You might not realize it, but Walt Disney Co (DIS) and Apple Inc. (AAPL) have a lot in common.
For instance, like Apple, DIS owns just about every facet of its ecosystem.
Disney makes a movie, it creates merchandise and then it implements the popular themes from those films to its theme parks. No other entertainment company comes close to owning its own brand, content and infrastructure like Disney.
And the only company that does it better is Apple; with its operating system, hardware, services and direct sales channels.
Clearly, Apple’s strategy has paid big dividends for the company, allowing the tech giant to become the most valuable company in the world. Thankfully for DIS, there is still one big move it can make to officially be like Apple — a move that would have a very profound effect on DIS stock.
DIS Must Own the Distribution of Its Content
Disney’s business all starts with content. It’s from content that all of its opportunities with merchandise, entertainment and theme parks are created.
Thankfully for DIS, its movie business has completely dominated the box office like Apple has smartphones and tablets. In 2014 and 2015, Disney’s box office market share was 14.9% and 19.8% respectively. So far in 2016 its share has jumped all the way to 31.4%! That’s unprecedented!
What’s even more remarkable than Disney’s first half of 2016 with Marvel and Pixar blockbusters is that the end of the year might actually lead to an even higher share. That’s because Disney will release its first Star Wars spinoff from LucasFilm, called “Rogue One,” and Marvel has yet another release with “Doctor Strange.”
Not only is it possible that the success of “Rogue One” could unlock a world of Star Wars spinoffs that become the sister to Disney’s Marvel universe, but it would shock no one if each film got near or even surpassed the billion-dollar benchmark.
Given this fact combined with Disney’s unmatched library of film and program content from the likes of ESPN and The Disney Channel, one has to wonder why the company is still relying on third-party hosts to distribute its content.
Hence, DIS needs to host its own content post-box office.
The NFLX Buyout Theory
Why is Disney selling rights for ESPN and Disney Channel to cable, broadband and satellite TV service providers? Why is Disney willing to accept $300 million to $400 million annually to give Netflix, Inc. (NFLX) distribution rights on new film content? It’s because Disney does not have its own platform, which would be equivalent to Apple owning the iPhone but not the actual operating system.
One might ask what Disney could do to break free from the cable and satellite companies, and from distributing its blockbuster films. The easy answer is to acquire Netflix.
Yes, it would be expensive, but by doing so Disney would gain a reputable platform with its own delivery network.
Then, the opportunities for DIS would be limitless, with new synergies and opportunities that would make $50 billion look like Facebook Inc (FB)’s acquisition of Instagram.
Disney could not only use the platform to distribute popular content from ESPN and the Disney Channel, but it could become a host for all past Disney film content. Lastly, Disney might have a good relationship with the film studios, but just consider the implications of releasing movies straight to its own platform for an additional box office-like cost.
Disney would no longer be limited to long-awaited release dates for theaters, and could quickly boost production to generate higher revenue while all these Marvel, LucasFilm and Pixar films are must watch products. If nothing else, having that option would give Disney complete control over distributors, cable and satellite companies, and theaters like Apple has over suppliers and the telecom industry.
It’s what Disney must do to create some excitement for DIS stock owners. Because even as Apple’s success has become its own worst enemy, DIS finds itself in a similar boat, being constantly compared to previous record-breaking years.
Unfortunately, Disney can only produce films at the rate that theaters can support. But by going straight to a streaming business model, DIS can release movies faster, which means more content, more merchandise and faster adoptions of those themes at its parks.
Yes, Netflix would be a costly acquisitions, but if Disney could double the production of its films while capturing a big bulk of the pay-TV market, wouldn’t it be worthwhile?
I think so, and think it is highly likely as the next phase in this company’s evolution.
As of this writing, Brian Nichols owns shares of AAPL and DIS.