You can never sell too many $150 toy robots.

Photographer: Chris Ratcliffe/Bloomberg

At Least Disney Has Toys

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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Walt Disney Co. freaked out a lot of people (financial people, at least) with the news last week, right there on Page 2 of its annual 10-K filing, that ESPN had lost 3 million cable subscribers (down to 92 million) during the fiscal year ended Oct. 3.

Cable networks are the biggest source of revenue (just ahead of parks and resorts) and operating income (way ahead of everything) for the company, and ESPN is Disney’s most important cable brand by far. Revenue still rose 10 percent and operating income 5 percent at the Disney cable networks in fiscal 2015, but any sign that we might be reaching peak ESPN, as I wrote this summer, is understandably greeted with much gnashing of investor teeth.

Still this is Disney we’re talking about, a company that has shown a much greater ability to regenerate itself and wring profits from its franchises than any of its entertainment-industry rivals.

Disney’s theme parks are one obvious differentiator. Comcast Universal has had success with its Universal Studios parks, especially since Harry Potter came along (and Time Warner chose to license the rights to Universal). Now Fox and Lionsgate are trying to get in on the fun. But being an also-ran theme park operator isn’t that great a business: Time Warner used to own the Six Flags parks, but got out in 1998 -- and in 2009, Six Flags filed for bankruptcy protection. CBS sold its Paramount theme parks in 2006.  Being the world’s No. 1 theme park operator, on the other hand, is a business that’s generated almost $20 billion in profit for Disney in the past decade.

Parks still have lower margins than TV networks or (most of the time) movie studios, but a particular attraction of amusement parks right now is that -- unlike the cable networks -- their business model isn’t obviously threatened by digital disruption. The same seems to be true for the fastest-growing of Disney’s divisions: consumer products, which the company’s 10-K says makes money by:

• licensing characters from our film, television and other properties to third parties for use on consumer merchandise

• publishing children’s books and magazines and comic books

• selling merchandise through our retail stores, internet shopping sites and wholesale business; and

• charging tuition at our English language learning centers in China

Here’s what the division’s revenue and operating income look like for the past decade:

Disney bought “Star Wars” creator Lucasfilm in 2012, and credits Star Wars classic merchandise (along with “Frozen” and “Avengers” stuff) for helping drive consumer products’ strong recent performance. The first Disney-produced “Star Wars” movie debuts Dec. 18, with loads of new characters to make money off of. This trend has a ways to run.

Now, the $1.75 billion in operating income for consumer products in the just-ended fiscal year still pales beside the $6.79 billion that cable networks generated. But it’s not as if that $6.79 billion is going to suddenly disappear. It’s just that, after years of growth, cable’s mix of subscriber fees and ad revenue is getting squeezed by the rise of digital alternatives. There’s still lots of demand for the content produced by Disney and its rivals, but in the future it will be delivered in different ways and the companies may have to figure out new business models to pay for it. Here’s Disney Chief Executive Officer Robert Iger, in the August earnings call that set off a wave of worry about cable’s prospects:

We actually believe that with Disney, ABC, ESPN, our other products, we’re really well positioned. We’ve been among the first, if not the first, to offer our product on new platforms even if it’s somewhat disruptive. We still believe in the expanded basic service for years to come, but we’re going to take advantage of opportunities.

In the meantime, it’s really nice to have a few things to sell that can’t be delivered digitally, at least not yet. Such as $150 toy robots.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Justin Fox at justinfox@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net