New Year’s Resolutions: How Disney Can Fix its Share Price in 2022
2021 was an ugly year for the Walt Disney Company. The blue-chip entertainment conglomerate faced some significant challenges in the form of covid-related travel restrictions, rising labor costs for its parks, and lower-than-anticipated growth in users for Disney+.
Even with improving top-line revenue growth over the last few quarters, Wall Street wasn’t impressed. Disney was the worst performing stock in the Dow Jones Industrial Average in 2021, shedding roughly 14% of its share price over the course of the year.
What can Disney do to change its course in 2022? Here are three suggestions.
Double-Down on ESPN as a Driver of its Digital Business
Sports have dominated network TV programming for decades. Disney’s ESPN is the market-leader in American sports broadcasting.
Even with declining subscribers for linear TV, ESPN remains a key piece of any OTT pay-TV offering. Sports are a primary reason for people keeping their cable subscriptions and Disney is well aware of its stranglehold on cable providers. ESPN commands the highest affiliate fees per subscriber because of its ability to reach the highly coveted adult male segment, with a steadily growing popularity amongst female audiences as well.
Over the last few years, ESPN has made strategic decisions that will further cement its position of paramounce in American sports including partnering with DraftKings in September 2020 to integrate gambling into its programming and ponying up $2.4 billion for Monday Night Football rights in April 2021, the latter of which includes simulcasting licenses for ESPN+.
Disney recognizes the importance of remaining relevant with younger audiences who tend to watch sports casually, with a greater emphasis on fantasy sports and in-game betting. These Gen Z consumers are watching sports with their phones in their hands — and not glued to the TV sets from Sunday morning to evening, flipping between channels, catching every play possible, like their boomer parents.
Disney also understands that ESPN needs to spend money to make money and, as such, was prepared to pay whatever the NFL asked for football rights. The NFL, despite all its PR issues, is still the premier sporting league and attracts the top-paying advertisers. By securing simulcasting rights for ESPN+, Disney can cater to both the older adult market (which are typically cable subscribers) and younger adult market (which are “never-cablers”).
Disney’s strategy of straddling both sides of the analog/digital divide are helping balance the loss from linear subscriber decline with the gain in digital subscribers. Although the former typically paid more per subscription, the accessibility of digital should translate into faster growth and, with the higher price-to-earnings multiple attributed to digital, add some air to Disney’s deflated share price. Disney needs to balance the high cost of sports broadcasting rights with its ability to improve its margin from the analog-to-digital transition. If not, this segment of its business will lag behind its peers and any short-term improvement in its trading multiple will vanish as profitability weighs.
Cut the Admission Price at Disney Parks
The Parks segment (which was combined with Disney’s consumer products division in 2018) has long been the proverbial cash cow of Disney’s business. While Disney’s Parks segment returned to profitability in 2021, the lingering presence of covid-19 and the ever-evolving uncertainty regarding international travel restrictions could spell trouble for 2022.
Bullish analysts like Morningstar’s Neil Macker, expect parks to “rebound after capacity limits are lifted as families will still view [them] as a prime vacation destination”. But the unpredictability of covid is a risk that Wall Street has factored into Disney’s share price. We’ve already witnessed the negative impact that covid has had on Disney’s Park segment: FY2021 park admissions revenue was ~51% of FY2019. Some analysts expect FY2022 revenues to improve but will still remain below FY2019, with return-to-normal likely not occuring until FY2024 at the earliest.
Arguably, the demand for in-real-life experiences has accelerated since pandemic restrictions began loosening in the United States and elsewhere. Given the underperformance of the Parks segment, the conventional wisdom would suggest Disney should capitalize on strong customer appetite and keep the status quo in terms of pricing. But the pandemic has thrown into question conventional wisdom and the lack of visibility with respect to international travel puts Disney in a tough place.
We propose a more radical approach: slash admission prices for 2022 and 2023 by 30% at its US and international parks. Our reasons are two-fold: (1) for those that could otherwise afford to take their families to Disney Parks, the savings could incentivize higher in-park spend on amenities and gifts and (2) for those who could not otherwise afford admission, the idea of a Disney vacation may become a reality.
While slashing the price of admissions will invariably lower margins, the (non-financial) goodwill generated from making its parks more accessible for families has long-term PR value. Disney needs to ensure that it continues to attract fans from all socio-economic groups and can use the re-opening of the global economy as an opportunity to get more in touch with a new class of fans.
Dive into the Metaverse
I know what you’re probably thinking: not another wonky metaverse plug. But, please, hear me out! Disney is literally the perfect company to make a big splash in the metaverse.
Augmented and virtual reality are bringing about a re-envisioning of the entertainment business and the metaverse is helping accelerate these trends. We’re beginning to see a convergence between video-driven storytelling and immersive experiences as a new form of entertainment.
Roblox — one of the most popular metaverse platforms with over 47.3 million DAUs as of the end of 2021 Q3 — has already experimented with blending video into its experiences (e.g. the KSI concert in August 2021 or the Bakugan launch party in September 2021). Both these experiences, however, included much more than just a video being streamed in the background. They had digital merch shops, billboard advertisements, games, obstacle courses, and much more.
Read more about Roblox here → Roblox: The Next Big Thing in Metaverse, User-Generated Content, Technology, and Gaming
In many ways, these metaverse experiences made you feel as though you were on a different planet — not dissimilar to how one might feel as they enter one of Disney’s parks. It seems only natural, therefore, for Disney to re-consider its IP in the land of meta. A digital version of its parks is one of the first ideas that comes to mind but Disney could go much deeper than that. It has literally dozens of IPs with seemingly endless potential for creating immersive worlds — from the Pixar classics to Marvel and Star Wars.
Disney’s treasure trove of legacy franchises would make its entry into the metaverse an instant hit and has the potential to not only draw hundreds of millions of eyeballs but also drive high-margin sales of digital products. One of the biggest barriers in any new digital medium is having the star power and pull to get people to your content. For most media companies, the costs of catching up with established brands is exorbitant and the risks are too high to take gambles on new, unproven technologies. This isn’t the case for Disney, which has both established brands and a massive marketing engine behind them.
From a marketing perspective, Disney jumping into the metaverse is a no-brainer. A metaverse story and the high margin it imports should also help improve its overall P/E mulitple, even if the proportion of revenue generated from this segment will be minimal to start. The real question, however, comes down to whether Disney should put its brands on the metaverse of another company or if it should build its own metaverse. But that’s a subject for another blog!
What Do You Think?
Does betting big on ESPN, dropping parks admission prices, and jumping head-first into the metaverse seem a bit risky? Are these “Hail Mary’s” or plausible? Let us know what you think in the comments below!
