as Disney transitions to a streaming future. The streaming will benefit from the new content being created at Disney and Fox television and film studios as well as the deep libraries at the studios. Disney’s media networks segment includes ESPN, ABC, and the acquired Fox cable entertainment channels like FX. ESPN remains the dominant domestic sports television network due to its large array of sports programming.
Disney continues to build on the already wide moat across multiple categories. I have said in the past, that the name of the game in OTT/SVOD is about building IP. On one hand, where, Netflix is losing subscribers, Disney continues to gain. Now there is definitely an argument that Netflix has 76M more subscribers than Disney and it might be difficult for Disney to cover the 55% gap in the near future. As I argued in the past, the Disney model of ad-based HULU and IP-based Disney still gives them a greater edge over Netflix’s 214M subscribers. What gives Disney an edge over other streaming platforms? Let’s dive in and understand Disney’s moat.
Disney’s Moat – Its business model
Imagine the lion king or Cinderella or Marvel story, not as a story but rather as a brand. Disney builds stories around characters, these characters are IP of Disney. Only Disney can use them for commercial purposes. Cinema and Entertainment industry then broadcast Disney stories/movies to the audience. Broadcasters pay Disney License fees to showcase these movies. This does not stop here like in traditional movies. Once the movie becomes a hit, Disney works with merchandise to make toys, clothes, games, and book publishers to allow them to use Disney characters. Disney gets licensing fees from these manufacturers. As a story lover, you want to see your favorite characters, as kids or adults, you dream to be with them. This is where the parks come in. If you want to enjoy a dream vacation with your beloved characters, go to Disneyland. Once you are in Disneyland, you spend money on watching Lion King play, buy a Cinderella dress for your daughter, a Marvel t-shirt for your son, and a Jedi master puzzle set for yourself. This story and process repeats for all characters Disney has and can produce in the future. These characters are Disney’s IP. Here is a snapshot of how Disney studio makes money:
Frozen – A brand well played
A classic example of this is the Frozen brand. The frozen movie which premiered in 2013, became a great hit grossing $1.28B in box office sales. In 2014, Disney sold $5 billion in merchandise related to the film. In fact, Frozen’s merchandise sales were so successful that some retailers were feeling the strain of selling too many products related to Elsa, Anna, and Olaf. When Frozen reached Disneyland, people waited 5 hours in line for a 5 mins Frozen ride. In 2016 Disney announced it would expand the Frozen franchise with a refresh for its books, animated shorts, and digital extensions. Frozen hype was so huge by 2019 that by September of the same year the second trailer debuted on Good Morning America. This announcement tweet alone reached 212k views. The accompanying song Let it Go, sung by Broadway star Idina Menzel generated over 280 million streams by the year 2019, six years after its release. Let it Go became the most streamed Disney song and stayed ahead of the Moana feature film’s ballad, ‘How Far I’ll Go’, which generated upwards of 116 million streams. As a result, Frozen II made $1.4B worldwide.
This is brand building at its best. Disney has built infinite love for its characters. This love is generational. Your parents, you, and then your kids all associate with Disney movies, characters, and merchandise. But how does Disney do that, what’s the vision behind this. How did they land here? Well, it’s the flywheel effect.
Disney and the flywheel effect
60% of Disney’s profits are all tied to its content library. It’s not a coincidence that a Marvel movie released in 2012 still makes money via merchandising or as we saw in the previous example of Frozen, which still lives as a brand. Before we dive too much let me define what is a flywheel effect. Jim Collins defined the flywheel effect as:
In 1957, Walt Disney came up with a napkin sketch, a.k.a Synergy map. The synergy map is a cycle of Disney’s business ecosystem. It’s built around Disney’s business units with context to products, customers, interactions, distribution channels, the idea of the source of new products, and potential markets. Every cycle provides more value and entertainment to its customers while growing products and brands.
It’s appropriate to talk about Disney+ in the context of the synergy map. While obviously, Disney+ competes with Netflix for consumer attention, the goals of the two services are different. Netflix’s entire business is streaming, it’s the sole driver of their revenue. Disney plans for Disney+ to be profitable, but the larger picture is Disney itself. By controlling the D2C channel, Disney wants to deepen its relationship and connection with customers. After staring at the synergy map for almost an hour, I simplified it to the following:
What else does Disney own – It adds to the moat
So far I have only talked about Disney as a movie, theme park, and merchandise company. Disney does not stop here. Here are some of the big names in the entertainment business which Disney owns.
- ESPN (80% stake)
- Touchstone Pictures
- A&E (50% equity holding with Hearst Corporation)
- The History Channel (50% equity holding with Hearst Corporation)
- Lifetime (50% equity holding with Hearst Corporation)
- Hollywood Records
- Vice Media (10% stake)
- Core Publishing
This warehouse of brands provides Disney with a wide moat. The collection of media networks and Disney branded businesses provide a strong pricing power and network effect. Disney+ direct and indirect network effects are impacting the growth across the company portfolio. Since launching Disney, Hulu, and ESPN+ app downloads have increased. ESPN is the dominant player in US sports entertainment. Its position and brand strategy empower it to change the highest subscriber fees of any cable network, which in turn generates sustainable profits. ESPN then uses these profits to reinforce its position by acquiring long-term sports programming rights including NFL, NBA, college football, etc.
Disney also owns ABC, one of the four major US broadcast networks and affiliated TV stations. This gives Disney access to 120M households in the US and the provider advertises access to households with cable TV.
Disney is the envy of every media company, regardless of whether it focuses on films, TV, gaming, music, or publishing. There has never been a more dominant player in the entertainment business, globally. Disney is a brand that your parents, you, and now your kids associate with. There is exponential love for Disney characters. People dream to visit Disney theme parks and capture a snap, take a ride, or watch a play related to their favorite characters. Disney+ has reached 135M subscribers and continues to grow its library. With digital transformation, Disney seems to become more dominant. Netflix disrupted the media industry by providing content on-demand and ad-less experience. Disney identified this opportunity and played a bigger game with its existing library to continue telling stories that people love watching.
Disney has mastered the art of monetization of its world-renowned characters and franchises across multiple platforms. Recent success with Pixar and Marvel have helped strengthen the Disney brand among children and parents, at the same time boosting Disney’s IP. A great media company does not just produce differentiated content but has an entire business model and integrated approach to match. The ultimate winners of the OTT streaming wars are the consumers that pay for the content because it is something they value. Hence streaming will never be a zero-sum game, good content will find its way and consumers will pay to watch it.