Stock in The Walt Disney Company (NYSE:DIS) has become a battlefield.
The shares have fallen 3% in the last four trading sessions, even while famous analysts like Jim Cramer pound the table for the stock.
Cramer is impressed by the words of CEO Bob Iger, who believes it will be easy to dominate streaming thanks to his movies, ESPN, and the assets of 21st Century Fox (NASDAQ:FOX), on which Disney expects to close next year.
Iger is doing what media people do. He is telling a story. He is telling investors to ignore the earnings miss. He is suggesting they ignore the $17.7 billion in debt on the company’s books. He is also saying they should ignore the company’s changing business model, which will soon depend on the internet rather than bundled revenue from networks, cable fees and advertising.
The Disney Position
For now, DIS stock is continuing to lose money in streaming, which it bundles into its cable network results. Its third-quarter report for June showed ESPN revenue increasing, and costs declining, with higher broadcast profits almost entirely offsetting that decline.
Disney is confident its deal to buy Fox will close, having already been blessed as good for consumers by regulators, who like Disney’s distaste for fringe fair and see its control of Hollywood production as family friendly.
DIS stock can be expected to slowly squeeze out costs at Fox, as it has at ESPN, using its market share dominance to make producers dance to its tune. Never mind that Fox was doing fine on its own.
Internet Asset Light
But while Disney can squeeze theaters, squeeze producers, and even squeeze leagues selling broadcast rights, it lacks key assets for internet distribution. Rivals Comcast (NASDAQ:CMCSA) and AT&T (NYSE:T), which have their own programming assets, including movie studios, control the last mile of the internet.
Disney, and Fox, are also guided in production decisions by instinct, not data, as Netflix (NASDAQ:NFLX) is. BAMtech, the unit that will control Disney’s streaming, is into collecting money, not data, as Netflix is. The strategy of rebuilding the cable bundle as a set of streaming services is untested.
DIS stock bears are not yet convinced it can find its way, not only against these competitors, but against growing competition from cloud czars such as Amazon.com (NASDAQ:AMZN) and Alphabet’s (NASDAQ:GOOGL) YouTube. Disney’s rivals, in short, have vertical integration. Ironically, it’s the lack of vertical integration that greased Disney’s way in the Fox deal.
Sell to Facebook?
Suddenly a brainstorm I had a few months ago, that Disney sell out to Facebook (NASDAQ:FB) and create an “AOL moment” for cloud stocks — demonstrating its maximum value — doesn’t seem quite so far-fetched.
In the original AOL-Time Warner deal, AOL got 60% of the resulting equity, Time Warner 40% — and 40% of Facebook’s equity value comes to $211 billion. That would be a fat 24% premium over Disney’s present market cap of $170 billion. It would give Disney the technology it needs to maximize the value of its content, and it would give Facebook both the storage and traffic it needs to maximize the value of its capital spending.
The fact that it would likely crash the value of Facebook’s cloud rivals, as the AOL-Time Warner deal ended the dot-com bubble a generation ago, would be a bonus.
The Bottom Line on DIS Stock
That fantasy remains unlikely, and anyone would be a fool to buy either DIS stock or FB stock betting it will happen.
But the fact is that Disney is going to have to buy, or build, distribution assets to compete with Netflix in streaming on an equal footing.
Disney has lots of programs. What it needs are programmers.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Romantic Detective Finds Her Family, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in T and AMZN.